Submissions on latest drafts of Schedules 1 and 3 to Insurance Bill, 2016

23 October 2017
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23 October 2017

 

Free Market Foundation’s

written submissions on latest drafts

of Schedules 1 and 3 to Insurance Bill, 2016

 

Latest drafts of Schedules 1 and 3

On 10 October 2017 the Treasury[1] issued a statement[2] inviting written submissions on the latest versions of Schedules 1 and 3 to the Insurance Bill, 2016,[3] containing amendments additional to those mooted in the version of the Bill that was tabled[4] on 10 May.[5] 

The Free Market Foundation’s submissions are about the Rule of Law. Schedule 3 and the Bill itself both violate the Rule of Law in a number of respects, and Schedule 1 (Laws amended) ignores the Financial Sector Regulation Act’s violations of the Rule of Law:

 

Executive summary

We deal first with Schedule 3 (Transitional arrangements). It has three provisions which we identify below that violate the principles of the Rule of Law that laws should be clear and predictable, that questions of legal right and liability should be resolved by law and not by discretion, and that laws should not be arbitrary or violate fundamental rights.

Schedule 1 (Laws amended) amends provisions of the Financial Sector Regulation Act, 2017.  We list below four provisions of that Act relating[6] to insurers that Schedule 1 should amend, as likewise violating the Rule of Law principles that laws should be clear (one provision is contradictory), and that liabilities should not be determined by discretion.

We also point out, in conclusion, four provisions of the Insurance Bill itself which violate the Rule of Law (one creates an absurdity), and which should also be revised.

 

Schedule 3 (Transitional arrangements)

     [a]  The latest version of Schedule 3 states that the Prudential Authority must convert the registration of an insurer that, immediately before the effective date for the coming into operation of this new Insurance Act, was registered as an insurer[7] under either of the 1998 Insurance Acts[8] to a licence to conduct a class and sub-class of life or non-life insurance business referred to in Schedule 2 to the Bill,[9] “if” that insurer immediately prior to the effective date was “actively” and “prudently” conducting insurance business similar to that class or sub-class of insurance business.[10]

            Schedule 3 contains no criteria for determining if a registered insurer was “actively” or “prudently” conducting insurance business similar to such a class or sub-class of business, and thus gives the Authority a degree of discretion those questions.

            This violates the principles of the Rule of Law that laws should be[11] intelligible, clear and predictable;[12] and that questions of legal right and liability should be resolved by application of law, not the exercise of discretion.[13]

     [b]  Schedule 3 also states[14] that a previously-registered insurer who “applies” for the conversion of its registration to a licence to conduct life-insurance business, must only be licensed to conduct a class or sub-class of life-insurance business referred to in Schedule 2’s Table 1.[15] And a previously-registered insurer who applies for conversion of its registration to a licence to conduct non-life insurance business, must only be licensed to conduct a class or sub-class of non-life (Schedule 3 in error refers to “life”) insurance business referred to in Table 2 of that Schedule. [16]

            This will mean that registered insurers who prior to the effective date had been lawfully conducting business in categories other than those mentioned in Schedule 2 will be prevented from continuing to do so.

            This could well violate the Rule of Law principle that laws of the land should apply equally, except insofar as objective differences justify differentiation.[17] No objective differences justifying this differentiation are identified in either Schedule 3, or the Bill, or its explanatory memorandum.[18]

            It is a principle of the Rule of Law that Parliament should not act arbitrarily. A statutory measure should have a rational relationship to the achievement of a legitimate government purpose, or the measure is unconstitutional.[19]

     [c]  The consequences of a registration not being converted to a licence are harsh: Schedule 3 states that, if the Prudential Authority does not convert the registration of a previously-registered insurer to a licence to conduct insurance business,[20] the Prudential Authority may[21] direct the insurer to make arrangements to the satisfaction of the Prudential Authority to ensure the orderly resolution of that insurance business of the insurer.[22]

            This violates the Rule of Law principle that laws must afford adequate protection of fundamental rights.[23] Everyone has the fundamental right to equal protection and benefit of the law.[24] No law may permit arbitrary deprivation of property.[25] A business licence that has been revoked may be treated as property, for the purposes of a fundamental right to property.[26] A juristic person is entitled to the rights.[27] 

            (If there has to be a limit on the conducting of unclassified insurance business, a preferable solution would be to grandfather previously-registered insurers who[28] were not conducting business similar to a business class or sub-class referred to in Schedule 2, for[29] a period of ten years or any remaining period of registration.[30])

           

Schedule 1 (Laws amended)

The latest version of Schedule 1 of the Insurance Bill will amend the Financial Sector Regulation Act’s schedule of “financial sector laws,”[31] to include this anticipated new “Insurance Act.”[32]

            Schedule 1 will also amend that Act’s schedule of responsible authorities, to state that the responsible authority for this new Insurance Act will be the Prudential Authority.[33]

            Schedule 1 should also amend the following aspects of the Financial Sector Regulation Act relating[34] to insurers, that violate the Rule of Law:

 

Aspects of Financial Sector Regulation Act violating Rule of Law

     [a]  The Financial Sector Regulation Act, 2017 states that the Prudential Authority may issue, to[35] a financial institution that provides a financial product, a written directive requiring it to take action specified in the directive if the institution is conducting its business in an “improper”[36] way and, as a result, there is a “risk” that the institution “may not be able” to comply with its obligations; or if the institution has contravened or is “likely to” contravene a financial sector law for which the Prudential Authority is the responsible authority.[37]

The directive must be “aimed at” achieving the Prudential Authority’s objective (to[38]promote”[39] the[40] soundness of financial institutions that provide financial products, and protect customers against the risk that those institutions may fail to meet their obligations[41]), and[42] at reducing the risk (that the institution may not be able to comply with its obligations), or at stopping the institution from contravening applicable financial sector laws or reducing the risk of such contraventions.[43] Action that may be specified in a directive includes the financial institution’s ceasing to provide a specific financial product.[44]

It is unclear what constitutes conducting business in an “improper” way, or what degree of “risk” that the financial institution “may not” be able to comply with its obligations would justify the Authority’s acting; or how “likely” to contravene a law the institution would need to be to justify the Authority’s acting.

The applicable criteria, that the directive must be aimed at achieving the Prudential Authority’s objective of promoting the soundness of institutions, and at reducing the risk that the institution may not be able to comply with its obligations,[45] are insufficient to save the provision from being vague and discretionary.

This power of the Prudential Authority[46] violates the principles of the Rule of Law that laws should be[47] intelligible, clear and predictable,[48] and that questions of legal liability should[49] be resolved by application of law not the exercise of discretion.[50]

     [b]  Similarly, the Financial Sector Conduct Authority may issue a directive to a financial institution to take specified action if the institution has contravened or is “likely” to contravene a financial sector law for which the Financial Sector Conduct Authority is the responsible authority.[51] The directive must be aimed at achieving the Financial Sector Conduct Authority’s objective (to[52] “protect financial customers by promoting fair treatment” of financial customers by financial institutions[53]), and stopping the institution from contravening applicable financial sector laws or “reducing” the risk of contraventions.[54] The specified action may include ceasing to provide a specific financial product.[55]

This similar power of the Financial Sector Conduct Authority, and for the same reasons, also violates the Rule of Law principles that laws should be predictable, and that liability should not be determined by discretion.

     [c] The Financial Sector Regulation Act will amend both Insurance Acts[56] to provide that the Authority[57] by notice to an insurer may amend,[58] replace or impose additional conditions of registration subject to which the insurer is registered, “when in the public interest or the interests of the policyholders or potential policyholders” of the insurer.[59]

It is unclear what constitutes “the public interest or the interests of the policyholders or potential policyholders.”

The amendments are vague and discretionary interferences with vested rights. The amendments violate the Rule of Law principles that laws should be intelligible, clear and predictable, and that questions of legal liability should be resolved by application of law not the exercise of discretion.

     [d] The Financial Sector Regulation Act’s transitional provisions also include a provision that the “Prudential Authority” must be substituted as a party in any pending proceedings[60] that have been commenced but not finally determined immediately before the date on which the provision comes into effect, for the Reserve Bank or “a Registrar in terms of” a banking Act,[61] “the Short-term Insurance Act or the Long-term Insurance Act.”[62]

However, the “Financial Sector Conduct Authority” must be substituted as a party in pending proceedings[63] for the Financial Services Board, Directorate of Market Abuse where applicable, or “a Registrar in terms of a financial sector law other than the Banks Act.”[64]

This is contradictory: The one provision[65] states that the “Prudential” Authority must be substituted as a party in pending proceedings for “a Registrar in terms of…the Short-term Insurance Act or the Long-term Insurance Act.” But the other provision [66] states that the Financial Sector “Conduct” Authority must be substituted as a party in pending proceedings for “a Registrar in terms of a financial sector law other than the Banks Act” (implying that the Financial Sector Conduct Authority must be substituted as a party in pending proceedings for a Registrar in terms of “the Short-term Insurance Act or the Long-term Insurance Act”).

These contradictions violate the Rule of Law principle that laws should be clear.

 

Aspects of Insurance Bill violating Rule of law

We point out that the Insurance Bill itself also violates the Rule of Law in several respects, and these shortcomings should be rectified:

     [a] The Bill states that “a person” is regarded as carrying on insurance business if “the person” carries on similar business outside the Republic and “that person” (or another person) acts in relation to that business “on behalf of the first-mentioned person.”[67]

This is absurd: A person cannot act on behalf of, or transact with, himself in relation to his business in one and the same capacity.[68] The Rule of Law requires that laws should be intelligible.[69]

     [b] The Bill states that the Prudential Authority may amend or replace any licensing conditions or impose additional licensing conditions when[70] it is “in the public interest,”[71] or in the interests of the policyholders or “potential policyholders” of the insurer.[72]

What constitutes the “public interest” or “the interests of…potential policyholders” is unclear. The clause is vague and thus gives the Authority a discretion on those questions.

The clause violates the principles of the Rule of Law that laws should be[73] intelligible, clear and predictable,[74] and that questions of legal liability should[75] be resolved by application of law not the exercise of discretion.[76]

     [c] The Bill states that the Prudential Authority may[77] withdraw a licence of an insurer, if it appears to the Prudential Authority[78] that the insurer ceased to enter into insurance policies to “an extent which does not justify its continued licensing” as an insurer.[79]

This clause too is vague and gives the Authority a degree of discretion. It too violates the Rule of Law principles that laws should be clear, and that questions of legal liability should not be resolved by the exercise of discretion.

     [d] The Bill states that an insurer may not declare a dividend[80] if it fails or is “likely” to fail to comply with the duty to maintain its business in a financially sound condition, or if the declaration would result in it failing or being “likely” to fail to comply with that duty.[81]

It is unclear how “likely” it should be that an insurer may fail to maintain its business in a financially sound condition, to oblige it to decline to declare a dividend.

This clause also violates these principles of the Rule of Law that laws should be intelligible, clear and predictable.

 


 

Conclusion

Schedule 3 violates the Rule of Law in three respects (in one case creating a contradiction).

Schedule 1 amends the Financial Sector Regulation Act, 2017 but ignores four provisions of the Act which violate the Rule of Law.

The Insurance Bill itself violates the Rule of Law in four respects (in one instance creating an absurdity).

It is evident that the Insurance Bill and its Schedules are not in final form or fit for enactment.

 

 

Prepared by

Gary Moore

South African lawyer and Senior Free Market Foundation Researcher

23 October 2017

 

——ooo0ooo——



[1]     And Financial Services Board.

[2]     National Treasury and Financial Services Board, 10 Oct 2017, Media Statement: “Insurance Bill, Release of Schedules 1 and 3 for Public Comment.”

[3]     Insurance Bill [B 1—2016].

      The Treasury and Financial Services Board on 17 Apr 2015 published a draft Bill for comment. On 28 Jan 2016 the Minister of Finance tabled the Bill in Parliament. On 15 Dec the Standing Committee on Finance invited further comment and held public hearings on 7 Feb 2017. The Treasury on 10 May gave the Committee its response to public comments, and proposed amendments to the Bill which included changes to Schedules 1 and 3: National Treasury, 10 May 2017, Response to public comments received on Insurance Bill, 2016: Presentation to Standing Committee on Finance, pp 6, 23, 24.

      The Committee deliberated in August and September and on 4 Oct. On 5 Oct the Committee asked the Treasury to invite submissions on the latest versions of Schedules 1 and 3. South African Government, 10 Oct 2017, “Treasury releases Schedules 1 and 3 of the Insurance Bill for public comment.”

[4]     In the Standing Committee on Finance.

[5]     The 10 May version of the Schedules incorporated public comments received during the Parliamentary process for comment on the Bill. National Treasury and Financial Services Board, 10 Oct 2017, Media Statement: “Insurance Bill, Release of Schedules 1 and 3 for Public Comment.”

[6]     Directly or indirectly.

[7]     i.e., a previously registered insurer. Insurance Bill, Sched 3 item 1(1) svv “previously registered insurer” read with “previous Act.”

[8]     Long-term Insurance Act 52 of 1998; Short-term Insurance Act 53 of 1998.

[9]     See Insurance Bill, Sched 2 (Classes and sub-classes of insurance business).

[10]   Insurance Bill, Sched 3 (Transitional arrangements) item 6(4)(a).

[11]   So far as possible.

[13]   Bingham, “The Rule of Law” (supra), second sub-rule.

[14]   Insurance Bill, Sched 3 (Transitional arrangements) item 6(4)(b)(i) and (ii).

[15]   Insurance Bill, Sched 2, Table 1 (Classes and sub-classes of insurance business: Life insurance).

[16]   Insurance Bill, Sched 2, Table 2 (Classes and sub-classes of insurance business: Non-life insurance).

[17]   Bingham, “The Rule of Law” (supra), third sub-rule.

[18]   Insurance Bill, Memorandum on the objects of the Insurance Bill.

[19]   Joubert et al, Law of South Africa vol 5(3) 2 ed repl, “Constitutional Law: Structures of Government” D W Freedman par 20; New National Party v Government of the Republic and others 1999 (5) BCLR 489 (CC) pars [19], [24].

[20]   The precise scope and applicability of the text in the latest version of Schedule 3 is unclear.

[21]   Inter alia.

[23]   Bingham, “The Rule of Law” (supra), fourth sub-rule.

[24]   Constitution s 9 (“Equality”) subsec (1).

[25]   Constitution s 25 (“Property”) subsec (1).

[26]   Courts tend to afford greater protection to government-granted licences and to characterise them as property, when the licence in issue has been revoked. Shoprite Checkers (Pty) Ltd v Member of Executive Council for Economic Development, Environmental Affairs and Tourism: Eastern Cape and others 2015 (9) BCLR 1052 (CC) par [116].

[27]   To the extent required by the nature of the rights and the nature of that juristic person. Constitution s 8(4).

[28]   Prior to the effective date.

[29]   For example.

[30]   Whichever is the longer period.

[31]   Financial Sector Regulation Act, Sched 1 (Financial sector laws).

[32]   Insurance Bill cl 72 read with Sched 1 (Laws amended), Financial Sector Regulation Act item 3.

[33]   And that the responsible authority for the 1998 Insurance Acts will henceforth be only the Financial Sector Conduct Authority. Insurance Bill cl 72 read with Sched 1, Financial Sector Regulation Act item 4.

[34]   Directly or indirectly.

[35]   Inter alios.

[36]   Or financially unsound.

[37]   Financial Sector Regulation Act s 143(1)(a)(i) and (ii)(aa).

[38]   Inter alia.

[39]   And “enhance.”

[40]   Safety and.

[41]   Financial Sector Regulation Act s 33(a) and (c).

[42]   Inter alios.

[43]   As the case may be. Financial Sector Regulation Act s 143(3)(a) and (c).

[44]   Financial Sector Regulation Act s 143(5)(a).

[45]   Or at stopping the institution from contravening applicable laws.

[46]   To direct an institution to take specified action if it is conducting its business in an improper way with a risk it may not be able to comply with its obligations, or if it has contravened or is likely to contravene a law.

[47]   So far as possible.

[49]   Ordinarily.

[50]   The broader and more loosely textured a discretion conferred on an official is, the greater the scope for subjectivity and hence for arbitrariness, which is the antithesis of the rule of law. Lord Bingham, “The Rule of Law” (supra), second sub-rule.

[51]   Financial Sector Regulation Act s 144(1)(d)(i).

[52]   Inter alia.

[53]   Financial Sector Regulation Act s 57(b)(i).

[54]   Financial Sector Regulation Act s 144(3)(a).

[55]   Financial Sector Regulation Act s 144(5)(a).

[56]   Long-term Insurance Act 52 of 1998; Short-term Insurance Act 53 of 1998.

[57]   i.e., the Authority responsible for registration of insurers, viz. the Prudential Authority.

[58]   Or delete.

[59]   Sched 4, Long-term Insurance Act item 8 cl 11(1)(aA), Short-term Insurance Act item 8 cl 11(1)(aA).

[60]   Whether in a court, tribunal or before an arbitrator or any other person or body.

[61]   Banks Act, Mutual Banks Act, or Co-operative Banks Act.

[63]   That have been commenced but not finally determined immediately before the date on which the provision comes into effect.

[64]   Financial Sector Regulation Act s 300(2).

[66]   Financial Sector Regulation Act s 300(2).

[67]   Insurance Bill cl 5(2)(b).

[68]   Christie, R H, The Law of Contract in South Africa, 7 ed 2016, G B Bradfield, pars 2.1.1, 6.2.

[69]   Bingham, “The Rule of Law” (supra), first sub-rule.

[70]   Inter alia.

[71]   Insurance Bill cl 26(1)(b).

[73]   So far as possible.

[74]   Bingham, “The Rule of Law” (supra), first sub-rule.

[75]   Ordinarily.

[76]   The broader and more loosely textured a discretion conferred on an official is, the greater the scope for subjectivity and hence for arbitrariness, which is the antithesis of the rule of law. Lord Bingham, “The Rule of Law” (supra), second sub-rule.

[77]   In full or in part.

[78]   On the basis of available information.

[79]   Insurance Bill cl 29(1)(b)(iii).

[80]   Or pay a dividend to its shareholders.

[81]   Insurance Bill cl 39(1)(b)(i) and (ii) read with cl 36.


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