Financial Services Providers: What Happens When Your Employee Hawks Confidential Information To A Competitor? – Financial Services

In September 2022, the Financial Services Tribunal handed down
two decisions reconsidering the debarment of a financial services
representative (“FSR“).

In both instances, the allegation by the employer, an insurance
broker (the Financial Services Provider or
“FSP“), was that their employee (the
FSR) had, before their resignation, stolen confidential client
information and attempted to persuade clients to join them in a new
business venture.

In the first instance, Van Heerden & Marais v Unigro
Insurance Brokers (Pty) Ltd, the Tribunal found that the FSP
had established on the facts that Mrs van Heerden and Mr Marais had
stolen confidential information and used it to advance the
interests of their prospective new employer. In this case, while
still employed by the FSP, the employees had assisted their new
employer to sign up existing or prospective clients of the FSP as
clients of the new employer by inducing these clients to take out
policies through the new employer rather than the FSP.

The Tribunal concluded that, at the very least, they were guilty
of a breach of section 13(1)(c) of the Financial Advisory
and Intermediary Services Act, 2002 because they had rendered
financial services other than in the name of the FSP of which they
were representatives, and of breaching a fiduciary duty.

The Tribunal observed:

“One cannot serve two masters, and one may not attempt to
do so. To use a bucolic comparison, one may not sow your own fields
with your employer’s seed”

Accordingly, the Tribunal concluded;

“The public is at risk if an FSR is prepared to filch
confidential information or acts on behalf of an FSP (the new
employer) without being that person’s registered
representative.”

In the second matter, Turner v GIB Insurance Brokers &
the Registrar of Financial Services Providers, the Tribunal
found that the evidence presented by GIB Insurance Brokers, that Mr
Turner had allegedly stolen confidential information to set up a
competing venture, was lacking. In any event, such evidence as
there was, had been presented after Mr Turner had already been
debarred and could therefore not be taken into account.

The Tribunal held:

“It is further trite that debarment may not be used to
stifle competition or to settle labour and other contractual
disputes. Finally, it is for the FSP to establish on a balance of
probabilities the facts on which it relies.

. . .

There are grounds for suspicion, but suspicion is not enough for
a debarment, especially if based on hindsight.”

Thus, the Tribunal said that an employee who, whilst still
employed by an FSP, filches confidential information of the FSP for
the benefit of another FSP (the new employer) or acts on behalf of
the new employer without being that employer’s registered
representative, puts the public at risk which can constitute valid
grounds for debarment. However, sufficient evidence establishing
such conduct is required.

These principles should be carefully considered by FSPs when an
employee leaves for a competitor.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.