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Regulator launches R143 million penalty ‘strike’

22 January 2024 Gareth Stokes

A couple of days after FAnews closed shop for the 2023-24 holiday period news broke of one of the Financial Sector Conduct Authority’s (FSCA’s) toughest enforcement actions yet. As Christmas loomed, the authority managed to exceed the R100 million in administrative penalties issued for the 2022-23 financial year in a single action.

A nine-figure penalty windfall?

In its 18 December 2023 press release, the authority said that it had slapped Mr Jacobus Geldenhuis, a director of Classic Financial Services One (Pty) Limited (Classic) with an administrative penalty totalling R143 million. The authority also issued a debarment order preventing Geldenhuis from (a) providing or being involved in the provision of financial services and (b) acting as a key person of any financial institution for a period of 20-years. The decision followed an investigation into financial transaction entered into between Classic, Geldenhuis and various consumers over the period 1 January 2019 to 12 May 2023. 

Details of events emerge from a series of press releases published by the FSCA in October and November 2022, and May and December 2023. The first, dated 28 October 2022, took the form of the now familiar warning to the public to “act with caution when conducting any financial services related business with Classic and its director, Geldenhuis”. The release informed the public that neither business or director were authorised to give financial advice or offer any intermediary services in terms of section 8 of the Financial Advisory and Intermediary Services (FAIS) Act. 

On asset forfeitures and preservation orders

The October communication also contained some bad news for those who had entrusted Geldenhuis with their cash, namely that the FSCA had conducted a search and seizure operation at Classic’s premises on 12 October 2022. The raid was initiated following complaints made by consumers to the FSCA. At the time, the FSCA Commissioner wrote: “We reported the matter to the Office of the National Director of Public Prosecutions (NDPP) and more specifically its Asset Forfeiture Unit (AFU) in Johannesburg; [the latter] successfully applied for a preservation order of funds [held in two bank accounts in Classic’s name]”. 

30-days later, a second press release was issued. In that communication, dated 30 November 2022, the FSCA repeated its earlier warning to the public alongside a phrase that strikes terror in the hearts of investors globally. “The evidence that the FSCA has collected to date indicates that Geldenhuis may be conducting a Ponzi scheme,” they wrote. The regulator noted that the AFU had successfully frozen the aforementioned bank accounts to preserve investors’ funds, and extended a word of thanks to the FIC and AFU for their assistance. 

Winding the clock forward to 10 May 2023, the third press release revealed that around R19 million had been preserved through the FIC and AFU actions. “The AFU intends to apply for final forfeiture orders in respect of the preserved funds, as well as the appointment of a curator bonis who will attend to the distribution of the preserved funds,” the FSCA wrote. At the time, the authority encouraged investors who had suffered a loss in their dealings with Classic to lodge a claim against the preserved funds for consideration by the curator. 

Scant detail on workings of alleged Ponzi

The December 2023 press release titled ‘The FSCA imposes an administrative penalty and debarment on Mr Jacobus Geldenhuis’ contained limited additional information about the nature of the financial transgressions. It revealed that Geldenhuis was using clients’ funds for his own benefit rather than investing these funds in shares as promised. The FSCA also reiterated that it had brought the matter to the attention of South Africa’s criminal authorities and encouraged any investors in Classic to contact the South African Police Services (SAPS) and the liquidators of Classic. 

In written response to FAnews, dated 11 January 2024, the authority confirmed that the total amount preserved by the AFU had climbed to R22.2 million, and that the sum was inadequate to refund investors. Unfortunately, it will be many months before investors find out how much of their capital will be recovered. And the wait for justice could drag on even longer. 

The FSCA enforcement action is commendable, but there were a couple of questions this writer felt compelled to raise. The first was why the word ‘debarment’ was used in the context of the facts presented. By the FSCA’s admission, neither Classic or Geldenhuis were licensed to give advice or offer intermediary services. As such, it seems the 20-year debarment order issued against Geldenhuis in terms of section 153(1)(a) and 153(2) of the Financial Sector Regulation Act is more correctly defined as a prohibition or restraint of trade. 

Debarment versus prohibition

In the aforementioned written response, the authority explained the oddity as follows. “The FSCA is a creature of statute that must comply with its empowering law, the Financial Sector Regulation (FSR) Act. “This act speaks to the debarment of persons through debarment orders and not prohibition orders, though it equates to the same thing. The FSR Act empowers the FSCA to debar any natural person if they are found to have contravened a financial sector law”. To ensure no misunderstandings, they added: “Mr Geldenhuis was found to have contravened the Banks Act and the FAIS Act, which are both financial sector laws; the implication [of the order] is that he cannot work in the financial sector for the period of his debarment”. 

The second question centres on the quantum of the administrative penalty that was levied against Geldenhuis in his personal capacity. The R143 million administrative penalty, inclusive of costs, is more than seven times the amount of pre-curatorship-fees cash preserved for victims of this alleged Ponzi. Contraventions of section 7(1) of the FAIS Act and section 11 of the Banks Act are serious, but surely the director’s capital should be attached ‘first and foremost’ to compensate victims of his financial transgressions rather than for fines. The FSCA responded: “Section 171 of the FSR Act sets out how proceeds of penalties are dealt with; proceeds of the fine unfortunately cannot be used to compensate investors”. The authority added that retribution for customers was an area of future work but would require a change in law.  

On the question of how likely it was that Geldenhuis could pay the R143 million fine, the FSCA said: “Section 230 of the FSR Act gives any person who is aggrieved by a decision of the FSCA the right to apply to the Financial Service Tribunal for a reconsideration of the decision”. 

You worked hard for it, so invest it smartly

To all the financial and risk advisers in our readership, please warn your clients to tread warily when investing their hard-earned cash. At a minimum, they should check that the entity or individual they transact with is authorised by the FSCA to provide the financial product or service being offered. 

If your clients insist on ‘going it alone’ when making important financial decisions, you should encourage them to do the necessary checks before doing so. They can telephone the FSCA on its toll-free number 0800-110-443 or conduct an online search for authorised financial institution by license category or authorised FSPs in terms of the FAIS Act

Writer’s thoughts:
Despite an impressive financial services regulatory framework, local investors continue getting caught up in questionable investment scams with quite familiar outcomes. Do administrative penalties discourage financial shenanigans, or should the focus be on sentencing scam perpetrators to hard time? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Gareth Stokes, 24 Jan 2024
This was among the questions that I put to the FSCA, @Valerie. They said that to reimburse investors from penalties would require a change to the regulation - and that this was something that was under consideration. I doubt, however, that this will come to pass any time soon.
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Added by Valerie Boshoff , 24 Jan 2024
It appears that the regulations have changed but not the crooks. The penalty funds should go back to the investors and if it doesn't may I suggest we ask why not. On behalf of the investors. Any amount over and above can be retained by the FSCA. Why didn't they close the bank accounts immediately,this would have provided more protection for the investors and has property been ceased. Do we act and react with consequences quickly enough or are the regulatory bodies without teeth
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Added by Gareth Stokes, 24 Jan 2024
There are many advisers / FSPs who share your sentiment, @Gavin. The ever-growing compliance burden does nothing to thwart those with criminal intent.
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Added by Gareth, 22 Jan 2024
@Wesley. Spot on; I also asked the FSCA about the seemingly absurd quantum of the penalty - and whether they saw any possibility of the fine being paid. Their response was a trifle vague; focusing on the serious nature of the infringements (to explain level of fine) and the rights of the 'defendant' to challenge same.
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Added by Gareth Stokes, 22 Jan 2024
Hello Craig A. You and I are on the same page here; and although the regulation is clear on how 'fines and penalties' are used - it still seems crazy that such funds would go to the 'police' rather than the affected clients. PS, the fines are available to the FSCA; but apparently ring-fenced for certain extra-operational budget items. We wrote an article on this quite some time ago (cannot remember the exact details).
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Added by GAVIN CAME, 22 Jan 2024
it may be worthwhile for the editor to research whether the advent of FAIS and FICA has served in any way to protect the consumer. it appears that the same schemes that caused significant loss to consumers before the FAIS Act, still cause significant losses to consumers now.
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Added by Wesley v, 22 Jan 2024
How is this acting in the best interest of the public and unfortunate clients? How did the FSCA determine the quamtum of the administrative penalty? And how does this meet with the very mission statement of the FSCA :
"To ensure a fair and stable financial market, where consumers are informed and protected, and where those that jeopardize the financial well-being of consumers are held accountable."
If the inordinate penalty is indeed jeopardising the potential financial wellbeing of the very clients that they are supposed to protect then how does the FSCA justify this in terms of their own vision and mission statement???

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Added by Craig A, 22 Jan 2024
"proceeds of the fine unfortunately cannot be used to compensate investors".
Let me understand this? He is fined R 143m but none of this goes back to the investor who lost their money? What happens to the money? I assume it is used to pay the bonuses at the FSCA.
How is this any different from the crook who stole the money? They are taking stolen money and keeping it for themselves. Seems like a serious a conflict of interest.
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