STUCK IN DENIAL
The Financial Services Tribunal has upheld an administrative penalty and debarment decision by the FSCA related to alleged Ponzi scheme Smart Billion
The Financial Services Tribunal, a body whose decisions are more interesting than you might expect, has delivered 18 rulings so far this year. Matters that reach the tribunal are mostly requests for it to reconsider decisions by another body, such as the Financial Sector Conduct Authority (FSCA) and the country’s pension funds adjudicator.
At least half of these 2023 cases concern whether someone selling policies, giving advice or performing particular financial duties ought to be debarred for allegedly fraudulent or other undesirable behaviour.
Particularly striking about the debarment matters is how often those at risk of being struck off appear to have no conception of how bad their behaviour has been.
The case of Renault Otto Kay illustrates the problem. The FSCA imposed an administrative penalty of R500,000 and barred him from providing financial services for five years.
Kay was one of two executive directors of Smart Billion and the company’s nominated “key individual”. But Smart Billion was, by all accounts, a typical Ponzi scheme, taking deposits from one client to pay for withdrawals requested by another. Clients received false financial statements, the FSCA found, and when the scheme failed, Kay resigned, the company was liquidated and clients lost millions.
Key individuals such as Kay have to satisfy the FSCA they are “fit and proper” to fulfil the responsibilities of managing or overseeing company activities.
But in an interview after the company folded, Kay conceded he wasn’t involved in the business or its financial affairs. He said he realised in 2016 that some statements issued by the business were “questionable” and some of its trading was deliberately conducted without his knowledge. In other words, Kay had no oversight of the company’s financial affairs, and he ignored the problem.
‘Could have stopped the rot’
After examining the documentation, the tribunal concluded that Kay had acted as a front, “pretending to be the key individual of the company, [but] performed no functions as key individual”.
The deputy chair of the tribunal, retired appeal court judge Louis Harms, questioned Kay’s “professed lack of knowledge” of what the company did, adding that he had shown a reckless, if not intentional, disregard for his duties as a key individual.
Every week, for years, he flew from Cape Town to Joburg and spent the week in Smart Billion’s offices, said Harms. He knew the company failed to hold board meetings and he wasn’t asked to consider financial statements. Though he knew he had been lied to about company affairs, he did not follow up.
Despite this appalling track record, Kay said he shouldn’t be punished by the FSCA because, strictly speaking, he didn’t “contravene” any financial sector law an argument the FSCA and Harms, via the tribunal, efficiently demolished.
Kay also said the administrative penalty issued by the FSCA was too high and the period of debarment was too long.
He proclaimed his “innocence”, saying he had been misled, and professed his desire to “maybe return to the financial industry”.
Harms said a higher body, such as the tribunal, couldn’t interfere with the decision of a lower body unless it had been biased or exercised its discretion capriciously or on a wrong principle.
Kay hadn’t shown this was so. Moreover, there was no indication from his “nonchalant attitude” to his statutory duty that he appreciated the seriousness of his failure. He still didn’t acknowledge that if he had taken the trouble to “look once at the bank statements” or ask where the money was coming from or going to, he would have “seen a rat”.
“The rot would have been put a stop to and the clients would not have lost their millions,”
Harms said.