Battle between PA and insurers: court clarifies regulatory powers

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While the Prudential Authority (PA) failed in its bid to overturn the Financial Services Tribunal’s findings in favour of the Land Bank Insurance Company SOC Limited (LBIC) and Land Bank Life Insurance Company SOC Limited (LBLIC), a High Court ruling affirmed the PA’s authority to uphold regulatory standards under South Africa’s Twin Peaks financial regulatory model.

In April 2022, the PA imposed penalties on both insurers for regulatory breaches. LBIC was fined R5 million, with R3m suspended for three years, conditional on avoiding similar offences. The PA cited the following contraventions:

  • Amending its memorandum of incorporation in December 2015 to increase authorised shares without approval under the repealed section 23(1)(a) of the Short-term Insurance Act (STIA).
  • Appointing directors without the PA’s approval, violating section 14(1) of the Insurance Act.
  • Removing directors without notifying the PA, contrary to section 16(1) of the Insurance Act.

Similarly, LBLIC was fined R2.064m, with R1.376m suspended for three years, for identical violations of sections 14(1) and 16(1) of the Insurance Act.

Both companies share the same board of directors, who were involved in the appointments and removals. Both insurers are owned by the Land and Agricultural Development Bank of South Africa, which is government-owned.

The Tribunal, however, found that the respondents did not breach section 14 of the Insurance Act and ruled that the PA’s action under section 23(1)(a) was ultra vires.

While LBLIC did not challenge the section 16 violation, it argued that the penalty imposed was excessive, prompting the FST to reduce the fine to R250 000.

Read: Tribunal slashes penalties imposed on the Land Bank’s insurance companies

In response, the PA filed a legality review in the High Court in Pretoria, challenging the FST’s decisions. The PA argued that the findings were irrational, based on legal errors, and represented an overreach or misuse of the Tribunal’s powers. It also contended that the FST’s conclusions were so unreasonable that no tribunal could have reasonably reached them.

Judge Sulet Potterill delivered judgment on this matter on 15 January.

 

‘Locus standi’ of the PA

The FST, LBIC, and LBLIC argued that the PA did not have the right to review the Tribunal’s decision. They claimed that because the FST is similar to the former Financial Services Appeal Board (FSAB), the same rules should apply. They referred to a past case (Registrar of Pension Funds v Howie NO) where the court decided that the registrar could not review the FSAB’s decision. In that case, it was said that allowing the registrar to challenge the Appeal Board’s decision would undermine its role.

The PA disagreed, arguing that under the Financial Sector Regulation Act (FSRA), unlike the older Financial Services Board (FSB) Act, the “decision-maker” is specifically allowed to bring a review. The PA pointed out that the FSRA includes the PA as one of the parties that can review a decision, because it is considered a “party” under the Act. This is different from the FSB Act, which did not allow such reviews.

Judge Potterill explained that the FSRA is more detailed than the FSB Act, and it creates a new system of financial regulation with two key bodies: the PA and the Financial Sector Conduct Authority.

In her decision, she pointed out that the FSRA allows “a party to the proceedings”, including the PA, to apply for a review of an FST decision, unlike the older law.

Although the Howie case ruled that the registrar could not review the FSAB’s decision because it did not directly affect the registrar’s regulatory role, the PA in this case argued that the FST’s decision would impact its ability to enforce laws, particularly in the insurance sector. The PA claimed this would undermine its regulatory powers.

Judge Potterill agreed with the PA, stating that the FSRA clearly allows the decision-maker (the PA) to bring a review application. Therefore, the PA has the right to challenge the FST’s decision.

 

The now-repealed section 23(1)(a) of the STIA

In 2015, LBIC admitted to increasing its share capital but was unsure whether it had obtained regulatory approval under the now-repealed section 23(1)(a) of the STIA. The PA imposed a penalty for this contravention.

However, LBIC argued that the transitional provisions in the Insurance Act barred the PA from taking regulatory action, claiming that it could not enforce penalties for actions that occurred under the old law after the repeal.

The FST ruled that the PA could not impose the penalty because the STIA did not provide for an administrative penalty for contravention of section 23. They found that the PA’s actions were beyond its legal authority (ultra vires).

The PA contended that section 167 of the FSRA allowed it to impose penalties, even for breaches under the old STIA, but the FST disagreed, asserting that section 167 could not be applied retrospectively.

Judge Potterill agreed with the FST, stating that although the PA has the right to investigate breaches under the STIA, it could not impose penalties using section 167 of the FSRA because it could not apply retroactively. The transitional provisions did not authorise the PA to impose penalties for contraventions that occurred under the STIA after its repeal, and the STIA itself did not include a provision for an administrative penalty for increasing share capital without approval. As a result, the PA’s penalty was found to be invalid.

Section 14 of the Insurance Act

Section 14(1) of the Insurance Act requires the appointment of key persons, including directors, to be approved by the PA and specifies that such appointments only take effect if approved.

However, between March and April 2020, four directors were appointed to the boards of LBLIC and LBIC without prior PA approval. Retrospective approval for these appointments was sought and granted over a year later, in June 2021.

The PA argued that prior approval is crucial to ensure that appointees meet regulatory standards. Allowing directors to serve before obtaining approval undermines the regulatory framework and the integrity of financial institutions.

The PA further argued that approval should be sought within 30 days of an appointment if prior approval was not possible. It contended that retrospective approval does not remedy the breach of section 14; it simply regularises the appointments after the fact.

The PA also maintained that the delayed approval request – over a year after the appointments – was unreasonable and should be considered a violation of section 14.

LBLIC and LBIC responded by arguing that section 14 does not explicitly require prior approval before making appointments. They argued that retrospective approval by the PA effectively aligned the timing of the appointments and approvals, and thus no breach occurred. They also cited the Covid-19 lockdown and compliance challenges as the reasons for the delays in seeking approval.

The FST ruled that there was no contravention of section 14, reasoning that the PA’s willingness to grant retrospective approval undermined its claim that prior approval was mandatory. The Tribunal concluded that retrospective approval effectively aligned the timing of the appointments and approvals, thus negating any breach.

Judge Potterill endorsed the FST’s decision, stating that the provision does not explicitly require prior approval for appointments. The court also dismissed the idea of a 30-day “reasonable period” for seeking approval, describing it as arbitrary and without basis in the Insurance Act.

The court acknowledged that retrospective approvals granted by the PA serve a practical purpose by addressing procedural delays while effectively legitimising appointments. This approach, the court noted, is in line with the challenges faced by regulated entities, particularly in cases where operational difficulties – such as the Covid-19 lockdown – disrupt compliance timelines.

Section 16(1)

Section 16(1) of the Insurance Act requires insurers to notify the PA within 30 days of terminating the appointment of a key person, which was not done in this case. The insurers acknowledged their failure to comply but contested the penalty, arguing it was excessive and unjustified.

The FST ruled that the penalty imposed was too high, particularly because there was no indication that the breach had any harmful effect on stakeholders like shareholders, creditors, or policyholders. It also found that the PA had not properly itemised which penalties corresponded to specific contraventions, making it difficult to assess the fairness of the penalty for the breach of section 16.

Ultimately, the FST decided to impose a reduced penalty of R250 000, arguing that penalties should be discretionary and not rigidly calculated. However, the PA disagreed, claiming that the FST overstepped its authority by substituting the penalty without returning it to the PA for reconsideration.

Judge Potterill sided with the FST, stating that it had acted within its powers to substitute the penalty, and there was no compelling reason to remit the matter to the PA.

The court also noted that the PA had failed to clearly outline how it calculated the penalty, which contributed to the FST’s decision to adjust it. Judge Potterill upheld the FST’s authority and decision, affirming the reduced penalty.

The application was dismissed with costs, with costs to include the costs of three counsel. However, the judgment underscores the shift in regulatory powers under the Twin Peaks model, empowering regulators such as the PA to challenge Tribunal decisions when necessary to enforce compliance.

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