FAIS: Debarring representatives violates the Rule of Law

Financial services employees get unequal treatment

The provision of the Financial Advisory and Intermediary Services Act of 2002 (“FAIS”) that vests in employers the power and obligation to banish (“debar”) financial-services representatives from the entire industry, has the effect of discriminating against far too many. This is in direct contravention of the Rule of Law which requires that the laws of the land be applied equally and consistently to all.

FAIS stipulates that the executive officer of the Financial Services Board (“FSB”) may prescribe requirements that a person must comply with to be seen as “fit and proper” for appointment as a financial service provider’s “representative”.

The fit and proper requirements are onerous for many and include standards of competence (measured mostly by examinations and continuous learning), operational ability, integrity and personal financial soundness.

The financial services provider’s compliance officer must monitor the compliance of representatives and must always be satisfied that they comply with these requirements. FAIS obliges a financial services provider to banish or “debar”, from the industry as a whole, a representative who no longer complies strictly with these requirements.

The financial services provider must inform the FSB that it has debarred someone and the reasons why. The FSB then publicises this debarment on its website and often in the media. No other provider may thereafter offer the debarred representative employment.

The Supreme Court of Appeal in 2015 confirmed that the FAIS Act precludes that person from rendering financial services on behalf of any other financial services provider in the country, not just on behalf of the employer who debarred her.

The Court reasoned that FAIS requires a financial-services provider to exercise oversight of the initial and continuing fitness of its chosen representatives. The provider, having itself gone through a vetting process at the hands of the FSB, is “eminently suited to subject its representatives to a similar initial vetting and thereafter to exercise oversight in respect of them”, said the Court.

The Court observed that the debarment is evidence the employer itself no longer regards the representative as having the required fitness and propriety or the competency. It said a representative debarred by the employer in this way “must perforce be debarred on an industry-wide basis”.

But with all due deference to the Court (which did not consider the point now following), it is highly probable that this statutory responsibility of employers to expel representatives from the industry is being carried out very unevenly, in clear breach of the Rule of Law.

The responsibility that FAIS lays upon individual employers to preclude defaulting representatives from rendering financial services throughout the industry, is a far-reaching and highly unusual function to vest in the hands of private entities. There appears to be no precedent for it.

It is a matter of simple common sense that not all employers will exercise this power to debar representatives in a uniform and consistent way. While some employers might identify their representatives’ infractions, others might fail to do so.

Smaller employers will not all have the resources to carry out the procedure consistently. Others might justifiably regard the FSB’s prescribed fit and proper requirements as unduly oppressive, no matter what segment of the market they serve.

Many an employer very possibly just terminates its non-compliant representative’s employment in the ordinary way, without treating it as formal debarment from the industry, and leaves the representative free to seek employment as representative elsewhere. Some employers might merely warn such a representative.

The FSB has the power to withdraw providers’ licences and compliance officers’ approved status if they haven’t carried out their responsibilities regarding the debarring of noncompliant representatives.

In this way, FAIS provides indirectly for the private policing of representatives who are no longer able to meet their fit and proper requirements. But this indirect supervision, where the FSB monitors financial service providers who in turn monitor their representatives, can at best be imperfect in practice.

The inevitably uneven and inconsistent application by employers of their obligation to debar representatives who are deemed no longer able to meet onerous fit and proper requirements therefore violates the Rule of Law in a most fundamental way.

As senior United Kingdom appeal judge Lord Bingham put it in 2006, it is a requirement of the Rule of Law that the laws of the land should apply equally to all, save to the extent objective differences justify differentiation. The Delhi Declaration of 1959 affirmed that the legislature in a free society under the Rule of Law must not discriminate in its laws as between one citizen and another.

FAIS’s provisions vesting in all employers the power and obligation to banish financial service representatives from the entire industry, have the effect of materially discriminating between different representatives.

It should be noted that the FSB itself also has the power to debar financial services providers’ representatives from the industry. According to its annual report, in the year ended March 2013, some 900 representatives were debarred by financial services providers, and another 90 by the FSB itself.

These were the unlucky ones!

Author Gary Moore is a South African lawyer and senior Free Market Foundation researcher. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.



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