Understanding Restraints Of Trade Against The Backdrop Of FSCA Debarments In The Brokerage Industry

A restraint of trade can place significant pressure on a broker whose ability to work is already under threat, particularly when combined with an FSCA debarment. In these situations, understanding your employment contract and rights under the Financial Sector Regulation Act (FSR Act) becomes critical. Many brokers do not realise the complexities of client "ownership" which may lead to debarment. However, it is not always the final word, it can be suspended or reviewed through the Section 230 and Section 231 of the FSR through the Financial Services Tribunal.

Restraints of trade in the brokerage environment

Restraint of Trade clauses are common in brokerage agreements. They are designed to protect the employer's legitimate interests, such as confidential information, client lists, and commercial relationships. A restraint is enforceable as long as:

• " The employer can show a protectable interest; and
• " The restraint goes no further than necessary in duration and scope.
• " Reasonable area or jurisdiction.

For brokers, this can become particularly complex when they have acquired client through their employment of a financial services provider and built relationships where the brokers are of the view that such relationships are theirs when, in fact, dependant on employment contracts or brokerage agreements, they are the FSP's (brokerage). Herein lies the possibility of misrepresentations and solicitation which could result in debarment. An over-broad restraint may effectively remove the broker from the industry altogether, which courts are slow to accept unless the employer's interests clearly justify it.

When a broker is debarred by the FSCA

A debarment can be issued where a financial services provider believes a representative no longer meets the requirements of honesty, integrity, "fit and proper", operational ability and financial soundness of section 14 of the Financial Advisory and Intermediary Service Act 37 of 2002. The consequences are serious: a debarred broker cannot work in the financial services sector until the debarment is uplifted.

However, many debarments are disputed. They may stem from employment disputes, allegations of misconduct, or conflicts within a brokerage. In these cases, the law provides important remedies.

Applying for a suspension of the debarment

Section 231 of the FSR Act allows a broker to apply to the Financial Services Tribunal for the suspension of the debarment. If it is granted, the suspension holds the debarment in abeyance while the review process takes place.

This can be critical where a broker is:

• " Facing a restraint of trade that prevents them from joining a new brokerage,
• " Unable to earn an income while the debarment stands, or
• " Disputing the factual basis of the debarment.

A suspension does not remove the debarment but prevents its effect from operating temporarily, giving the broker the chance to continue working pending the final decision.

Applying for a reconsideration of the debarment

Section 230 allows the broker to challenge the debarment on review. The Tribunal examines whether the decision was lawful, substantively reasonable, and procedurally fair.

It may set aside the debarment, remit the matter back to the FSCA or the provider for reconsideration, or confirm the decision.

This offers a vital safeguard against debarments that were issued without proper process or evidence.

How Restraints and Debarments intersect

When these two issues collide, a broker may find themselves unable to work due to both contractual and regulatory restrictions. In such cases, a court or the Tribunal will consider whether:

• " The restraint is genuinely protecting a legitimate interest,
• " Enforcing it would be unreasonable when combined with a debarment, and
• " A suspension under section 230 is appropriate to prevent unjust prejudice.

A coordinated legal strategy is essential. Challenging the debarment may undermine the factual basis for the restraint or vice-versa, especially where allegations overlap.

Brokers who face both a restraint of trade and an FSCA debarment often feel trapped between contractual obligations and regulatory action. Fortunately, the FSR Act provides meaningful avenues for relief. By pursuing a suspension under section 231 and a reconsideration under section 230, affected brokers can safeguard their right to work while ensuring the debarment process is fair and lawful.

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.