Debarment process gets a revamp

In recent years the debarment of individuals in the financial services industry has been one of the most controversial practices in this sector. Under the Financial Sector Regulation Act (FSRA), however, this is set to change dramatically.

Anyone who has been debarred is effectively unable to work as a broker or financial advisor. This is an extremely serious step, but controversies have arisen because the process involved has not been sufficiently vigorous to prevent abuse.

Previously debarments were handled under the Financial Advisory and Intermediary Services (Fais) Act. This legislation however only provided financial services providers with guidelines on how to act, with no specific procedures set down. This led to two major issues with the way debarments were handled.

Under the act, companies were given the power to debar representatives who either no longer complied with fit and proper requirements or broke the law. They were also, however, under the guidance of the then Financial Services Board, allowed to debar people who no longer worked for them.

Previous abuses

“Many debarments were done after the particular individual had left,” compliance consultant Alan Holton explained at the Moonstone Regulatory Update in Cape Town on Monday. “There were no real guidelines at all – just a form you had to submit. You could attach documents relating to the debarment, but in many instances those weren’t attached and debarments were registered by the regulator anyway. Some people were debarred because they changed jobs, so the former employer found something wrong and debarred them.”

The second problem was that the Fais Act made no provision for a debarred individual to appeal the decision. Their only recourse was to take the matter to the high court, which for many people was prohibitively expensive.

Holton highlighted a case that was heard in the high court that resulted in the court delivering a scathing judgement in favour of a financial adviser, and lifted his debarment. The process had however cost him hundreds of thousands of rands.

The debarment procedure set out in the new FSRA, however, clearly addresses both of these concerns.

Lawful, reasonable and fair

Any company wishing to debar an individual must now, according to risk management group Masthead, act in a manner that is “lawful, reasonable and procedurally fair”. This means that the company not only has to demonstrate which specific requirements the individual has broken or no longer complies with, but it also has to follow a very specific process.

“You have to give person adequate notice of the intention to debar them, including reasons,” said Holton. “They must then be able to respond, and that response must be considered. The whole process must be procedurally fair.”

The company must also provide the individual with a copy of its debarment policies and procedures. What this means is that every financial services provider now has to formulate a formal policy that meets this requirement.

“From a practical perspective, this means that you are not going to debar anyone if you haven’t been through a formal disciplinary process,” said Billy Seyffert, head of compliance at Moonstone. “That includes appointing a chairman who is seen as unbiased.”

Appeals

Under the FSRA, debarred individuals also have the opportunity to appeal to the Appeals Tribunal, which is staffed with senior legal people. The company debarring them must also inform them of this right and how to exercise it.

“This is far less costly than going to the high court,” Holton said. “You also don’t necessarily need legal representation, although I would still argue that you should have it.”

Seyffert said that he expects that the tribunal will see a lot of work because of this.

“It is a better procedure now, because I think a lot of people were very roughly treated in the past,” he said. “But everyone who is debarred is now probably going to apply to the tribunal. I hope that it is very well staffed because its going to be a big bureaucratic process.”

A final important consideration in the new legislation is that a company wanting to debar someone who no longer works for them must do so within six months of that individual having left. There is therefore a limit on taking steps against someone after the fact.

Wider powers for the FSCA

Another change in the FSRA is that it also enhances the powers of the Financial Sector Conduct Authority (FSCA, formerly the FSB). Previously, the regulator could debar a key individual or representative found not to be fit and proper. Now, however, the conduct authority can debar “any natural person” who contravenes any financial sector law.

This extends to anyone involved in the provision of financial products or services, including directors and senior executives of financial services companies.

“For instance, if a director of a financial institution is found to be no longer fit and proper, they can be debarred,” said Holton. “The FSCA can stop them from being a director, and they may also not provide services on the basis of an outsourcing arrangement either. This means it has much wider powers than before. They want to remove people from this industry who have contravened any financial sector law in a material fashion.”

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