From CompliNEWS | Financial Service Intelligence Watch
Shuping and Shuping Brokers CC v FSCA (Debarment set-aside; lessons to be learned)
Financial Services Tribunal (‘FST’) or (‘Tribunal’)
The following matter was handed down by the Financial Services Tribunal on 22 March 2024:
• Mr Shuping and Shuping Brokers CC (Applicant) and Financial Sector Conduct Authority (Respondent) – (case number: A30/2023)
Fast facts
Reconsideration application – Decisions to debar a natural person (s 153(1)(a) FSR Act) and withdraw FSP authorisation/licence (s 9(1) and (2) FAIS Act) – Financial Advisory and Intermediary Services Act 37 of 2002 (‘FAIS Act’) ss 1; 8A; 9(1), 9(2); 19, 19(1), 19(2)(b)(iii) – Financial Sector Regulation Act 9 of 2017 (‘FSR Act’) – ss 3; 153(1)(a); 230(1); 232(5)(a).
Summary
Background
Mr Shuping – sole member and key individual of Shuping Brokers CC (‘Suping Brokers’) rendered advisory and intermediary services under an ‘intermediary services agreement’ concluded with 1Life Insurance Limited (‘1Life’). 1Life advised the FSCA that it noticed possible irregularities in the long-term insurance policies submitted by Shuping Brokers in that several policy application forms had the same cell phone number and address. 1Life found that Shuping Brokers had submitted three policy application forms under the pretext that they were for policy holders and for which 1Life issued the said policies. The FSCA then initiated the debarment proceedings. Mr Shuping provided the FSCA with statements signed by the three relevant policy holders. The statements confirmed that the policy holders had taken out policies with 1 Life, and contradicted 1Life’s version presented to the FSCA. The FSCA rejected Mr Shuping’s explanation: although the three statements had different dates, they appeared to have been written by the same person and that the signatures on the statements differed materially from the signatures on the application forms.
The FSCA debarred Mr Shuping for failing to meet the fit and proper requirements. The FSCA withdrew the authorisation of Shuping Brokers on the basis that does not meet or no longer meets the fit and proper requirements – which finding was based exclusively on the findings relevant to the debarment of Mr Shuping, namely that Mr Shuping had dishonestly contended that the policy holders had taken out policies with 1Life. The FSCA also alleged that Shuping Brokers CC contravened s 19(2) read with s 19(1) of the FAIS Act in failing to submit annual financial statements for the financial years ended: 2016, 2017, 2018, 2019, 2020 and 2021. Mr Shuping challenged his debarment and Shuping Brokers CC challenged the withdrawal of its licence.
The issue
Whether the FSCA was justified in its decisions to:
- debar Mr Shuping in that he no longer met the fit and proper requirements as an FSP,
- withdraw the licence of Shuping Brokers CC.
Facts of the matter
Mr Shuping, the sole member and the key individual of Shuping Brokers CC (‘Suping Brokers’) concluded an ‘intermediary services agreement’ with 1Life Insurance Limited (‘1Life’) and rendered advisory and intermediary services.
1Life advised the FSCA that it noticed possible irregularities in the long-term insurance policies submitted by Shuping Brokers in that several policy application forms had the same cell phone number and address. 1Life found that Shuping Brokers had submitted three policy application forms under the pretext that they were for policy holders and for which 1Life issued the said policies.
The FSCA then initiated the debarment proceedings. It sent a Notice of Intention to Withdraw Authorisation (in respect of the FSP, Shuping Brokers CC), and Notice of Intention to Issue a Debarment Order (in respect of Mr Shuping). In terms of the notices, Shuping Brokers CC and Mr Shuping were afforded the opportunity to provide reasons why Mr Shuping should not be debarred and why the withdrawal of authorisation of the FSP licence should not be effected.
Mr Shuping responded in an email on 21 December 2022 but did not attach any proof of the allegations upon which his response was grounded. On 22 December 2022, the FSCA informed Mr Shuping that his bare denials were not sufficient and urged him to submit evidence by no later than 23 December 2022. Mr Shuping then submitted statements signed by the three relevant policy holders that confirmed that the policy holders had taken out policies with 1 Life and contradicted 1Life’s version presented to the FSCA. T
he FSCA rejected Mr Shuping’s explanation on the basis that although the three statements had different dates, they appeared to have been written by the same person and that the signatures on the statements differed materially from the signatures on the application forms.
The FSCA also alleged that Shuping Brokers CC contravened s 19(2) read with s 19(1) of the FAIS Act in failing to submit annual financial statements for the financial years ended: 2016, 2017, 2018, 2019, 2020 and 2021.
On 6 September 2022, Shuping Brokers CC received a Notice of Intention to Suspend its licence as a financial services provider in terms of s 9(1) read with s 9(2) of FAIS. In the same notice Shuping Brokers CC was afforded an opportunity to provide reasons why the withdrawal of its authorisation should not be effected on the terms set out in the notice. Reasons were required by 6 October 2022. The FSCA found that Shuping Brokers CC failed to provide reasons why the withdrawal of its authorisation should not be effected. The FSCA then withdrew the licence and notified Shuping Brokers CC of its decision on 28 June 2023.
The FSCA found that Mr Shuping no longer complied with the fit and proper requirements, particularly the character qualities of honesty and integrity as required in terms of s 8A of the FAIS Act read with s 8(1) of Board Notice 194 of 2017 (Determination of fit and proper requirements for financial services providers, 2017), and s 2 and s 3(1)(d) of the General Code of Conduct for Authorised FSPs and representatives (‘the General Code’). The FSCA debarred Mr Shuping under s 153(1)(a) of the FSR Act, and the FSCA withdrew the authorisation of Shuping Brokers CC as a financial services provider under s 9(1) read with s 9(2) of the FAIS Act.
The FSCA found that Mr Shuping had represented to 1Life that the three policyholders had applied for the policies whilst that was not the case; and that he knowingly and intentionally submitted false personal information in the policyholders’ name without their knowledge and consent. The FSCA served on Mr Shuping:
- a Notice of Debarment on 26 June 2023 which prohibited him from furnishing any financial advice or rendering any intermediary services as defined in s 3 of the FSR Act to financial customers for a period of five (5) years,
- a Notice of Withdrawal of Authorisation on 28 June 2023 which withdrew the licence of Shuping Brokers CC to act as a FSP under s 9(1) read with s 9(2) of the FAIS Act.
Mr Shuping and Shuping Brokers CC sought reconsideration of the FSCA debarment and withdrawal of authorisation decisions. Mr Shuping contended:
- He was unfairly treated and denied his right to be heard because the FSCA relied exclusively on the forensic report received from 1Life which identified the three disputed policies as fraudulent and rejected his evidence and the statements signed by the three policy holders without contacting the policy holders themselves.
- He was never given a chance to explain any discrepancies on the policy application forms. He contended that the first time he had come to know of the 1Life forensic report was when he received the notice of intention to debar him. 1Life never gave him a copy of the report and never afforded him an opportunity to respond to the allegations of fraud against him. He did not have access to the alleged ‘fraudulent’ policy application forms.
- The funeral policy application forms had been completed online (on a tablet device provided to him by 1Life), and unlike other insurance companies 1Life had not provided him with copies of the applications.
- The debarment process was unfair in that the FSCA failed to properly investigate the allegations presented by 1Life and failed to conduct the necessary disciplinary hearing. Mr Shuping submitted that the decision to debar him and withdraw his licence was ultimately influenced by a material error of law as the FSCA failed to follow a fair procedure and ultimately denied him his common law right of audi alteram partem. He submitted that the sanction of debarment and the withdrawal of authorisation as licensee was not fair in the circumstances, and it was not a decision that a reasonable decision maker could have made. Mr Shuping reiterated that the three policyholders had voluntarily applied for funeral policies and had signed all the relevant documents. He maintained that the policies were not opened fraudulently as contended by 1Life and the FSCA.
The FSCA maintained that the process followed to debar Mr Shuping was fair because the ‘Notice of intention to issue a debarment order’ and the ‘Notice of intention to withdraw’ issued in September 2022 and November 2022 were legally compliant, that Mr Shuping provided an explanation and there were subsequent further engagements between the FSCA and Mr Shuping where he had responded to the notice and where he dealt with the various allegations set out therein. Regarding the two materially conflicting versions before the tribunal, the FSCA proposed that the Tribunal should exercise its powers under s 232(5)(a) of the FSR Act and direct the policyholders to appear before the Tribunal. Section 232(5)(a) provides that ‘the person presiding over a panel – (a) may, on good cause shown, by order, direct a specified person to appear before the panel at a time -and-place -specified in the order to give evidence, to be questioned or to produce any document’. The Authority’s proposal is premised on the fact that what was said to 1Life by the policy holders is contradictory to what they indicated in the statements provided by Mr Shuping, and relied on John Henry Elmsue Murray v FSCA (A37/2021).
Findings
The FST considered:
- Section 153(1)(a) of the FSR Act provides that the FSCA (the responsible authority for a financial sector law – in this case the FAIS Act) ‘… may make a debarment order in respect of a natural person if the person has (a) contravened a financial sector law in a material way…’.
- Section 8A of the FAIS Act provides as follows: ‘Compliance with fit and proper requirements after authorisation. An authorised financial services provider, key individual, representative of the provider and key individual of the representative must – (a) continue to comply with the fit and proper requirements; and (b) comply with the fit and proper requirements relating to continuous professional development.’
- Chapter 2 of Board Notice 194 of 2017 sets out the fit and proper requirements relating to honesty, integrity, and good standing. In terms of s 8 thereof, an FSP must be a person who is honest and has integrity and be of good standing. Section 9 of the Board Notice lists incidents which constitute prima facie evidence that a person is not honest, or lacks integrity, or is not of good standing. Section 9 of the FAIS Act provides for the suspension or withdrawal of a licence under certain circumstances.
- In relation to an FSP’s obligations to submit financial statements, s 19 of the FAIS Act provides that such financial statements must ‘… be submitted by the authorised financial services provider to the registrar not later than four months after the end of the provider’s financial year or such longer period as may be allowed by the registrar.’
- Two of the policyholders appeared before the Tribunal.
- One confirmed that she knew Mr Shuping (who was married to her aunt), that he assisted her with a funeral policy, that she later received her policy document by mail, and she confirmed her signature on the statement which Mr Shuping had submitted to the FSCA. She denied that she ever received a call from anyone at 1Life questioning whether she took a policy with Mr Shuping.
- Another policyholder confirmed that she is related to Mr Shuping, who assisted her to apply for a funeral policy, that she had signed for the policy on a ‘cell phone’ (which was a reference to the tablet that Mr Shuping had been provided with by 1Life). She identified and confirmed her signature on her statement which Mr Shuping had submitted to the FSCA.
- What weighed heavily with the FSCA in withdrawing the authorisation of Shuping Brokers CC was the FSCA finding that the licensee does not meet or no longer meets the fit and proper requirements – which finding was based exclusively on the findings relevant to the debarment of Mr Shuping, namely that Mr Shuping had dishonestly contended that the policy holders had taken out policies with 1Life.
- Regarding the FSCA’s decision to withdraw the licence of Shuping Brokers CC as a FSP, Mr Shuping alleged that he had applied for exemption from the obligation to submit financial statements in 2015 and the FSCA had failed to respond to his application. When he did not hear from the FSCA, he assumed that he had been exempted and subsequently did not submit his financial statements for the 2016 financial year end and subsequent years.
• Counsel for the FSCA conceded that the FSCA had not responded to Mr Shuping’s application for exemption and that it had not at all engaged him on his application and his failure to submit his AFSs for the period 2016 to 2022.
- Mr Shuping submitted that he had suffered great prejudice as a result of the debarment and the withdrawal of authorisation of Shuping Brokers CC.
- He has been unemployed since 26 June 2023.
- He is prohibited from furnishing any financial advice or rendering any intermediary services as defined in s 3 of the FSR Act to financial customers.
- He has also been prohibited as licensee from concluding any new business as envisaged by the FAIS Act.
- He has suffered financially and will continue to suffer financially as Shuping Brokers CC was his only source of income.
- He was required to pay an amount of R 20 000,00 to his attorneys for legal fees, and his attorney had to withdraw as he could not afford the further legal fees.
- The FSCA did not conduct its own investigation, and that it relied solely on the information which 1Life had submitted to it which included a forensic report.
- Mr Shuping was not aware of the investigation which 1 Life had conducted, as this had not been communicated to him previously.
The FST held:
- As Mr Shuping had submitted statements from the three policy holders which materially contradict the FSCA’s conclusion that he had fraudulently signed up the policy holders, it was necessary to resolve the two conflicting versions by hearing from the policy holders themselves – which the Tribunal did in terms of s 232(5)(a) of the FSR Act.
- Two of the three policyholders corroborated Mr Shuping’s version that the policies were taken out with their permission and that they signed the application. Both policyholders confirmed their respective statements. Both witnesses were credible.
- The written statements provided by the policy holders were sufficient to create a material dispute of fact. Faced with such dispute, the FSCA could not have arrived at the decision that they did. The FSCA ought not to have debarred Mr Shuping, and consequently should not have withdrawn the authorisation of Shuping Brokers CC based on its findings.
- The FSCA findings upon which it based its decisions were materially wrong. The FSCA made the decision to debar Mr Shuping based on a report which it had received from 1Life. It did not conduct its own investigation to verify the allegations and findings by 1Life that Mr Shuping had essentially committed fraud.
- The FSCA made the decision to debar Mr Shuping on unverified and hearsay evidence. In aggravation, such decisions were made when confronted with material disputes. Had the FSCA conducted its own investigation it would have been placed in possession of the true facts surrounding the conclusion of the policies and that the policies were completely above board. Yet, it took the drastic and far-reaching decision to debar Mr Shuping to his prejudice.
- The FSCA’s decision to debar Mr Shuping was irregular and unlawful.
- The primary basis upon which the FSCA decided to withdraw the licence of Shuping Brokers CC is based on the findings made against Mr Shuping.
• The FSCA contends that there is an intrinsic link between an FSP and its only key individual (Mr Shuping). The fact that Mr Shuping was debarred on the basis that he no longer met the honesty and integrity requirements triggered the withdrawal of the licence of Shuping Brokers CC. The debarment findings were wrong, and accordingly the primary basis for the withdrawal of the licence/authorisation of Shuping Brokers CC also fails.
• Regarding Shuping Brokers CC’s failure to submit financial statements as contemplated in s 19 of the FAIS Act, the facts demonstrate that Mr Shuping had applied for an exemption from submitting financial statements and the FSCA conceded that it had not replied to the application for exemption, nor did it engage Mr Shuping for several years on his failure to submit financial statements.
• The FSCA’s silence and failure to address the issue clearly made Mr Shuping believe that his application was granted and that nothing further was required of him. This impression was not dispelled by the FSCA. The position was created by the FSCA and it cannot now seek to rely on its own failure to prejudice Mr Shuping further by withdrawing the licence for this reason.
- As it is clear that the primary reason for the withdrawal of the licence was based upon the findings of the FSCA regarding the conduct of Mr Shuping, and the evidence shows that those findings were clearly wrong. Had the correct evidence been before the FSCA, it is probable that the FSCA would not have exercised its discretion in terms of s 9 of FAIS to withdraw the licence/authorisation.
- The application for reconsideration must accordingly succeed.
- Mr Shuping suffered great prejudice because of his debarment and the withdrawal of Shuping Brokers CC’s licence. He was not able to earn an income and he was not able to conduct his business. The manner in which the FSCA debarred Mr Shuping was not only deficient but caused Mr Shuping significant harm.
• The circumstances constitute exceptional circumstances and warrant a costs order against the FSCA.
Conclusion and Order
The application for reconsideration is upheld. The FSCA decisions are set aside and remitted to the FSCA for further consideration. The FSCA shall pay 50% of Mr Shuping’s and Shuping Brokers CC’s legal costs associated with the application.
The law
Financial Advisory and Intermediary Services Act 37 of 2002 – ss 1; 8A; 9(1), 9(2); 19, 19(1), 19(2)(b)(iii)
- Board Notice 194 of 2017 – ss 8, 8(1)(a); 9, 9(3)
- General Code of Conduct for Authorised Financial Services Providers and Representatives – ss 2; 3(1)(d)
- Financial Sector Regulation Act 9 of 2017 – ss 3; 153(1)(a); 230(1); 232(5)(a).
Cases considered
- John Henry Elmsue Murray v FSCA (A37/2021) [2022] ZAFST 18 (4 April 2022)
- Pather v FSB 2018 (1) SA 161 (SCA).
This determination involving Mr Shuping and Shuping Brokers CC versus the Financial Sector Conduct Authority (FSCA) presents several important lessons, notes Compli-Serve, especially for financial services providers (FSPs) and regulators in SA. Here are key takeaways and lessons from this case:
Importance of Detailed Record-Keeping and Evidence Submission
Mr Shuping’s initial inability to provide sufficient evidence to counter the FSCA’s findings highlights the need for FSPs to maintain comprehensive and easily accessible records. This is critical for substantiating claims or defences in regulatory or legal proceedings.
Significance of Proper Communication Channels and Procedures
The FSCA’s failure to respond to Mr Shuping’s application for exemption from submitting financial statements underscores the importance of clear and efficient communication between regulators and FSPs. It’s crucial for regulatory bodies to provide timely feedback to applications and inquiries to prevent misunderstandings or procedural defaults.
Fairness and Due Process in Regulatory Actions
The Tribunal found that the FSCA relied heavily on a report from 1Life without conducting its own independent investigation, leading to decisions made on unverified evidence. This highlights the necessity for regulatory bodies to ensure fairness and due process by conducting thorough and independent investigations, especially when the evidence is disputed.
The Audi Alteram Partem Rule
The principle of audi alteram partem, meaning ‘let the other side be heard as well,’ was a crucial aspect of this case. Mr. Shuping argued that he was denied the right to be heard, which the Tribunal acknowledged by hearing from the policyholders directly. This underscores the importance of this principle in ensuring fair hearings and just decisions in regulatory matters.
The Role of Technology in Compliance and Verification
The case also touches upon the use of technology, as Mr Shuping contended that the funeral policy application forms were completed online, and no copies were provided to him by 1Life. This situation points to the need for technology platforms that ensure transparency, accountability, and ease of verification for all parties involved.
Remedial Measures and Sanctions Must Be Proportionate and Justified
The FST’s decision to set aside the FSCA’s actions due to insufficient investigation and reliance on contested evidence shows that sanctions and remedial measures need to be proportionate, well-founded, and justified. Regulators must ensure that their actions are not only legally compliant but also fair and reasonable, considering all evidence.
The Impact of Regulatory Decisions on Individuals
Finally, the case illustrates the significant impact regulatory decisions can have on individuals’ lives and livelihoods. The Tribunal acknowledged the prejudice suffered by Mr Shuping due to the debarment and withdrawal of his FSP’s licence, emphasising the need for careful consideration and fairness in regulatory interventions.