Debarred advisers: Twin Peaks could perpetuate ‘lawless’ guidelines – FMF

JOHANNESBURG — Are debarred advisers – who make significant strides to be reappointed and comply with regulation – being treated too harshly? It’s a question that has been raised by Gary Moore of the Free Market Foundation. He argues in this piece that much of the regulation is over-reaching and risks being draconian by making it very hard for debarred advisers to get back on the right track. And Twin Peaks could make this situation worse, argues Moore. Well worth a read. – Gareth van Zyl

By Gary Moore*

The Financial Services Board (“FSB”) has posted on its website a 2011 FAIS “guideline” for reappointing debarred representatives. This “guideline” is illegal, invalid and unenforceable.

Financial-service providers (“FSPs”), namely financial intermediaries or advisers, that want to reappoint representatives who were for any reason debarred, besides complying with requirements gazetted under the Financial Advisory and Intermediary Services Act 2002 (“FAIS”), are also required to jump through additional hoops illegally erected by the FSB.

An FSP employs or mandates representatives to provide advice or intermediary services on its behalf to its clients. FAIS says, if an FSP’s representative stops complying with its prescribed fit-and-proper requirements, the FSP must withdraw their authority to act and debar them from rendering new financial services on its behalf. And the courts have affirmed that a representative debarred by their FSP is debarred from acting for other FSPs as well.

FAIS prohibits a debarred representative from being reappointed, unless they comply with requirements determined by the Registrar of Financial Service Providers, by government-gazette notice.

The Registrar’s gazetted requirements for reappointing debarred representatives state that “at least twelve months” must normally elapse after their debarment. Their unconcluded business at the FSP that debarred them and any legal proceedings must be finalised, and they must comply with the prescribed fit-and-proper requirements.

Read also: Warning: FAIS killed off swathes of financial advice industry, failed investors – now brace for FAIS II

But, besides the requirements gazetted by the Registrar, the FSB has also posted on its website a 2011 FAIS “guideline” for reappointing debarred representatives.

This “guideline” confirms that it is for FSPs to ensure that their representatives are fit and proper, not the Registrar. This is correct, and the courts have confirmed that FAIS requires FSPs to oversee their own representatives.

But the FSB’s website “guideline” then declares that there is a “misconception” that a debarred representative qualifies automatically for reappointment after the twelve months have elapsed.

The guideline decrees that the representative will “not be removed” from a “list of debarred representatives” unless, on “application” by the reappointing FSP, supported by “satisfactory” evidence that the FSP is satisfied that the representative is honest and has integrity, the Registrar removes the representative in question from a “database of debarred representatives.”

Financial Services Board

The guideline further proclaims that the applicant bears an “onus” to convince the Registrar on a “balance of probabilities” that the representative has had a “genuine, complete and permanent reformation,” that their “defect of character, attitude or other aspect” no longer exists and that they will conduct themself “in a professional manner” and can “be trusted” to perform their duties “in a satisfactory way,” and that the provider is “satisfied” that they will not commit the “offence” again.

Over and above this, the “guideline” dictates that, even if the applicant satisfies the Registrar in all respects, the application may “still be turned down” if the contravention is “of such a serious nature that the profession could not be seen to accommodate the representative within its ranks.”

Let us be frank: This FSB “guideline” is invalid and unenforceable. It purports to impose requirements which are ultra vires (i.e. beyond the power) of the FSB or Registrar to impose. The guideline cannot be enforced by the FSB or Registrar in court against an FSP or its representatives who are reappointed without compliance with this “guideline.”

The guideline cites no FAIS provision authorising it, because there is none: FAIS does not require an FSP wishing to reappoint a debarred representative to convince the Registrar that the representative has reformed and is trustworthy.

Still less does FAIS authorise the Registrar to turn down “the application” if the contravention is “of such a serious nature that the profession could not be seen to accommodate the representative within its ranks.”

Nor does FAIS authorise the Registrar to maintain a “list of debarred representatives”. FAIS refers only to an FSP’s register of representatives, and the Registrar’s central register of all representatives. FAIS does not contemplate a register of “debarred representatives” kept by the Registrar.

If the Registrar tries amending his gazetted requirements for reappointing debarred representatives to include this defective FSB “guideline”, that amendment would also be invalid for all these reasons.

The guideline violates the principle of the Rule of Law that public officers may not exceed the limits of the powers conferred upon them.

Read also: Chris Hattingh: Twin peaks; twin fallacies – a conservative R4.8bn yearly cost

The recently-enacted Financial Sector Regulation Act, 2017 (part of the “twin peaks” revision of financial regulation laws) will, when it eventually comes into operation, amend FAIS to authorise the Registrar to maintain a central register of all persons debarred. But that Act does not introduce any requirement that an FSP seeking to reappoint a debarred representative must convince the Registrar to remove their name from this new central register of debarred persons.

If the FSB is willing to act significantly beyond its powers now and ignore the governing legislation, who can guarantee that a renamed and no doubt wildly more expensive FSB will not continue to act lawlessly under its new, self-made “twin peaks” legislation?

  • Gary Moore is a South African lawyer and senior Free Market Foundation researcher. 
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