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Bark without Bite?

The latest finding by the FSB’s Enforcement Committee (EC) will no doubt raise an eyebrow or two, given the promise of harsher treatment promised in July this year.

A short-term provider transgressed Section 44 of the Short-term Insurance Act (STIA) which states: No person shall provide, or offer to provide, directly or indirectly, any valuable consideration as an inducement to a person to enter into, continue, vary or cancel a short-term policy, other than a short-term reinsurance policy.

The provider was fined R50 000.

In July this year, the FSB indicated that it planned to take firmer action against transgressors of the Acts administered by the regulator.

“It cannot be business as usual when offenders get away with non-compliance, there must be serious consequences. We want to now ensure that we not only remove the economic benefit derived from non-compliance, but that we also institute a further gravity penalty. This will take into account the severity of the non-compliance and will act as a further deterrent to offenders,” said Mr Thulare.

The fine imposed in this instance is very much in line with those handed out before.

What does the Enforcement Committee have to consider when hearing a case?

The FSB website provides the following guidelines:

In terms of section 6D(3) of the FI Act, the EC must have regard to the following factors, when imposing a penalty:

  1. The nature, duration, seriousness and extent of the contravention;
  2. any loss or damage suffered by any person as a result of the contravention;
  3. the extent of the profit derived or loss avoided by the respondent from the contravention;
  4. the impact which the respondent’s conduct may have on the relevant sector of the financial services industry;
  5. whether the respondent has previously failed to comply with a fiduciary duty or law;
  6. any previous fine imposed or compensation paid for the contravention based on the same set of facts;
  7. the deterrent effect of the administrative sanction;
  8. the degree to which the respondent co-operated with the applicant and the EC; and
  9. any other factor, including mitigating factors submitted by the respondent, that the EC considers to be relevant.

The three factors, highlighted above, should quite possibly have received special attention. If a company can make a profit of, say R1 million, knowing that the expected penalty is much less, why would they refrain from transgressing the law? And why would others not follow suit?

Another factor to consider: imagine another provider commits the same transgression, but is whacked with a penalty equal to the profit made. Will they not be able to appeal successfully in view of the precedent created by this finding?

It is likely that other, similar illegal inducements are in place in the industry. Will the penalty of R50 000, meted out in this instance, deter any other transgressor, who is making substantially more? Methinks not.

Concerning mitigating circumstances, the finding notes that the respondent acted in good faith and obtained legal advice regarding complying with the STIA, prior to launching the offending offering. One can understand that this could have influenced the EC to impose a lesser fine, yet, ignorance of the law is never regarded as a valid excuse.

The respondent also accepted responsibility for the contravention, cooperated fully with the investigation and took remedial action. This appears verbatim in most of the earlier findings by the Enforcement Committee.

The FSB website states that the Enforcement Committee may impose an “unlimited but specified penalty.” In view of the promised harsher measures and “gravity penalty” mentioned above, one would have expected the actual profit derived from the illegal inducement to be taken into consideration when determining the penalty.

We are not propagating stricter censure for transgressors. We are merely asking that a uniform standard is applied, whatever the size of the FSP involved.

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