Business Maverick

BUSINESS MAVERICK: ANALYSIS

The troubling matter of David vs Sanlam

The troubling matter of David vs Sanlam
The fire at the offices of Parker Khan Inc in Lansdowne, Cape Town, during the early hours of the morning of Tuesday, 25 February, destroyed what could be vital evidence. (Photo: Adobestock)

A financial professional is debarred by a big company. A professor of finance and insurance deems the applicable legislation and its application unconstitutional. The insurer replies ‘that is the law’. This is how small people are trampled.

In two separate, but linked cases, insurance giant Sanlam fired and then debarred an employee, Lemuel Melvill for misconduct and then cancelled his father, David Melvill’s long-standing contract because David employed him as an administrator.

While ordinary investors may welcome the idea that the industry is working to protect them from exposure to unscrupulous brokers and conmen, what should be alarming is that it was not the regulator, or a court who took the action, but a company that has acted as judge, jury and executioner.

Robert Vivian, professor of Finance and Insurance at Wits University, is alarmed at this turn of events. In a lengthy comment on the matter, which was sent to Business Maverick, he argues that this outcome is what comes of badly drafted legislation, specifically the Financial Advisory and Intermediary Services (FAIS) Act of 2002, and that in the Melvill cases, Sanlam has interpreted the Act incorrectly.

The Act, Vivian says, was not passed with “the troubling practice of debarment in mind”. Instead, its purpose was to address the lapse rate of life policies. A concern which was “misplaced” anyway, he writes.

As it turns out, the Act has not succeeded in curbing life policy lapse rates, which have continued to increase, with enormous cost implications.

The FAIS Act became the most expensive regulatory apparatus ever introduced in South Africa,” he writes. But nothing was learnt from this as the Act is due to be repealed and incorporated into the Twin Peaks system. “The massive costs of FAIS pales into insignificance compared to the R4.8-billion to R6-billion per annum it is estimated that the Twin Peaks system will cost,” Vivian writes.

The problem with bad legislation is that it is seldom repealed. In this case, the Act has morphed into a piece of general market conduct legislation out of which evolved the current practice of debarment.

Vivian believes it is important to assess the practice of debarment as it will reappear in the Conduct of Financial Institutions Act (COFI), the FAIS replacement. “Very few I suppose have given the matter of debarment much thought and probably will not until they, like David Melvill, become a victim of the practice.”

The problem with debarment lies not with the merits of the individual issues, but with the process. “It is the debarment process as currently interpreted which is the problem. It should not be permitted to continue.”

He then uses a somewhat extreme hypothetical example to explain his argument.

Assume there is a supplier to a very large retailer. A problem crops up between them and the retailer gets its internal team to investigate the matter, and decides the supplier is in the wrong. The retailer asks the supplier to pop round to discuss the matter and articulates its view. The retailer’s security team then takes the supplier outside and shoots him.

As far as the retailer is concerned, the matter is now finalised. Someone asks the retailer if the police will be concerned and the retailer replies that the police don’t get involved in these things. However, the police do have a website on which the retailer will record the shooting. This will be added to statistics that show the system is effective.

The problem is not whether the supplier got a fair hearing or not. The entire system is the problem.

To support his argument, Vivian refers to the work of economist and Nobel laureate Professor Douglass North whose work can be summed up thus: Institutions matter and history matters. In the North framework, intuitions are constraints.

The supplier cannot just be shot and certainly not by the retailer. There are constraints that prevent this, specifically in the form of institutions and history.

What are the institutional frameworks that protect the supplier?

The retailer can take no penal action against the supplier. The retailer can investigate, prepare a report and lodge a complaint with the South African Police, but they (the private sector), cannot take penal action against another person.

The South African Police cannot take penal action against the supplier either. They can investigate the matter and submit a dossier to the public prosecutor.

And the public prosecutor cannot take penal action against the supplier. The prosecutor can study the dossier and if appropriate, summons the supplier to court, setting out in an indictment, the basis on which the prosecutor concluded that an existing law had been violated and that independent objective evidence exists that supports this conclusion.

These two taken together are known as the Principle of Legality.

The case will proceed before a judge who will ensure the case follows the due process of law, and who if a guilty verdict is found, will impose the appropriate sentence.

The punishment must fit the crime, the principle of the Lex Talionis which goes back to the Code of Hammurabi,” writes Vivian.

The due process of law involves a number of practices, which go back centuries and are known to experienced lawyers and judges, one of these is what is called the principle of personal guilt.

There is no such thing in our law as vicarious criminal liability, he notes, but more about that later.

The Lemuel Melvill matter

David’s son, Lemuel Melvill was employed by Sanlam, where he was found guilty of forging a client’s signature on secondary insurance documentation (with no financial gain). This, says Vivian, is an industrial relations matter, which is well covered by the CCMA, the Labour Courts and the Labour Appeal Court.

A disciplinary hearing was arranged which was chaired by an independent advocate, David Woolfrey who found against Lemuel and recommended a first and final warning be issued against him. For reasons not stated, Sanlam went against the recommendation of the independent chairman and dismissed Lemuel.

The reasons are important since Sanlam has overridden the decision of an independent chairman. This is even more important when it comes to debarment – if the matter was confined to a labour relations issue, there would not have been a problem,” Vivian writes.

Not only was Lemuel dismissed, but he was also debarred. This is a different kettle of fish, says Vivian. “The termination of the services of an employee is a contractual matter. Debarment is a penal matter. As indicated above, historically, the private sector has no legal authority to impose penal sanctions – the retailer cannot shoot the supplier.”

Debarment as a practice has evolved, and as evidenced by this matter, precludes the debarred person from obtaining virtually any employment anywhere in the South African financial sector. Like the right to life, the right to work is a natural right, which debarment ends.

All of the institutional frameworks, as set out above, exist to ensure these rights are protected. “They cannot willy-nilly be cut down, not even to get the devil,” Vivian says.

He notes that statutory debarment is rare and for comparison, examines another statutory practice of debarment. “The only other example of statutory debarment that I am aware of is the debarring of individuals from holding the office of director of companies. This can only occur under very restricted circumstances.”

The Companies Act sets out that a person can only be debarred from holding the office of director if convicted by a court of law of specific pre-existing offences involving dishonesty, such as theft, and received a severe sentence. The debarment does not preclude that person from any other employment; only the very limited holding the office of director. Unlike FAIS, as currently interpreted, it does not eliminate the natural law of the right to work. The debarment process set out in the Companies Act is a far cry from what has evolved out of FAIS.

The debarment in terms of FAIS is much wider in its application (not limited to those holding the office of director, but virtually everyone who works in the finance industry), and its scope is wider in that it is not confined to merely serving on the board of directors. Any process that can be so widely applied needs a very strict interpretation and clear process to be followed if it is to pass constitutional muster.

Vivian notes that in the documentation he has examined on the matter, he has been unable to find detail on the process followed by Sanlam to debar Lemuel. Sanlam’s view expressed on 27 December on journalist Alec Hogg’s radio programme was: “On advice from Sanlam’s compliance division, distribution management decided to terminate Lemuel’s contract as his conduct displayed a clear lack of honesty and integrity, and amounted to material contravention of the FAIS Act. Given this outcome, Sanlam was obliged to debar Lemuel in terms of the current legislation with effect 14 March 2018.”

Where a penal sanction is involved the principle of legality is important. “It is not sufficient merely for the compliance division to conclude a person’s conduct displayed lack of honesty and integrity. What is necessary is that a pre-existing law involving dishonesty, which imposes a criminal sanction, must be contravened and a conviction secured before a court of law following due process. The mere opinion of the security guard is not enough to be able to take the supplier out and shoot him. This is clear from the debarring process of directors. To be debarred, the director had to commit a criminal offence (principle of legality), involving dishonesty, be convicted by a court of law, after investigation by the police and a case brought by a prosecutor before a properly convened court of law and after the due process of law imposed a severe sentence of imprisonment.”

What Vivian finds difficult to comprehend is that in terms of FAIS, all that is necessary is that the corporate compliance division forms an opinion that the employee’s conduct displayed clear lack of honesty and integrity. “This is a long way from legal reality.”

The second part of Sanlam’s argument is more troubling, he says. This is the fact that Sanlam says it was “obliged to debar Lemuel in terms of the current legislation”. “This would account for my inability to find a debarment process which was followed – it appears there was no process,” says Vivian.

He points out that a disciplinary hearing and debarment are two different things. Debarment deprives the debarred person of his fundamental right to work. “It seems that Sanlam is of the view it is obliged to deprive persons of the right to work without any due process being followed if their compliance division says so.

It, according to this view, is doing so by parliamentary decree. Those who understand history, North’s point, will understand the problem with Sanlam’s approach. As Parliament evolved into a law-making institution, the question which had to be faced is, is Parliament the sovereign law-making body? As the idea evolved that it was, Leslie Stephen posed the famous question, which has remained unanswered to this day. If Parliament is sovereign, what is the position if it passed a law that all blue-eyed babies be put to death?”

Vivian references Albert Dicey, regarded as a leading constitutional jurist, who could not answer this question. Dicey accepted that society would probably revolt and not obey the law. “He was wrong, as demonstrated by this case. Irrespective of the extent that the ‘law’ violates fundamental legal principles, the ‘law’ will be implemented,” writes Vivian. “It is absurd to believe a person can be deprived of the right to work, while also violating all the fundamental institutions protecting those rights including the principle of legality, by mere parliamentary decree.”

It should be recalled that Advocate Woolfrey who chaired the disciplinary hearing did not recommend the termination of Lemuel’s services. Under these circumstances, I cannot see how any independent presiding official not recommending the termination of employment contract would recommend something as extreme as debarment, eliminating that person’s right to work. Debarment cannot be an automatic appendage flowing from the disciplinary hearing.”

On the matter of David Melvill

The main issue addressed by Vivian’s comment is the action taken against David Melvill.

Once debarred in terms of the current practice, Lemuel became virtually unemployable in the financial market in South Africa, until the debarment was lifted, which has happened. His father David Melvill rightly offered him interim employment. It is common cause that David Melvill did not appoint Lemuel as a representative or as a key person, the two positions defined in FAIS. He was appointed as an administrator and personal assistant.”

As discussed earlier, debarment as a director means the person may not be appointed as a director, but can do anything else. That person is free to earn an income from any other activity. On the other hand, if a person is debarred in terms of FAIS, as currently applied, what is it the person may not do?

Now since the natural right to work is limited by debarment, one would think that prohibition against working would have to be very narrowly construed. Failure to do so will mean whenever anyone is arbitrarily debarred, that person would be left to starve.”

Sanlam seems to have adopted a very broad interpretation of what is restricted. In fact, determining what is restricted, is an interpretation of law. Once again in this matter, Sanlam took it that it, via its security guard, determines that and not the courts.”

In the case of a director, in terms of the Companies Act, if it is found that a debarred person is holding the office of a director, the regulator advises the company of this, whereupon the company acts.

One would think that if Sanlam was of the view Lemuel’s employment by the senior Melvill was in breach of the debarment, its course of action would be to advise the regulator, or police and leave it up to these institutions to take appropriate action.

As indicated above, penal matters should not be the terrain of the private sector.

Sanlam’s view appears to be that Lemuel did something wrong. Thus it concluded it could take any action they desired against David including cancelling his contract, debarring him and destroying his livelihood. This again is outside of the due process of law.”

Criminal vicarious liability

Vivian now comes to the subject of vicarious liability, which he believes is another serious issue. “As mentioned earlier, David had not appointed Lemuel as a key person or as representative, which are statutory positions. It was made clear to Lemuel that he may not perform any acts reserved to key persons or representatives and there is no evidence to suggest that he did so. David himself thus did not breach the provisions of FAIS.”

However, Sanlam’s view is that Lemuel nevertheless factually performed these acts and therefore David must pay the price. “This is penal or criminal vicarious liability,” writes Vivian. “There is no basis for criminal vicarious liability in law and never has been.”

Failure to follow any process – let alone due process

Vivian adds that in his analysis of the documentation, there is no evidence of the process followed by Sanlam.

What the giant insurer should have done, Vivian suggests, if it believes it has the right or obligation to take action against David, is to:

  • Set out that basis of the case in writing (the indictment)

  • Set out the factual evidence on which they believe the action can be proven

  • Appoint an independent person to adjudicate the matter

  • Present that case and give David the opportunity to refute the case

  • The presiding officer should provide written reasons for his decisions. The principles are the principles of natural justice.

Even if this were done, it is not clear it would be lawful since it remains a penal matter imposed by the private sector,” he says.

Whatever the merits of the case against the Melvills, Vivian’s key concern is that the debarment process introduced by FAIS, and as currently implemented within the industry, is fundamentally unfair.

It does what Thomas More thought may happen – all the laws which protect the individual are cut down and now the devil is turning. Any plan to continue with this practice in terms of the new Act should be resisted. The debarment provisions in FAIS should never have seen the light of day.”

Sanlam’s response

In a written response to Business Maverick, the company notes that it has at all times acted in compliance with its regulatory responsibilities, more specifically as set out in section 14 of the FAIS Act, relating to the debarment of representatives, and as amended by the provisions of the Financial Sector Regulation Act.

While the FAIS Act places a solemn and onerous responsibility on an insurer to comply with numerous statutory provisions, it also requires that we apply the same level of compliance to business engagements with our sales force and financial advisers.

Sanlam’s recent dealings with the Melvills are rooted in these statutory provisions. We specifically deny that Sanlam has acted without following due process or in a heavy-handed manner, as is alleged. The protection of consumers is the very essence of pieces of legislation such as the FAIS and Financial Sector Regulation Acts – something Sanlam takes seriously.

No mention is made of the debarred representative’s right to apply to the Financial Sector Tribunal for a reconsideration of the decision to debar him (as set out in the Financial Sector Regulation Act of 2017).

To the extent that the prevailing legislation may have draconic or unfair implication in its application, that would be an issue to be rectified by legislation, not by insurers declining to follow the provisions of the legislation. We are not in a position to enter into a debate as to the constitutionality of prevailing legislative provisions,” the company says. BM

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