Financial Institutions (Protection of Invested Funds and Trust Property)
Steinhoff is a name that used to be mentioned in tones of admiration. Of course, that all changed in 2017 when a massive news story broke, implicating at least the CEO of the company in accounting irregularities of alarming proportions. The drop of the share price erased as much as 82% of investor value in a matter of days. Investing on the stock exchange does have its risks.
However, fraud and accounting irregularities are not the kind of risks that investors bargain on, and should not have to worry about, either.
This is what the Financial Institutions (Protection of Funds) Act 2001 aims at. It contains some fairly hefty provisions affecting those people and institutions who take money and property from the public either to invest or to hold in trust for someone. As with most, if not all of the other financially-related statutes, it falls under the auspices of the Financial Sector Conduct Authority, established in terms of the Act of that name.
A financial institution means:
- a company which provides a financial product or a financial service in terms of the FSR Act;
- an exchange, or other financial market infrastructure as contemplated by the Financial Markets Act;
- a holding company of group of companies which has been designated by the Prudential Authority as a ‘financial conglomerate’; and
- a person who is required to be licensed (or is already licensed) in terms of financial sector laws.
A ‘nominee company’, for the purposes of this Protection of Funds Act, is a company controlled by a financial institution, specially to act as a representative of (or nominee for) any person in holding his property or funds in trust.
The obligations imposed by the Act generally affect the financial institution or nominee company itself, as well as any director, member, partner, official, employee or agent. For ease of reference, these will be referred to as a ‘functionary’.
A. Duties of good faith
Any financial institution or nominee company, or functionary, who invests, holds, keeps in safe custody, controls, administers, or alienates any funds of the financial institution commits a criminal offence if he does not exercise proper care and diligence and observe the utmost good faith.1
When it comes to trust property, the financial institution, nominee company or functionary must equally observe the utmost good faith, and exercise the care and diligence required of a trustee – both in relation to the trust property and the terms of the agreement which established the transaction. It is an offence not to do this.2
It is a crime to deal with the funds or trust property in any way which is likely to gain any improper advantage (directly or indirectly) for any person, to the prejudice of either the financial institution or the principal concerned.3
B. Investment of trust property
A financial institution, nominee company or functionary who administers trust property and invests it otherwise than as directed or required by the establishing agreement commits an offence.4
If there is no specific direction or requirement in the establishing agreement, trust property may not be invested otherwise than in the name of the principal, or the financial institution or the nominee company. If a financial institution or nominee company or functionary does otherwise, he commits a criminal offence.5
If, however, the trust property in question constitutes shares or debentures in a company whose memorandum of incorporation prohibits the registration of its shares (or debentures) in the name of a trust, financial institution or nominee company, then those shares or debentures must be registered in the name of a director, or a member, partner or manager of the financial institution. It is a criminal offence to contravene this provision.6
Prior to such registration, the financial institution must furnish security to the satisfaction of the Master of the High Court (if not already done in terms of the Trust Property Control Act). It is an offence not to do so.7
It is an offence for a financial institution:
- not to keep trust property separate from its assets;
- not to indicate the trust property clearly in its books of account; and
- not to clearly specify the principal to whom the property belongs.8