The Financial Services Tribunal (FST) has slashed penalties totalling millions of rands imposed on the Land Bank’s insurance companies for contraventions of the Short-term Insurance Act (STIA) and the Insurance Act.
In April 2022, the Prudential Authority (PA) fined the Land Bank Insurance Company (LBIC) R5 million, of which R3m was suspended for three years, subject to the LBIC not committing a similar offence during this period.
According to the PA, the penalty arose from the following contraventions:
- In December 2015, the LBIC amended its memorandum of incorporation. Among the amendments was a change to the capital structure, which resulted in an increase in the authorised shares without obtaining approval in terms of the now repealed section 23(1)(a) of the STIA.
- The LBIC appointed directors to its board without the approval of the PA in terms of section 14(1) of the Insurance Act.
- The LBIC removed directors without notifying the PA, as required by section 16(1) of the Insurance Act.
The PA also fined the Land Bank Life Insurance Company (LBLIC) R2.064m, of which R1.376m was suspended for three years, subject to the LBLIC not committing a similar offence during this period.
The penalty arose from identical contraventions of sections 14(1) and 16(1) of the Insurance Act. Both the LBIC and the LBLIC have the same board of directors, and the same people were appointed or removed.
The Land and Agricultural Development Bank of South Africa, which is wholly owned by the government, is the sole shareholder in both insurers.
The FST heard the reconsideration applications by the LBIC and the LBLIC together.
No provision for a penalty
According to the FST’s decision, the LBIC admitted that it increased its share capital in 2015, but the short-term insurer said that because of the lapse of time and “organisational issues”, it was unable to determine whether regulatory approval had been sought or obtained.
However, the LBIC submitted that the transitional provisions in item 5 of Schedule 3 to the Insurance Act prevented the PA from either commencing an investigation under the Financial Sector Regulation Act (FSRA) in relation to a breach of the repealed section 23 that occurred in 2015 or taking any regulatory action under the STIA in respect of that contravention.
Item 5 (“Continued investigation and enforcement of previous Act”) states:
Despite the partial repeal of the previous Act [the STIA] –
(a) any investigation or inspection under the previous Act [the STIA] by the Registrar in respect of compliance with the previous Act and pending immediately before the effective date [1 July 2018] may be continued by the PA, and the PA may take any regulatory action under those Acts that the PA deems appropriate in respect of any non-compliance; and
(b) for a period of three years after the effective date, the PA may initiate an investigation or inspection under the FSRA in respect of any suspected non-compliance with the previous Act that occurred during the period of three years immediately before the effective date and may take any regulatory action under those Acts that the PA deems appropriate in respect of that non-compliance.
The FST found that item 5 did permit the PA to take regulatory action under the repealed STIA. However, the STIA did not provide for the imposition of an administrative penalty for a contravention of section 23. Therefore, the PA was not entitled to take regulatory action against the LBIC, and its decision in this regard was ultra vires.
PA undermined its case
The LBIC and the LBLIC accepted that four directors were appointed on their boards in March and April 2020 without the prior approval of the PA. Approvals were subsequently sought and granted with retrospective effect during June 2021.
The insurers submitted that section 14(1) of the Insurance Act:
- Does not specify when approval must be sought;
- Simply provides that the appointment of a key person such as a director must be approved by the PA; and
- Means that the appointment takes effect only if the PA approves the appointment.
The PA submitted that the wording of the section does not support the applicants’ interpretation that the appointment takes effect only on approval but can occur earlier.
The FST said the PA’s submission was undermined by its willingness to grant retrospective approval, more than a year later, of the appointments.
“Assuming, as we must, that the approvals were properly granted by the PA, this approach undermines the contention that the approval must be granted prior to appointment and supports the applicants’ arguments on this issue.”
The tribunal accordingly hold that the insurers did not contravene section 14.
Section 16 contravention conceded
The insurers admitted that they terminated the appointment of four directors during April, August and October 2020 without timeously (within 30 days of termination) notifying the PA. The notifications took place in March 2021.
The applicants did not ask for a reconsideration of the decision that they had contravened section 16(1) of the Insurance Act but said the penalty was inappropriate.
Excessive penalty
The FST said it was faced with the problem that the PA imposed the fines for all the contraventions, and so it was impossible to determine which portion was allocated to the contravention of section 16(1) only.
However, if one has regard to the penalty imposed on the LBLIC, one would be justified to assume that the amount would have been about R1m per company, half of which was suspended, the FST said.
But the tribunal said that amount, taken in isolation, was excessive.
“There is no indication that the PA, the company, its shareholder or policyholders were in any way affected by the breach.
“It is apparent that the PA was more concerned about the general problems with the administration of the applicants than with the seriousness of the particular contravention. (Even the contravention of section 23 had no external effect because it did not affect the shareholder, creditors, policyholders, the PA, or whoever.) In addition, the two applicants were in effect twice penalised for the same omission,” the FST said.
The tribunal deemed it appropriate to exercise its powers in terms of section 234(1)(b)(i) of the FSRA and set aside the PA’s decision and substitute it with its own decision.
The LBIC and the LBLIC were each fined R250 000, half of which was suspended on the same conditions as imposed by the PA.
