Finally, a fit and proper #snot-klap
A few years back, this writer remembers many financial services stakeholders being up in arms over attorneys that were extracting extortionate fees from the country’s struggling Road Accident Fund (RAF). You may recall the reporting at the time, describing attorneys and lawyers who were billing the RAF for more hours per week than physics allows. Sadly, it turns out that the legal profession is not in alone in conjuring time out of thin air.
Before you complain about your calendar…
Just this week, Fin24.com published an article under the headline: ‘Security guard pension board paid themselves for 493 meetings in a year’. For those who shun basic arithmetic, this translates to 41 meetings each month, or four meetings over each three-day period, with no breaks for weekends or public holidays. You will agree this is an impressive achievement in a country where it often takes weeks for pension fund administrators to respond to a basic email query let alone handle a complex section 14 fund transfer. Apologies for the digression, and possible conflation of issues. To get back on point, the reason for today’s newsletter is to revisit the regulatory actions taken by the Financial Sector Conduct Authority (FSCA) against the Principal Officer and current and former trustees of the 493-meetings-in-a-year Private Security Sector Provident Fund (PSSPF).
The PSSPF mess has its roots in 2017 and involves what the FSCA aptly describes as “a long, detailed and complex investigation of the board of trustees of the Fund”. All told, it took around five years to complete all the necessary steps to resolve the matter, including an independent forensic investigation on behalf of the PSSPF; an on-site inspection by the FSCA; an investigation by the FSCA’s Enforcement Division into the affairs and management of the PSSPF; and allowing the members of the board extensive opportunities to respond, through their lawyers, to the various assertions and allegations levelled at them. These events culminated in a number of findings, published by the regulator on 5 August 2022. FAnews has paraphrased these findings from the original FSCA media release as follows:
Firstly, the board of the PSSPF deviated from its own procurement policy and processes. The board appointed service providers without any justifiable basis, while the agreements in respect of these appointments being inconsistent with service providers’ tender proposals. To make matters worse, tender negotiations with service providers took place after the conclusion of the tender process. It also emerged that the rates paid to board members during the 2017 financial period were higher than and inconsistent with the PSSPF’s Trustee Remuneration Policy, and that board members received remuneration for attending a Golf Day and conference, among other shortcomings. Furthermore, chairpersons of each sub-committee received a fixed monthly fee in addition to their fee for attendance of meetings, which was not standard practice in the retirement funds industry.
Blatant disregard for the FS law
Putting the necessary legal spin on the transgressions, the FSCA announced that the board members “failed to take all reasonable steps to ensure that the interests of members, in terms of section 7C of the Pension Funds Act (PFA), were always protected; failed in their fiduciary duty of acting with due care, diligence and good faith; and failed to ensure that the resources of the PSSPF were utilised in a sound and cost-effective manner, which constituted a breach of the board’s duties in terms of the PFA and the Financial Institutions (Protection of Funds) Act”. Apologies, dear reader, that was a mouthful; but it serves to illustrate the serious nature of the allegations levelled at the board, and explains why the resulting regulatory actions were so harsh.
In this case, the FSCA responded with a mix of administrative penalties against individuals and the removal of the Principal Officer and board members. But that was not the end of the matter. The beauty of South Africa’s various regulatory frameworks is that transgressors have the opportunity to contest actions and penalties. So, it should come as no surprise that a number of the individuals who were taken to task by the regulator on 5 August last year chose to petition the Financial Services Tribunal for reconsideration of the FSCA’s decision. FS Tribunal Case A41-2022, one of three related cases, was duly summarised as “an application for reconsideration in terms of section 230 of the Financial Sector Regulation (FSR) Act of a direction by the FSCA objecting to the continued appointment of the Principal Officer of a Pension Fund, termination of appointment as Principal Officer per sections 8(5)(a) and (c) and 8(6) of the PFA [and a] test of fit and proper”.
Challenging a fit and proper finding
Case A41-2022 was a challenge by the affected Principal Officer of the original FSCA conclusion that he was no longer fit and proper to hold the position. The first of six protestations offered by the Appellant was that a Principal Officer “does not owe any fiduciary duties, including to the Fund, and that he was duty bound at all times to follow the dictates of the board”. Interesting, though we do not have the column inches to rehash all the details of the case.
For those among you who snorted at the 493-meetings-in-a-year comment, we include a line from the case, which reads: “The Applicant conceded that he was aware of the increase in the number of board meetings, 493 meetings for the period 9 January 2017 to 1 February 2018, and accordingly an increase in the fund’s liability regarding such attendance of board meetings…” Incidentally, this paragraph triggered the nth #facepalm moment this writer has suffered in his writing career. And it came as no surprise that on 9 May 2023 the FS Tribunal decided to uphold the FSCA decision in a move that the regulator describes as having wide-ranging implications for trustees and Principal Officers.
Although it took 15 or so pages to cover the legal back-and-forth in this matter, the ruling ended with a short-and-sweet order, being: “The Applicant’s application for reconsideration is dismissed”. In its media release confirming the unsuccessful appeal the FSCA said: “The ruling confirms [our powers] to remove such officers from the boards of funds, as well as the feasibility of imposing penalties in the personal capacity of such representatives”. The regulator added that the judgement also highlights the role and responsibilities of a Principal Officer and confirmed its view that a Principal Officer holds a fiduciary responsibility towards the stakeholders in the fund.
You cannot possibly disagree on this one
PS, the industry does not always agree with FSCA actions; but in this case the original actions and penalties and subsequent upholding of same by the FS Tribunal deserve applause. The regulator has sent a clear message to individuals who serve on the boards of trustees at pension funds, being that “conduct which can be construed as deliberate or grossly reckless, self-enriching, or an abuse of position with ulterior motives or malicious intent, will be sanctioned”. And that, as South Africa’s financial and risk advisers are frequently reminded, is what being ‘fit and proper’ is all about.
Writer’s thoughts:
One of the things that amazes me about commercial crime and fraud is how often entire boards or executive teams are either complicit or aware of transgressions, but not prepared to intervene. Do you share these concerns, and how do you explain this lack of accountability / level of disregard for the law? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
Comments