The Financial Services Tribunal (FST) has dismissed an FSP’s contention that it could not act against representatives who sold fraudulent policies until it was provided with a forensic report from Old Mutual.
The FSCA withdrew the licence of Mbalane Financial Services (Pty) Ltd in March this year after finding that the FSP had contravened the following provisions:
- Sections 14(1)(a) and 13(2) of the FAIS Act [failure to debar representatives];
- Sections 36(1)(c)(v), 42(1), and 42(3) of the Fit and Proper Requirements [lack of operational ability];
- Sections 13(1) and 13(2) of the FAIS Act [fit and proper requirements of the key individual and representatives]; and
- Sections 2 and 11 of the General Code of Conduct [failure to act in the best interest of clients].
Mbalane had a brokerage agreement with Old Mutual to market funeral policies. Old Mutual terminated the agreement in December 2020 after engaging with the FSP for two years about its representatives’ fraudulent activities.
Mbalane was aware since November 2018 that many of its representatives were writing fraudulent policies. These policies eventually amounted to 864 (67%) of 1 281 policies written by 56 representatives, some of whom were unregistered, while others did not have employment contracts, the FST stated in its decision.
Old Mutual informed the FSCA of its reasons for terminating the contract. The FSCA summarised these reasons as including Mbalane’s featuring among the top five high-risk brokers. The group’s forensic investigation found that Mbalane had the second-highest number of complaints relating to fraud perpetrated against teachers working for the Eastern Cape’s Department of Education.
Old Mutual also flagged that Mbalane “failed to provide copies of the employment contracts of the representatives responsible for wring some of the abovementioned business. It appears that the licensee’s business practice is to enter into verbal employment contracts with representatives.”
When Mbalane was initially notified of the fraud in November 2018, it issued four agents with warnings and informed them that if Old Mutual’s findings indicated fraud, debarment proceedings would follow. Some of these agents had submitted 50 fraudulent policies. One individual provided Mbalane with a written apology for submitting 172 fraudulent policies, the FST said.
Subsequent complaints from Old Mutual did not motivate Mbalane to do anything about the allegations. According to an email in June 2019, Old Mutual asked the FSP for urgent feedback about more than 200 incidents involving seven agents, the FST said.
Old Mutual “repeatedly” informed Mbalane of its responsibilities under sections 13 and 14 of the FAIS Act to assess and investigate the complaints received against its intermediaries.
Mbalane’s approach was that it was a labour law issue, it alone incurred a loss because of the fraudulent policies (the commissions were reversed), the complaints may have been the result of buyer’s remorse, Old Mutual had ulterior moves, and it would not act unless it had a forensic report from Old Mutual, the FST said.
The duty to act lay with the FSP
Mbalane’s reconsideration application did not directly dispute the FSCA’s reasons for withdrawing its licence, the Tribunal said. Instead, Mbalane said it was entitled to wait for Old Mutual to finalise its forensic report before it could act against the implicated representatives.
Mbalane framed the issue in terms of the Promotion of Administrative Justice Act (PAJA) and the audi alteram partem principle. It should have been given a reasonable opportunity to make representations in response to the report’s findings, which would have enabled it to institute debarment proceedings against the representatives found to have committed fraud.
The Tribunal dismissed Mbalane’s argument, stating:
- Old Mutual’s failure to provide Mbalane with the forensic report was not an infringement of PAJA and the audi rule because Old Mutual was not an “administrator” in terms of the Act.
- The implicated representatives were those of Mbalane, not Old Mutual, and it was the FSP’s duty to ensure that its representatives were “fit and proper”.
- Old Mutual had only a contractual relationship with Mbalane, and it had no authority over or duties towards the FSP or its agents.
- Old Mutual did not have a duty to obtain and provide Mbalane with evidence of wrongdoing.
- The FSCA provided Mbalane with the details of the forensic report in its warning letter in December 2022. Mbalane did not take issue with anything therein, and it was not entitled to more by way of disclosure or discovery.
The Tribunal drew attention to the FSCA’s finding that Old Mutual had provided Mbalane with sufficient evidence to conduct its own investigation and take appropriate action, per section 14(1) of the FAIS Act. Yet, the FSP had done nothing.
The FST dismissed the reconsideration application.
