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NBFIRA’s powers challenged

By Jayne Eleanor Maja Cross

The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) is the body charged with regulating non-bank financial institutions and improving the fairness, efficiency and orderliness of the non-bank sector and the stability of the financial system.

A non-bank financial institution includes, amongst others, asset managers, a finance or leasing company, an insurance broker, an insurer, a micro lender, a retirement fund and a medical aid fund.

NBFIRA has the power to appoint an inspector to inspect the affairs of any entity regulated by it.

In terms of the Securities Act NBFIRA is further empowered to appoint a person to be the statutory manager of a regulated entity if it appears that such entity is not complying with financial services laws, is in an unsound financial position or may be involved in financial crime. The appointment necessarily must be done urgently to protect the interests of the clients of the entity, and for the stability, fairness, efficiency and orderliness of the financial system and the safety and soundness of financial institutions.

Any appointment of a statutory manager will take effect immediately. NBFIRA is however obliged to approach the high court to confirm the appointment within 5 business days after the appointment has been made. On hearing the matter the court is mandated to confirm the appointment unless satisfied that NBFIRA was not entitled to make the appointment or that the grounds for making the appointment no longer exist.

NBFIRA’s powers to appoint a statutory manager in terms of the Securities Act were recently the subject of contentious dispute before the court. NBFIRA had appointed a statutory manager over a particular regulated entity and accordingly filed an application at the court for confirmation of the appointment.

The entity in question opposed the application for confirmation and challenged NBFIRA’s actions on various grounds. The Court had to make a determination on whether NBFIRA was entitled to appointment a statutory manager over the particular entity. This was the first time that NBFIRA’s powers under the Securities Act had been challenged before Court.

In its judgment the Court held that the decision to appoint a statutory manager involves the exercise of a discretion on the part of NBFIRA. As such, where this discretion is exercised irrationally, unreasonably or illegally the court will not confirm the appointment. Also,   where the jurisdictional facts prescribed in the Securities Act are not present, the appointment will similarly not be confirmed.

The court found that it is only entitled to consider the facts that were before NBFIRA at the time the appointment was made. No new evidence could be introduced or considered by the court at the time of the hearing of the confirmation application in order to justify the appointment.

The court went on to deal with each of the jurisdictional facts that would have to be present in order to warrant the appointment of a statutory manager. The court held that not each and every instance of non compliance with a financial services law would warrant the appointment of the statutory manager. According to the court, the non compliances should be so material as to adversely affect the safety and orderliness of financial markets or the financial system to an extent that it is necessary to appoint a statutory manager urgently to avert irreparable harm.

The court stated that objective evidence would have to be present from which it could be concluded, on a balance, that the regulated entity is or is likely to be in an unsound financial position. Furthermore, there must be objective evidence linking the entity to any of the financial crimes as defined in the relevant statutes. An assumption that an entity is or is likely to be involved in financial crime is in itself insufficient to warrant the appointment of a statutory manager.

The court went on to state that where there is a combination of remedies available to the affected parties such as restitution, interdicts, compliance directives and/or investigations, NBFIRA would have to explain why there would still be a necessity and urgency to appoint a statutory manager.

According to the court, where NBFIRA exercises its extraordinary powers in terms of the Securities Act it is under an obligation to afford  the regulated entity an opportunity to take corrective measures to avert the adverse consequences or to make representations (unless it is impossible to do so) first. The court found that the failure to afford the affected entity a hearing would result in a denial of justice and consequently, a miscarriage of justice.

In this particular matter the court refused to confirm the appointment of the statutory manager and the appointment was set aside. The effect of the judgment is that NBFIRA’s regulatory powers over entities that it regulates have been seriously curtailed.

The case is currently on appeal.