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Financial Services Tribunal doesn’t spare MetCI in Third Circle case

The fine has been reduced from R100m to R30m, but remains one of the highest penalties ever imposed by the regulator.

Financial Services Tribunal doesn’t spare MetCI in Third Circle case

The Financial Services Tribunal has reduced the penalty imposed by the Financial Services Sector Authority (FSCA) on Met Collective Investments (MetCI) for the firm’s failures in respect of the Third Circle MET Target Return fund.

The fund lost two thirds of its value in just two days on 10 and 11 December 2015, after extensive derivative positions taken by the manager turned against it. This followed Jacob Zuma’s firing of Nhlanhla Nene as finance minister on the evening of 9 December.

The Tribunal upheld the majority of the regulator’s decision in the matter, agreeing that MetCI contravened a number of financial sector laws. It however set aside the FSCA’s finding that MetCI had been ‘reckless’.

The Tribunal also set aside the original penalty of R100m, and replaced it with one of R30m, of which R10m is remitted.

This makes the fine the joint second largest ever imposed by the regulator. Steinhoff was ultimately fined R53m for breaches of the Financial Markets Act during 2016, and Harmony Gold was fined R30m for publishing financial statements it knew to be incorrect in 2007.


The losses suffered in the Third Circle MET Target Return fund were the sharpest ever experienced in a local collective investment scheme. However, due to the complexity of the derivative positions in the portfolio, it took the regulator nearly four years to publish its findings on what had taken place.

In its original finding issued in October last year, the FSCA found that ‘MetCI did not have proper risk management processes in place to manage and exercise proper control, oversight and governance over the fund’.

It also found that ‘the extent of the fund’s exposure to derivatives was contrary to the prescripts of the relevant financial sector laws as well as the fund’s own investment policy statement and mandate’.

The regulator believed that MetCI’s failures in this regard were ‘reckless’.


MetCI appealed the decision on three grounds: procedural failures; that the nature of its transgressions did not warrant the decision reached; and on the basis that the FSCA has misapplied the law in reaching its decision.

The procedural arguments were entirely dismissed by the Tribunal. The Tribunal also found that MetCI’s transgressions were material.

It noted that: ‘The facts, which counsel for MetCI studiously evaded in his heads and during argument, are stark. On 7 December, the total market value of the portfolio was R345.8 million whereas its net effective exposure was already R1 306.5 million. The investment loss between close of business on 9 and 11 December was calculated to be 68.3%. By 14 December, the Fund reduced its loss of market value to 43.7%.’

The only physical holdings in the fund were unit trust holdings of R1.2 million. The rest of the portfolio was in cash held in margin accounts at the JSE.

‘Applying the SAFEX/YIELDX deltas furnished by the JSE, the net effective exposure of the overall portfolio (i.e. the sum of the effective exposures of the financial instruments held by the fund on each of 7, 8, 9 and 10 December, together with the R1.2 million units, considerably exceeded the total market value of the portfolio,’ the Tribunal noted. ‘This was the case not only after the events of the evening of 9 December 2015 but also on each of the preceding three days.’

The Tribunal therefore agreed that MetCI had breached its obligations to ensure that the fund was compliant with the necessary sector laws and regulations.

‘It is not without significance that MetCI itself considered the matter in such a profoundly serious light that it closed down the fund, ended its relationship with Third Circle as general portfolio manager, and introduced new control systems,’ the Tribunal noted.


However, the Tribunal agreed with MetCI that the FSCA had erred in finding its behaviour reckless.

‘The Commissioner based his finding of recklessness on the fact that, for an extended period, MetCI allowed the Fund to continue to invest in securities for which, in its own view at the time, it did not have reliable deltas in respect of interest rate and currency option to determine on a daily basis the Fund’s effective exposure and therefore could not determine whether it was in breach of Board Notice 90,’ the Tribunal noted. ‘Assuming that sec 167 used “recklessness” in the wide sense, and not something between gross negligence and intentional, we do not believe that the Commissioner was correct in his conclusion, and that MetCI did not overstep the boundary. Much we know or what should have been known is based on hindsight.’

In a brief statement following the decision, the regulator said:

‘The FSCA is of the view that the Tribunal’s decision sends out a strong message to CIS managers to ensure that white label portfolios are properly managed.’

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