Principal officers have a statutory duty to report irregularities to the FSCA both during their term of office and after their appointment has been terminated, the Financial Services Tribunal (FST) said when it rejected a reconsideration application by the former principal officer of the Private Security Sector Provident Fund (PSSPF).
In August 2022, the FSCA concluded that Mziwandile Zibi was no longer fit and proper to be a principal officer and objected to his continued appointment as the principal officer of the PSSPF.
The Authority also took regulatory action against 10 current and past members of the PSSPF’s board after finding they were no longer fit and proper. Eight board members lodged a reconsideration application, which was dismissed by the tribunal.
Read: FST ruling has ‘far-reaching implications’ for trustees, principal officers, says FSCA
The FST said its decision in the Zibi matter should be read in conjunction with its decisions regarding the eight board members.
Interests of the fund come before those of the board
In considering, Zibi’s application, the tribunal focused on the interpretation and application of section 8(5)(c) of the Pension Funds Act (PFA), which sets out the “fit and proper” criteria for principal officers.
It also drew attention to paragraph 18 of Pension Fund Circular 130, which states that the role of the principal officer is vital for the proper performance of the board. His or her duty to the fund overrides any responsibilities or obligations arising from being employed or paid by the employer, the sponsor, or a service provider.
According to the FST’s decision, Zibi asserted that, as the principal officer, he did not owe any fiduciary duties, including to the fund, and he was duty-bound to follow the dictates of the board.
“This narrative that he lacked any decision-making powers, and can accordingly attract no blame or liability, is the golden thread that runs through his grounds of application and augmented grounds of application,” the FST said.
It said Zibi’s understanding of his duties as principal officer was flawed. PF Circular 130 made it clear that his duties were not limited to executing the board’s decisions but included acting with utmost good faith towards the fund and in the best interest of all its members, ensuring that the board gave full and proper effect to the rules of the fund, and dealing with all matters relating to the fund and its members in accordance with his fiduciary duties.
“It is the duty of the principal officer to oversee the general workings of the fund, which includes the duty to oversee service providers and ensure that they are performing their tasks. In terms of Article 17.5 of Circular PF 130, the applicant, as the principal officer, should have met with the board to monitor the operations of the fund. If this was done, the applicant would have been aware of the improprieties at the fund,” the FST said.
Irregular procurement and conflicts of interest
The tribunal said Zibi not only failed in his fiduciary duties, but could not be considered as a person who is fit and proper to be entrusted as the principal officer for the following reasons:
Appointment of Salt
Zibi was involved in the appointment of Salt Employee Benefits as the fund’s benefits administrator. The procurement process was irregular and did not adhere to the fund’s procurement policy, the FST said.
Appointment of Vendicure
The fund paid Vendicure (Pty) Ltd, a company owned by Zibi, purportedly for section 14 and secretarial services provided by Zibi.
Zibi submitted that the payments were not irregular because it was standard practice by board members to have their remuneration paid to legal entities identified by them. The FST said there was no evidence to substantiate this, nor did it negate “a clear conflict of interest”.
There was no service level agreement between the fund and Vendicure, in contravention of the fund’s procurement policy, it said.
Appointment of Zibi’s daughter
The fund appointed Zibi’s daughter as a junior secretary. Zibi co-signed her offer of employment in his capacity as principal officer, which was a direct breach of the fund’s recruitment and selection policy.
Zibi contravened paragraph 19 of PF Circular 130, which expressly states that, as part of the fiduciary duties owned to the fund, conflicts of interest ought to be avoided by the board, as well as by the principal officer.
“The appointment of his daughter was a clear conflict of interest, which could be viewed as nepotism,” the FST said.
Increase in the number of board meetings
Zibi conceded that he was aware of the increase in the number of board meetings and the increase in the fund’s liability to remunerate board members for their attendance. The board held 493 meetings between 9 January 2017 and 1 February 2018. However, Zibi was unable to provide any evidence that he objected to such excessive meetings, or even raised a concern in this regard, the tribunal said.
In addition, Zibi failed to provide any evidence indicating that he objected to the way legal prescripts were flouted, or to the fact that excessive meetings were held to the detriment of the fund, or that he has reported these contraventions to the FSCA, as he was mandated to do, the FST said.
The fund was exposed to reputational and financial damage while Zibi was “at the helm”, it said.
A principal officer’s reporting obligations
Zibi submitted that the FSCA had incorrectly interpreted section 8(6) of the PFA. This section states that a principal officer must:
(a) Within 21 days of his or her appointment being terminated, other than in accordance with the condition referred to in sub-section 5(b), submit a written report to the registrar detailing the principal officer’s perceived reasons for the termination; and
(b) On becoming aware of any matter relating to the affairs of the pension fund which, in the opinion of the principal officer, may prejudice the fund or its members inform the registrar thereof in writing.
According to Zibi, the duty to report arises only upon termination.
The FST said this argument was baseless. As the use of the word “and” indicates, the section imposes two separate reporting requirements on principal officers: one relating to the perceived reasons for his or her termination and another relating to matters that may prejudice the fund and its members. The latter duty exists while the principal officer holds office, not upon termination of his or her appointment.
If the wording of the provision is not clear, Pension Fund Directive 5 sets out in unequivocal terms the responsibilities of a principal officer to report in terms of section 8(6)(b).
There was no evidence that Zibi adhered to his duty to report the irregularities regarding irregular procurement, excessive board meetings, conflicts of interest, and any other matter that he deemed prejudicial to the fund and its members.
In addition, Zibi, in terms of his service agreement with the fund, was responsible for monitoring and reporting the payment of contributions in terms of section 13A and Regulation 33 of the PFA.
The FSCA’s records show that no reporting was received during 2015 and 2016. The FSCA only received a report of non-compliance for August 2016. The annual financial statements for the period to the end of February 2016 reflected non-compliance with section 13A and Regulation 33, the FST said.
