Regulator deals decisively with wrongdoers
An integral part of financial services regulation is the enforcement of the provisions contained in various Acts and Codes of Conduct. The organisation tasked with the enforcement function across the non-banking financial services industry is the Financial Services Board (FSB). They play a part in the development, implementation and enforce of policy for financial services providers and insurers (both short and long-term) as well as for the retirement and collective investment schemes industries. Industry stakeholders who quibble over the volume of legislation imposed across the sector often question the FSB’s ability to enforce said laws. No doubt they’ll be pleased with recent developments.
The FSB Enforcement Committee (Committee) had its hands full during March 2011 and April, finalising a number of complaints against companies and individuals in contravention of the Pension Funds Act and the Securities Services Act. The Committee is an administrative body created in terms of section 10(3) of the Financial Services Board Act and may impose administrative penalties, compensation orders and cost orders on respondents that are found to have contravened any law administered by the FSB.
Fines for operating without approval
Section 13B (1) of the Pension Funds Act requires financial services providers to be approved by the Registrar of Pension Funds before administering funds for a pension fund. It transpires that Colourfield Liability Solutions was administering such investments between 1 June 2010 and 13 September 2010 without the required approval, prompting the registrar to refer a case to the Committee. The FSB observes: “Colourfield admitted contravening the act and agreed to settle the matter.”
In determining the appropriate enforcement action the Registrar considered a number of mitigating factors. These included that Colourfield’s office bearers accepted responsibility for their contravention, that there was no evidence of any prejudice resulting from the contravention, that Colourfield had not contravened the Act before and that the company fully co-operated with the Registrar’s investigation. It also helped that the office bearers “displayed remorse for the contravention”. The Registrar agreed to a penalty of R158 455 which was duly imposed by the Committee on Colourfield on 28 March 2011.
In a similar case the Registrar agreed to a penalty of R30 888 which was subsequently imposed by the Committee on Pan-African Asset Management on 24 March 2011. Pan-African had also contravened Section 13B (1) of the Pension Funds Act by administering investments on behalf of several pension funds – without approval from the Registrar – between 31 July 2010 and 14 September 2010. The mitigating factors in this case were identical to those just discussed.
Company director fined for insider trading
In a more serious case the FSB Enforcement Committee had to consider an appropriate administrative penalty regarding a contravention of Section 73 of the Securities Services Act (Insider Trading) against Nicolaas van der Merwe, an erstwhile director of a Sentula Mining Limited subsidiary.
This case was brought to the FSB Enforcement Committee by the Directorate of Market Abuse (DMA) who alleged that Van der Merwe was privy to inside information during 2008. They believed he was aware of significant impairment of assets and an unjustified overvaluation of certain assets in Sentula’s subsidiary companies. The Committee determined that Van der Merwe had indeed contravened Section 73 of the Act and imposed a penalty of R2 million.
Counting the costs of market abuses
This ruling follows on from a case finalised in June 2010. At that time the Committee ruled against Johan Pieterse, the then managing director of Scharrighuisen Drilling – also a subsidiary of Sentula. Pieterse used the same “inside” information – knowledge of impairments to a subsidiary’s assets – to trade beneficially in the company’s shares. He admitted the allegations and tendered a penalty of R1 million, which was duly imposed by the Committee!
Although the DMA doesn’t mention the quantum or time frame of the contraventions in each of these cases, we can easily demonstrate the value of “insider” knowledge by looking at Sentula Mining’s share price around the time the impairment became common knowledge. On Monday, 3 June 2008, shares in the opencast mining specialist fell 24.9%, closing at just R11.90/share versus the previous close of R15.85! The share lost further value and was trading at just R8.60 per early in September, at which stage it was suspended from further trading by the JSE Limited pending the outcome of various investigations. Today the share changes hands at just R2.90.
Editor’s thoughts: Regulation doesn’t work without enforcement. A perfect non-financial proof of this assertion is the behaviour of South African road users. Motorists now view speeding, not stopping at red traffic lights, or a range of other traffic offences as their choice based on the likelihood of being caught and their ability to “talk their way out of” the legal consequences. Do you think the FSB Enforcement Committee is doing a good job – or are we just seeing the tip of the iceberg in terms of the “prosecution” of illegal conduct in the financial services space? Please add your comment below, or send it to gareth@fanews.co.za
