Regulatory Assessments: Director & Prescribed Officers - Are you covered? (2013-05-27)

February 20, 2015  3067  3067   

Moreover, business scandals and the unrelenting regulatory change is indeed a recipe for many more fines which are inevitable. It has also been a period of an unprecedented focus on risk, control and compliance activities within companies; and this trend looks set to continue as companies deal with the fall-out of major fines and regulatory change. 

As the call for corporate governance intensifies, all the signs indicate that companies and their directors will need to seriously ‘stretch’ their risk and compliance functions yet further still; and will hopefully see these functions going beyond the typical ‘tick-box’ exercise adopted by so many companies.  In recent times, a distinct trend has emerged with regulators in the way that they are drafting legislation. The overall effect is that directors and prescribed officers of companies are being held personally accountable for offences committed by the company.  The trend shows the following:

• personal liability of directors and prescribed officers is now an option;
• the punitive fines have increased in value significantly (e.g. tenfold or multiples of earnings);
• ability of the regulator and aggrieved parties to convert punitive fines into civil judgements;
• ability of the regulator to prevent a person from acting as a director;
• ability of the regulator to institute civil action for damages;
• withholding of funds.

There are a number of South African pieces of legislation causing this new focus upon personal liability and various forms of penalties as afore-mentioned.  The most common legislation causing these nightmares includes: 

• Financial Intelligence Centre Act;
• Consumer Protection Act;
• Financial Markets Act;
• Protection of Personal Information Bill;
• Foreign Account Tax Compliance Act.

Comparative examples of administrative fines

Regulators across the globe are flexing their muscle and using the increased powers that have been afforded to them. For example, the regulator in the UK imposed administrative fines on 25 companies in 2012.  Twenty-two of the fines were imposed for security breaches.  Other fines were imposed for breach of the direct marketing rules relating to bulk SMS spam and breach of a rule that requires personal information to be accurate.  The largest of the fines imposed by the UK regulator on the private sector was approximately R4.2 million, because the company had sent millions of unsolicited direct marketing text messages, concealed the identity of the company, and failed to provide a valid "unsubscribe" address.

The regulator also issued a fine of approximately R4.5 million, for an inappropriate disposal of IT equipment. Hard drives with personal information of customers were not destroyed and the personal information of its customers was accessed without permission. 

The South African regulators are following their UK/European and US counterparts in levying hefty fines against companies that contravene legislation.  An example of this is the recent fine of R1.5 million levied against Hippo for contraventions of the FAIS General Code of Conduct.  The South African Competition Tribunal has also issued fines, based on multiples of earning, for restrictive practices and abuse of dominant position.

In some cases it is not necessary for the aggrieved party or the regulator to establish intent or negligence on the part of the company for a successful action for civil damages against the company.  When found responsible, a court may award any amount that is just and equitable, including: 

• payment of damages as compensation;
• aggravated damages;
• interest; and
• costs of suit.

Attached Files

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