The Supreme Court of Appeal (SCA) has dismissed, with costs, an appeal by the directors of Fusion Guarantees (Pty) Ltd that challenged the procedural fairness of sections 154 and 167 of the Financial Sector Regulation Act (FSRA).
An investigation by the FSCA concluded that Fusion, a licensed credit provider, and its directors, Ilse and Eugene Becker, had contravened the Short-term Insurance Act.
In February 2020, the Authority notified Fusion and the Beckers that it intended to impose an administrative penalty of R200 million on Fusion and debar the Beckers for 15 years. The notice set out the factors the FSCA considered in determining the intended regulatory action. Fusion and the Beckers were afforded an opportunity to make submissions on the investigation report, the proposed administrative penalty, and the proposed debarment.
Fusion and the Beckers made detailed submissions. They also applied to the High Court in Pretoria to declare sections 154, 167, 230, and 231 of the FSRA unconstitutional and invalid. They did not persist with the challenge to section 230.
Section 154 requires the FSCA to invite and consider submissions before it issues a debarment order.
Section 167 empowers the FSCA to impose an administrative penalty on a person who has contravened a financial sector law. Section 167(2) sets out the matters the Authority must and may consider in determining an appropriate penalty.
The High Court dismissed Fusion’s application in January 2022.
Read: High Court dismisses constitutional challenge to sections of the Financial Sector Regulation Act
Grounds for the appeal
In their appeal before the SCA, the appellants contended that although sections 154 and 167 afforded them a right to make submissions to the FSCA concerning the sanctions that might be imposed upon them, the Act did not provide them with procedural fairness in respect of the Authority’s finding that they had contravened certain financial sector laws.
If the Authority is not required to invite and consider submissions from a person who has been investigated, as to whether he or she has contravened a financial sector law, before deciding this issue, then the FSRA does not respect the right to procedural fairness entrenched in section 33(1) of the Constitution.
It was submitted that the absence of a requirement for the FSCA to invite and consider such submissions exposed the Beckers to considerable risk. If the Authority issued a debarment order, they could apply to the Financial Services Tribunal for the decision to be reconsidered. But the process to secure a reconsideration takes time. “In the interim, the debarment is enforced, with its drastic consequences for the Beckers, both as to what they may not do and the public opprobrium they will suffer.” This is because section 231 provides that neither an application for a reconsideration of a decision nor the proceedings that follow suspend the decision of the Authority unless the Tribunal so orders.
Contravention is the central issue
In its judgment, the SCA said an administrative sanction can be imposed only if a financial sector law has been contravened. Section 154(1) of the FSRA requires the FSCA to invite submissions “on the matter”, and no “matter” is more central to a debarment decision than whether a financial sector law has been contravened.
“It would also be a perverse incongruity if section 154(1) required the Authority to provide reasons that engage the issue of contravention, but exclude from submission, and hence consideration, what might be said by a person as to why no contravention had taken place or that the contravention is of a lesser kind or degree,” wrote Acting Judge of Appeal David Unterhalter.
When the FSCA considers whether to make a debarment order, it cannot have made a final decision as to whether a financial sector law had been contravened. An investigation may have led the Authority to conclude there is prima facie evidence of a contravention. But any decision on the issue must await the submissions of the person alleged to have contravened the financial sector law, and the Authority’s consideration of those submissions.
The Act requires the FSCA to provide reasons for its proposed order, and these reasons must traverse the issue of contravention. Furthermore, it requires the Authority to invite submissions that engage this issue.
“The constitutional challenge of the Beckers, who face a proposed debarment order, cannot succeed. The challenge to section 231 of the Act was framed as an entailment of the invalidity that was said to attach to the debarment order. It must therefore also fail.”
For similar reasons, the Beckers’ challenge to section 167 also failed. This section requires the FSCA to have regard to submissions “relevant to the matter”. Nothing is more relevant to the matter than whether a person has contravened a financial sector law, “the very predicate upon which any imposition of an administrative penalty rests”, Acting Judge of Appeal Unterhalter said.
Here too it followed that the Authority cannot make a final decision as to whether a contravention has taken place until it has considered the submissions of the person alleged to have contravened a financial sector law. “Thus, for the reasons given, the Act permits of no want of procedural fairness in conferring a power upon the Authority to impose an administrative penalty,” the judge said.
