Background

The PA imposed penalties on LBIC and LBLIC for alleged governance breaches. The PA alleged that the LBIC amended its memorandum of incorporation (MOI) without prior approval, in contravention of section 23(1)(a) of the STIA; that both the LBIC and LBLIC appointed directors without prior regulatory approval, as required by section 14(1) of the Insurance Act; and they failed to notify the PA of director terminations within the prescribed period under section 16(1) of the Insurance Act. The penalties were significant: the LBIC was fined R5 million (R3 million suspended), and the LBLIC was fined R2,064 million (R1.376 million suspended).

The LBIC and LBLIC argued before the Tribunal that they had not breached section 14 of the Insurance Act because director appointments were made subject to PA approval and the PA had been informed thereof. They contended that the Insurance Act does not require PA approval before the appointment of select key persons (such as directors). Regarding section 16 of the Insurance Act, the LBIC and LBLIC admitted their late notifications but maintained that no prejudice was caused to any stakeholders as a result thereof. On penalties, they argued that the amounts imposed were disproportionate and that the PA had not acted within the FSRA’s prescribed timeframe for enforcement.

The statutory framework

Section 23(1)(a) of the STIA provided that “a short-term insurer shall not amend its memorandum or articles of association without the prior approval of the Registrar”. This provision was repealed when the Insurance Act came into force.

Under the Insurance Act, section 14(1) states 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.”

In terms of section 14(1)(a) of the Insurance Act a director is deemed to be a key person.

Section 16(1) of the Insurance Act requires that: “An insurer … must notify the Prudential Authority of the termination of the appointment of a key person within 30 days of the termination of such a person.”

Tribunal’s findings

The LBIC and LBLIC applied for reconsideration of the PA’s findings and penalties under section 230(1) of the FSRA.

The Tribunal held that the PA’s reliance on section 23(1)(a) of the STIA when having imposed the penalty on the LBIC was unlawful because:

“Schedule 3 of Item 5 of the Insurance Act permits the taking of regulatory action under the repealed STIA.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 … 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.”

On section 14 of the Insurance Act, the Tribunal found that the PA’s willingness to have granted retrospective approval of the directors’ appointment undermined its contention that its approval must be granted prior to appointment and supported the insurers’ arguments on this issue. In circumstances where the PA grants retrospective approval of inter alia director appointments, the Tribunal held, such approval has the result that the appointments and the approvals coincide.

Regarding section 16 of the Insurance Act, the Tribunal acknowledged that the insurers’ notifications of director terminations were late but emphasised the absence of harm. The Tribunal held:

“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.”

On penalties imposed by the PA, the Tribunal stressed the importance of proportionality and held, in relation to the amount of the penalty imposed: “taken in isolation it is excessive”.

As a result, the penalties imposed by the PA were reduced to R250,000, half of which was suspended on the same conditions as per the initial PA ruling. 

High Court review

The PA sought judicial review of the Tribunal’s ruling in the High Court under the Promotion of Administrative Justice Act 3 of 2000, arguing that the Tribunal acted irrationally and exceeded its powers. The High Court dismissed the application with costs.

On section 14 of the Insurance Act, the court agreed with the Tribunal’s interpretation and further held that: “section 14, on no interpretation, reads that there must be approval of directors by the PA before appointment … logically and practically, there cannot be approval before appointment”.

On section 16 of the Insurance Act, the court endorsed the Tribunal’s approach:

“The external effect is a factor to consider and the PA could not refer to a single negative external impact of this contravention two years after section 16 was contravened … There is however no evidence that stakeholders herein were not protected … With the PA not setting out … what factors were considered, the FST acted within its powers to substitute the amount of the penalty and acted rationally … The PA should have placed facts before the FST as to how the penalty was determined.”

Finally, on section 23(1)(a) of the STIA, the court confirmed that: “It is undeniable that the FSR Act cannot be applied retrospectively … the FST was correct in finding the PA acted ultra vires when it imposed the penalty for the contravention of section 23.”

What these decisions mean for insurers

These rulings confirm that although the PA could rely on section 23(1)(a) of the (now repealed) STIA to the extent, and during such time periods, as provided for in superseding legislation, the transitional provisions of the superseding legislation did not authorise the PA to impose penalties for contraventions that occurred under the STIA after its repeal, and the STIA itself did not make provision for administrative penalties to be imposed on short-term insurers for amending their MOI without prior regulatory approval.

In relation to section 14 of the Insurance Act, the judgments clarify that regulatory approval is required for the appointment of select key persons but not necessarily before the appointment is made; to the extent that relevant key persons are appointed subject to regulatory approval, such appointments do not amount to a breach the Insurance Act.

Section 16 of the Insurance Act remains important, as insurers must notify the PA within 30 days of termination of the appointment of key persons, however, penalties imposed by the regulator for non-compliance with these statutory timelines should reflect actual harm caused rather than technical non-compliance.

For insurers, these decisions highlight the importance of:

• Understanding the Insurance Act’s transitional provisions and prescribed time limits for regulatory.
• Ensuring that key person appointments are made conditional on PA approval and that record thereof is properly documented.
• Maintaining timely notifications under section 16 of the Insurance Act and, in case of non-compliance, keeping clear records evidencing that such late notifications caused no harm or prejudice to relevant stakeholders.