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IN THE FINANCIAL SERVICES TRIBUNAL

 

 

CASE NO: PA1/2022

 

 

In the matter between:

 

LAND BANK INSURANCE COMPANY SOC LIMITED                     Applicant

 

and

 

THE PRUDENTIAL AUTHORITY                                                       Respondent

 

 

CASE NO: PA1/2022

 

 

In the matter between:

 

LAND BANK LIFE INSURANCE COMPANY SOC LIMITED            Applicant

 

and

 

THE PRUDENTIAL AUTHORITY                                                        Respondent

 

 

Tribunal Panel:                LTC Harms (Chair), PJ Veldhuizen, M Le Roux SC

For the Applicant:            S Khumalo SC

For the Respondent:       A Bava SC Hearing Date: 5 October 2022

 

 

DECISION

 

 

INTRODUCTION

 

1.         These two reconsideration applications were heard together, and this decision relates to both matters since the applicants are related SOCs and there is an overlap of issues.

 

2.         The applications are in terms of sec 230(1) of the Financial Sector Regulation Act 9 of 2017 against two decisions of the respondent, the Prudential Authority, in terms of which it imposed financial penalties on the Applicants in terms of sec 167(1) of the Act.

 

3.         In the first matter (PA1/2022), the Applicant is the Land Bank Insurance Company SOC Limited (“the INSURANCE COMPANY”), an insurance company registered in terms of the Insurance Act 18 of 2017. The INSURANCE COMPANY was first registered as a short-term insurer on 24 May 2014 in terms of the since repealed provisions of the Short-term Insurance Act, 53 of 1998 (the STIA). Its sole shareholder is the Land and Agricultural Development Bank of South Africa which is wholly owned by the Government.

 

4.         In the very similar second matter (PA2/2022), the Applicant is the Land Bank Life Insurance Company SOC Limited (“the LIFE COMPANY”), also an insurance company registered in terms of the Insurance Act and its sole shareholder is also the Land Bank.

 

5.         Reverting to the first matter, the PA imposed an administrative penalty for contraventions of:

 

5.1.1.       the now repealed section 23(1)(a) of the STIA;

 

5.1.2.       section 14(1) of the Insurance Act; and

 

5.1.3.       section 16(1) of the Insurance Act.

 

6.         The PA recorded in the administrative penalty order that the penalty arose from the following contraventions by the INSURANCE COMPANY:

 

“a)    The PA found that on 02 December 2015 the INSURANCE COMPANY amended its Memorandum of Incorporation (MoI). Amongst the amendments to the MoI was a change in the capital structure, which resulted in the increase of the authorised shares without the approval required in terms of the now repealed section 23(1)(a) of the then Short-term Insurance Act, 1998 (Act no. 53 of 1998), that was in force at that time;

b)          The PA also found that the INSURANCE COMPANY appointed various directors to their Board of Directors without the required approvals from the PA in terms of section 14(1) of the Insurance Act; and

c)          The PA found that the INSURANCE COMPANY effected terminations of directors without the required notifications to the PA in terms of section 16(1) of the Insurance Act.”

 

7.         Turning then to the second matter, the PA found that the LIFE COMPANY had also contravened secs 14(1) and 16(1) of the Insurance Act. No other contraventions were noted. These contraventions are identical to those in the first matter considering that the companies have the same board of directors, and the same persons were appointed or removed.

 

8.         The following main issue arose namely

 

·             Contravention of sec 14 of the Insurance Act;

·             Contravention of sec 16 the Insurance Act;

·             Contravention of sec 23(1)(a) of the STIA;

·             The appropriate penalties (if any)

 

SECTION 14(1)(a) OF THE INSURANCE ACT, 2017

 

9.         Section 14(1) of the Insurance Act provides that:

 

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:

 

(a) In the case of an insurer . . ., a director. . ..

 

10.     The applicants accept that four directors were appointed on their boards in March and April 2020, and that those appointments were without the prior approval of the PA. Approvals were subsequently sought and granted with retrospective effect during June 2021.

 

11.     The Applicants submit that section 14(1):

 

11.1.     does not specify when approval must be sought;

11.2.     simply provides that the appointment of a key person such as a director must be approved by the PA; and

11.3.     means that the appointment takes effect only if the PA approves the appointment.

 

12.     The PA submitted that the wording of the section does not support the Applicants’ interpretation that the appointment only takes effect on approval but can occur earlier.

 

13.     The PA’s submission in this regard is 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. In these circumstances, the PA’s approach has the result that the appointments and their approvals coincide.

 

14.       We accordingly hold that the Applicants did not contravene sec 14 of the Insurance Act.

 

SECTION 16(1) OF THE INSURANCE ACT

 

15.     Section 16(1) of the Insurance Act provides:

 

An insurer . . . must notify the Prudential Authority of the termination of the appointment of a key person within 30 days of termination.”

 

16.       The Applicants concede that they terminated the appointment of four directors during April, August and October 2020 without timeously (within 30 days of termination) notifying the PA. These terminations were only notified in March 2021.

 

17.     The Applicants do not ask for a reconsideration of the decision that they had contravened the provision but say that the penalty, which will be discussed later, was inappropriate.

 

SECTION 23(1)(a) OF THE STIA

 

18.     Pursuant to its amendment by section 123 of the Financial Services Laws General Amendment Act No 45 of 2013 which came into effect on 28 February 2014 section 23(1)(a) (since repealed) read as follows:

 

Notwithstanding the provisions of the Companies Act, a short-term insurer shall not without the approval of the Registrar or otherwise than in accordance with the conditions that the Registrar determines –

 

(a) Issue any securities or change the capital structure of the company ….

 

19.       The PA found that on 2 December 2015, the INSURANCE COMPANY amended its Memorandum of Incorporation and that, amongst the amendments to the MoI was a change in the capital structure of the INSURANCE COMPANY, which resulted in the increase of the authorised shares without the approval required in terms of this section.

 

20.     The INSURANCE COMPANY admits that it increased its share capital in 2015 but is due to the lapse of time and organisational issues unable to determine whether regulatory approval had been sought or was obtained.

 

21.     The INSURANCE COMPANY contends though that the transitional provisions in Schedule 3 Item 5 of the Insurance Act bar the PA from either commencing an investigation under the FSRA against the INSURANCE COMPANY in relation to a breach of the repealed section 23 that occurred in 2015; or taking any regulatory action under STIA in respect of that contravention. As a result, the INSURANCE COMPANY contends that the imposition of the administrative penalty by the PA n relation to the breach of the repealed section 23 of STIA was unlawful.

 

22.     Schedule 3 of Item 5 provides as follows:

 

“5 Continued investigation and enforcement of previous Act

 

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 Prudential Authority, and the Prudential Authority may take any regulatory action under those Acts that the Prudential Authority deems appropriate in respect of any non- compliance; and

 

(b)        for a period of three years after the effective date, the Prudential Authority may initiate an investigation or inspection under the Financial Sector Regulation Act 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 Prudential Authority deems appropriate in respect of that non-compliance.”

 

23.     There is a basic problem with the PA’s regulatory action. The item permits the taking of regulatory action under the repealed STIA. However, the STIA contained no provision for the imposition of an administrative penalty for a contravention of section 23. To the extent that sec 167 of the FSRA may provide otherwise, the item is a lex specialis which overrides the general provisions of sec 167. As a result, no administrative penalty could competently have been imposed by the PA on the INSURANCE COMPANY for a contravention of section 23 of STIA.

 

24.     We therefore find that the PA was not entitled to take any regulatory action against the INSURANCE COMPANY and that its decision in this regard was ultra vires.

 

APPROPRIATE ADMINISTRATIVE PENALTY

 

25.     In the case of the INSURANCE COMPANY, the PA imposed an administrative penalty of R5 000 000 (five million rand), R3 000 000 (three million rand) of which is suspended for a period of three years from the date the penalty is imposed, subject to the INSURANCE COMPANY not committing a similar offence during this period. The remaining balance of R2 000 000 (two million rand), inclusive of costs, was to be paid within 14 days of the date of the letter.

 

26.     And in the case of the LIFE COMPANY, the PA imposed an administrative penalty of R2 064 000 (two million and sixty-four thousand rand), R1 376 000 (one million, three hundred and seventy-six thousand rand) of which is suspended for a period of three years from the date the penalty is imposed, subject to the LIFE COMPANY not committing a similar offence during this period. The remaining balance of R688 000 (six hundred and eighty-eight thousand rand), inclusive of costs, was to be paid within 14 working days from the date of the decision letter.

 

27.     The problem we are faced with is that these penalties were imposed in respect of all the contraventions and it is, accordingly, impossible to determine which portion was to be allocated to the contravention of section 16(1) only. If one has regard to the penalty imposed in the LIFE COMPANY’s case, one would however be justified to assume that the amount would have been about R1 million per company, half of which was suspended.

 

28.     The problem with that amount is, though, that taken in isolation it is excessive.

 

There is no indication that the PA, the company, its shareholder or policy holders 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 sec 23 had no external effect because it did not affect the shareholder, creditors, policy holders, the PA or whoever.) In addition, the two Applicants were in effect twice penalised for the same omission.

 

29.     Since the decision to impose an administrative penalty is “a decision in terms of Chapter 13” as contemplated in section 234(1)(b)(i) of the FSRA, the Tribunal is entitled to set aside the decision and substitute the PA’s decision with the decision of the Tribunal. We believe that this is an appropriate instance to do so.

 

30.     Without working through the checklist of sec 167 and considering the respective submissions of counsel, we have decided that a financial penalty is justified but in an essentially lower amount. Penalties are discretionary matters and are not subject to calculation and in our estimation a penalty of R250 000.00 would be appropriate

 

ORDER

 

31.     Accordingly, we make the following order:

 

31.1.     The administrative penalty imposed by the PA in case number PA1/2022 is set aside and replaced with R250 000, half of which is suspended on the same conditions; and

31.2.     The administrative penalty imposed by the PA in case number PA2/2022 is set aside and replaced with R250 000, half of which is suspended on the same conditions.

 

 

19 December 2022

 

 

Tribunal Panel:             LTC Harms (Chair)

PJ Veldhuizen M Le Roux SC

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