On 28 July 2020, the Financial Sector Conduct Authority ("FSCA") published FSCA Communication 44 of 2020 (INS) advising that the FSCA has published, for public comment, a revised draft Conduct Standard delineating the requirements relating to third party cell captive insurance business ("Draft Conduct Standard")
The Draft Conduct Standard follows the publication by the FSCA of a position paper titled "Position Paper- Final Policy Proposals for Conduct Related Requirements Applicable to Third Party Cell Captive Insurance Business" on 11 December 2019 ("Position Paper"), wherein the FSCA indicated that it intended to publish a revised draft conduct standard in early 2020. (Click here to view our newsflash on the position paper dated 11 December 2019).
The statement supporting the Draft Conduct Standard identifies specific risks in conducting insurance through third party cell structures, which the proposed Draft Conduct Standard seeks to address. The risks identified were mooted in the Position Paper and include the following amongst other things:
- Conflict of interest risk where the cell owner is a non-mandated intermediary;
- The risk of regulatory arbitrage, resulting in uneven playing fields for non-mandated intermediaries and underwriting managers; and
- The risk exacerbated by the nature and business models of cell captive insurers.
The Draft Conduct Standard aligns to the proposals mooted in the Position Paper and inter alia provides as follows:
- Imposition of stringent proactive governance and oversight requirements on cell captive insurers, including that a cell captive insurer undertakes due diligence investigations in respect of a cell owner prior to entering into a new cell structure, and that, where the cell owner is a non-mandated intermediary, the cell owner meets the Fit and Proper Requirements in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 ("FAIS Act");
- Limiting the ownership of cell structures by non-mandated intermediaries (and their associates). As mooted in the Position Paper, the Draft Conduct Standard states that a non-mandated intermediary and their associates who are cell owners will be restricted to rendering services as an intermediary (including advice) in respect of only policies underwritten in the cell structure of that cell owner. Therefore, the non-mandated intermediary must be a tied agent of the cell captive insurer. In addition the Draft Conduct Standard requires cell owners who are non-mandated intermediaries to be registered as financial services providers as contemplated in the FAIS Act. Accordingly, cell owners who are non-mandated intermediaries will not be allowed to be a representative on the cell captive insurer's license.
- Requiring cell captive insurers to disclose the exact nature of their relationship and remuneration arrangements (including profit shares and dividends), to the policyholder prior to inception of any policy and when such arrangements change.
- Imposing reporting obligations on cell captive insurers which include that:
- A cell captive insurer must at least 30 days before entering into any cell structure agreement notify the FSCA in writing of such and in the format required by the FSCA; and
- A cell captive insurer must at least 60 days before terminating a cell structure agreement, inform the FSCA in writing and in the format required by the FSCA of (amongst others) (i) the date on which the agreement will terminate; (ii) the manner in which the policies underwritten in the cell structure will be dealt with; and (iii) any other details required by the Authority to ensure the protection of any policyholder that may be impacted by the termination.
The FSCA notably may also raise at any time, at its own accord, by notice to the cell captive insurer an objection related to the cell structure agreement and instruct the cell captive insurer (amongst others) to amend any terms and conditions of the cell structure agreement as determined by the FSCA.
The Draft Conduct Standard provides for specific transitional periods, namely, any cell structure entered into prior to 1 January 2020 must, within two years of the commencement date of the said Standard, comply with the requirements delineated therein.
Submissions to the FSCA on the Draft Conduct Standard using the submission template are requested by no later than 22 September 2020.
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