The High Court in Pretoria has found that the Financial Services Tribunal (FST) did not exceed its powers when it reduced a penalty imposed by the Prudential Authority (PA) on two insurers.
The court also upheld the Tribunal’s decision that the PA exceeded its authority when it imposed a penalty for a contravention of the now-repealed section 23(1)(a) of the Short-term Insurance Act (STIA).
The judgment is the outcome of litigation between the PA (applicant) and the FST and two state-owned insurance companies, Land Bank Insurance Company SOC Limited (LBIC) and Land Bank Life Insurance Company SOC Limited (LBLIC). The LBIC and LBLIC are subsidiaries of the Land and Agricultural Development Bank of South Africa SOC Limited.
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In 2022, the PA imposed administrative penalties on both companies for breaching sections 14(1) and 16(1) of the Insurance Act. LBIC was also penalised for contravening section 23(1)(a) of the STIA.
LBIC was fined R5 million, with R3m suspended for three years contingent on no further similar offences. LBLIC was fined R2.064m, with R1.376m suspended under the same condition.
Tribunal: penalty was excessive
Section 16(1) of the Insurance Act requires insurers to notify the PA within 30 days of terminating a key person’s appointment.
The insurers terminated four directors in April, August, and October 2020 but did not inform the PA until March 2021, well beyond the 30-day deadline. They admitted this breach before the FST but challenged the PA’s penalty as excessive and inappropriate, seeking its reconsideration.
The FST reviewed the case and faced difficulty determining the exact portion of the penalty tied to the section 16(1) violation, because the PA’s penalties addressed multiple contraventions. It estimated that the penalty for this breach might have been about R1m per company, with half suspended, but concluded that “taken in isolation, it is excessive”.
The FST reasoned: “There is no indication that the PA, the company, its shareholder or policyholders were in any way affected by the breach,” and noted that the PA seemed more concerned with broader administrative issues than the specific contravention’s impact.
Finding that the insurers were penalised twice for the same omission, the FST invoked section 234(1)(b)(i) of the Financial Sector Regulation Act (FSRA) to set aside the PA’s decision and impose a reduced penalty of R250 000, viewing it as a fair discretionary adjustment.
PA: penalties must deter misconduct
The PA challenged this decision in the High Court, arguing that although the FST could substitute a penalty under section 234(1)(a), it was legally bound to remit the matter back to the PA for redetermination rather than setting its own amount.
The PA claimed the FST’s R250 000 penalty was arbitrary and not aligned with regulatory goals, asserting that the FST exceeded its powers by not deferring to the PA’s authority.
The PA further argued that the FST misunderstood the penalty calculation process and emphasised the inherent seriousness of section 16(1) violations, which could warrant both administrative sanctions and criminal sanctions. The PA said that upholding such laws is essential to protect financial market integrity and stakeholder trust, warning that lax enforcement could destabilise the financial system.
Additionally, the PA dismissed the relevance of the contravention’s lack of immediate impact on stakeholders, stating that “allowing the respondents to flout these prescripts without consequences could have broader adverse implications for the financial sector”. It argued that the delayed or hidden effects of such breaches justify penalties regardless of visible harm.
Court’s ruling on the penalty
In a judgment delivered in January, the High Court found that the PA failed to follow Rule 13 of the Tribunal’s Rules when imposing its penalty. This rule requires the PA to provide detailed facts and explain how the penalty was computed.
The court said the PA did not provide the facts and the method of how the penalty was computed. Instead, it issued a single, lumped penalty amount for multiple contraventions without breaking down what penalty applied to each specific breach, creating a lack of transparency in its approach.
The court said it could not alter the FST’s penalty just because it might have preferred a different figure.
It also rejected sending the case back to the PA for reassessment unless the PA clarified how it would recalculate the penalty.
The court upheld the FST’s authority to adjust the PA’s penalty, dismissing the claim that “submitting that the FST exceeded its powers is simply wrong”.
In setting the reduced penalty, the FST applied factors from section 167 of the FSRA, such as the nature of the contravention and its external impact, which the PA’s counsel admitted were the same factors it considered.
The court found no evidence of harm, noting, “The PA could not refer to a single negative external impact of this contravention two years after section 16 was contravened.”
Despite the PA’s claim that the breach was serious and required strict enforcement to protect stakeholders, the court upheld the FST’s R250 000 penalty as rational, given the lack of demonstrated harm.
Section 23(1)(a) of STIA
The now-repealed section 23(1)(a) of STIA required regulatory approval for share capital increases, which LBIC admitted to doing in 2015 without clear evidence of approval.
LBIC acknowledged the 2015 share capital increase but, because of elapsed time, could not confirm compliance with section 23.
LBIC argued before the Tribunal that the Insurance Act’s transitional provisions in Schedule 3, Item 5, limited the PA’s actions. Item 5 allows continued investigations and regulatory actions under the STIA after repeal on 1 July 2018 for prior breaches, but only for three years afterwards.
The FST agreed that Item 5 permitted regulatory action but ruled, “the STIA contained no provision for the imposition of an administrative penalty for a contravention of section 23”. It deemed Item 5 a specific law overriding section 167 of the FSRA, concluding the PA’s penalty was ultra vires (beyond its legal power).
PA: transitional provisions apply
In the High Court, the PA submitted that the STIA, listed as a financial sector law in the FSRA, allowed administrative penalties under section 167(1). Section 167(4) implies penalties can be administrative if no criminal prosecution occurs, and section 65(2) of the STIA labels section 23 breaches as offences with fines up to R1m upon conviction. Since no prosecution was pursued, the PA argued it could penalise administratively.
It challenged the FST’s finding, asserting that transitional provisions manage the application of repealed laws, not restrict broader FSRA powers. The PA noted it imposed penalties under the STIA before repeal and argued the FST’s interpretation – excluding administrative penalties for three years – was irrational.
The PA further claimed its penalty was lawful, because the investigation began within three years after July 2018 for a breach within the prior three years, and the FSRA/STIA framework supported it. It also cited sections 65 and, later, 66 of the STIA, although the latter was raised only in supplementary arguments.
LBIC responded that the PA relied solely on section 167 initially and could not shift grounds on review. With the FSRA effective from 1 April 2018, and the penalty imposed in 2022 for an act in 2015, LBIC argued that section 167 lacks retrospective effect – a point the PA counsel conceded at the FST.
LBIC also clarified that section 66 addresses document issues, not share capital, and section 65 provides only criminal fines, not administrative penalties.
No provision for penalties
The High Court said the FST proceedings established that LBIC’s breach of section 23 was not in dispute; the key issue was whether the PA’s penalty, imposed in 2022, complied with the law at that time.
The PA’s notification letter to LBIC clearly stated the penalty was enacted under section 167 of the FSRA, which governs administrative penalties for breaches of financial sector laws.
However, as the court noted, “It is undeniable that the FSRA cannot be applied retrospectively,” prompting an examination of the Insurance Act’s transitional provisions in Schedule 3, Item 5. These provisions allow the PA to continue STIA investigations and take “regulatory action under those Acts” for three years after the STIA’s partial repeal on 1 July 2018. The court interpreted “those Acts” to mean the STIA, suggesting the PA could act until mid-2021, but it did not.
A critical hurdle emerged: the STIA itself lacked any provision for administrative penalties under section 23. The court explained, “the STIA did not have provision for the imposition of an administrative penalty for a contravention of section 23”. Section 65 of the STIA addresses other breaches with criminal fines, while section 66 relates to document submission failures, neither covering share capital approvals.
Despite this, the PA pinned its penalty on section 167 of the FSRA, enacted in 2018, which was after the 2015 breach.
The court rejected stretching the transitional provisions to invoke the FSRA’s powers, stating, “This unfortunate scenario cannot be blamed on the transitional provisions with a plea to ascribe some interpretation thereto to assist the PA.”
The court found no basis for the retroactive use of section 167, a principle unchallenged by the PA. Even if the STIA still applied, the PA could not impose an administrative penalty for section 23.
Consequently, the court upheld the FST’s ruling that the PA’s action was ultra vires.
