South Africa features a highly regulated financial services industry, with specific rules that apply to insurers who provide funeral insurance cover and to the agents and representatives who sell this cover to consumers.
The Twin Peaks regulatory framework makes provision for two types of oversight in the market, namely market conduct, regulated by the Financial Sector Conduct Authority (FSCA) and prudential matters, regulated by the Prudential Authority (PA).
South Africa’s regulatory framework
What does the regulatory framework for funeral insurance agents and representatives consist of? To begin, the Financial Advisory and Intermediaries Services (FAIS) Act sets minimum standards for the business activities and conduct of authorised financial services providers (FSPs). The Act requires any person or company that provides financial services to register as a FSP and obtain a licence through the FCSA.
The purpose of licensing is to ensure that applicants are fit and proper for business and that they operate lawfully, in the public’s interest. Only licensed FSPs and their duly appointed representatives can provide advice or intermediary services, known as financial services, under the FAIS Act.
Advice includes providing clients with recommendations, guidance or proposals of a financial nature relating to the purchase, variation, replacement or termination of an insurance product.
The FAIS Act also provides for the conduct and prudential framework for FSPs in line with the financial product categories they distribute. It stipulates that all authorised FSPs must ensure that their key individuals and representatives are, when rendering a financial service, competent to act, and comply with all the fit and proper requirements as well as any other requirements included in the Act.
Fit and proper requirements
The FAIS Fit and Proper Requirement for FSPs and their representatives establishes a higher level of professionalism and compliance in the industry. FSPs are always expected to be honest and have integrity and be in good standing. FSPs and their representatives are expected to operate in the best interest of their clients, especially when advising on financial products. They should disclose all information about the financial product at the inception stage, during the lifetime of the policy and at the claim stage.
FAIS also requires FSPs to be financially sound and not to use client premiums to carry out business operations. In other words, clients’ premiums should only be used to insure their clients against claims that may arise on a risk event and not for administration costs or for other operational purposes.
The law for insurers
The Insurance Act establishes a legal framework for the prudential regulation and supervision of insurers and insurance groups. It ensures the safety and soundness of insurers, enhances the protection of policyholders and potential policyholders, promotes the broad-based transformation of the insurance sector and contributes to the stability of the financial system in general. This Act also sets out the licensing of insurers and their governance and solvency requirements, so that insurers can pay claims as they arise.
Insurers are also regulated under the Long-Term Insurance Act (LTIA), which describes how they should conduct themselves in the market. In particular, under Rule 2A of the Policyholder Protection Rules (PPR), the LTIA sets out specific standards of how funeral products should be structured and administered to ensure fair outcomes for policyholders.
Penalties for non-compliance
A person who conducts business in South Africa without an insurance licence commits an offence and is liable on conviction to a fine of up to R10 million. The PA may also direct that person to discharge all or any of its insurance obligations and may apply for the liquidation of that person.
Remember, in the event of a breach of any of the compliance obligations, ignorance of the law will not be an excuse. For this reason, it is vital that all role players in the industry familiarise themselves with the regulatory requirements and strictly adhere to them.
This article first appeared on page 16 of the FANews Funeral Insurance Digital Magazine published on 16 April 2021 and is attributed to Anelang Kakudi, BrightRock Senior Manager: Market Conduct and Regulatory Affairs.