The Insurance Apprentice: FSCA Case Study

The Financial Sector Conduct Authority (FSCA) is once again a proud sponsor of the Insurance Apprentice 2024, now in its 10th season. The competition is a reality styled series during which contestants are filmed over a one-week period. 

The aim of Insurance Apprentice competition is to harness skills and attract more young people to the insurance industry. This series premiered in 2015 and has successfully shot and produced ten seasons to date.

The FSCA-sponsored episode will see contestants tackle the challenge of outstanding payments to annuitants by an insurer. Here is an in-depth look at the task that will be given to contestants, as well as possible solutions. 

Task for contestants 

‘Consider the background below and advise the FSCA on the steps it can take to ensure successful action against insurer A to ensure that it makes the necessary payments to the affected annuitants. Please also advise the FSCA on the specific aspects of B Services Provider’s (BSP) conduct that are of concern and what steps the FSCA should take against BSP.’ 

Background  

Insurer A entered into binder and intermediary agreements with BSP in 2022.These agreements allow BSP to perform all five binder functions on behalf of Insurer A in relation to Living Annuity Policies, collect premiums and make payment of such living annuities on behalf of Insurer A.

On 7 September 2023, Insurer A terminated the two agreements (binder and intermediary) with BSP. It is alleged that BSP misappropriated the premiums collected. BSP is unhappy about the termination of these agreements and has, as a result, instituted legal proceedings against Insurer A in the High Court claiming damages on the basis that Insurer A has breached the two agreements. Several annuitants are affected as Insurer A no longer pays monthly payments due to them. 

Insurer A disputes that it received the premiums in respect of these annuities and refuses to pay the annuitants. The FSCA does not agree with Insurer A’s contentions. To date we have gathered information from the annuitants and have submitted a letter to the Prudential Authority (PA) for its views on the matter as we intend to direct the insurer, in terms of Section 144 of the Financial Sector Regulations Act, (Act No. 9 of 2017) (FSR Act), to effect annuity payments to the annuitants without further delay to avoid any further prejudice to these policyholders who entered into policies with Insurer A through BSP.

Section 144 states that the FSCA may issue a written directive to a financial institution or individual in the financial sector under the following circumstances: 

• If the institution or person is conducting business in a way that poses a material risk to financial markets. 
• If their treatment of financial customers is not in compliance with fair treatment obligations. If they are providing financial education against conduct standards. 
• If they have contravened financial sector laws or are likely to do so. 
• If they have not complied with enforceable undertakings. 
• If they are involved in financial crime. 
• If they are causing or contributing to instability in the financial system.

The directive aims to achieve the objectives of the FSCA, which include stopping contraventions of financial sector laws, ensuring compliance with enforceable undertakings, preventing involvement in financial crime, reducing systemic risks, and remedying the effects of contraventions or involvement in financial crime.

The FSCA may not issue a directive with regard to causing instability in the financial system without direction from the relevant authorities. The actions specified in a directive may include ceasing offering or modifying financial products or services, removing individuals from specific positions, not paying specified bonuses or performance payments, and remedying the effects of contraventions. 

The FSCA’s prima facie view is that Insurer A is in breach of various provisions, with the key provisions being Section 49A(5) of the Long-term Insurance Act, No. 52 of 1998 (LTIA) and Rule 1.4(f) of the Policyholder Protection Rules (PPRs), as promulgated by the LTIA of 1998. Section 49A(5) states that even if there is an agreement that says otherwise, the long-term insurer is still responsible for compliance with the Act and will be held accountable for any claims relating to policies included in the agreement, even if those claims are due to the other person's failure to comply with the agreement. Rule 1.4 of the PPRs requires insurers to have policies and procedures in place to ensure fair treatment for policyholders. This includes ensuring that policyholders do not encounter unnecessary obstacles when trying to change or replace a policy, submit a claim, or make a complaint. There are other provisions in the Rule 1.4 that are also applicable to the matter.

The dilemma is that the FSCA has not been able to establish where the premiums are, and if indeed the funds were paid directly into the bank account of BSP. The FSCA needs this data to determine if the defence raised by Insurer A would be valid against our intended Directive. Due to this dilemma, the FSCA is also considering holding BSP accountable to ensure that the affected annuitants eventually receive payments either from Insurer A or BSP or both. In a response, through its attorneys, BSP states that it is surprised that, contrary to its clear statutory mandate, the FSCA is interfering in a civil matter between BSP and Insurer A which is currently pending in the High Court. BSP adds that since it was merely acting on behalf of Insurer A in terms of agreements which have since been unlawfully terminated by Insurer A, it has done nothing wrong and the FSCA should consider taking steps only against Insurer A. The FSCA is concerned about the conduct of both BSP and Insurer A.

 What are the possible solutions?

• Investigation of BSP's actions: The FSCA should conduct a thorough investigation into BSP's activities to determine if any misappropriation of premiums occurred. This could involve requesting bank statements and financial records from BSP to track the flow of funds. 
• Legal action against BSP: If evidence is found that BSP has indeed misappropriated premiums, the FSCA should take legal action against BSP to hold them accountable for their actions. This could involve withdrawing their FSP licence, pursuing criminal charges or civil litigation to recover the funds and ensure compensation for the affected annuitants. 
• Collaboration with law enforcement agencies: The FSCA should work closely with law enforcement agencies, such as the police or financial crimes units, to investigate and prosecute any criminal activities related to the misappropriation of premiums. This would help ensure that those responsible for the wrongdoing are held accountable. 
• Assistance to affected annuitants: The FSCA should provide support and assistance to the affected annuitants by guiding them through the process of claiming their annuity payments. This could involve providing them with the necessary information, forms, and resources to file their claims and receive their rightful payments. 
• Review of regulatory framework: The FSCA should also review and assess its regulatory framework to identify any gaps or weaknesses that may have allowed such a situation to occur. This could involve implementing stricter oversight measures, improving reporting requirements, and strengthening penalties for non-compliance to prevent similar incidents in the future. 
• Dialogue with Insurer A: The FSCA should engage in open and transparent dialogue with Insurer A to understand their perspective and determine if they have any valid reasons for not paying the annuitants. This could involve requesting additional information or conducting on-site inspections to verify the insurer's premium collection and claims processes. The oversight of the insurer is imperative in cases where any functions are outsourced. Overall, it is important for the FSCA to prioritise the interests of the annuitants and take swift and decisive action to resolve the situation and ensure that they receive their rightful payments. The FSCA should consider directing the insurer to pay the funds over to the annuitants. 
• Collaboration with other regulatory bodies: The FSCA should consider collaborating with other regulatory bodies, such as the Prudential Authority to share information and coordinate efforts in addressing the issue. This would ensure a holistic approach to resolving the situation and prevent further harm to the affected annuitants.

Watch the FSCA episode on 11 April 2024 using the link below:

https://www.youtube.com/@TheInsApp