The High Court in Pretoria has upheld a decision by the Financial Services Tribunal (FST) that section 14 of the Insurance Act does not require the prior approval by the Prudential Authority (PA) of the appointment of a director.
The court’s judgment is the outcome of litigation that pitted the PA against 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.
The PA oversees the prudential and regulatory supervision of insurance companies.
In 2022, the PA imposed administrative penalties on both companies for breaching sections of the Insurance Act. LBIC faced a penalty of 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.
The cited contraventions involved sections 14(1) and 16(1) for both companies, while LBIC allegedly contravened section 23(1)(a) of the Short-term Insurance Act (STIA).
According to the PA, the penalties arose because:
- The companies appointed directors to their boards without the approval of the PA in terms of section 14(1).
- They removed directors without notifying the PA, as required by section 16(1).
- When LBIC amended its memorandum of incorporation in 2015, there 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structure, which resulted in an increase in the authorised shares without obtaining approval in terms of the now-repealed section 23(1)(a) of the STIA.
Dissatisfied with the penalties, LBIC and LBLIC appealed to the FST.
The FST’s decision favoured the companies on several points. It determined that neither LBIC nor LBLIC had contravened section 14 of the Insurance Act. Regarding section 23(1)(a), the FST concluded that the PA “was not entitled to take any regulatory action against LBIC”, rendering the PA’s decision ultra vires (beyond its legal authority). Although LBLIC accepted the finding of a section 16 contravention, it contested the penalty’s severity. The FST agreed, reducing the fine from R2.064m to R250 000, stating the original amount was unreasonable.
The PA escalated the matter to the High Court, seeking to review and overturn the FST’s findings. In its application, the PA argued that the FST’s decisions were flawed on multiple grounds. It asserted that the findings were “irrational, influenced by an error of law”, and the FST either exceeded its powers or exercised them incorrectly.
Read: Court backs FST’s decision to scale down penalty for insurance breach
Submissions on section 14(1)
Section 14(1) of the Insurance Act provides: “The appointment of any of the following key persons must be approved by the Prudential Authority and takes effect only if the Prudential Authority approves the appointment.” Directors are explicitly included as key persons, and Prudential Standard GO1 4, issued under section 63, reinforces this by stating that the PA must approve directors and auditors before their appointment.
It is undisputed that the insurers appointed four directors without the PA’s approval in 2020.
The companies sought retrospective approval a year later, which the PA granted in June 2021, labelling it “condonation” to address practical problems and prevent unbusinesslike outcomes. LBIC and LBLIC attributed the delay to the Covid-19 lockdown, the loss of their compliance control function, and the need to extend certain directors’ terms to maintain a quorum.
The FST concluded there was no contravention of section 14. It noted the PA’s argument that appointments cannot precede approval but found this undermined by the PA’s own actions, stating: “The PA’s submission is undermined by its willingness to grant retrospective approval, more than a year later, of the appointments […] In these circumstances, the PA’s approach has the result that the appointments and their approvals coincide.”
In the High Court, the PA argued that section 14 aims to ensure key persons meet standards before serving, a purpose defeated if they act without prior approval, resulting in legally ineffective appointments.
Although it acknowledged that practical constraints may prevent prior approval, the PA maintained it could ratify such appointments later based on the circumstances. It suggested that retrospective approval should be sought within a reasonable period, proposing 30 days, and failure to do so breaches section 14.
The PA further asserted that retrospective approval does not erase the initial breach but merely regularises the situation moving forward.
In contrast, LBIC and LBLIC argued that approval can only follow an appointment, because the PA cannot approve something non-existent. They highlighted that section 14 does not explicitly require prior approval and note that the Minister of Finance, as their shareholder, appoints board members without needing prior PA consent.
They also contended that retrospective approval deems the appointment approved from the date of approval, negating any breach.
No requirement in the Act or in GOI 4
In its decision handed down in January, the High Court found that section 14, “on no interpretation, reads that there must be approval of directors by the PA before appointment”. It said GO1 4 ascribes wording to section 14 that does not exist and does not aid the PA. It said that logically and practically, there cannot be approval before appointment.
The PA argued that approval should be sought within 30 days of an appointment, a point not raised during the FST proceedings. The court dismissed this as “arbitrary”, highlighting that no such provision exists in either the Insurance Act or GO1 4.
Complicating the PA’s position, approval had been granted retrospectively, meaning, as the court stated, “approval and appointment occurred in conjunction”. This retrospective action effectively aligned the two processes, undermining any claim of non-compliance based on timing.
Concerns were also raised by the PA about the respondents seeking approval a year after the appointments, potentially allowing directors to serve without regulatory oversight for an extended period.
The court acknowledged this issue but emphasised that “the only way to achieve [a solution] is by amending section 14 via the legislator”, because judicial authority does not extend to rewriting laws.
The additional argument about seeking approval within a “reasonable time” was noted but dismissed as irrelevant to the review, because it was not presented to the FST. The court observed that the legislature had set specific time limits in other sections, such as section 16, but chose not to do so in section 14.
In its final assessment, the court upheld the Tribunal’s finding, stating: “The FST correctly found that the respondents did not contravene section 14 of the Insurance Act.”
