Steep penalties for fit and proper failings
If the volume of scam emails in your writer’s inbox is anything to go by, then your next financial loss is only a click away. On the daily, an email or SMS arrives promising financial reward, or warning of an urgent matter that must be attended to. The flavour of the month seems to be a “you have an outstanding traffic fine that must be paid immediately, to avoid prosecution and/or jail time” text message.
Phishing and smishing galore
For now, the average inbox is awash with courier delivery phishing scams. If you never ordered it, dear reader, then you do not have to pay customs to release it. And assuming you did order it, you had best double- and triple-check that the Aramex or DHL or Fastway or (insert courier name here) that is emailing you for outstanding fees is the real deal. The age-old saying “prevention is better than cure” works like a charm when it comes to online payments; a bank ETF or credit card payment is far easier to avoid than undo.
Unfortunately, you can encounter a world of challenges when transacting with businesses that seem to be above board. These are areas where South Africa’s enforcement entities have a responsibility to protect and warn financial consumers. Case in point, the Financial Sector Conduct Authority (FSCA), which sends out more than 100 ‘red flag’ notices annually. These statements warn against fraudsters impersonating licensed financial institutions, financial advisers or even regulators; social-media investment scams promising unrealistic returns; and unauthorised individuals and businesses soliciting investments, among others.
The FSCA also performs an oversight and enforcement function to keep financial institutions, regardless of size, in line. It recently confirmed an investigation into the Public Investment Corporation (PIC), saying it was “concerned by recent developments … relating to governance, leadership stability [and] transparency” at the entity. The announcement, signed off by the FSCA Executive Committee, warned of the “potential impact of these developments on the integrity and confidence in one of South Africa’s important financial institutions”.
Smaller firms under scrutiny
At the other end of the scale, the FSCA has just announced sanctions against 80 Eight South Africa (Pty) Ltd. In keeping with its track record of stiff penalties for contraventions of advice-related regulation, the FSCA issued a R2.5 million administrative penalty on the financial services provider (FSP) and its key individual (KI), Mr Faadil Moti, jointly and severally.
“The regulatory action follows an investigation by the FSCA [which] found that 80 Eight inter alia, failed to ensure that its clients did not suffer financial losses as a result of theft, fraud and other dishonest acts of its employees,” the FSCA wrote. It said that 80 Eight, its KI and an employee of the firm had “materially contravened various financial sector laws…”
The applicable laws were summarised as sections 2 and 11 of the General Code of Conduct for Authorised Financial Services Providers and Representatives; section 13(3)(a) of the Financial Advisory and Intermediary Services (FAIS) Act; and section 42(1) of the Determination of Fit and Proper Requirements for Financial Services Providers. These are regulations that many FAnews readers encounter daily. Even so, it helps to revisit the basic compliance requirements that brokers and financial advisers must meet.
As an aside, your writer found it quite tricky to find up-to-date versions of the acts and regulations the FSCA oversees. In a perfect world, there should be one central repository of documents, including amendments, managed by, say, National Treasury and linked from the FSCA and Prudential Authority (PA) websites whenever necessary. Instead, it is left to the individual to do a deep dive into the internet, using Google or whatever, and hope they find something more useful than a scanned PDF uploaded back in 2002.
Responsibilities of an FSP
Setting aside that brief rant, one finds a version of the FAIS Act that heads section 13(3) as ‘Responsibilities of an FSP’. More specifically, section 13(3)(a) holds that “an FSP must be able to demonstrate and record that it has evaluated and reviewed at regular and appropriate intervals (a) its representatives’ and key individuals’ competence and has taken appropriate action to ensure that they remain competent for the activities they perform”. The FSCA press release did not go into detail about the specific transgression in this context.
Meanwhile, section 42(1) of the Fit and Proper Determination provides that “a key individual must have the operational ability to effectively manage and oversee the financial services related activities of the FSP or juristic representative and the financial services in relation to the financial product for which the key individual was approved or appointed.” This means that a KI cannot be appointed merely in name; he or she must have the genuine capacity and ability to manage and supervise the FSP’s regulated activities.
The General Code of Conduct provisions are somewhat generic. Section 2 establishes the overarching conduct standard and requires a provider to render financial services “honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.” In practical terms, this means that an FSP, its KIs and representatives must act ethically, competently and carefully at all times. The section imposes a positive duty to protect clients’ interests and uphold confidence in the financial services industry.
Operational risk controls
Section 11 deals with operational risk controls, requiring a provider to “at all times have and effectively employ the resources, procedures and appropriate technological systems” that can reasonably be expected to eliminate, as far as reasonably possible, the risk of financial loss caused by “theft, fraud, other dishonest acts, poor administration, negligence, professional misconduct or culpable omissions”. So, you must have adequate people, procedures and systems in place, as well as use them.
The R2.5 million administrative penalty against the firm and KI was accompanied by a directive to “prepare and implement a policy that will ensure that clients, product suppliers and other providers or representatives are protected from the risks that they will suffer financial loss through theft, fraud, and other dishonest acts”.
In addition, a 20-year debarment was issued against one of the firm’s employees. Per the FSCA announcement, “in terms of section 153(1)(a) and (c) read with section 153(2) of the Financial Sector Regulation Act [we] hereby debar Mr Mahommed Bashir for a period of 20 (twenty) years”. It is a stiff penalty that serves as a stark reminder to KIs and advisers to keep on the straight and narrow, lest they get hauled in front of the authority.
Under the debarment, the affected individual may not provide, or be involved in the provision of “all financial products or financial services, defined in all financial sector laws for which the authority is the responsible authority”. The affected individual may not act as a key person of any financial institution or provide any services to a financial institution, whether under outsourcing arrangements or otherwise.
A triple-warning to advise to
This newsletter carries a triple-warning that should be heeded by consumers and financial professionals alike. The first is to keep your eyes open for phishing and smishing scams, and learn to resist the requests for payment or information sharing they often contain. The second is to think carefully about the financial institutions, advisers and platforms you interact with, because a licence or polished brand does not remove the need for caution.
And the third, for the FSP owners, KIs and representatives out there, is to pay close attention to the laws applicable to your disciplines and conduct. As the 80 Eight matter shows, the FSCA does not mess around when it discovers contraventions of the Code of Conduct, Fit & Proper or the FAIS Act.
Writer’s thoughts:
A R2.5 million administrative penalty or 20-year debarment will certainly get the attention of most local financial services providers. Do you think fines and debarments are a more effective deterrent than criminal prosecution, or does it depend on the facts at hand? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
