Land Bank: Prudential Authority review application dismissed with costs

An application by the Prudential Authority (PA), the financial regulator, to review and set aside the findings of the Financial Services Tribunal (FST) in favour of the Land Bank’s insurance and life insurance companies, has been dismissed with costs by the High Court in Pretoria.

The PA regulates banks, insurers and other financial institutions, while the FST is an independent body that reviews decisions made by the PA and other financial regulators.

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The PA previously imposed administrative penalties for contraventions of the Insurance Act on:

• The Land Bank Insurance Company (LBIC); and
• The Lank Bank Life Insurance Company (LBLIC).

It imposed a penalty of R2 064 000 on the LBLIC, with R1 376 000 suspended for a period of three years subject to the LBLIC not committing a similar offence during this period.

The R688 000 balance of the penalty was to be paid within 14 days.

A penalty of R5 million was also imposed on the LBIC, of which R3 million was suspended for a period of three years on condition the LBIC did not commit a similar offence during the period of suspension.

The R2 million balance of the penalty was to be paid within 14 days.

Land Bank approaches tribunal

The two companies, in terms the Financial Sector Regulation Act (FSRA), approached the FST to reconsider the decisions of the PA.

The FST found the companies did not contravene sections of the Insurance Act and the PA was not entitled to take any regulatory action against the LBIC, making the PA’s decision ultra vires or invalid.

The LBLIC did not seek a reconsideration of the decision by the PA related to Section 16 of the Insurance Act but claimed the penalty imposed was unreasonable, resulting in the FST reducing the penalty to R250 000.

Application to review tribunal decisions 

The PA applied to review the decisions of the FST, submitting that the findings were irrational, influenced by an error of law and the FST exceeded its powers and/or exercised its powers incorrectly.

The authority further claimed the FST’s findings were so unreasonable that no other tribunal could come to such findings.

The PA also claimed there was no rational connection between the findings made and the purpose of the FSR Act, the Insurance Act and the PA’s standards.

The FST, LBLIC and LBIC argued the PA does not have a direct right to bring a review.

They claimed the FST is the successor to the Financial Services Appeal Board and the PA has the same powers as that board and is akin to the registrar of that board and therefore has no right to review the FST’s decision.

The PA argued the unintended consequence of the FST ruling is that Section 14 of the Insurance Act is rendered factually unenforceable and only serves to undermine the standards the PA is mandated to uphold in terms of the FSRA.

It further argued the FST’s ruling has the unintended effect of stripping the PA from wielding the necessary tools to enforce sections of the Insurance Act and Short-Term Insurance Act.

Judge’s view

Judge Sulet Potterill said the FSB Act provided for an appeal whereas the FSRA provides for a reconsideration, but the acts regulating the two bodies are vastly different.

Potterill said the FSRA was promulgated to, among other things, establish a system of financial regulation by establishing the PA and the Financial Sector Conduct Authority (FSCA) and conferring powers on these entities, with it seen as a new dawn for the financial services sector as these new ‘Twin Peaks’ regulators were established.

“The fact that a reconsideration is seen as an internal appeal in terms of … PAJA [Promotion of Administrative Justice Act] confirms that a party can, if dissatisfied with a decision of the FST, review the decision in terms of PAJA,” she said.

Potterill ruled that the PA has the right to bring the review application.

Director appointments

Discussing whether the two companies contravened Section 14 of the Insurance Act, Potterill said it was common cause at the reconsideration hearing that four directors had been appointed to the boards of the LBLIC and LBIC between March and April 2020 without the approval of the PA.

Listen/read: ‘We are not involved in aggressive methods of liquidating clients’ – Land Bank [Aug 2022]

Potterill said the companies sought retrospective approvals for the appointments a year later, which the PA granted retrospectively in June 2021.

The LBLIC and LBIC said the Covid-19 lockdown had interfered with their functioning and it had lost all members of its compliance control function, which created gaps in its compliance processes.

They further said they had extended certain directors’ appointments to avoid a lack of a quorum, with all of these factors causing the delay in complying with Section 14 of the Insurance Act.

The FST found there was no contravention of Section 14 of the Insurance Act and submitted the wording of the section does not support the PA’s interpretation that the appointment only takes effect on approval but can occur earlier.

The PA argued that Section 14 has the purpose to ensure that persons holding key positions meet the necessary standards of necessary prudential oversight.

It said this cannot be obtained if these key persons are allowed to serve in positions before the PA grants approval because it fundamentally undermines the regulatory framework designed to protect the integrity of financial institutions.

Potterill said she understands the PA is aggrieved that the two companies sought approval only after a year, and that it seeks to guard against this becoming a practice – with directors being appointed and resigning or being removed with no regulatory control in that time.

She said the only way to achieve this is by amending Section 14 via the legislator.

“This court cannot fulfil this function and overreach into that domain.”

Potterill said the FST correctly found that the LBLIC and LBIC did not contravene Section 14 of the Insurance Act.

Penalty computation detail lacking 

She added that the PA had not provided the facts and the method of how the penalty was computed and she cannot find that the FST acted irrationally when considering the amount of the penalty imposed by the PA for the contravention of Section 16.

Potterill said it was common cause that Section 16 was breached but with the PA not setting out what skill and expertise is necessary to impose a penalty, or what factors were considered, the FST acted within its powers to substitute the amount of the penalty and acted rationally.

She said the FSR Act commenced on 1 April 2018 and the LBIC was no longer registered under the Short-Term Insurance Act when the penalty was imposed in 2022 for a breach in 2015.

On the matter of share capital

Potterill said it seems from the record of the proceedings before the FST that it was accepted that LBIC had breached Section 23 in not seeking approval to increase its share capital.

She said the only issue the FST had to decide was whether the penalty imposed was done in terms of the applicable law at that time that the penalty was imposed.

Potterill said there is no doubt the letter informing the LBIC of the penalty expressly states the penalty is imposed in terms of Section 167 of the FSR Act.

“It is undeniable that the FSR Act cannot be applied retrospectively,” she said.

“I am satisfied the FST was correct in finding the PA acted ultra vires when it imposed the penalty for the contravention of [Section 23].”

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