FINANCIAL SERVICES LITIGATION - SOUTH AFRICA

Authors: Peter Leon and Jonathan Ripley-Evans 

Common causes of action: What are the most common causes of action brought against banks and other financial services providers by their customers?

Customers have historically lodged complaints alleging unfair contractual terms or treatment, or other practices prohibited by statute, with one or more of the relevant industry regulators, whose remits overlapped. Although we do not expect a fundamental change in the grounds likely to be relied upon by claimants when pursuing their claims, the manner in which such claims are to be advanced will change under the Financial Sector Regulation Act 9 of 2017 (FSR Act), which came into force on 1 April 2018. All financial institutions are now ultimately regulated under the FSR Act, which establishes a regulatory and supervisory framework for the industry.

The FSR Act has established the Financial Sector Conduct Authority (FSCA) and the Prudential Authority as regulatory bodies:

The Prudential Authority is required to: promote and enhance the safety and soundness of financial institutions, market infrastructures and protect financial customers, through, inter alia, cooperating with its counterparts in other jurisdictions.

The FSCA is required to: enhance and support the efficiency and integrity of financial markets, protect financial customers and assist in maintaining financial stability, through, inter alia, cooperating with its counterparts in other jurisdictions.

The FSCA has, since April 2018, replaced the prior authority, which was known as the Financial Services Board (FSB).

Although there are additional statutes that regulate the industry, the FSR Act prevails in the event of a conflict between any other act that is a ‘financial sector law’ and the FSR Act.

Additional Acts that also regulate the industry include:

• the Inspection of Financial Institutions Act 80 of 1998 and Financial Institutions (Protection of Funds) Act 28 of 2001;
• banks, mutual banks and cooperative banks are supervised by the South African Reserve Bank, under the Banks Act 94 of 1990, Mutual Banks Act 124 of 1993 and Co-operative Banks Act 40 of 2007;
• participating banks can opt to face claims up to 1 million rand before the Ombudsman for Banking Services;
• suppliers of credit above significant arm’s-length transactional thresholds (including banks) are answerable to the National Credit Regulator (NCR) and the National Consumer Tribunal, under the National Credit Act 34 of 2005;
• participating credit providers and credit bureaux can opt to face certain complaints before the Credit Ombud;
• securities exchanges and their users are supervised by the FSCA, under the Financial Markets Act 19 of 2012, read with the FSR Act;
• many suppliers of financial services are also answerable to the National Consumer Commission and the National Consumer Tribunal, under the Consumer Protection Act 68 of 2008;
• collective investment schemes are supervised by the FSCA, under the Collective Investment Schemes Control Act 45 of 2002, read with the FSR Act;
• pension funds are supervised by both the FSCA and the Pension Funds Adjudicator, under the Pension Funds Act 24 of 1956 and the FSR Act;
• insurers are supervised by the PA or the FSCA (insofar as they relate to matters within their respective objectives), under the Long-term Insurance Act 52 of 1998 or Short-term Insurance Act 53 of 1998 (Insurance Acts), read with the FSR Act, but consumers may opt to lay certain complaints before the Ombudsman for Long-term Insurance or Ombudsman for Short-term Insurance;
• financial advisers and intermediaries are supervised by the FSCA and the Ombudsman for Financial Services Providers, under the Financial Advisory and Intermediary Services Act 37 of 2002 (which requires financial services providers to be duly licensed and creates a professional code of conduct with specific enforcement measures);
• incorporated financial services providers are (like all corporations) regulated in certain respects by the Companies and Intellectual Property Commission and the Companies Tribunal, under the Companies Act 71 of 2008; and
• most financial services providers are also accountable to the Financial Intelligence Centre for certain monitoring and reporting functions to prevent money laundering and the financing of terrorism, under the Financial Intelligence Centre Act 38 of 2001 (FICA).

Less frequently (but not infrequently), customers institute court claims for the cancellation of transactions with, and the recovery of funds paid or goods pledged to, financial services providers who have breached the terms of such transactions, or who were not duly registered or authorised to enter into such transactions, either on those terms or at all.

Complaints and court claims against financial services providers often concern misrepresentation of the qualities of the financial service offered. In court claims, such misrepresentations may give rise to liability either in contract or in delict (tort). Contractual liability arises (regardless of wrongfulness or fault) from a breach of the express, implied or tacit terms of the agreement. Delictual liability arises (regardless of the terms of the agreement) from conduct that causes the claimant’s loss, in a manner that is both wrongful (ie, breaching a legally recognisable duty to the claimant) and culpable (ie, intentional or negligent).

Increasingly common, since the National Credit Act came into effect in 2006, are (successful) claims for the suspension of execution (fore-closure) on mortgaged properties and the rescission (reversal) of the underlying default judgments obtained by secured lenders, on the technical grounds that one or more mandatory pre-action procedures had not been followed (see question 15).

There have also been an increasing number of cases in which the courts have found banks to have engaged in reckless lending, in breach of their statutory duties under the National Credit Act.

Non-contractual duties: In claims for the misselling of financial products, what types of non-contractual duties have been recognised by the court? In particular, is there scope to plead that duties owed by financial institutions to the relevant regulator in your jurisdiction are also owed directly by a financial institution to its customers?

It is reasonably well settled that statutory duties towards regulators are, in principle, implied terms of any contract concerning the regulated transaction, to the extent that those duties have not been expressly excluded by the parties, which, in turn, is permissible to the extent that the statute does not prohibit such exclusion (see question 7).

There is also considerable precedent for the proposition that statutory duties towards regulators can also constitute legally recognisable duties for the purposes of delictual liability, to the extent that, in view of all relevant circumstances, those duties are also objectively owed to the claimant (customer). If so, breach of those duties could be considered wrongful, and may give rise to delictual liability, if the breach was intentional or negligent, and caused loss to the claimant. Depending on the facts of each case, it is in the nature of some statutory duties applicable to financial services providers (eg, prohibitions on misinformation, market abuse and other improper practices) that they are objectively owed not only to their regulators but also to their customers, while that is not necessarily the case for others (eg, technical registration and reporting obligations). Although the former would be actionable, the latter would not.

Several statutes explicitly construct non-contractual causes of action for customers against financial services providers. For example:

• the Collective Investment Schemes Control Act provides that any person contravening any of its provisions (or related regulations, notices or directives) is liable to any person who suffers any loss or damage as a result of the contravention (with specific reference to the prohibition on making fraudulent, false or misleading statements that induce any person to invest);
• the Companies Act empowers any holder of issued securities to apply to court to protect any right conferred by the Act, the company’s constitution or rules, or any debt instrument, as well as to rectify any harm arising from the company’s contravention of any of those; and
• the FSR Act provides that a person who suffers a loss, as a result of a contravention of a financial sector law by another person, may recover the amount of such loss by action in a court of competent jurisdiction against the other person and any person who was knowingly involved in the contravention.

Statutory liability regime: In claims for untrue or misleading statements or omissions in prospectuses, listing particulars and periodic financial disclosures, is there a statutory liability regime?

At common law, the role of good faith in contracts is unclear. The Supreme Court of Appeal has held that ‘although abstract values such as good faith, reasonableness and fairness are fundamental to our law of contract, they do not constitute independent substantive rules that courts can employ to intervene in contractual relationships’. However, a 2013 High Court judgment, relying on a minority judgment of the Constitutional Court, held that an implied duty of good faith precluded a moneylender from enforcing an acceleration clause after the debtor erroneously underpaid an instalment by a miniscule amount. Therefore, the proposition that parties must observe a duty of good faith in the implementation of contractual terms remains unsettled in our common law.

Of course, statutes may impose such a duty. The Financial Markets Act obliges securities exchanges and their users to adhere to codes of conduct that include duties to act honestly and fairly, with due skill, care and diligence, and in the interests of their clients, as well as to uphold the integrity of the financial markets. The Financial Advisory and Intermediary Services Act does the same. More directly, the Financial Institutions (Protection of Funds) Act obliges all persons dealing with funds and trust property held by financial institutions to observe utmost good faith and exercise proper care and diligence. All of these can be construed as implied duties of good faith, which are actionable in contractual claims.

Furthermore, the recently enacted FSR Act provides that certain of the objectives of the FSCA are to:

• protect financial customers through the promotion of fair treatment by financial institutions; and
• monitor the extent to which the financial system is delivering fair outcomes for financial customers ‘with a focus on the fairness and appropriateness of financial products and financial services’.

In this regard, the FSCA is entitled to:

• publish ‘conduct standards’ to achieve these objectives; and
• issue written directives to financial institutions if its treatment of its financial customers is such that the institution ‘will not be able to comply with its obligations in relation to the fair treatment of financial customers’.

The FSCA published its Draft Conduct Standard for Banks on 29 April 2019. The Draft Conduct Standards introduce requirements that promote the fair treatment of financial customers of banks, mutual banks and co-operative banks. For example, it requires a Bank to ensure that the terms, conditions and requirements, in a contract that relates to a financial service or product which includes charges and fees, are not unfair.

In addition to the above, the Conduct of Financial Institutions Bill (CoFI) (published in December 2018, provides as one its objectives the fair treatment and protection of financial customers by financial institutions. By way of example, the Bill sets out:

• what is considered unfair or unreasonable contract terms in contracts with retail financial customers; and
• post-sale barriers and post-sale obligations. Financial institutions may not, for example, impose unreasonable post-sale barriers on customers that may prevent them from holding a financial institution accountable for its contractual obligations; expectations created that are not being met, or perceived unfair treatment pertaining to a financial product or financial service. Financial Institutions must also continue to promote fair treatment during and after termination of contracts.

Fiduciary duties: In what circumstances will a financial institution owe fiduciary duties to its customers? What is the effect of such duties on financial services litigation?

One of the objectives of the FSR Act is to: ‘achieve a stable financial system that works in the interests of financial customers . . . by establishing . . . a regulatory and supervisory framework that promotes . . . the fair treatment and protection of financial customers . . . [and] financial inclusion’. ‘Financial inclusion’ is defined as ‘timely and fair access to appropriate, fair and affordable financial products and services’.

The FSR Act therefore seems to envisage the creation of fiduciary duties, to the extent that financial institutions must treat their customers fairly. However, this has not yet been tested in litigation, in light of the fact that the FSR Act only came into force very recently.

Apart from the above, there is no general fiduciary duty owed by a financial institution to its customers. However, the Mutual Banks Act explicitly provides that directors owe fiduciary duties not only to the mutual bank itself, but also to its members and depositors. Similarly, under the Pension Funds Act, a board has fiduciary duties not only to the fund itself, but also to its members and beneficiaries. Although not explicitly stipulated, it is implied that fiduciary duties are necessarily also owed to customers by persons entrusted with funds under the Collective Investment Schemes Control Act and the Financial Institutions (Protection of Funds) Act. It is unlikely that a court would uphold any contractual clause purporting to exclude these duties (see question 7).

Master agreements: How are standard form master agreements for particular financial transactions treated?

Regulations under the Collective Investment Schemes Control Act require interest rate swaps to be supported by an International Swaps and Derivatives Association (ISDA) Master Agreement, including a Credit Support Annex. The South African Reserve Bank’s Exchange Control Manual prescribes the use of ISDA Master Agreements for all credit derivative transactions and all trades of over-the-counter hedging instruments. There are no reported cases in which South African courts have addressed the interpretation of such agreements.

The Consumer Protection Act provides that any standard form, contract or other document prepared by or on behalf of a supplier, must be interpreted (by the Consumer Tribunal or any court) to the benefit of the consumer.

Limiting liability: Can a financial institution limit or exclude its liability? What statutory protections exist to protect the interests of consumers and private parties?

Under the common law, a contracting party (including a financial institution) may exclude liability for negligence but may not exclude liability for fraud or gross negligence. The courts have generally (and frequently in financial services litigation) declared contractual terms unenforceable to the extent they are clearly unconscionable (ie, inimical to the interests of the community), though the Constitutional Court has cautioned that these determinations are best left to the legislature.

The legislature has indeed imposed several significant restrictions. Under the Financial Markets Act, securities exchange users cannot escape liability for grossly negligent or wilful failure to comply with applicable rules. The Co-operative Banks Act precludes limitation of directors’ liability for fraud or reckless trading. Under the Pension Funds Act, board members cannot be relieved of liability for wilful misconduct or wilful breach of trust. Under the Insurance Acts, insurers cannot be exempted from liability for the actions, omissions or representations of their agents, and policyholders cannot waive their statutory rights. Under the Collective Investment Schemes Control Act, custodians and trustees must indemnify investors against any losses caused by their wilful or negligent conduct, and cannot be released from this liability by agreement.

Most comprehensively, the National Credit Act and Consumer Protection Act prohibit all contractual terms that purport at all to waive consumers’ statutory rights or limit the liability of credit providers and suppliers of services. The statutory rights that cannot be waived include a consumer’s right to have debts restructured, to have repossessed goods sold at a fair market-related price and to dispute any debits that pass through a consumer’s account. In addition, the National Credit Act precludes the waiver of several common law rights and remedies, including the defence of error in calculation or that the debt has no basis.

Freedom to contact: What other restrictions apply to the freedom of financial institutions to contract?

The primary restriction is that a financial institution must be duly registered or licensed to provide the financial services and, or sell the financial products entailed in the contract. If not, the contract is void at the outset, leaving the service provider unable to enforce its terms and vulnerable to administrative and criminal penalties. Under the National Credit Act, prior to entering into a credit agreement, a financial institution must conduct a detailed financial assessment on behalf of the client. Failure to do so could result in the transaction being classified as reckless credit, which a court may set aside, restructure or suspend.

There are also statutory constraints on the contents of financial services contracts. The Collective Investment Schemes Control Act prescribes detailed terms that must be included in every deed. The Insurance Acts are highly prescriptive of what terms must be and may not be included in insurance policies. The Conventional Penalties Act 15 of 1962 permits the enforcement of penalty clauses but restricts them, such that a party may not claim both penalties and damages, and may only claim damages in lieu of penalties if the contract expressly so provides. In addition, the court is given the power to reduce the penalty where it is out of proportion to the prejudice suffered.

Under the common law, it is well settled that courts will not enforce clauses permitting self-help (ie, circumventing the courts), such as summary execution against mortgaged or pledged property without a court order. Interestingly, a 2004 High Court judgment found that a clause permitting a microlender to recover a borrower’s overdue debt by using his or her pledged bank card and personal identification number code did not constitute self-help and was enforceable. Such clauses have, however, since been forbidden by the National Credit Act and the Consumer Protection Act, among many other clauses considered prejudicial to consumers.

Litigation remedies: What remedies are available in financial services litigation?

The common contractual remedies are enforcement of proper performance of the defendant’s duties, cancellation, restitution of performances rendered by the claimant and compensatory damages. The common delictual remedy is compensatory damages (potentially with consolatory damages as well). In both contract and delict, declaratory orders as well as interdicts (injunctions) can be obtained to prevent an imminent breach of rights. All of these common law remedies are available in financial services litigation.

Certain statutory remedies are also available to customers, for example:

• the Financial Markets Act, which creates a mechanism for investors affected by insider trading to claim compensation out of the fine imposed on the guilty parties by the FSCA;
• the Financial Institutions (Protection of Funds) Act empowers the FSCA to order a transgressor to compensate any person who suffered patrimonial loss or damage as a result of the transgression;
• the Consumer Protection Act gives the courts a wide range of powers ‘to ensure fair and just conduct, terms and conditions, as well as to ‘award damages against a supplier for collective injury to all or a class of consumers generally, to be paid on any terms or conditions that the court considers just and equitable; and
• the FSR Act provides that a person who suffers a loss, as a result of a contravention of a financial sector law by another person, may recover the amount of such loss by action in a court of competent jurisdiction against the other person and any person who was knowingly involved in the contravention.

The FSR Act also provides additional avenues to protect consumers in the financial services industry, establishing the Ombud Council as well as the Financial Services Tribunal (FST) for the protection of consumers and as additional mechanisms for the attainment of remedies in financial services litigation.

Limitation defences: Have any particular issues arisen in financial services cases in your jurisdiction in relation to limitation defences?

In March 2015, an amendment to the National Credit Act entered into force (Amendment), which prohibits the transfer, collection or reactivation of a debt which has been extinguished by prescription (a limitation of three years, in respect of most debts). In December 2016, the Supreme Court of Appeal (by a narrow majority of three to two) dismissed a defence based on this amendment.

The defence was raised by a debtor who had, in 2014, signed an acknowledgment of debt in respect of a debt that had already prescribed. The Court held that, as the legislature had not explicitly made the Amendment (introduced in 2015) retrospective, it could not disallow the enforcement of a prescribed debt which had been ‘reactivated by an acknowledgment of debt’, before the Amendment entered into force.

Specialist courts: Do you have a specialist court or other arrangements for the hearing of financial services disputes in your jurisdiction? Are there specialist judges for financial cases?

There is no specialist division of the High Court for financial services matters; however, certain high courts in South Africa have established ‘Commercial Divisions’, which hear ‘commercial’ matters. The high courts in Gauteng define a commercial matter as ‘a substantial case that has as its foundation a broadly commercial transaction or commercial relationship’.

There are also several administrative and quasi-judicial bodies created by statute, described below.

The National Consumer Tribunal is composed of a chairperson and at least 10 (currently 16) other part-time members with suitable qualifications and experience in economics, law, commerce, industry or consumer affairs, appointed by the state president for five-year terms (renewable once). Most matters are heard by a panel of three members (one of whom must be a lawyer), but some can be heard by a single member. It has jurisdiction over a range of issues under the National Credit Act and Consumer Protection Act, including consumer complaints, as well as reviews of registration and compliance rulings by the National Credit Regulator. Its orders - which may include deregistration of credit providers, reversal of reckless credit or excessive charges, interdicts, interim relief and imposition of fines up to 1 million rand - are binding but are capable of appeal or review in the High Court.

The Pension Funds Adjudicator, an experienced legal practitioner appointed by the Minister of Trade and Industry (after consulting the FSCA), has jurisdiction to hear individual complaints relating to the administration of or investments by pension funds, and to make any order that a high court could make (which may, however, be reviewed by a high court). Disputes about the apportionment of an actuarial surplus may be resolved by an ad hoc specialist tribunal appointed by the FSCA.

The statutory Ombud for Financial Services Providers is now regulated under the FSR Act and must be qualified in law and possess adequate knowledge of the financial services industry. The Ombud may make any determination it deems appropriate and just, however, its decision is subject to reconsideration by the Financial Services Tribunal under the FSR Act (which has replaced the FSB’s appeal board).

The voluntary ombudsmen also make binding awards, in accordance with their constitutions and rules. The Ombudsman for Banking Services is a practising advocate, as is the Ombudsman for Short-term Insurance, while the Ombudsman for Long-term Insurance is a sitting High Court judge. Decisions of the insurance ombudsmen may be taken on appeal to a tribunal headed by a retired judge.

Procedural rules: Do any specific procedural rules apply to financial services litigation?

There are no specific procedural rules for financial services litigation in the High Court. The National Consumer Tribunal must hold its hearings in public, in an inquisitorial, informal and expeditious manner, for which it has its own procedural rules. The Ombud for Financial Services Providers is similarly required to proceed in an informal, economical, expeditious and equitable manner, in accordance with rules prescribed by the (now disbanded) FSB, whose rules still remain extant. The Pension Funds Adjudicator determines its own procedure, which is also required to be inquisitorial, informal, economical and expeditious. Proceedings before voluntary ombudsmen are informal and generally confidential.

Rules for the conduct of proceedings before the Financial Services Tribunal are also in place, as required by the FSR Act. These rules set out the manner in which the Financial Services Tribunal must be approached when an applicant wishes to challenge a decision made by a decision-maker under the FSR Act.

Arbitration: May parties agree to submit financial services disputes to arbitration?

In principle, any financial services dispute may be submitted to arbitration (subject to review by the courts), as the only disputes excluded by the Arbitration Act 42 of 1965 are matters relating to matrimony or an individual’s legal status. Even in the absence of a prior agreement, the Companies Act, Consumer Protection Act and National Credit Act each explicitly permit consumers to refer their complaints to arbitration. Note, however, that the Policyholder Protection Rules promulgated under the Short-term Insurance Act prohibit parties from agreeing that a dispute ‘can only be resolved by arbitration’ (ie, precluding original recourse to the courts).

Out of court settlements: Must parties initially seek to settle out of court or refer financial services disputes for alternative dispute resolution?

The National Credit Act provides that a consumer or credit provider may not approach the Consumer Tribunal until after an accredited alternative dispute resolution agent has certified that there is no reasonable prospect of the parties resolving their dispute by alternative means.

Remarkably, a consumer may only approach the courts to enforce the rights conferred by the Consumer Protection Act ‘if all other remedies available to that person in terms of national legislation have been exhausted. However, it is important to note that section 10 of the FSR Act excludes the application of the Consumer Protection Act in respect of certain financial services.

The ombudsmen generally encourage amicable settlement before adjudicating any dispute and are often specifically empowered to facilitate this. For example, the Ombud for Financial Services Providers, before entertaining a complaint, must explore (and may direct the parties to exhaust) any reasonable prospect of a conciliated or mediated settlement. The FSR Act describes the objective of the Ombud Council as ‘ensuring that financial customers have access to, and are able to use, affordable, effective, independent and fair alternative dispute resolution processes for complaints about financial institutions in relation to financial products, financial services, and services provided by market Infrastructures’. However, parties are not obliged to approach the ombudsman before approaching a court with their financial services dispute.

Pre-action considerations: Are there any pre-action considerations specific to financial services litigation that the parties should take into account in your jurisdiction?

The National Credit Act provides for a defaulting consumer to be given a written notice by the credit provider, proposing that the consumer approach a debt counsellor, alternative dispute resolution agent or relevant ombudsman with a view to developing a plan to bring the payments up to date. Moreover, the Act precludes a credit provider from approaching the courts to enforce any debt until:

• at least 20 business days have elapsed since the consumer fell into default;
• at least 10 business days have elapsed since the credit provider delivered the default notice to the consumer, by hand or by registered post; and
• the consumer has ignored or rejected the proposals in the default notice.

The determination of whether and when a default notice can be deemed to have been ‘delivered’ to a consumer has been the subject of extensive litigation (resulting in Constitutional Court judgments and a legislative amendment), and it remains the subject of countless exceptions (technical defences) to enforcement claims by banks, as well as of countless applications for the rescission of default judgments obtained by banks.

Unilateral jurisdiction clauses: Does your jurisdiction recognise unilateral jurisdiction clauses?

In terms of South African law, jurisdiction is established by the courts and not conferred upon it by the parties. As such, the courts do not exercise jurisdiction in the absence of at least one of the established jurisdictional factors.

The National Credit Act prohibits any agreement in which a consumer consents to the jurisdiction of the High Court for debts falling within the magistrates’ courts’ jurisdiction, or to the jurisdiction of any court seated outside the area in which the consumer resides or works. In a landmark judgment by the High Court in 2015 (which was subsequently confirmed by the Constitutional Court in 2016), this prohibition was extended to outlaw clauses in which judgment debtors consent to the issuing or enforcement of emolument attachment or garnishee orders outside the areas in which they reside or work.

Similar clauses in other arm’s-length agreements would likely be struck down by a court on common law public policy grounds, if their application could potentially be oppressive or abusive to any party. In agreements falling within the scope of the Consumer Protection Act, such unilateral jurisdiction clauses would likely fall foul of the prohibition on ‘excessively one-sided’ contract terms.

Disclosure obligations: What are the general disclosure obligations for litigants in your jurisdiction? Are banking secrecy, blocking statute or similar regimes applied in your jurisdiction? How does this affect financial services litigation?

In High Court litigation, the rule is that parties to an action must discover ‘all documents and tape recordings relating to any matter in question in such action . . . which are or have at any time been in [their] possession or control’. This is interpreted widely to include any material that is potentially directly or indirectly relevant to the dispute (ie, that may advance or damage either party’s case, or may fairly lead to a train of enquiry that could have either of these consequences). When disputed, the courts prefer disclosure over non-disclosure. The only potentially relevant material exempted from discovery is that which is properly protected by legal professional privilege.

Protecting confidentiality: Must financial institutions disclose confidential client documents during court proceedings? What procedural devices can be used to protect such documents?

Contractual or even statutory client confidentiality does not exempt any potentially relevant material from discovery. However, any party compelled to discover confidential documents may apply to the court for an order that they be sealed and subject to an appropriate secrecy regime. In extreme cases, the commercial or competitive sensitivity of the documents could justify an order that they be kept secret not only from the public but even from the other litigants, whose legal representatives may view them purely for the purposes of argument and may not disclose their contents to their clients. Such orders are, however, highly exceptional, and require the most compelling motivation.

Disclosure of personal data: May private parties request disclosure of personal data held by financial services institutions?

See questions 17 and 18.

In the context of disclosures outside of litigation, the Promotion of Access to Information Act 2 of 2000 (PAIA) gives effect to the constitutional right of access to information held by another person that is required for the exercise or protection of any rights.

The PAIA creates a mechanism that can be utilised to request access to certain records held by public and private institutions, in certain circumstances. It is important to note, however, that the PAIA also provides for various legitimate grounds of refusal, which includes the mandatory protection of certain confidential information of third parties.

The Protection of Personal Information Act 4 of 2013 (POPI) (which is yet to come fully into force) is also applicable in these circumstances. The POPI Act promotes the protection of personal information held by public and private bodies and it prescribes various formalities that must be adhered to by the holders of ‘personal information’ (which would include financial institutions), when processing such information.

Financial services institutions must take the POPI Act (once it comes into force) and the PAIA into account when such a request is made.

Data protection: What data governance issues are of particular importance to financial disputes in your jurisdiction? What case management techniques have evolved to deal with data issues?

Litigation discovery remains primarily paper-based, but electronic discovery and virtual data rooms are gradually being employed by parties seeking greater efficiency as well as information security. Such innovations are, however, driven and managed exclusively by the parties, while the courts remain accustomed to traditional paper filing.

Once the POPI Act (see question 19) comes into force, financial institutions will also need to take into account its provisions, in respect of the processing of data.

Authority powers: What powers do regulatory authorities have to bring court proceedings in your jurisdiction? In particular, what remedies may they seek?

Most regulators are empowered to institute court proceedings against financial services providers, and many are also empowered to impose sanctions directly, without recourse to the courts.

The FSR Act provides the FSCA with numerous powers. It allows the FSCA to:

• approach the courts for wide-ranging relief;
• impose administrative fines;
• institute criminal proceedings in relation to offences;
• revoke or suspend licences;
• seize and remove the assets of a financial institution for safe custody, pending the exercise of any other legal remedy that may be available to it;
• prevent the concealment, removal, dissipation or destruction of assets of evidence by a financial Institution; and
• issue binding directives to financial institutions, upon which their customers may directly rely in applying to court for compensatory and other relief.

The Reserve Bank may apply to court for an order liquidating a bank, cancelling or suspending its registration or limiting the influence of a major shareholder, but may itself directly impose fines and restrictions on banks for certain transgressions.

The Financial Intelligence Centre may apply to court to compel compliance with FICA, if the relevant regulator has not made such an application in a timely manner after being requested to do so by the Centre.

Disclosure restrictions on communications: Are communications between financial institutions and regulators and other regulatory materials subject to any disclosure restrictions or claims of privilege?

Most financial services statutes require regulators to keep confidential any information gathered in the execution of their regulatory functions, except where a court orders otherwise or a law requires otherwise. Many of these statutes explicitly authorise regulators to share relevant information with other local and foreign regulators, as well as with police and tax authorities.

Information gathered by regulators may also be requested by members of the public under the Promotion of Access to Information Act 2 of 2000 and must be disclosed unless one or more specified grounds of refusal are met (eg, that such disclosure would prejudice a third party in commercial competition).

Most financial services statutes (the FSR Act, the Financial Markets Act, Banks Act, Insurance Acts, National Credit Act, Consumer Protection Act and Companies Act) provide for privilege against self-incrimination; namely, that no information furnished by any person under compulsion may be used against that person in subsequent criminal proceedings.

Private claims: May private parties bring court proceedings against financial institutions directly for breaches of regulations?

See question 2.

In a claim by a private party against a financial institution, must the institution disclose complaints made against it by other private parties?

To the extent that such records are potentially relevant to the pleaded issues, as described in question 17, they must be discovered. However, such records would likely fall foul of the general rule against the admission of ‘similar fact’ evidence.

Enforcement: Where a financial institution has agreed with a regulator to conduct a business review or redress exercise, may private parties directly enforce the terms of that review or exercise?

There have been no reported cases of such enforcement. In principle, an agreement can only be directly enforced by the parties to it, but it is possible that an agreement reached with a regulator could be indirectly enforced by a customer or other third party if the breach of such agreement meets the requirements for delictual liability in the particular circumstances (see question 2).

Changes to the landscape: Have changes to the regulatory landscape following the financial crisis impacted financial services litigation?

The FSR Act, the Financial Markets Act (which came into force in 2013) and the Financial Services Laws General Amendment Act 45 of 2013 (which came into force in 2014) are aimed at tightening regulatory oversight of the financial services sector in accordance with international standards, principally the Basel Accords. While it is foreseeable that the increased standards of conduct imposed under these laws will make financial services providers more vulnerable in litigation, so far there have been no reported cases of claimants directly or indirectly invoking these increased standards.

It is worth noting that the relatively stringent lending requirements imposed by the National Credit Act (effective from 2006) ensured that South African banks and other lending institutions were generally better prepared for the 2008 global financial crisis than their counterparts in other countries. South Africa’s banking sector has been specifically praised for this.

Complaints procedure: Is there an independent complaints procedure that customers can use to complain about financial services firms without bringing court claims?

See questions 11 and 14.

Recovery of assets: Is there an extrajudicial process for private individuals to recover lost assets from insolvent financial services firms? What is the limit of compensation that can be awarded without bringing court claims?

While there are no such processes specific to circumstances of insolvency, several statutes create extrajudicial mechanisms for private individuals to recover losses from financial service providers. The Financial Markets Act, for example, creates a mechanism for any person adversely affected by insider trading to claim a share (proportionate to their loss) of any amounts recovered by the FSB from the perpetrators.

Recent developments: Are there any other current developments or emerging trends that should be noted?

Challenges and trends 

29 What are the principal challenges currently facing the financial services litigation landscape in 2019? What trends are apparent in the nature and extent of financial services litigation? Are there any other noteworthy features that are specific to financial services litigation in your jurisdiction?

The FSR Act

The FSR Act remains extremely new and significantly transforms the financial services litigation landscape, in essence, it moves South Africa to a ‘twin peaks’ model of financial sector regulation, based on that in the United Kingdom.

It is often the case that, when new Acts and Regulations are introduced into the statutory landscape, litigation may increase in circumstances where clarification of the Act is required, or for interpretation purposes. For example, the National Credit Act saw complex disputes being brought before courts surrounding interpretation issues (some of which have been referred to above). Given that the FSR is a new Act in South Africa, South African courts may see an increase in litigation surrounding the interpretation of the FSR.

The FST

The FST was established by the FSR and, in essence, took over the functions of the Financial Services Board Appeal Board, from 2018. The FSR has also extended the powers of the FST to include the ability to take action against unlicensed entities, by preventing them from conducting business in South Africa.

According the FST’s website, 11 matters were referred it in 2018 and 48 in 2019. Most matters referred to the FST in 2018 seem to have dealt mainly with the debarment of financial services providers who did not qualify as ‘fit and proper’ individuals. The 2019 year has seen the referral of numerous pension fund matters (particularly pertaining to the reconsideration of decisions made by the Pension Fund Adjudicator) and reconsideration of debarment decisions.

The CoFI Bill

On 11 December 2018, the CoFI Bill (see question 4) was published. The purposes of the CoFI Bill is to consolidate the requirements for the way in which financial institutions must conduct business, in particular, it focuses on fair outcomes and market integrity. The closing date for submissions of public comments on the draft CoFI Bill was 1 April 2019; however, public workshops are expected to be held during the course of 2019.

Court litigation

One of the principal challenges facing financial services litigation in South Africa is the adjudication of financial services disputes by judges in high courts who are not equipped with the requisite specialised knowledge to hear and adjudicate these disputes. This has resulted in a trend of more complex financial services matters being referred to arbitration, where the parties can elect their own adjudicator with the requisite specialised knowledge.

On 3 October 2018, and largely as a result of the above issues, the office of the Judge President of the Gauteng division of the High Court of South Africa released a Commercial Court Practice Directive that came into effect immediately, creating a specialised Commercial Court administered as part of the Gauteng Division of the High Court. The types of claims that this Commercial Court may hear and adjudicate include banking and finance services matters. The formation of the Commercial Court in the Gauteng division of the High Court of South Africa Is intended restore confidence in the court system by ensuring uniform, efficient and higher-quality decision making in this specialised field.

 

Accreditation: Reproduced with permission from Law Business Research Ltd. This article was first published in Lexology Getting the Deal Through – Financial Services Litigation 2019 (Published: August 2019). For further information please visit https://www.lexology.com/gtdt 

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