Picture source: Getty/iStock
The question regarding the correct process to follow when initiating disciplinary inquiries against the employees or independent contractors of a financial services provider (FSP) remains a topic of interest in inquiring minds. The debarment process under the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act) was amended, and the now-repealed s 14A of the FAIS Act conferred on the Registrar of Financial Services Providers (Registrar) the authority to debar representatives at his or her own discretion, whereas the substituted s 14 provides for debarment at the request of an FSP. This reform prescribes that FSPs must ensure that the debarment process is lawful, reasonable and procedurally fair before debarring an individual.
This analysis will study the differences between debarment and termination of an employment contract or service agreement, as well as the applicability of the disciplinary actions in each unique case.
Section 213 of the Labour Relations Act 66 of 1995 (LRA) stipulates that an employee is a person other than an independent contractor who works for another person or the state and receives compensation for such work. While this is a widely used description of an employee, s 78 of the LRA provides a more specific definition, which excludes persons who occupy senior managerial positions and are conferred with the authority to take certain policy decisions and represent their employer in matters concerning workplace forums.
On the other hand, an independent contractor is a person who concludes a contract to provide services to a client. They typically conduct their own business and exercise complete control over daily business operations and financial affairs, including tax-related issues. The relationship between an independent contractor and their client is governed by the terms of their service agreement. Thus, they are not governed by employment legislation. In terms of the FAIS Act, both employees and independent contractors can be classified as representatives.
There is a plethora of cases that pervaded the financial sector where representatives were found to have been dishonest in how they conducted themselves either in the course and scope of their employment, or in executing their mandates as independent contractors. In many instances, it had been discovered that misrepresentation was the main source of the contravention of s 13(1)(b)(iA) read with s 6A of the FAIS Act. Section 6A provides for the fit and proper requirements for representatives, which may relate to –
This is not an exhaustive list of the conduct expected of a fit and proper representative. The outcome of each case will be informed by its merits.
Where an FSP discovers that an independent contractor has breached the material terms of their service contract or their mandate, the FSP may summarily terminate the service contract if such a breach is deemed to have impugned the character of the independent contractor as a fit and proper representative. The termination of the service contract may be accompanied by a debarment in such a case.
Conversely, s 188 of the LRA warrants misconduct as one of the grounds for the dismissal of an employee, provided that the dismissal is substantively and procedurally fair. However, the LRA dictates that no employee may be dismissed without a fair investigation/disciplinary inquiry into the offence alleged to have been committed by such employee. The reasons for termination of employment must be valid and sound in law, and all the procedural requirements must be complied with before an employee may be dismissed for misconduct.
Disciplinary action that can be taken in respect of representatives includes –
Most company policies provide for instances of dishonesty, including misrepresentation, which is defined in the Oxford Reference as ‘an untrue statement of fact, made by one party to the other in the course of negotiating a contract, that induces the other party to enter into the contract’ (www.oxfordreference.com, accessed 23-1-2025). The procedures for addressing acts of gross negligence and incompetence is also provided for in most company policies. This encompasses cases of a serious failure by an employee to observe the standard of care that an employee would reasonably be expected to exercise in the performance of his or her duties, which could have adverse implications for the employer. Dishonesty, gross negligence and incompetence are serious offences that warrant disciplinary action, and ultimately, dismissal on the first transgression. Before a dismissal may be adopted as the appropriate sanction, the employer must consider the conspectus of evidence and the circumstances surrounding the alleged offence.
In Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A), the appellate court underscored the common law principle of misrepresentation in insurance transactions by stating:
‘There is a duty on both insured and insurer to disclose to each other prior to conclusion of the contract of insurance every fact relative and material to the risk … or the assessment of the premium. This duty of disclosure relates to material facts of which the parties had actual knowledge or constructive knowledge prior to the conclusion of the contract of insurance. Breach of this duty of disclosure amounts to mala fides or fraud, entitling the aggrieved party to avoid the contract of insurance.’
As an example, where a representative who is engaged by an FSP misleads potential clients about the product offerings of the FSP, thereby inducing the client to enter into a contract with the FSP and creating a serious reputational and financial risk for the FSP, the FSP will have to determine whether the misrepresentation was material. In doing so, the court in the Mutual and Federal Insurance case considered the following factors:
In insurance contracts, failure by a representative to adhere to the common law duty of disclosure constitutes a misrepresentation that renders the insurance contract voidable at the instance of the policyholder. If the policyholder elects to void the contract, he or she will be entitled to restitution if there is a sufficient causal link between the misrepresentation and a repudiated claim. Whether the misrepresentation was committed negligently, fraudulently or innocently, both the insurer and representative could be held liable for damages suffered by the policyholder. In this case, the insurer would be warranted to take action against the representative by instituting disciplinary proceedings in the case of an employee, or by issuing a notice of breach or terminating a service contract where an independent contractor is concerned.
A person who renders financial services to the public is required to register as a representative of the FSP and to obtain a licence to practise as such from the Financial Sector Conduct Authority (FSCA). The FSP bears the duty to closely monitor representatives working under their supervision, and ‘to ensure that [the] representatives [comply with] the fit and proper requirements under the FAIS Act’ (S Ngcamu ‘Facts of a disciplinary enquiry may be taken into account when debarring a representative under FAIS Act’ (www.webberwentzel.com, accessed 23-1-2025)).
The decision to debar an individual falls within the ambit of administrative action that can be reviewed under the Promotion of Administrative Justice Act 3 of 2000 (PAJA) (Ngcamu (op cit)). PAJA enables a court to set aside administrative action that is procedurally unfair, or a decision that was taken by an administrator who was biased or where there was a reasonable apprehension of bias (Ngcamu (op cit)). An FSP that has resolved to debar an individual must observe the audi alteram partem principle by affording the individual an opportunity to present their case against the contemplated debarment.
In Associated Portfolio Solutions (Pty) Ltd and Another v Basson and Others [2020] 3 All SA 305 (SCA), the Supreme Court of Appeal (SCA) considered the confluence of disciplinary inquiries convened in accordance with the LRA and the debarment process in terms of the FAIS Act. Two FSPs sought to debar an individual (representative) who was concurrently registered as a representative and key individual of the companies. The relationship between the representative and the other directors of the FSPs soured, which led to negotiations relating to the representative’s exit from the FSPs. However, evidence of misconduct committed by the representative was brought to the attention of the managing director, and ‘the representative was suspended from his employment pending [the outcome of] an investigation into the alleged misconduct’ (Ngcamu (op cit)).
A disciplinary inquiry in terms of the LRA followed the allegations of misconduct. During the disciplinary proceedings, the representative was found guilty of five counts of misconduct (Ngcamu (op cit)). The chairperson found that all the charges were so serious that they warranted a dismissal. This meant that he could no longer meet the fit and proper requirements. Notices of directors’ meetings and the contemplated resolution to debar were sent to the representative, and he was advised of his right to make representations at one of the meetings in relation to the outcome of the disciplinary inquiry. The representative made written representations indicating that he rejected the results of the disciplinary proceedings because the fact that the other directors sought to pursue charges against him in an effort to devalue his shares and acquire them was disregarded.
After considering the representations, the board adopted the resolutions and the results of the board meeting were communicated to the representative, who was consequently debarred (Ngcamu (op cit)). The representative brought an application in the High Court to set aside the debarment. He succeeded, and the High Court held that the findings made at the ‘disciplinary inquiry could not inform the debarment’ process, which ‘fell under the FAIS Act’ (Ngcamu (op cit)). A separate debarment inquiry should have been convened in terms of ss 13 and 14(1) of the FAIS Act (Ngcamu (op cit)).
The SCA dissented and held that a further debarment factual inquiry would not necessarily change the perception of the representative’s honesty and integrity, which were affected by the serious charges brought against him in the disciplinary inquiry. It could not be accepted that while the representative was not a fit and proper employee, he could be a fit and proper representative. Once the chairperson made their findings at the disciplinary proceedings, the FSPs were mandated by the FAIS Act to in act in accordance with that outcome (Ngcamu (op cit)). The disciplinary proceedings were found to be procedurally fair, and the debarment was sustained.
An FSP may apply for the reappointment of a debarred representative to the FSCA. However, it should be borne in mind that the FSCA cannot rescind the debarment solely on the basis of an application brought before it. The Financial Services Tribunal or a competent court of law must instruct the FSCA to reappoint the representative. He or she must have been debarred for a minimum of 12 months unless the debarment was due to non-compliance with the fit and proper requirements; in which case, the representative may be reappointed once the requirements have been met. In cases of serious offences, such as dishonesty, the reappointment of a representative will be contingent on the hiring FSP determining whether the representative has been rehabilitated. The FSCA may reject the application if the transgression for which the representative was debarred constituted a serious contravention, and if it would be in the interest of the financial services industry.
When seeking to discipline representatives, FSPs must ensure that the correct procedure is followed. Debarment must not be used as a measure to settle contractual and labour disputes, unless there is an overlap between such disputes and the individual’s ability to comply with the fit and proper requirements under the FAIS Act. This was the position in the Associated Portfolio Solutions case. The debarment process is meant to sift out unscrupulous representatives from the financial services industry so as to protect consumer interests. It is not intended to serve as a sanction in contractual or other grievances. A contractual dispute must be resolved in accordance with the terms of the contract, and a labour dispute must be referred to the appropriate forums. In the example of an employee or independent contractor who breaches their employment or service contract, or the FSP’s code of conduct, a debarment would not be justified except where the conduct complained of impacts the individual’s honesty and integrity, or any other standard of conduct set by the Registrar.
Sbongile Manana Bernardette Mhlambi LLB (summa cum laude) (UWC) is a non-practising legal practitioner and a pending LLM (Insurance Law and Governance) graduate at the University of Pretoria. Ms Mhlambi writes in her personal capacity.
This article was first published in De Rebus in 2025 (March) DR 28.
