On Monday, we published an article about a case where the “breakaway kids” used the FSP’s client data to feather their potential future nest.
Read: Representatives used FSP’s client info to obtain quotes for a competitor
Shortly thereafter, another tribunal case addressed additional considerations that employers, as well as those intending to elope, need to bear in mind.
Background
The applicant, a long-time employee of the FSP who eventually became the managing director of its aviation division, decided to begin his own brokerage specialising in aviation insurance.
Before giving his month’s termination notice, he formed a company, opened a bank account with a minimum deposit, successfully applied for the registration of the company as a financial services provider, and sought, unsuccessfully, to convince a co-employee to leave her employment and join his new venture.
The FSP was unaware of this, and on receipt of his notice of resignation, sought to convince him to reconsider, which he refused. The FSP then suspended him with a week’s notice, but before the suspension took effect, it served him with a charge sheet, charging him with five disciplinary contraventions for breaches of common law, contractual duties and FAIS obligations.
Disciplinary hearing
The hearing proceeded, chaired by an advocate instructed by the FSP. The chairman found the applicant guilty and recommended that he be dismissed, which he was on 29 April, the day before his notice period would have run out.
According to the Financial Services Tribunal, these charges all dealt with labour issues, which do not necessarily overlap with FAIS issues.
“The real issue was the fact that the applicant, during his employment, had set up an enterprise in direct competition to the business of his employer. The adjectives used in the other paragraphs are not much more than elaborations of and embellishments on this complaint, which is essentially a contractual issue.
“The sting, as far as the fit and proper requirements of FAIS are concerned (and on which reliance is later placed), lies in the allegation that he ‘utilised and divulged confidential information’ of (his employer) to set up and further the interest of an enterprise which is in direct competition to the business of the employer.”
The chairperson of the disciplinary hearing noted: “ln the circumstances, it is more probable than not that (the applicant) utilised confidential information, obtained whilst being employed, to set up his business as well as making the appropriate application for accreditation in terms of the FSP application. Only time will tell to which extent he breached his confidentiality undertaking.”
This did not go down well with the tribunal.
“The finding was not based on any evidence. It was not even suggested or put to the applicant during the hearing that he had utilised confidential information. The last sentence is telling – the chairman was guessing, and it was not a case, as section 14(1)(b) requires, where this ‘reason’ had been ‘known’ at the time. I refer to this, not because the labour matter is before the tribunal but because this aspect became central to the debarment proceedings that followed.”
Debarment proceedings
On 17 May, the applicant received a notice of an intention to debar him. It relied on the disciplinary charges mentioned and added the following:
- Unlawful removal/theft and/or destruction of company records and information.
- Failure to declare an actual or potential conflict of interest and/or a situation in which an FSP or representative has an actual or potential interest which, when providing advice and/or intermediary services to a client . . ..
- Dishonesty, breach of fiduciary duty or business conduct relating to honesty, integrity and good standing (by) unlawful disclosure of information by breaching the terms of a non-disclosure and confidentiality undertaking… (which) constitutes an offence in terms of the Financial Markets Act.
For purposes of this article, we will focus on the second point above.
The applicant’s attorney responded in a lengthy letter, including an objection to the fact that additional charges had been added to those at the disciplinary hearing. A material issue raised was the lack of specificity underlying the charges which the employer chose to ignore and proceeded to debar the applicant.
He applied for and was granted a suspension of the debarment order pending the final determination of the application for reconsideration to the tribunal.
Failure to declare a potential conflict of interest
From 1 May 2022 to 7 May 2022, at least 14 clients of the respondent appointed the applicant as their broker. This indicates that he had engaged with such clients as a representative for and on behalf of his new business prior to the effective date of his resignation.
“A representative may not contract with product suppliers regarding the distribution of their products or in respect of any other business relating to the rendering of financial services other than in the name of the FSP of which it is a representative.”
The tribunal notes that it is likely that the applicant did flinch the FSP’s clients, especially if one has regard to the fact that all the switch letters were identically worded. There are, however, two problems:
- This does not establish that the applicant furnished those clients with any financial advice in contravention of section 13(1)(c).
- The employer only learnt of the possibility of filching/seduction after the end of April, by which time the applicant’s notice period had expired.
Conclusion
The tribunal listed three considerations in arriving at its decision:
- It is trite that the reasons for any debarment must have become known to the FSP while the applicant was still a representative;
- It is further trite that debarment may not be used to stifle competition or to settle labour and other contractual disputes; and
- Finally, it is for the FSP to establish on a balance of probabilities the facts on which it relies.
“This does not mean that a trial must be conducted or that the representative has (as his attorney and counsel believe) the rights of an accused in a criminal trial or that the employer or its delegate who may have some institutional prejudices may not conduct the proceedings – the Act requires it!”
There are grounds for suspicion, but suspicion is not enough for a debarment, especially if based on hindsight.
Since the tribunal was not satisfied that the employer had discharged its onus, the application for reconsideration was upheld and the debarment was set aside.
