The fine line between the law and its application

30 September 2019 Jonathan Faurie

The financial services sector was left dumbstruck at the end of 2017 when Steinhoff, one of the darlings of the JSE, capitulated following revelations that the company misrepresented its financial statements.

Steinhoff has been under investigation ever since. On 5 September, the Financial Sector Conduct Authority (FSCA) revealed that it imposed a massive R1,5 billion administrative fine on the company. However, because of mitigating factors, Steinhoff will only have to pay R53 million. 

This will no doubt leave many unanswered questions. FAnews spoke to Brandon Topham, Divisional Executive for Investigations and Enforcements at the FSCA to find out more about the FSCA’s ruling and its implications.  

What did the FSCA find Steinhoff guilty of?

The FSCA investigated Steinhoff for several possible instances where the regulator felt that the company may have broken the law. 

The FSCA payed close attention to three key areas of the Financial Markets Act. These were:

  • insider trading;
  • the presentation of false information; and
  • price manipulation. 

Steinhoff, as a legal entity, was found guilty of publishing false information to the market regarding its financial statements. The FSCA therefore levied an administrative (technical) fine on the company of R1,5 billion which is one of the highest in the world to date in our sector. 

It is important to note that the FSCA will be investigating the key role players in the Steinhoff saga in their private capacity. The regulator hopes to finalise these investigations within the next eight to eighteen months. 

Why will Steinhoff only be liable to pay R53 million of the R1,5 billion fine?

The ruling that was published on 5 September was against Steinhoff as a legal entity. It is important to note that the regulator took several mitigating circumstances into account when the fine was remitted to R53 million. 

Firstly, Steinhoff is already facing serious liquidity issues where the sustainability of the company is in serious question. Steinhoff probably won’t be able to pay the R53 million as a once off payment, it will most likely be paid off in instalments. There are also members of the public who are still invested in Steinhoff, so to impose a fine that will financially cripple the company and probably force it to close its doors will not benefit anybody. 

Second, there is the issue of innocence. The irregularities (illegality) within Steinhoff were perpetrated by specific people within the company. There were many Steinhoff employees who did not know what was going on, and there were some employees who were merely acting on the instruction of the company’s leadership. We cannot punish innocent employees and shareholders because of the actions of a few individuals. 

Finally, during the investigation, Steinhoff was very cooperative, open and honest. We also must remember that Steinhoff will have to testify or present evidence in the case against the individual members. The company needs to exist in order to do this. 

No matter what fine the FSCA imposed on Steinhoff, the regulator felt that it would face an outcry from the public. If it was too low, the public would accuse the Regulator of being lenient. If it was too high, the public would accuse the Regulator of being draconian and overzealous. 

The case against the individual members of Steinhoff is ongoing and the fine that will be imposed on them will be significant. They will also have the right to argue for a remittance of the amount. However, the Regulator is unlikely to be as understanding with them as it was with the legal entity.  

Does the remittance of the fine not give the impression that the FSCA is taking its role of Conduct Authority a bit lightly?

The FSCA has a dual mandate:

  • it needs to protect the rights of the public; and
  • it needs to ensure the efficiency, integrity and sustainability of the financial services sector. 

We imposed a fine that is unheard of before anywhere in the world, but no company will be able to pay a fine of R1,5 billion and be able to open its doors the next day. 

As stated before, there is also the issue of innocence. We cannot, with good conscience, create a situation where there is the unemployment of innocent people. 

The fine is significant, companies know that if they break the law, they will pay the price. However, we also must be fair. 

The fine is payable to the FSCA. What will happen to the funds from there?

The fine is payable to the FSCA, but it will be handed over to the Department of Justice and will go back into the criminal justice system. The FSCA will not benefit from the fine in any way. 

This leaves a bad taste in the mouth of the Regulator as we are aware of the direct loss that members of the public felt because of the actions of certain individuals. The Regulator is looking at ways to broaden its scope for future investigations where it can hopefully reclaim money on behalf of investors in the future. Unfortunately, it cannot do it for this case. 

Editor’s Thoughts:
No matter which way you look at it, the FSCA was caught between a rock and a hard place. It needed to act, but any action it took had its own criticisms. There is a fine line between law and the fair application thereof. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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