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FSCA releases long-awaited final policy proposals for third party cell captives

  • 12 December 2019 12 December 2019

On 11 December 2019 the Financial Sector Conduct Authority ("FSCA") released a position paper titled "Position Paper- Final Policy Proposals for Conduct Related Requirements Applicable to Third Party Cell Captive Insurance Business" (the "Position Paper").

The Position Paper serves as confirmation to interested parties and regulated entities on the policy direction taken by the FSCA regarding the regulation of conduct in third party cell captive insurance business. The Position Paper is issued for communication purposes only and does not invite public comment. However, the FSCA will update the previous draft conduct standard issued for public comment on 20 July 2018  to incorporate the proposal set out in the Position Paper.

The FSCA has indicated that it intends to publish the updated draft conduct standard in early 2020.

The Position Paper identifies specific risks in conducting insurance through third party cell structures, which the proposals mooted in the Position Paper seeks to address.

In this regard, the following conduct-related risks are stated in the Position Paper:

  1. The risk of conflict of interest, resulting in risks of:
    • biased advice;
    • mis-selling;
    • unfair decision making; and
    • inappropriate motivation to move a book of business
  2. The risk of regulatory arbitrage, resulting in uneven playing fields for non-mandated intermediaries and underwriting managers;

  3. The risk exacerbated by the nature and business models of cell captive insurers; and

  4. Supervisory and oversight challenges.

The following proposals are mooted in the Position Paper to address the aforesaid risks, including:

  1. Limiting the ownership of cell structures by non-mandated intermediaries (and their associates).
    • The Position Paper states that a non-mandated intermediary and their associates which 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
    • The non-mandated intermediary must therefore be a tied agent of the cell captive insurer.
    • Notably, the FSCA will not proceed with the following previous proposals:
      • limiting a non-mandated intermediaries' ownership of cell structures to the circumstance where an affinity relationship exists between the main business of the cell owner and the insurance business conducted through the cell structure; and
      • prohibiting non-mandated intermediaries from being cell owners where their primary business is rendering services as intermediary, will not be proceeded with
  2. Requiring cell owners who are non-mandated intermediaries to be registered as financial services providers as contemplated in the Financial Advisory and Intermediary Services Act, 37 of 2002. Accordingly, cell owners who are non-mandated intermediaries will not be allowed to be a representative on the cell captive insurer's license.
  3. Requiring cell owners who are non-mandated intermediaries (and their associates) 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.
  4. Imposing more stringent pro-active governance and oversight requirements on cell captive insurers, including requiring cell captive insurers to undertake due diligence investigations in respect of a cell owner prior to entering into a new cell structure.

In addition, the Position Paper sets out specific proposals in respect of complaints management and product design requirements which will be imposed on cell captive insurers.

The Position Paper states that the proposals will apply to both new and existing cell structures, and that an appropriate transitional period will be allowed for such alignment. Notably, the previously mooted exemption from the cell ownership limitations in order to promote transformation of the insurance sector will not be proceeded with. However, a general exemption application process will be permitted as part of the broader exemption powers contained in the Financial Sector Regulation Act, 9 of 2017.

A copy of The Position Paper can be accessed here

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