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Third party cell captive conduct standard tabled in Parliament

18 May 2022 Webber Wentzel

The long-awaited conduct standard, "Requirements relating to third party cell captive insurance business" (2022 Conduct Standard), together with the Statement of Need and Intended Operation as well as the Consultation Report, was tabled in the National Assembly and National Council of Provinces recently.

The 2022 Conduct Standard follows the publication by the Financial Sector Conduct Authority (FSCA) of a draft conduct standard, under the same heading, on 28 July 2020 (2020 Draft Conduct Standard).

Notwithstanding the significant public engagements and the comments received in respect of the 2020 Draft Conduct Standard (as evidenced in a 151-page Consultation Report), the 2020 Draft Conduct Standard remained virtually unchanged. In particular, the limitations imposed in respect of cell owners who are non-mandated intermediaries (NMIs) or associated to NMIs (paragraph 6 of both the 2020 Draft Conduct Standard and the 2022 Conduct Standard) have remained unchanged.

The following limitations, amongst others, will consequently apply in respect of a cell owner who is a NMI or associated to a NMI:

1. the cell owner (if an NMI), or the NMI associated to the cell owner, may only render services as an intermediary in respect of the policies underwritten through the cell structure of that cell owner; and
2. the cell owner and any NMI associated to the cell owner, may not, individually or together, hold (i) more than one life insurance, non-life insurance or microinsurance cell structure or (ii) a microinsurance cell structure and either a life insurance or a non-life insurance cell structure.

Effectively, this means that the cell owner (if an NMI), or the NMI associated to the cell owner, will become a tied agent of the cell captive insurer. This will have a significant impact on groups, where NMIs who render services as intermediary in respect of a cell structure held by an associate of the NMI, will be prohibited from rendering services as an intermediary in respect of the policies underwritten by any other insurers in the same group of which it forms a part.

According to the Consultation Report, the FSCA does not deem the limitations set out above to impede cell captive market growth or inhibit smaller entrants. The FSCA confirmed the purpose of the limitations is to address the risks articulated in the December 2019 Position Paper, and to ensure that cell owners would be required to "choosing the role that the cell owners want to fulfil and not simply attempting to circumvent limitations on remuneration, which is unfair to other industry players."

In addition, the FSCA also does not deem the limitations to impede competition in the market.

The FSCA did however note that it is afforded broad powers in terms of the Financial Sector Regulation Act, 9 of 2017 to exempt an applicant from provisions of legislation, and that it will do so in the appropriate circumstances and on a case-by-case basis.

It is also noteworthy that the 2022 Conduct Standard does not regulate and/or refer to similar arrangements, and it is not clear how similar arrangements will be impacted (if at all), by the publication of the 2022 Conduct Standard.

Finally, the 2022 Conduct Standard provides that it will commence upon publication thereof and provides for a 2-year transitional period in respect of cell structures entered into before 1 January 2020. All cell structures entered into before 1 January 2020 must therefore comply with the requirements of the 2022 Conduct Standard within 2 years of commencement of the 2022 Conduct Standard. No transitional period is provided in respect of cell structures entered into after 1 January 2020, and such structures must therefore comply with the requirements of the 2022 Conduct Standard upon commencement of the 2020 Conduct Standard.

It is not clear whether the 2022 Conduct Standard was approved by the National Assembly and the National Council of Provinces.

by Dawid de Villiers, Johan Henning, Johann Scholtz, Kent Davis, Lenee Green, Zelda Swanepoel, Partners, Keah Challenor, Candidate Attorney, Danelle Prinsloo, Senior Associate from Webber Wentzel

 

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