Insure Group Managers (IGM), a subsidiary of Inshare (Pty) Ltd, collected premiums from policyholders on behalf of short-term insurers, including Hollard, Santam, Old Mutual and Guardrisk.
Charl Cilliers and Diane Burns were the controlling shareholders of Inshare and ran the business of both companies, according to the Financial Services Tribunal (FST).
In 2018, IGM went into curatorship after it was revealed that it had a shortfall of R200 million in outstanding premiums due to insurers on 15 September 2018. This action was taken because insurers were collectively owed more than R1.5 billion, of which more than R660m was overdue, according to the Prudential Authority’s 2018/19 annual report.
The FSCA debarred Cilliers, IGM’s director and key individual, and Burns, its director and representative, from rendering financial services or acting as key individuals from August 2020.
In essence, the Authority debarred Cilliers and Burns for “causing or permitting” IGM to use the premiums contrary to section 45 of the Short-term Insurance Act, and the relevant regulations, by investing the funds in illiquid assets for the benefit of IGM and/or lnshare. These “unauthorised investments” amounted to the “misappropriation” of the premiums, which caused systemic risk to the short-term insurance sector and the financial services industry, according to the FSCA.
It was standard industry practice for collection FSPs, such as IGM, to retain as income the interest they earned on the collected premiums, which they could hold for up to 45 days (within 15 days after the end of the month during which premiums were received).
According to the FSCA, the term “interest” implied that the premiums would be deposited with a financial institution that paid interest to IGM. It does not, in normal business language, indicate returns on illiquid investments.
The FSCA said Cilliers and Burns contravened section 2 of the Financial Institutions (Protection of Funds) Act and section 8A(a) of the FAIS Act. Cilliers, in his capacity as KI, also contravened section 2 and sections 3(1)(b) and 3(1)(d) of the General Code of Conduct.
The alleged contraventions occurred from about December 2013 to 1 August 2018, when IGM was placed under statutory management.
Did the insurers give their consent?
Cilliers and Burns applied to the FST for their debarments to be reconsidered. The hearing was held in October, and the tribunal handed down its decision this month.
In terms of the substantive grounds for reconsideration, the FST considered whether the insurers in some way provided IGM with consent to invest the premiums as it wished.
It was submitted that IGM had written authorisation from the insurers “to receive, hold or deal” with the premiums, and they thereby expressly consented to any method of dealing by IMG. It was also argued that consent to “deal” with the premiums included the express consent to invest them for the purpose of building a balance sheet.
In the FST’s view, to “deal” can, in the context of the Short-term Insurance Act, refer only to a dealing contemplated by the Act.
It said an analysis of the mandates between IGM and the insurers did not support the submission that the insurers had provided IGM with written authority or consent to invest in long-term illiquid investments.
What the FSCA knew
The FST also addressed the issue of whether FSCA was aware that IGM used the premiums to invest in illiquid assets.
The applicants referred to a comment that IGM made on an FSCA draft directive of 15 April 2011. The FST said this reference was misleading because the comment dealt with the practice of “the benefit of the interest earned on premiums whilst lawfully in the possession of such intermediary” and not with investments in illiquid assets.
Counsel for IGM also referred to two items in the financial statement and submitted that a knowledgeable person would have known what the line items represented.
The FSCA disputed this and said the line items only reflected investments in the two subsidiaries as assets of IGM that were “available for sale”, without any notes indicating that they were acquired with short-term premium income. The fact that they were acquired with short-term premium income was also not disclosed in any other earlier financial statements of IGM since the time those assets were acquired.
“The applicants avoided the point made by the Authority by stating in reply that the accounts were audited according to auditing standards and that such a note is not appropriate or necessary. How the Authority or anyone else should have read the accounts in the manner originally stated by the applicants is not explained,” the tribunal said.
Procedural issues
The applicants also raised two procedural issues: non-compliance with the audi principle and the striking out of vexatious allegations. The tribunal also did not find merit in any of these grounds.
The FST dismissed the applications for reconsideration.
