An October 2021 decision of the Financial Services Tribunal upholding an administrative order, a directive, and a penalty by the Prudential Authority is worth noting. The Tribunal held there was no basis for successfully challenging the penalty for an intergroup loan arrangement not recorded in writing and for unjustified dividends paid.
A small licensed life insurance company entered into a cash sweeping transaction with its holding company allowing interest-free loans for an agreed limit of R7.7 million which was exceeded. There was no written record setting out the terms of the arrangement. The arrangement contravened the Insurance Act of 2017: section 30(1)(a) for having no documentary evidence of its insurance business regarding the loan; section 36(1) because the arrangement breached minimum capital requirements; and section 38(1)(e) because the insurer concluded a loan to the holding company without the approval of the Prudential Authority. The life insurer was fined R3 million (R2 million suspended), told to cease the arrangement, and ordered not to pay any dividends for a period of 12 months “to ensure that the insurance business is prudently managed”. Challenges against these orders failed.
An administrative penalty imposed in the discretion of a regulatory authority will only be set aside on limited grounds of bias, not acting for substantial reasons, capriciousness, or for being wrong in principle. None of those grounds were demonstrated. It was said to be “facile to argue” that because the insurer was the wholly-owned subsidiary there was no risk in regard to the loans. The sweeping back of the loaned money at the end of each month did not mean that the company had maintained its minimum capital requirements and the deterrent penalty was appropriate.
The directive not to pay dividends was appropriate because the company declared a dividend at a stage when it ought not to have done so based on statements that did not reflect the true position but only a temporary one and on a misrepresentation to the Prudential Authority. The PA’s directive was properly intended to ensure that the business was prudently managed.