2 of 2019

FINANCIAL SERVICES RULINGS

Withholding of benefit is unjust, oppressive and inequitable

Rosina Raisibe Tleane (“the Applicant”) v the Pension Funds Adjudicator (“the Adjudicator”), Sanlam Umbrella Pension Fund (“the Fund”) and Much Asphalt (Pty) Ltd (“the Employer”)

The Applicant sent a request to the Financial Services Tribunal (“the Tribunal”) for reconsideration of the Adjudicator’s determination which allowed the withholding of the Applicant’s withdrawal benefit.

The Employer had requested the withholding of the Applicant’s withdrawal benefit on the basis that the Applicant was alleged to have perpetrated acts of fraud and/or theft against the Employer and a criminal case had been laid against her.

The Employer submitted that the fact that there was a pending criminal case of fraud and/or theft suffices and triggered the exercise of discretion by the board of the Fund not to pay the Applicant’s benefit to her. The Employer was advised by the Fund that withholding of the benefit was subject to the condition that it provided monthly updates to the Fund regarding the status of the criminal case and in addition it had to provide a copy of the affidavit that it made at the South African Police Services (“SAPS”) to the Applicant.

It was submitted that the Fund had acted reasonably in exercising its discretion and withholding the Applicant’s benefit pending the outcome of the criminal matter.

The Tribunal reviewed the case and found that no documents were submitted to it to serve as proof or evidence that there was regular monitoring of the criminal case or the delivery of monthly updates to the board of the Fund. No progress was made in the criminal case as the SAPS did not have the Applicant’s name, surname, physical address and contact details nor did the case lodged with the SAPS mention the Applicant as a suspect. The date of the alleged crime was also after the Applicant had resigned from the Employer.

The Constable who had confirmed to the Employer that a charge had been laid, confirmed to the Applicant that no case was opened against her. The Tribunal was of the view that the Applicant’s version was more probable as it was corroborated by other evidence on record.

The Tribunal was not satisfied with the statement that payment was withheld “pending the finalisation of the criminal case”. The Applicant had not been criminally charged for a period of more than a year since her resignation.

The Tribunal held that the Adjudicator’s determination that the withholding was in order was unjust as the amount withheld exceeded the amount of the claim and the board of the Fund had failed to balance competing interests with specific regard to the strength of the Employer’s claim against the prejudice suffered by the Applicant.

The Tribunal found the withholding to be unjust, oppressive and inequitable and not able to even sustain a liberal interpretation of section 37D.

The Tribunal granted the application for reconsideration and set aside the Adjudicator’s determination and ordered the Fund to pay the Applicant her withdrawal benefit.

Although, in terms of S234 of the Financial Sector Regulation Act, the Tribunal only has the power to remit the matter to the Adjudicator for further reconsideration and or to dismiss the application, it set aside the decision of the Adjudicator and substituted it with its own order.

Funds cannot withhold benefits without evidence proving the basis of the withholding

Linda McCreesh (“the Applicant”) v the Pension Funds Adjudicator (“the Adjudicator”), Sanlam Umbrella Provident Fund (“the Fund”) and Capital Caterers Swaziland (Pty) Ltd (“the Employer”)

The Applicant sent a request to the Financial Services Tribunal (“the Tribunal”) for reconsideration of the Adjudicator’s determination where she had dismissed a complaint regarding the withholding of a withdrawal benefit in terms of section 37D. The Employer accused the Applicant of committing fraud and misappropriating the Employer’s monies.

The Applicant’s grounds for requesting reconsideration were that the Adjudicator had failed to balance the competing interests by not considering the weakness in the Employer’s case and that the Employer had failed to prove the existence of criminal proceedings.

At the time that the complaint was lodged with the Adjudicator, no proceedings had been instituted against the Applicant. In the complaint, the Applicant claimed the release of her withdrawal benefit and a cost order against the Employer.

The Adjudicator determined that the Applicant must wait for the finalisation of the criminal proceedings before claiming the full withdrawal benefit and if the Employer failed to prove the loss, the Fund would be ordered to pay the Applicant her withdrawal benefit.

The Tribunal found that the decision of the Adjudicator to allow the withholding at the time of her decision was consistent with section 37D and therefore lawful, but that the period which the Employer was given to prove its loss had passed and as such the Employer had failed to prove the loss it alleged to have incurred.

The Tribunal found that there was no evidence proving the basis of the withholding, as there was no indication that there was progress in the criminal or civil proceedings.

The Tribunal referred the matter back to the Adjudicator for reconsideration of her initial decision. The Tribunal stated that this was an exceptional circumstance that warrants a cost order to be ordered in favour of the Applicant. The Tribunal held that the Employer’s excuse for not appearing before the Tribunal was without merit and as such it found the Employer to be liable for costs of the application and all reasonable costs relating to the Applicant’s travel and accommodation for the purposes of attending the hearing.

Both cases indicate that if an Employer decides to pursue a criminal case against a member in terms of section 37D of the Pension Funds Act, that the Employer must do more than merely hand the case to the SAPS, it needs to follow up on the case and provide the SAPS all details needed to proceed.

Professional indemnity insurance covers negligent financial advice

Centriq Insurance Company Limited (“Centriq”) v Oosthuizen (“the Client”) & another (“the Advisor”)

This Supreme Court of Appeal (SCA) case concerned the interpretation of a professional indemnity insurance policy. The policy offered by Centriq indemnifies a financial advisor from liability for breach of duty in connection with his business by reason of any negligent act, error or omission.

The Advisor had advised the Client to invest in a dubious property development scheme. The investment failed and the Client sought to recover her loss from him, who in turn claimed the indemnity from Centriq. The Client’s claim was that the Advisor had failed to act honestly and fairly in her interests in recommending the investment; that he had not given her objective financial advice appropriate to her needs; and that he had not exercised the degree of skill, care and diligence expected of an authorised financial services provider.

The Client sued the Advisor on the basis that he had failed to give her adequate investment advice, suitable to her needs for a safe investment, and not because the investment had not performed in accordance with the advice she had obtained.

The Advisor claimed that he was entitled to be indemnified under the policy concluded with Centriq, but Centriq denied liability because the Client’s loss fell within the ambit of an exclusion contained in the policy. The exclusion provided that Centriq would not be liable to indemnify its policyholders from third party claims arising from or contributed to by depreciation (or failure to appreciate) in value of any investments or as a result of any actual or alleged representation.

Both the Advisor and Centriq did not dispute the fact that the Advisor was liable to the Client, but Centriq maintained that its liability as a third party is excluded.

The High Court held that the Advisor invested the Client’s money in an investment that he himself did not understand. He chose to ignore critical newspaper articles without satisfying himself as to whether there was substance to it. He failed to explain the risks of the investment to allow the Client to make an informed decision.

The SCA agreed with the High Court that the Advisor was in breach of his fiduciary duty to his client because he had not taken reasonable steps to satisfy himself of the safety of the investment and to give her adequate financial advice to meet her needs.

The SCA held that:

•	Centriq indemnified the Advisor for negligent advicefor other aspects of his business. Centriq was entitledto decline to underwrite investment risk of any type,even when the client had done so based on negligentadvice or misrepresentation of the true qualities of theinvestment.
•	If Centriq however wanted to achieve this kind of exclusion, it should have used clearer language, but that itinstead used obscure language.

The SCA therefore upheld the High Court’s conclusion to uphold the Advisor’s claim to be indemnified in accordance with the policy.

If an insurer wants to exclude certain claims, it should not word its policies in obscure language.

HIGH COURT RULING

Trustees perform a social function in the allocation of death benefits

JM Kim v Afgri Staff Pension Fund and Others

The deceased’s daughters sought an order from the Adjudicator to set aside the decision of the board of the Afgri Staff Pension Fund in the distribution of the death benefit of their mother. The basis of their complaint was that the deceased’s stepdaughter was neither nominated nor a dependant of the deceased and should not have been included in the distribution. They also disputed that the deceased’s husband was factually dependent on the deceased and contended that they had separated several months before her death.

The Adjudicator set aside the decision of the board and ordered the board to reconsider its decision and to investigate the deceased’s husband’s and stepdaughter’s dependency on the deceased.

The board made a second decision which still included an allocation to the deceased’s husband and stepdaughter, remaining of the view that they were dependent on the deceased when they were sharing a common household.

The deceased’s daughters eventually referred the matter to the High Court to review the decision of the board.

The High Court held that the Fund adopted a technical approach in responding to the application and that it was less concerned with explaining how it reached its decision. It further held that in making section 37C decisions a Fund performs an important social function and when its decisions are challenged, it is appropriate that a fund assist the Court in providing the appropriate information. A Fund should also be diligent in its dealings with persons aggrieved by its decisions and not regard itself as an adversary of the aggrieved person.

An employer can be held liable to a retirement fund for arrear contributions with interest

TP Hlongwane (“Complainant”) v Phuthaditjhaba Municipality Pension Fund (“the Fund”), National Fund for Municipal Workers, ACA Employee Benefits (“the Administrator”), Maluti-A-Phofung Local Municipality (“the Employer”)

The Complainant was dissatisfied with the Employer for not paying monthly contributions to the Fund even though the Employer deducted these contributions from his salary. He also complained that the Fund was not taking action against the Employer and that he was not provided with annual benefit statements.

The Adjudicator found that the Fund and Administrator had taken the prescribed action against the Employer for not paying members’ contributions timeously. The Administrator submitted that the Fund had experienced serious challenges in obtaining arrear contributions from the Employer.

The Fund followed the process set out in section 13A of the Pension Funds Act and took the following steps:

•it sent a letter of demand to the Employer demanding payment of members’ contributions, failing which it would face legal action for failure to pay the arrear contributions and late payment interest;•it wrote to the chairperson requesting that he address-es the matter with the Employer;•it sent member communication detailing the non-pay-ment of contributions to members; and•it reported the matter to the Financial Sector Conduct Authority. The Employer failed to remedy the situation which led to the principal officer of the Fund lodging a criminal case with the South African Police Services against the Employer for failure to pay members’ contributions to the Fund. The Employer subsequently entered into a settlement agreement wherein it undertook to pay the arrear contributions in relation to members who had exited the Fund and that the balance would be rectified at a later stage. The Employer however failed to pay the late payment interest. The Adjudicator found that the Employer had contravened the Pension Funds Act and the rules of the Fund which make provision for payment of interest where the Employer has failed to pay contributions timeously. The Adjudicator ordered the Employer to pay interest to the Complainant for late payment of contributions. She also ordered the Fund to provide the Complainant with the latest benefit statement and an annual statement for as long as he remains a member of the Fund. An Employer must pay contributions to the fund in terms of section 13A of the Pension Funds Act and it remains liable to pay interest on the contributions to the fund. A retirement fund has a responsibility to provide its members with benefit statements even though the Fund might be battling to get payment of contributions from the Employer. Disclaimer.