Section 14(1) ‘knowledge test’ under the spotlight in two debarment matters

Section 14(1)(b) of the FAIS Act states that the reasons for a debarment must have occurred and become known to the FSP while the person was a representative of the provider. Compliance with this provision came under the spotlight in two recent reconsideration applications to the Financial Services Tribunal (FST).

Case 1. Forensic investigation concluded after resignation

Telesure Investment Holdings, acting on behalf of its subsidiaries, debarred a former representative (“NH”), who resigned with effect from 31 July 2022.

According to Telesure’s forensic investigation, between 15 July 2022 and 8 August 2022, NH forwarded confidential company information, policy schedules, quotes, and sales activity reports to his private email address.

The investigation also found that, before submitting his resignation on 17 July, NH had existing Telesure clients sign external broker appointment letters with an insurance brokerage he registered while employed by Telesure.

Telesure issued NH with a notice of intention to debar in November 2022.

In his response, NH admitted emailing documents to his personal email address, which he said was a poor decision and something he regretted. However, he said the documents were not used for personal gain or shared with anyone.

The tribunal’s decision as to whether NH responded to the allegation about signing up Telesure’s clients.

Telesure debarred NH in February 2023. NH lodged a reconsideration application and subsequently an application for the debarment to be suspended, which was granted.

NH based his reconsideration application on two grounds.

The first was that Telesure sent him the debarment notice on 3 February 2023, which was outside the required six-month period – NH ceased being Telesure’s representative on 31 July 2022.

The FST said this ground was without merit; it was based on a misinterpretation of sub-section 14(5) of the FAIS Act.

The correct reading of sub-section 14(5) is that an FSP cannot commence debarment proceedings against a former representative after six months from the date that the former representative ceased to be a representative of that FSP. In other words, as long as the debarment proceedings were commenced within six months from the date that the person ceased to be a representative, the notice of debarment may be issued after six months.

NH resigned from Telesure with effect from 31 July 2022, and the notice of intention to debar was issued to him on 4 November 2022. Therefore, the debarment proceedings were commenced within six months after he had ceased to be a representative.

However, the tribunal upheld the second ground on which NH challenged his debarment: non-compliance with section 14(1)(b).

NH ceased to be Telesure’s representative on 31 July 2022, and the transgressions were uncovered by the forensic investigation that was concluded in September 2022.

“It is evident that before the forensic report was issued in September 2022, Telesure was not aware of the transgressions it now relies upon as the grounds for debarment. For this reason, the requirement in section 14(1)(b) that the reasons for debarment must have occurred and become known to the FSP while the person was still a representative of that FSP was not satisfied. Therefore, the debarment decision falls to be set aside on this ground alone,” the FST said.

The FST set aside NH’s debarment. It said it would be legally meaningless to remit the matter because Telesure did not have any jurisdiction to deal with NH’s debarment.

Case 2. Suspicion does not pass the ‘knowledge test’

The representative, “BB”, resigned from the FSP on 28 June 2022, and her last working day was 26 August.

On 25 August, the FSP’s compliance manager emailed BB, asking her to attend a meeting on 30 August to discuss “a possible fraud” that was under investigation.

BB advised she would not attend the meeting.

On 2 December 2022, the FSP served a notice of intention to debar, alleging BB had committed fraud during her employment and was no longer a fit and proper person as contemplated in the FAIS Act. The debarment hearing went ahead in BB’s absence, and she was advised of her debarment in January 2023.

BB successfully applied to the FST for the suspension of the debarment pending the outcome of her reconsideration application.

In its decision, the FST said the record indicated that the alleged reasons for the debarment were not known to the FSP while BB was its representative.

For example, the email requesting a meeting with BB on 25 August 2022 referred to “possible fraud”. If the FSP had the information at its disposal (knowledge of the facts), there would have been no need to meet; the debarment proceedings could simply have commenced, the tribunal said.

The inference is that the FSP was still investigating matters, “but this cannot be elevated to the level of knowledge as envisaged in section 14(1)(b)”.

The FST commented it was “telling” that the FSP delayed until 2 December 2022 to serve the notice of intention to debar. “Presumably, the intervening period was used to conduct the investigation, again pointing to a lack of knowledge of the facts giving rise to the alleged fraud.”

Second, an internal email dated 21 July 2022 inferred that the FSP was still investigating and debating what, if any, charges could constitute a ground for debarment proceedings to be instituted against BB.

Third, the FSP’s written submissions in respect of BB’s suspension application made it clear that the alleged fraud only became apparent to the FSP during the further investigation, which took place after she ceased to be its representative.

The tribunal was satisfied that the FSP established knowledge of BB’s alleged conduct during her employment and while she was its representative.

It upheld the reconsideration application and set aside the debarment.