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The FSCA hosts financial soundness workshop for premium-collecting FSPs

The FSCA hosts financial soundness workshop for premium-collecting FSPs
20-09-22 / Tau kaVodloza & Sisanda Ndlovu

The FSCA hosts financial soundness workshop for premium-collecting FSPs

Pretoria - Premium collecting and or asset holding Financial Services Providers (FSPs) were recently hosted by the Financial Sector Conduct Authority (FSCA) at a financial soundness workshop which sought to explain, among other things, the requirements for financial soundness as well as the different types of financial statements, as well as supporting documents required to demonstrate financial soundness.

There is litttle doubt that the regulator continues to be wary of premium payers safety, and the possibility of falling victim to unscrupulous FSPs who might collect premiums and not pass them on to the respective parties for the benefit of the consumer. The Insure Group Managers (IGM) issue of 2018 is testament to the challenges that find their way into this space. It was a scandal that rocked the inusrance industry, rattled regulators and left insurance giants Santam, Hollard, Old Mutual and Guardrisk with a loss of R944-million among them, with Charl Cilliers and Diane Burns, directors of Insure Group Managers – being debarred as financial service providers, based on their lack of honesty and integrity. 

The regulator said this workshop was a first of two series, whereby the second workshop will focus on FSPs that do not collect premiums. During the insightful and highly interactive session, the FSCA explained the general financial soundness requirements contained in Chapter 6 of the Determination of Fit and Proper Requirements for Financial Services Providers, 2017 (BN 194 of 2017) (Fit and Proper Requirements).

For an FSP to be considered financially sound it must:

  • ensure that its adjusted assets exceed its adjusted liabilities at all times;
  • maintain adequate financial resources to carry out its activities;
  • be able to meet its liabilities as they fall due; and
  • have strategies, processes, systems and financial resources to cover its risk exposures. 

Conversely, an FSP is regarded as not being financially sound when it is:

  • declared insolvent or provisionally insolvent;
  • placed under liquidation or provisional liquidation;
  • subject to proceedings that lead to any of the above statuses;
  • found to have seriously and persistently failed to manage its financial obligations; and 
    undergoing business rescue proceedings. 

The FSCA said its general requirements for the submission of financial statements in terms of Section 19 of the Financial Advisory and Intermediary Services Act, No. 37 of 2002 (FAIS Act) were also discussed during the session, and these include:

  • an FSP having to submit its financial statements annually and no later than four months after its year-end;
  • financial statements needing to be approved by the executive management or sole proprietor of an FSP; and
  • fully complete financial statements containing the following:
    • Balance sheet
    • Income statement
    • Cashflow statement
    • Statement of changes in equity
    • Notes to the financial statements
    • Director’s/ members’ report
    • S19(2) auditor’s report in accordance with International Financial Reporting Standards (IFRS)
    • Comparative figures from the prior year 

While the South African law ensures that the policyholders won’t carry the can for the loss of their premiums through a premium collection agent acting on behalf of the principal, the regulator has a responsibility of ensuring that all Financial Service Providers are fit for purpose. An amount of close to R1.5-billion in premiums could not be repayed back by Insure Group Managers, and the principal insurers were forced to swallow the losses, as these were deemed collected the moment they were deducted from policyholder accounts.

So, as part of its efforts to pre-emptively spot early warning signs of a possible contravention of the Fit and Proper Requirements, the FSCA encouraged FSPs that collect premiums to immediately notify it, in writing, if any of the following occurs:

  • the assets of an FSP or Juristic Representative exceed liabilities by less than 10%;
  • the current assets of an FSP or Juristic Representative exceed current liabilities by less than 10%;
  • the FSP or Juristic Representative does not meet any of the requirements set out in 
    Chapter 6; and
  • the FSP becomes aware of an event or situation that may or will result in the early warning events occurring.

The regulators said the notification of the above must be authorised by the executive management of the FSP, and if these early warning signs exist, the FSP may not make any payments by way of loans,  advances, bonuses, dividends, repayments of capital or loans, or any other payments or  asset distributions. This is to any director, officer, partner, shareholder, related party or  associate without the prior written approval from the FSCA.

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