We briefly touched on this topic in a previous article FSB Enforcement Committee. In this article we expand on the actual workings of the Enforcement Committee, and provide information that will stand you in good stead, should you ever have to appear before it.
It is important that you distinguish between the Enforcement Committee and the Enforcement Department, as will become evident later on. The latter is part of the FSB’s FAIS division, while the former is a body formed by non-FSB employees.
To recap: The Enforcement Committee is an administrative body established to adjudicate on all alleged contraventions of legislation, regulations, codes of conduct, etc. administered by the Financial Services Board. The Committee may impose unlimited penalties, compensation orders and cost orders. Such orders are enforceable as if it was a judgment of the Supreme Court of South Africa.
Enforcement Committee (EC) members are appointed for their knowledge and experience with reference to the different industries. In addition, the chairperson and deputy chairpersons must either be judges, advocates or attorneys with more than 10 years of litigation experience.
The Investigation
Of course, before any matter can be referred to the EC, there has to be a suspected transgression. Investigations are conducted in response to cases arising from a wide array of sources – Ombud determinations, formal complaints to the FSB, media reports and formal inspections of FSP practices are but some of them.
Once an investigation has been conducted, and grounds for regulatory action are found, the possible contravention is relayed to the FSP to react to the allegations. On receipt of the FSP’s response, the FAIS enforcement department of the FSB relays its decision on whether to refer the matter to the EC or not, to the FSP.
This communication also provides the grounds for its decision, and offers the alleged transgressor the choice of entering into a settlement agreement, or contesting the case before the EC.
Part of the settlement agreement includes a recommended penalty amount, determined by the FSB’s enforcement department. If the FSP accepts the recommended penalty, the EC merely endorses the amount, and the conditions pertaining to its payment. This is then announced via a media release and is also published on the Regulator’s website.
We have certain concerns regarding the determination of the proposed penalty amount. If one looks at the examples posted on the FSB website, it is not possible to determine the basis used. We assume that the same principles listed below, for the EC, also apply here.
Hearing by the EC
Should you decide to throw yourself at the mercy of the EC, it becomes much more of a formal legal process. The EC panel comprises a chairperson who is either a judge or other legal professional, plus at least a further two additional members who are suitably qualified. Please click here to view the current panel making up the members of the EC.
A matter is referred to the EC by the serving of the following documentation by the FSB on the FSP at his residential address, registered office or principal place of business:
- A notice in terms of section 6B(1)(a) of the Financial Institutions (FI) Act (“a section 6B notice”) setting out the detail of the alleged contravention and the penalty to be imposed; and
- An affidavit setting out all the necessary facts and documents in support of the allegation(s) and the relief sought.
The panel will consider the case as set out in the affidavits. The proceedings are designed in such a way that the affidavits will crystallize the points of dispute.
The chairperson may require heads of argument to be filed by the parties. In addition, he may allow legal representation during the hearing. The role of legal representatives will be to argue the case as set out in the affidavits. Such argument may include any points of law, but must be confined to the facts before the EC. The only way to introduce new facts is to get special leave from the EC to file additional affidavits.
The chairperson may also rule on matters such as the case being presented as a stated case, by way of abbreviated pleadings or other proceedings that will expedite the matter. However, the standard procedures were designed in such a way that there will seldom be scope for expediting the proceedings further.
Provision is also made for oral evidence.
Determination by EC
If the EC determines that a respondent has contravened a provision of FSB legislation, it may:
- Impose a penalty;
- Order the respondent to pay compensation
- Make a cost order.
The imposition of a penalty
In terms of section 6D(3) of the FI Act, the EC must consider the following factors, when imposing a penalty:
- The nature, duration, seriousness and extent of the contravention;
- Any loss or damage suffered by any person as a result of the contravention;
- The extent of the profit derived or loss avoided by the respondent from the contravention;
- The impact which the respondent’s conduct may have on the relevant sector of the financial services industry;
- Whether the respondent has previously failed to comply with a fiduciary duty or law;
- Any previous fine imposed or compensation paid for the contravention based on the same set of facts;
- The deterrent effect of the administrative sanction;
- The degree to which the respondent co-operated with the applicant and the EC; and
- Any other factor, including mitigating factors submitted by the respondent, that the EC considers relevant.
Appeal proceedings
A respondent or the FSB may appeal to the High Courtagainst an EC order. The appeal rules of the High Court (relevant to an appeal from a civil district court) apply to this appeal.
Should I Follow the EC Route?
This will depend on a number of factors. We recommend that you consult with legal or FAIS Compliance experts before deciding what route to follow.
The factors to be considered by the EC before imposing a penalty, as listed above, should equally guide one’s own considerations.
It is common practice in law to consider the ability of a transgressor to pay when determining a penalty or fine. One would expect that, for a similar transgression, the fine for a one person business would differ vastly from the fine imposed on a big company.
A review of the cases listed on the FSB website provides some guidance as to what the norm could be. Regrettably, it appears that most of these cases were settlements, rather than hearings. This means that the considerations, indicated above, were possibly not applied in view of the alleged transgressor accepting the settlement offer.
The Fear Factor
The FAIS Ombud’s last annual report reflects that there were 781 settlements in the 2011-2012 financial year, alone. From 2005 to 2012, there were only 200 determinations, in total.
This makes it evident that people prefer to pay up, rather than defend themselves. One wonders how often this is driven by fear, born from ignorance, rather than malicious intent when the transgression took place.
I believe the time has come for us to re-consider our options.
