Insurers: What to expect from your new FICA “Big Brother” – Prudential Authority!

• 2018-06-25
• Business, Compliance
• Ilze Calitz

THE INSURANCE PRACTICE: IMPACT SINCE 1 APRIL 2018

The name and mandate change of the FSB to the FSCA (a new entity in its entirety) is by far the lesser evil of all changes brought about by the FSRA.

The insurance industry undoubtedly made the loudest noise, voicing their disapproval and concerns with the Twin Peaks Model, during the lengthy consultation process– not only relating to the cost impact “by the huge potential cost that will inevitably be charged back to the industry through product and servicing fees – directly affecting consumers”, but also the “timing of regulatory interventions given the parlous state of the South African economy”.

The staff of the Insurance Prudential Department (within the previous FSB) left their offices on Friday, 30 March 2018, under the governance of the Long-term Insurance Act 52 of 1998 (LTIA) and the Short-term Insurance Act 53 of 1998 (STIA), only to return on Monday 2 April 2018, reporting to the PA for prudential purposes and the FSCA on conduct matters, governed by the FSRA.

Further amendments were brought about by the Insurance Act 9 of 2017, and further to be expected from the Conduct of Financial Institutions (COFI) Act (currently a Bill), replacing the FAIS Act.

WHERE DOES FICA BECOME RELEVANT?

The FSRA, in conjunction with FICA, brought about the PA’s mandate to supervise banks and insurance entities for compliance with FICA - levelling the playing field between banks and insurers. The PA continues with the financial crime oversight role over banks, which was initially performed by the BSD of the SARB since April 2012. The PA’s approach to supervision is risk-based, assessing and enforcing the adequacy and effectiveness of the controls implemented by Accountable Institutions (which includes long-term insurers) in their attempt to prevent financial crime.

It’s noted that, until very recently, the FSCA communicated to all financial services providers (including insurers, regulated by the PA from a financial crime perspective) regarding the FICA implementation roadmap and the deadline of 2 April 2019 for implementation with the new requirements of the FIC Act as amended, for all Accountable Institutions.

IN CONCLUSION

A word of advice: Having had extensive exposure and dealings with the previous BSD (within SARB), as well as the FSB (now FSCA) during on-site inspections, qualifies me to say - Insurers will need to “clean their house” and prepare themselves for a far more intrusive, intense and challenging style of supervision by the PA than what they’ve been accustomed to with the previous FSB. Effective reporting, accurate and complete data, all aspects being at infancy stage for several Insurers, are of key importance.

One advantage of the Twin Peaks model is that it can facilitate better enforcement – my prediction is that the PA will prove that the model evidently does enforce FICA compliance better, via administrative sanctions and/or penalties, than the previous sectoral model. Having two independent Regulators, with diverse skills, different roles and responsibilities, as well as scope of oversight, results in better coverage, focus and more frequent on-site visits and/or inspections – mutually working towards the enforcement of the said regulations and the upliftment of financial soundness across the financial services industry, resulting in improved financial demeanour and “consumer-centric” conduct.

The fact that FICA (as amended 2017) has only been applicable to previous exempted Accountable Institutions, such as Long-Term Insurers, from 2 October 2017 will not be an acceptable excuse for non-compliance to the PA.

Below is a short summary of what can be expected by and from the PA:

• Extensively meticulous on-site inspections, with no stone un-turned;

• Documented business rationale and business practices for all key decisions taken, risk ratings provided, alert closures etc. Remember, if it’s not documented, it does not exist;

• Key controls to be automated as far as possible to avoid human error;

• Application at ground level to be 100% aligned to documented practices and procedures and vice versa.;

• Consistent application of financial crime controls across the Accountable Institution;

• A solid/clear understanding of financial crime from the Board to junior staff members;

• Testing of an Accountable Institution’s ability to detect and rapidly respond to industry threats / new modus operandi’s;

• Test practical application of RBA and RMCP at ground level, testing the understanding of an RBA across all organisational levels; and

• Expect thought-through and achievable action plans to address issues such as, backlog of alerts, non-compliant client files etc.

In closing – in terms of the FSR, FICA and Insurance Act, Insurers have three Regulators to answer to – the PA for prudential requirements which includes financial crime prevention), the FSCA for market conduct requirements and the FIC as an Accountable Institution (i.e. Long-term Insurers) and Reporting Institution (i.e. Short-term Insurance). As they say – “prevention is better than cure” – especially if the “cure” comes with a heavy financial penalty. Therefore, try not to test the patience and tolerance levels of the Regulators as from the 2nd of April 2019 with non-compliance, and get your “house in order” ASAP!

Article written by:

ILZE CALITZCo-Founder & Chief Legal & Compliance Officer