The FSB has its say on Model Insurance

One of the unfortunate realities of South Africa is that issues such as fraud and corruption are rampant in certain sectors. While it is seemingly going unchecked in many industries, the financial services industry has managed to keep its integrity intact with the majority of the companies in the industry being reputable financial service providers.

This is the assurance given to the FAnews by Jonathan Dixon, Deputy Executive Officer of Insurance at the Financial Services Board (FSB). But while it is true that the majority of the companies in the industry are reputable companies, the case of Model Insurance – which we profiled in a newsletter on 16 September – has left a horrible taste in the mouth of many industry stakeholders as well as the general public with many now casting a dubious eye on any financial services provider outside of the obvious big companies.

Sufficient due process?

We asked Dixon to provide the FSB's story with the Model Insurance debacle. Dixon pointed out that the FSB started receiving complaints as early as 2010 about Model Insurance and their failure to payout claims while they were quick to bank premiums. The FSB looked into this matter and engaged with Pieter De Wet, the founder of Model Insurance. The FSB and De Wet established an undertaking that Model Insurance would either stop offering cover (in this case short-term insurance policies) or that the company would be underwritten by a reputable company. The FSB also started to collect evidence to build a criminal case against Model Insurance.

De Wet failed to honour the conditions of the undertaking. The FSB therefore continued to gather evidence of unregistered insurance business conducted by De Wet.

"It must be pointed out that the FSB struggled to gather sufficient evidence to build a criminal case at the pace in which it wanted to. Model Insurance was uncooperative and reluctant to hand over information. Members of the public who were reportedly defrauded by Model Insurance were also reluctant to sign affidavits to support the allegations against De Wet,” says Dixon.

He adds that despite these challenges, the FSB persevered with their investigation and once sufficient evidence was collected, it was handed over to the South African Police Services in April 2012. The FSB also issued a public warning alerting the public and recommending that they avoid Model Insurance.

Despite this, the FSB received further complaints regarding fraudulent activities and it was reported on 19 September that the FSB was able to secure an interim interdict through the courts which prevents Model Insurance from operating. Any breach of this interdict constitutes contempt of court.

One has to question a few aspects. Firstly, why was the investigation into the criminal case wrought with challenges? One can understand that Model Insurance was reluctant to comply, if it was further going to expose their guilt, but surely as the regulator of the financial services industry, the FSB has sufficient muscle and recourse to rubbish this resistance? And why was the public reluctant to provide the necessary affidavits? Surely if a person was defrauded by Model Insurance, whether it was by R200 or R200000, you would be standing in line at the FSB's door to hand these over?

Sufficient action

The whole debacle paints a worrying picture on both fronts, firstly the fact that Model Insurance did what they did, and secondly how the FSB allowed the company to operate without a licence from 2010 and the actions taken by the FSB to finally bring some measure of appropriate action against the company only occurred in 2013.

But Dixon is adamant that appropriate steps were followed. "Once the FSB receives complaints about a company, we engage with that company and 90% of the time, an offending company does toe the line and either becomes compliant or stop operations. Model Insurance was a special case in that De Wet was determined to carry on operating unlawfully even after we engaged with him. An interdict is really a last resort,” says Dixon.

The date for the criminal case against De Wet to proceed has not been set and one can understand the frustrations of the public who are eager to see justice served. Some measure of solace can be gained in that De Wet cannot operate as he will be in direct contravention of a court order. It is now a case of sitting and waiting for our overburdened legal system to hear the case.

Future enlightenment

The case of Model Insurance is a perfect example of the need for public awareness or education programmes into the financial services industry. If there was proper awareness of red flag situations, then the damage caused by Model Insurance would have been much less.

Once again we ask, where does the responsibility of this type of education lie? Does it lie with the FSB, the South African Insurance Association (SAIA), or the Financial Intermediaries Association of Southern Africa (FIA)?

Dixon points out that there is a list on the FSB's website which points out all of the FSB registered insurers and financial services providers. If a member of the public is dealing with a company which is not on that list, Dixon encourages the public to avoid the company and to alert the FSB of their existence.

"There is a role that brokers, advisers and intermediaries can play in this. While the FSB endeavours to resolve these cases in a speedy manner, we need to have a network of information from the ground. We encourage brokers, advisers and intermediaries to alert the public of dubious companies and to pass these concerns onto the FSB who can then take appropriate action,” says Dixon.

Editor's Thoughts:
At the end of the day, if the Model Insurance debacle proves anything, it proves that it is far too easy to defraud the public who entrusts their assets with a company who they see as reputable. We will now have to wait for the court case to play out, but the sad reality is that not everyone will get their money back from Model Insurance.

The case also highlights a need for public awareness and the need for the FSB to either gain critical mass in order to gain the necessary intelligence to stop this from re-occurring, or it highlights the need for the FSB to gain the necessary powers to be harder on companies and not let another case like Model Insurance plague the industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.

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