Debarments reveal systemic issues within the financial services industry

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This is evident from an analysis of the most recent rulings of the Financial Services Tribunal, where a substantial proportion of the rulings pertain to reconsideration applications, challenging FSPs' decisions to debar their former representatives. Are these simply the actions of rogue representatives, or do they indicate a deeper cultural issue within the sector?

Legal framework

The legal framework governing debarments was conveniently summarised by the Financial Services Tribunal in Rasakanya v Clientele Life, as follows:

“The FAIS Act, read with inter alia the General Code of Conduct and the Determination of Fit and Proper Requirements, 2017 (“the Fit and Proper Requirements”), regulates the conduct of FSPs, key individuals and representatives.

Section 2 of the General Code of Conduct states that an FSP must at all times render financial services honestly, fairly and with due skill, care, and diligence in the interests of clients and the integrity of the financial services industry.

Section 8(1), read with section 7(1) of the Fit and Proper Requirements, states, amongst other things, that the representative must be a person who is (i) honest and has integrity and (ii) of good standing.

FSPs must ensure that their representatives and key individuals are fit and proper persons to be entrusted with providing financial advice to the investing public. Thus, FSPs are charged with a duty to take reasonable steps to ensure that representatives comply with any applicable code of conduct and applicable laws in the conduct of business.

Accordingly, if it is found that a representative has committed an act of dishonesty sufficiently serious to impugn the honesty and integrity of the representative, the FSP must ensure that the representative is debarred in terms of section 14(1) of the FAIS Act.”

Acts of dishonesty

Acts of dishonesty committed by representatives of FSPs are concerning in that they result in public harm and damage to the sector's reputation. This is evidenced by the facts revealed in the four Financial Services Tribunal cases discussed below. In each case, the representatives brought reconsideration applications challenging their respective debarments, which were, quite correctly, refused by the Financial Services Tribunal.

Case 1: Unauthorised opening of funeral policy

The applicant, employed as a sales representative, was contacted by an existing client who reported losing his bank card and requested to change his bank details. Seizing this opportunity, the applicant opened a new funeral plan in the client's name without the client's knowledge or consent. Despite the applicant resigning from the FSP before the debarment inquiry, he was ultimately debarred, leading to his application for reconsideration of the decision.

Case 2: Preventing or delaying the recoupment of upfront commission

The applicant was employed as a financial advisor. Her remuneration included upfront commission on the premiums receivable by her employer on the life insurance policies sold by her. The commission was subject to a clawback provision, stipulating that any upfront commission paid could be recouped if the relevant policy lapsed within 24 months.

In terms her employment contract, she was prohibited from paying any premiums, whether in part or in full, on behalf of clients. The applicant was found guilty of making 11 payments on behalf of clients to prevent the lapse of policies, thereby delaying, or preventing the recoupment of upfront commission she had earned. Following a debarment inquiry, her employer took the decision to debar the applicant.

Case 3: Unilaterally inflating client loans

The applicant was employed as a branch consultant. Under her employer's compensation plan, branch consultants are motivated to sell financial products by earning embedded value (EV) on these sales. This means they receive commission on top of their base salary for the products they sell.

The applicant was charged with unilaterally inflating the loan amounts requested by clients, which led to clients having to pay higher initiation fees and instalments, while the applicant earned more commission. Following an investigation, the applicant was found guilty of committing numerous acts of dishonesty and debarred.

Case 4: Bribing of clients

The applicant, employed as a sales representative, was responsible for marketing funeral products to potential clients. Following a tip-off from a whistle-blower, the applicant's employer initiated an internal forensic investigation, alleging that the applicant and two colleagues had bribed potential clients to take out policies. Following the investigation, the applicant was charged with paying clients R100 to take out policies, found guilty, and subsequently debarred.

Addressing culture and conduct

While debarments may assist in getting rid of rogue representatives, they do not change the culture within the sector. Regulatory initiatives, such as the General Code of Conduct, the Fit and Proper Requirements, and the Treating Customers Fairly (TCF) framework, aim to address the conduct and culture within FSPs.

These regulations set out standards for honesty, fairness, and transparency, promoting a customer-centric approach and ensuring that FSPs and their key individuals and representatives act with integrity and accountability.

However, it is clear from the number of debarments that regulatory initiatives on their own are not enough. For meaningful change, FSPs must cultivate an ethical culture from within.

Practical ways of doing so include setting clear ethical standards, providing regular training on ethical issues, and establishing open lines of communication for reporting unethical behaviour.

Reward ethical behaviour

Crucially, financial incentives must be aligned with ethical behaviour. This means designing compensation structures that reward not just sales performance but also adherence to ethical standards. For example, bonuses and promotions should be linked to ethical conduct and customer satisfaction metrics rather than solely to sales targets.

By embedding these values into the core of their operations, FSPs can foster a more ethical and trustworthy environment, ultimately restoring public trust and enhancing the overall integrity of the sector.