Getting debarment right the first time – Important considerations when debarring a person

On 1 April 2018, the debarment process under the FAIS Act was amended by the FSR Act 9 of 2017. In terms of section 14(3) of the FAIS Act, a FSP must, before debarring a person, take specific steps. Section 39 of the FAIS Act further stipulates that any person aggrieved by a decision of an FSP, including electing to debar a person in terms of section 14, may now also apply for the reconsideration of the decision to the Financial Services Tribunal.

As a result of the right to appeal against a debarment decision, there was a substantial increase in debarment cases referred to the Tribunal since April 2018. These cases highlighted that there was still very little clarity with regards to the process that needs to be followed as well as the FSCA’s obligations in this regard.

The FSCA has now published Guidance Notice 1 of 2019 to clarify the role of all parties in this process.

Debarment defined

The requirement and duty imposed by the FAIS Act on FSPs to debar representatives was enacted in 2002 as a measure of self-regulation of functions of advice and intermediary services. The legislature saw fit to clothe FSPs with the statutory power to debar representatives.

Debarments in terms of section 14(1) of the FAIS Act is therefore a regulatory tool aimed at ensuring that only persons who comply with the provisions of the FAIS Act and satisfy the fit and proper requirements are allowed to render financial services. A debarment decision by an FSP constitutes the exercise of a statutory power and amounts to administrative action.

Relevant factors of debarment process

1. Obligation on FSP

The Guidance Notice once again stresses the obligation on FSPs to follow due process when they debar a person and describes when and how they should exercise their powers.

Prior to the amendment of section 14 of the FAIS Act, the FAIS Act did not specifically deal with the timing of when a debarment may or should be effected, particularly where a person had ceased to be a representative of the debarring FSP. Clarity in this regard has now been provided in sections 14(1)(b) and 14(5) of the FAIS Act, which provide that an FSP retains the obligation to debar a person who no longer is a representative of that FSP, provided that the –

(a)	reason for a debarment must have occurred and became known to the FSP while the person was still a representative of the FSP (see Guidance Note where this becomes known after the rep left); and
(b)	debarment must commence no longer than six (6) months from the date that the person ceased to be a representative of the FSP.

• Requirements for debarmentSection 14(3) of the FAIS Act sets out the requirements with which an FSP must comply when debarring a person. These requirements must be contained in an FSP’s policies and procedures governing its debarment process. (See article in Your Practice Made Perfect)3. Conduct of representativesThe purpose of the defined process is to afford a representative an opportunity to make submissions in response to the grounds and reasons that inform an FSP’s intention to debar him/her. An election by a representative not to make use of this opportunity does not prevent the FSP from considering the matter and taking a decision concerning the debarment of that person.The FSCA has however noticed that a practice has developed whereby certain representatives, who anticipate their debarment, try to avoid the debarment by resigning employment or terminating his/her mandate. An FSP retains its power to debar a person who is no longer a representative of that FSP, provided that the first and second requirement, set out above, is met.

  The Guidance Notice further clarifies that an oral hearing is not required; that FSPs should not use debarments as a result of other grievances and that FSPs should in all cases act reasonably and rationally.

  It is also important to take note of the following (some of these will be unpacked in future articles):

• FSP’s duties after the debarment
• Debarred persons rights
• Powers of the Tribunal should it disagree with debarment decisions
• The Role of the FSCA upon receipt of a debarment notification

Click here to download Guidance Notice 1 of 2019.