What are the acceptable grounds for debarments?

FSPs must pay close attention to the procedure they follow when debarring a representative or key individual, and debarment must not be used to settle contractual or labour relations disputes, says Jessica Blumenthal, an executive in the banking and finance department of law firm ENSafrica.

In a webinar, Blumenthal discussed what financial institutions can learn from the debarment cases that have come before the Financial Services Tribunal (FST) from 2018 to February 2022.

Read: Why you should ask a regulator for reasons for a decision

The FAIS Act creates on obligation for FSPs to protect customers from unscrupulous representatives and KIs. To the extent that an FSP believes its representative or KI has contravened a provision of FAIS or no longer meets the Fit and Proper requirements – particularly those relating to honesty and integrity – it is required to debar the individual.

But there is an inherent bias in the process, because the FSP making the decision to debar the individual is also his or her employer, and, historically, there has been “a lot of procedural irregularity and bias” in debarment decisions, said Blumenthal.

The FST’s decisions have underscored that the debarment process, as set out in the FAIS Act and FAIS Guidance Notice 1 of 2019, must be procedurally fair at all times.

Blumenthal said that what comes through in many of the cases decided by the tribunal is that FSPs must always exercise their debarment powers within the framework of the FAIS Act and the Promotion of Administrative Justice Act. This means they must ensure that the proper procedure is followed every step along the way.

FSPs must also act in accordance with their internal debarment policy. If an FSP deviates from this policy, it adds an element of procedural unfairness.

In some cases, the FST has provided guidance to FSPs on how to make the procedure fairer, said Blumenthal.

For example, in the Everson case, the tribunal made the point that appointing someone internally to chair the debarment proceedings may have disadvantages. Where there is a perception of bias, an independent person should be appointed to chair the proceedings.

Debarment must not be used to settle contractual disputes

The purpose of debarment is to rid the industry of incompetent or dishonest representatives or KIs, and it should never be the sanction for a contractual or other grievance, said Blumenthal.

In several cases, the tribunal – like the FSCA – has warned FSPs not to use debarment to settle contractual disputes. If there is a contractual dispute, it must be resolved in the appropriate forum. If disciplinary action needs to be taken, this must be done within the context of labour law, she said.

In the Everson case, the representative was debarred for stealing client lists. The tribunal found the process was procedurally fair, but the decision was substantively unfair and so it was set aside.

An enquiry into whether an employee contravened his or her employment contract or the company’s code of conduct is not the basis for debarment. A separate enquiry, conducted in accordance with the FAIS Act, must be held to determine whether a debarment is justified.

Single act of dishonesty is not necessarily sufficient

Another point that comes through in the FST’s decisions is that a single act of dishonesty, incompetence, mismanagement or negligence may not by itself be grounds for debarment, said Blumenthal.

If an FSP believes a representative or KI is guilty of misconduct that justifies debarment, it should first establish whether the grounds for debarment are a contravention of the Fit and Proper requirements or the FAIS Act.

Where the FSP believes the misconduct constitutes a breach of the Fit and Proper requirements, it cannot necessarily debar an individual for a single act of dishonesty but must consider the person “more fully”, Blumenthal said.

The misconduct must be such that it impugns the character of the individual to the extent that he or she can no longer meet the Fit and Proper requirements.

In the Osman case, the representative admitted to making an error of judgment (based on the bad advice of her colleagues). The FST found that although the error constituted potential misconduct in terms of the employee-employer relationship, it was not sufficient for debarment.

In the Ntongana case, the FST considered the level of dishonesty required in order to result in debarment. The representative lied about being at work. This was dishonest but fell outside the scope of the FAIS Act. The FST stated that debarment is meant to protect consumers from unscrupulous representatives; it cannot be invoked by employers in respect of dishonesty in the employee-employer relationship.

Where the FSP believes the misconduct concerns a contravention of the FAIS Act, the contravention must be material.

In the Williams-Mothei case, the FST stated that professional misconduct in terms of the employer’s code of conduct and policies did not sufficiently demonstrate her non-compliance with the FAIS Act in a material way.

Two key Cofi changes

When the Conduct of Financial Institutions Bill (Cofi) becomes law, it will replace the FAIS Act’s debarment provisions.

Cofi’s debarment provisions (section 15) are similar to those in the FAIS Act but with two additions:

• There will be another ground for debarment, apart from contravening Cofi (including the fit and proper requirements in section 1 of the Bill): failing to comply with the Financial Sector Regulation Act or “another financial sector law” (section 15(1)(a)(ii)).
• The requirement in Debarment Guidance Notice 1 of 2019 that an FSP must take steps to ensure the debarment does not prejudice the interests of clients is incorporated in section 15(4)(c) of Cofi.