Claims against financial services providers in South Africa

Nature of claims

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, breaches of fiduciary duties (in the context of financial advisors) or other practices prohibited by statute with one or more of the relevant industry regulators, whose remits overlapped. On 1 April 2018, the Financial Sector Regulation Act 9 2017 (the FSR Act), came into force. There has not been much of a shift in terms of the most common causes of action brought by consumers since the FSR Act came into force.

All financial institutions are now ultimately regulated under the FSR Act, which establishes a regulatory and supervisory framework for the industry.

The FSR Act established the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) as regulatory bodies in the following manner:

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

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.

The Inspection of Financial Institutions Act 80 1998 and the Financial Institutions (Protection of Funds) Act 28 2001 also regulates the industry. In addition:

• banks, mutual banks and cooperative banks are supervised by the South African Reserve Bank under the Banks Act 94 1990, the Mutual Banks Act 124 1993 and the Co-operative Banks Act 40 2007;
• participating banks can opt to face claims up to 1 million South African 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 and the National Consumer Tribunal under the National Credit Act 34 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 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 2008;
• collective investment schemes are supervised by the FSCA under the Collective Investment Schemes Control Act 45 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 1998 or Short-term Insurance Act 53 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 (the FAIS Act) (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 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 2001.

Less frequently (but not infrequently), customers instigate 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 those transactions, or who were not duly registered or authorised to enter into those 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, those 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 (foreclosure) 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.

There have also been many 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 mis-selling 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.

There is also considerable precedent for the proposition that statutory duties towards regulators can also constitute legally recognisable duties for delictual liability to the extent that, given 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, some statutory duties applicable to financial services providers (eg, prohibitions on misinformation, market abuse and other improper practices) may be 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 General Code of Conduct for Authorised Financial Service Providers and Representatives, published under the FAIS Act, provides that an authorised financial services provider ‘must at all times render financial services honestly, fairly, with due skill, care, diligence and in the interests of clients and the integrity of the financial services industry’;
• 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 a 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 the 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?

One of the principal themes of the Companies Act is to create greater accountability for company directors. It imposes a strict regime under which every company director, promoter or other official involved in the issuing of a prospectus containing materially untrue or misleading statements or omissions, subject to certain defences, is liable for any resulting loss sustained by any person who acquired securities on the faith of that prospectus. While this liability regime does not preclude any person from instituting a common law claim, no person can recover the same loss more than once.

The Companies Act also imposes severe criminal consequences for issuing such a prospectus, as well as for the preparation or publication of false or misleading accounting records or financial statements. Similarly, the Financial Markets Act criminalises the publication of materially false, misleading or deceptive statements, promises or forecasts concerning listed securities.Duty of good faith

Is there an implied duty of good faith in contracts concluded between financial institutions and their customers? What is the effect of this duty on financial services litigation?

At common law, the role of good faith in contracts was unclear until a recent judgment delivered by the Constitutional Court on 17 June 2020 (Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others [2020] ZACC 13).

The Constitutional Court has held that there are public policy grounds upon which a court may refuse to enforce contractual terms. In particular, it has enumerated the proper role of ‘fairness, reasonableness and good faith’ in contracts, as follows:

[71] The impact of the Constitution on the enforcement of contractual terms through the determination of public policy is profound. A careful balancing exercise is required to determine whether a contractual term or its enforcement, would be contrary to public policy.

[72] It is clear that public policy imports values of fairness, reasonableness and justice. . . These values form important considerations in the balancing exercise required to determine whether a contractual term or its enforcement, is contrary to public policy.

Although the concept of the sanctity of contracts still prevails in South Africa, its courts will undertake a balancing act to determine whether contractual terms violate the constitutional principles referred to above. An adverse finding in this regard may lead to the invalidation of the contract; however, the Constitutional Court has made it clear that this will be done only in the clearest of cases, and a courts’ power to invalidate a contract on this basis should be exercised sparingly.

Certain statutes also 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, and the Codes published thereunder, 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 FSR Act provides that some 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 has published numerous draft conduct standards, including its Draft Conduct Standard for Banks. The Draft Conduct Standards for Banks 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 that includes charges and fees, are not unfair.

The following conduct standards were finalised and published in 2020:

• Conduct Standard 1 of 2020: Conduct Standard on Net Asset Valuation calculation and pricing for Collective Investment Scheme Portfolios – coming into effect on 19 November 2020, creating a legal framework for protecting investors against the potential risks of unfair valuation of assets and pricing of participatory interests in collective investment scheme portfolios; and
• Conduct Standard 2 of 2020: Requirements for delegation of Administration Functions by a Manager of a Collective Investment Scheme – came into effect on 19 May 2020, ensuring that the delegation of these administrative functions does not affect the cautious management of the scheme’s administration.

In addition to the above, the Conduct of Financial Institutions Bill (CoFI), which has not yet been enacted, is intended to strengthen the regulation of consumer treatment and general market conduct. One of CoFI’s objectives is the fair treatment and protection of financial customers by financial institutions. For example, CoFI sets out:

• what is considered to be an unfair or unreasonable contract term in contracts with retail financial customers;
• post-sale barriers and post-sale obligations (eg, financial institutions may not 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; and
• the requirement for financial institutions to continue promoting fair treatment during and after the 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 because of the Act recently coming into force.

Apart from the above, there is no general fiduciary duty owed by a financial institution to its customers. However, fiduciary duties are imposed by statute in various instances. For example, 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.Master agreements

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

As far as we are aware, there are no reported cases in which South African courts have addressed the interpretation of those 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.

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.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 unconscionable (ie, inimical to the interests of the community), although 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 the 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 the 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. Also, 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 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, before 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 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 instead of penalties if the contract expressly so provides. Also, 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. Those 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 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 the 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 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 that 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 acknowledgement 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 that had been reactivated by an acknowledgement of debt, before the Amendment entered into force.

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: July 2020). For further information please visit https://www.lexology.com/gtdt. .