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THE FINANCIAL SERVICES TRIBUNAL

 

CASE NO: A62/2020

 

In the matter between:

 

 

BENNIE JORDAAN BROKERS (PTY) LTD                          APPLICANT

 

and

 

FINANCIAL SECTOR CONDUCT AUTHORITY                   RESPONDENT

 

 

Tribunal:   AdvVJ Ndinisa (Chair), Adv SM Maritz and Mrs Z Nkubungu-Shangisa

 

Appearance for Applicant: In person (Mr Fourie Gericke)

 

Appearance for Respondent: Ms Ziyanda Mshunqane

 

Date of Hearing: 8 September 2021

 

Date of Decision: 14 October 2021

 

Summary:    Application for Reconsideration of Decision of Financial Sector Conduct Authority ("the FSCA") in terms of section 230 of the Financial Sector Regulation Act, 9 of 2017 (" the FSR Act") - Failure to comply with the requirements of section 44{4) of the Financial Advisory and Intermediary Services Act, 37 of 2002 ("the FAIS Act") to exempt juristic representative from compliance with section 45(2) of Board Notice 194 of 2017 ("the BN 194 of 2017) - Financial Soundness

 

 

DECISION

 

 

A.         INTRODUCTION

 

 

1.          The Applicant lodged an application for reconsideration in terms of section 230 of the FRS Act of the decision taken by the FSCA on 18 November 2020 to decline its application for exemption in terms of section 44(4) of the FAIS Act.

 

2.          The concluding reasons for the Respondent's decision to decline the Applicant's application were that it was not satisfied that reasonable grounds existed to warrant the granting of the Applicant's exemption application. The Respondent concluded that the exemption would conflict public interest, prejudice the interests of clients and frustrate the achievement of the objects of the FAIS Act.

 

3.          Mr Fourie Gericke ("Mr Gericke"), the sole director (and shareholder) and key individual of the Applicant, lodged an application on 22 October 2019 on behalf of the Applicant for exemption from complying with the financial soundness requirements as envisaged in section 45(2) of the Determination of Fit and Proper Requirements for Financial Services Providers (FSP), BN 194 of 2017.

 

4.          The main reason stated by the Applicant in its exemption application for its non­ compliance with section 45(2) of BN 194 of 2017, which came into effect on 1 April 2018 (1 March 2019), was that due to the change in law regarding the requirements of financial soundness for FSPs, the Applicant's ability to exclude subordinated loans from the calculation of assets and liabilities was took away and that, the loan account could not overnight be expunged. Further reasons are set out hereinunder.

 

5.          On 18 November 2020 the Respondent took its decision to decline the Applicant's application for exemption based on the reasons as stated in paragraph 2 above as well as for reasons set out hereinunder.

 

6.          On or about 17 December 2020 the Applicant lodged its application for reconsideration of the decision of the Respondent, which forms the subject of this application.

 

7.          We are therefore required to determine whether the Respondent's decision to decline the Applicant's exemption application is justified.

 

 

B.         APPLICANT'S GROUNDS FOR EXEMPTION FROM REQUIREMENTS IN TERMS OF SECTION 45(2) OF BOARD NOTICE 194 OF 2017 (FINANCIAL SOUNDNESS)

 

8.          On 22 October 2019 the Applicant lodged an application to be exempted from complying with the requirements of financial soundness as contemplated in terms of section 45(2) of BN 194 of 2017.

 

9.          Mr Gericke, the sole director, and shareholder of the Applicant submitted that the Applicant was set up in 1979 with the objective of providing financial advice and intermediary services to clients.

 

10.      Mr Gericke further submitted that in relation to the 2019 financial statements a loan from him, was subordinated to the benefit of other creditors.

 

11.      He further submitted that with reference to the provisions of BN 106 of 2008, which were in effect until 31 March 2018, the assets (excluding goodwill, intangible assets, investments in and loans to related parties and investments with or loans to persons to whom the FSP render financial services) of the Applicant exceeded its liabilities (excluded loans subordinated in favour of other creditors).

 

12.      It was submitted that up and until the effective date of BN 194 of 2017, being 1 April 2018, the Applicant fully complied with the financial soundness requirements.

 

13.      Mr Gericke submitted that he is the sole director and shareholder of the Applicant and as such he will not require the loan to be paid back immediately to negatively affect the solvency of the Applicant.

 

14.      He submitted that he understood the provisions of BN 194 of 2017, specifically the requirement that the FSP's assets must at all times exceed its liabilities.

 

15.      He submitted that due to amended BN 194 of 2017, which became effective from 1 April 2018, the Applicant's ability to exclude subordinated loans from the calculation of assets and liabilities was taken away. These loans could not simply be wiped out on 1 April 2018.

 

16.      He further submitted that if it was not for the amendment to the financial soundness requirements, the Applicant's assets would have continued to exceed its liabilities and it would have continued to meet its financial soundness requirements.

 

17.      It was his submission that based on the above, it became necessary for the Applicant to apply for exemption.

 

18.      A remedial action plan for the repayment of the loan by the Applicant to Mr Gericke was referred to, but no specific details were given as to how the loan will be paid back. It was submitted that the Applicant is in the process of reducing the load and paying the money back to Mr Gericke, but that it will take a couple of years.

 

19.      The Applicant requested a period of a minimum of 3 years in which to effect the necessary changes.

 

20.      An exemption from payment of the exemption fee was requested as it was submitted that it was a consequence of the change in legislation.

 

21.      On 13 July 2020, prior to the lodging of the exemption application, Mr Gericke also conveyed via email to Mr Mpho Radebe of the Respondent the following:

 

21.1          That over the years he woutd continue to deposit money into the Applicant's account for every day running of it in the months that the income was too low to cover the expenses. This increased the loan account to the amount of R334 423.00 in the financial statements ending February 2019.

 

21.2      That it was never a priority to reduce the loan account as the Applicant is 100% owned by him and this amount is owed to him and no one else. He

submitted that it is a subordinated loan. He further stated that his personal assets are worth more than 10 times this loan account amount.

 

21.3          That the Applicant does not accept payments from clients into its business account or collect cash premiums from clients and therefore there is no risk to the Applicant's clients in him having a loan account with the Applicant.

 

21.4          That he had to give surety in his personal capacity to the insurance companies that the Applicant is dealing with.

 

21.5          That the loan account will be expunged by the financial year ending February 2022.

 

21.6          That the Applicant will reduce the loan account to him by reducing its monthly expenses i.e., the Applicant's administration assistant, namely BD Jafta, is no longer an employee of the Applicant and the Applicant took a decision not to replace her to reduce its monthly expenses.

 

21.7          That the budget is to reduce the loan account by Rll 500.00 per month.

 

22.      On 16 October 2020, in response to the Respondent's letter, dated 1 October 2020, Mr Gericke replied as follows:

 

22.1             That the loan account was reduced as follows:

 

22.1.1        at the end of February 2019 it was R334 423.00;

22.1.2        at the end of February 2020 it was R273 935.00;

22.1.3        at the end of September 2020 it was R158 196.97; and

22.1.4        at the end of February 2021 it will probably be less than

Rl00 000.00.

 

22.2             He further submitted that the loan will probably be expunged even earlier than February 2022 (as mentioned earlier).

 

22.3             He further stated that the Applicant wants to comply with the new law, but that it needs time to reduce the loan.

 

22.4             He denied that he was dishonest and explained that he signed surety with the service providers with his personal assets. He stated that when he said that his assets exceeded his liabilities, he referred to it in his personal capacity and as business. He stated that he views the Applicant as himself. He stated that as a result thereof if the Applicant owes money to a service provider and it is not able to pay, the service provider will come after him personally.

 

22.5             With reference to his financial statements, he submitted that he has adequate financial resources to fulfil the short-and-long term financial obligations of the Applicant.

 

22.6             He further informed Mr Mpho Radebe that he told some of the Applicant's clients that the Respondent said that his director's loan account could cause them financial hardship or prejudice their interests.

 

23.      Based on the grounds, as stated above, the Applicant lodged its exemption application.

 

C.         THE RESPONDENT'S DECISION REGARDING THE EXEMPTION APPLICATION

 

24.      The decision taken by the Respondent on 18 November 2020 as well as its letter, dated 1 October 2020, set out in detail the reasons why the Applicant's application for exemption was declined, which inter alia were based on the following reasons, namely:

 

24.1          The Applicant failed to comply with the requirements of section 45(2) of the Fit and Proper Requirements (financial soundness).

 

24.2          The power of the Respondent to exempt the Applicant in terms of section 44(4) of the FAIS Act read with section 281{3)(b) of the FSR Act provides that the Respondent may exempt the Applicant on reasonable grounds provided that the Respondent is satisfied that-

 

24.2.1        the rendering of financial services by that person is already partially or wholly regulated by another law; or

24.2.2        the application of a provision of the Act will cause that person or clients of that person financial or other hardship or prejudice; and

24.2.3        the granting of the exemption will not conflict with the public interest, prejudice the interests of clients, and frustrate the achievement of the objects of the Act.

 

24.3          It was submitted by the Respondent that in exercising its discretion it is necessary to have regard to the qualifying factors as set out in section 44 of the FAIS Act.

 

24.4          The Respondent is not satisfied that the Applicant has proven reasonable grounds, as contemplated in section 44 of the FAIS Act, to justify an exemption from the financial soundness requirements and was of the view that if an exemption is granted it would conflict public interest, prejudice the interests of clients and frustrate the achievement of the objects of the FAIS Act.

 

24.5          The Applicant's implied contention that no transitional period was provided to enable compliance with amended financial soundness requirements and that the subordinated loan could not be wiped out as of 1 April 2018 was rejected by the Respondent on the basis that it is widely recognised and accepted that regulation has and always will have a negative financial impact on and/or may create other burdens for regulated persons. This was within the contemplation of the legislature when it decided to impose the amended financial soundness requirements.

 

24.6          It was the contention of the Respondent that the question, inter alia, is not whether compliance with the requirements creates hardship, but rather

what reasonable grounds exist in relation to that hardship to support an application for exemption i.e., whether the hardship experienced by the Applicant is excessive in relation to other financial services providers that are in a similar position having cognisance of the purpose of the requirements and the objects of the Act. The Respondent was of the view that in the absence of such information the mere claiming that compliance with the requirement creates hardship does not constitute reasonable grounds as contemplated in section 44(4) of the FAIS Act.

 

24.7          The financial soundness requirements were amended with effect from 1 April 2018. The Applicant's compliance officer (Ms Verona Claassen) confirmed that Mr Gericke was made aware of the amended financial soundness requirements on 17 March 2018 via email and through subsequent discussions during compliance meetings.

 

24.8          The Respondent referred to the purpose of the financial soundness requirements and pointed out that they require from the FSPs to remain solvent and that FSPs should at all times have adequate financial resources to fulfil their short-and-long term financial obligations as and when it falls due.

 

24.9          It was submitted that Mr Gericke completed the financial soundness declaration indicating that the Applicant met financial soundness requirements as at the year-end 28 February 2019, in which he included his personal assets in the Applicant's (FSP's) financial soundness calculation.

 

24.10     It was submitted that the Applicant (licensee} is a legal entity, and that Mr Gericke should not have considered his personal assets when he declared that the Applicant met financial soundness requirements as at year-end. It was the submission of the Respondent that Mr Gericke was dishonest when the declaration was completed. The Applicant (Mr Gericke} ought to have known how financial soundness is calculated.

 

24.11     The Respondent rejected the submission by the Applicant that the Respondent has said that the subordinated loan could cause them financial hardship or prejudice their interests.

 

24.12                         The Respondent considered the Applicant's submission, as stated in its email, dated 16 October 2020, that the subordinated loan was reduced as soon as the Applicant became aware of the change in the calculation of the financial soundness requirements as well as the submission that the loan would probably be expunged before February 2022.

 

24.13     In considering the submissions made by the Applicant as the basis for its exemption the Respondent noted the following:

 

24.13.1        The regulatory framework of the FAIS Act provides for certain fundamental requirements of which solvency is one. These requirements ensure the achievement of the objects of the FAIS Act and are in line with international developments. It was submitted by the Respondent that the Applicant's exemption application did not comply with the requirements referred to in section 44(1) of the FAIS Act.

 

24.13.2        FSPs that have been approved by the Respondent are required to comply with the applicable law as well as prescribed rules and conditions.  These legal requirements have been pronounced in the public interest and their objectives are to ensure that required entities conduct their business properly to protect clients.

 

24.13.3        These objectives are aligned to Government's commitment to a 'safer financial sector to serve South Africa'. Therefore, an exemption application must be approached with circumspect to avoid the potential impediment of Government's intended objectives.

 

24.14     It was submitted by the Respondent that in view of the above, it was not satisfied that reasonable grounds exist to warrant an exemption from the financial soundness requirements.

 

24.15     For reasons stated above, the Respondent dismissed the Applicant's application for exemption.

 

D.         THE APPLICANT'S GROUNDS FOR RECONSIDERATION OF THE RESPONDENT'S DECISION (17 DECEMBER 2020)

 

25.      The Applicant's grounds were as follows:

 

25.1      It was submitted by Mr Gericke that in 2018 the law was changed in respect of the Fit and Proper Requirements for FSP and as a result thereof the approach of the Respondent in respect of subordinated loans also changed.

 

25.2      Mr Gericke submitted that in 2006 he took over the Applicant and became the sole director with 100% shareholding.

 

25.3      He submitted that he would sometimes deposit money into the Applicant's account for expenses and the running of the Applicant. These amounts

accumulated over the years. He submitted that the loan at the end of November 2020 was R142 696.00.

 

25.4      He submitted that prior (before 1 April 2018) to the changing of the law the loan account was stated as a subordinated loan in the annual financial statements.

 

25.5      He submitted that once he became aware of the changing of the law, he started to reduce the loan account.

 

25.6      He submitted that he informed the Respondent that he wanted to comply with the requirements of the amended law, but that he needed time to expunge the loan and could not do it overnight. He stated that this was the reason for the Applicant's exemption application.

 

25.7      He submitted that the loan will probably be expunged by the end of July 2021.

 

25.8      He submitted that he signed surety in his personal capacity with Sanlam, Old Mutual and Momentum ("service providers") and that these service providers who come after him in his personal capacity as surety if the Applicant owes them money. He submitted that's the reason why he included his personal assets in the Applicant's financial soundness declaration. He denied that he was dishonest as alleged by the Respondent.

 

25.9      He confirmed that the Applicant does not collect, hold, or receive premiums from clients.

 

25.10 He confirmed that the Applicant has adequate financial resources to fulfil its short- and long-term financial obligations as and when these falls due.

 

25.11 He submitted that the subordinated loan will not prejudice the interests of clients and that no financial harm will come to the clients of the Applicant because of the loan.

 

25.12 He submitted that he has respect for the laws of this country and that probably 99% of companies in South Africa have directors' loans.

 

25.13 Subsequent to filing the Applicant's application for reconsideration Mr Gericke filed a document in which he confirmed that the loan as of 31 January 2021 was R90 696.00. In that document he requested that an extension be granted to expunge the loan account until the end of July 2021.

 

25.14 Based on the above reasons, Mr Gericke on behalf of the Applicant requested this Tribunal to refer this matter back for reconsideration of the Respondent's decision and to grant an extension until the end of July or August 2021to expunge the loan account.

 

E.          RELEVANT LEGISLATION & LEGAL PRINCIPLES

 

26.      The Determination of Fit and Proper Requirements 2017 ("BN 194 of 2017") came into effect on 1 April 2018 and it provides that all registered FSPs must comply therewith.

 

27.      Section 45 of the abovementioned BN 194 of 2017 took effect from 1 March 2019 as envisaged in terms of the provisions of section 53(1) thereof (financial soundness requirements).

 

28.      Section 45{1) of BN 194 of 2017 applies to a Category I FSA and a juristic representative of a Category I FSP that does not hold, control or has access to client assets or that does not collect, hold, or receive premiums or other monies in respect of a financial product. It is not disputed that the Applicant is a juristic representative and that it operates as a Category I FSP.

 

29.      Section 45(2) of BN 194 of 2017 states that the assets of a Category I FSP and juristic representative of a Category I FSP must at all times exceed the liabilities of that FSP or that juristic representative.

 

30.      Section 47 of BN 194 of 2017 defines "assets" in relation to the general solvency requirement and the additional asset requirement to mean the assets of an FSP excluding the goodwill, intangible assets, and investments in and loans to related parties.

 

31.      Section 47 of BN 194 of 2017 defines "liabilities'' in relation to the general solvency requirement to mean the liabilities of the FSP excluding loans in favour of other creditors.

 

32.      "Liquidity requirement'' is defined in section 47 of BN 194 of 2017 for a Category I FSP and a juristic representative as liquid assets equal to or greater than 4/52 weeks of annual expenditure.

 

33.      The Registrar is empowered to grant an exemption to any person or category of persons from any provision in terms of section 44 of the FAIS ACT.

 

34.      The Respondent may exempt any person or category of persons in terms of section 44(4) of the FAIS Act read with section 281(3){b) of the FSR Act on reasonable grounds provided that the Respondent is satisfied that-

 

34.1          the rendering of financial services by that person is already partially or wholly regulated by another law; or

34.2          the application of a provision of the Act will cause that person

or clients of that person financial or other hardship or prejudice; and

34.3          the granting of the exemption will not conflict with the public interest, prejudice the interests of clients, and frustrate the achievement of the objects of the Act.

 

35.      In exercising the Registrar's discretion, it is necessary to have regard to the qualifying factors as set out in section 44 of the FAIS Act, which factors should be met in the exemption application to the satisfaction of the Registrar before exemption will be granted.

 

36.      Regarding the factor of "hardship" it is necessary to consider that the Registrar cannot look at financial hardship in isolation but that it must consider what reasonable grounds exist in relation to that hardship to support an application for exemption. In other words, the Registrar must weigh up all the factors as set out in section 44 of the FAIS Act conjunctively.

 

37.      According to the Registrar, the enquiry should be whether the hardship experience by the Applicant is excessive in relation to other persons that must comply with the same requirements. Hence, by merely claiming that compliance with the requirements creates hardship, does not constitute reasonable grounds as is envisaged by section 44(4) of the FAIS Act.

 

38.      If the Registrar declined an application for exemption the aggrieved Applicant is entitled to apply in terms of section 230 of the FSR Act for reconsideration of the decision of the Registrar by the Financial Services Tribunal.

 

F.          SUBMISSSIONS AND ANALYSIS THEREOF

 

39.      Applicant's submission:

 

39.1          In addition to the submissions already recorded Mr Gericke made the following submissions:

39.1.1    Mr Gericke denied that he knew since 17 March 2018 of the amendments to the law regarding the financial soundness of FSPs. He admitted that the compliance officer sent him an email, but he denied that it came to his attention on 17 March 2018. He stated that he only became aware of the amendments in 2019 and immediately thereafter applied for exemption.

 

39.1.2    He stated that the loan account has been reduced and is currently approximately R19 596.00.

 

39.1.3    He stated that if an exemption is not granted the Applicant's clients will suffer hardship. He explained that most of the Applicant's clients are long-standing clients since 1996 and if the Applicant's license is suspended, these clients need to find new FSPs and that they will be prejudiced.

 

39.1.4    He stated that if the Applicant is closed-down, he will personally suffer hardship as it will have a direct impact on his income since the Applicant's business is his main income-stream for the past 25 years.

 

39.1.5    He stated that the Applicant has enough financial resources to immediately clear the loan account and he indicated that it will be done immediately in which event the Applicant will be compliant with the financial soundness requirements.

 

39.1.6    He stated that the loan account is to him personally and not to third parties.

 

39.1.7    He acknowledged that the Applicant does not comply with the financial soundness requirements and therefore the exemption application.

 

39.1.8    He acknowledged that a consultation process was held with industry by the Respondent regarding the amendments to the law, but he denied that industry was satisfied and stated that the Respondent disregarded the comments made by industry.

 

40.      Respondent's submissions:

 

40.1      In addition to the submissions made by the Respondent in its decision the Respondent's representative submitted that the Applicant did not adequately address in its exemption application the aspect of "prejudice to the interests of clients" neither did it show that meeting the financial requirements "will cause financial or other hardship".

 

40.2      It was further submitted that the Applicant did not address why the granting of the exemption application wilt not conflict public interest and not frustrate the achievement of the objects of the FAIS Act.

 

40.3      It was the submission of the Respondent's representative that the Respondent could only consider the submissions before it at date of the exemption application and based its decision on those submissions.

 

40.4      It was submitted that the Applicant carried the onus to satisfy the Respondent on reasonable ground that all the factors referred to in section 44(1) of the FAIS Act were met. The Applicant did not discharge this onus and consequently its exemption application was dismissed.

 

40.5      It was further submitted that despite having known of the proposed amendment to the requirements prior to it coming into effect the Applicant made no effort to bring its affairs in line with the amended requirements. The application for exemption was only lodged as a reaction to the Respondent having raised non-compliance during its analysis of the 2019 financial statements of the Applicant submitted on 15 July 2019.

 

40.6      The Respondent's legal representative further submitted that the Applicant's application for reconsideration will have no practical effect since the Applicant in its reconsideration application requested that it be given an extension until endof July or August 2021to expunge the loan account and that such period has already lapsed. This Tribunal· was then referred to relevant case law from which it appears that a Court (and this Tribunal) should not and ought not decide issues of academic interest only.[1]

 

40.7      It was submitted by the Respondent's legal representative that the powers of this Tribunal are circumscribed as this Tribunal can only set aside the decision and remit it back for further consideration, but that it is not open to this Tribunal to substitute such decision.[2]

 

41.      Tribunal's findings:

 

41.1          This Tribunal has duly considered the submissions made by both parties and finds that the Applicant in its exemption application has not discharge the onus that reasonable grounds exist, as contemplated in section 44(4) of the FAIS Act, to justify an exemption from the financial soundness requirements. In the absence of such information the mere claiming that compliance with the requirements will create hardship does not constitute reasonable grounds as contemplated in section 44(4) of the FAIS Act.

 

41.2          In its exemption application the Applicant has failed to adequately address the qualifying factors as set out in section 44 of the FAIS Act i.e., that the application of a provision of the FAIS Act will cause the Applicant or its clients financial or other hardship or prejudice and that the exemption will not conflict with public interest, prejudice the interests of clients and frustrate the achievement of the objects of the FAIS Act. Although it has attempted to address these factors in its application for reconsideration as well as at the hearing, this Tribunal agrees with the submissions made by the Respondent's representative that, the Respondent could only consider the submissions, which were before it at the date of the exemption application and at date thereof these further submissions were not before it.

 

41.3          This Tribunal further agrees that the application for reconsideration will have no practical effect for the following reasons:

 

41.3.1    The period for which an extension is requested to expunge the loan account has lapsed (until end of July or August 2021).

 

41.3.2    Mr Gericke submitted that the Applicant will immediately pay the outstanding amount on the loan account (approximately R19 596.00) and as a result thereof the loan account will be expunged and the Applicant will meet the financial soundness requirements.

 

41.3.3    Mr Gericke previously submitted that the loan account will be repaid in instalments of Rll 500.00 per month. Even if the loan account was not immediately repaid, as promised by Mr Gericke at date of hearing, the loan account will be expunged within 2 months from date of hearing in terms of payment of the proposed monthly instalments (Rll 500/month).

 

41.3.4    Mr Gericke further submitted that the Applicant has enough financial recourses to meet its financia short-and-long term obligations when it falls due.

 

41.3.5    The Applicant's license was not suspended and/or withdrawn by the decision of the Respondent and by becoming compliant with the financial soundness requirements there will be no need for further adjudication on this matter.

 

41.3.6    As a result of the above any remittance of the application will have no practical effect as it will only be of academic interest (See: Magidiwana case supra).

 

G.         CONCLUSION

 

42.      Having considered the evidence, we find that the Respondent's decision for refusing the exemption application is-justified and this Tribunal finds no basis to interfere therewith.

 

H.         ORDER

 

The following order is made:

 

1.          The Applicant's application for reconsideration is dismissed.

 

 

2.          No order as to costs.

 

 

ADV SM MARITZ

(Signed on behalf of Tribunal consisting of:

Adv W Ndinisa (Chair), Adv SM Maritz & Mrs Z Nkubungu-Shangisa)

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