Exemptions regarding credit life and funeral products
The Financial Sector Conduct Authority (FSCA) recently published exemptions applicable to FSPs, Key Individuals and Representatives that render financial services in respect of credit life products and funeral products.
New classes and sub-classes of insurance business were introduced through the Insurance Act in 2017. Subsequently, in 2020, the Determination of Fit and Proper Requirements for Financial Services Providers was amended to ensure alignment between the subcategories of financial products contained in the Fit and Proper Requirements and the new classes and sub-classes of insurance business under the Insurance Act. This however inadvertently resulted in certain complications concerning the Fit and Proper Requirements for FSPs, Representatives and Key Individuals.
In our previous article, we wrote about the complications which were set out in FSCA Communication 4 of 2022 (FIAS). The FSCA has also published FSCA Communication 4 of 2022 (FAIS) which provides more information on the complications that were identified. As a reminder, please see the complications identified below:
Credit Life Products
Prior to the Insurance Act, credit life type products could be written under the Short- term Insurance Act, 1998 (STIA) i.e. as short-term insurance policies. Credit life type products that were written under the STIA were classified in the Fit and Proper Requirements under the short-term Insurance: personal lines subcategory. All credit life products written under the Long-term Insurance Act, 1998 (LTIA) were classified in the Fit and Proper Requirements under long-term insurance subcategory B1 (if only risk benefits were provided) or long-term insurance subcategory B2 (if risk benefits were provided in conjunction with a guaranteed investment value or a materially equivalent value).
With the advent of the Insurance Act, credit life insurance products were no longer classified under the short-term insurance/non-life insurance classes and had to be written under Credit Life Class (which falls under life insurance).
Before the Insurance Act, where FSP’s and representatives were rendering financial services in relation to credit life products written under the STIA, and key individuals were managing and overseeing the rendering of such financial services, they were licensed to operate under the short-term insurance: personal lines subcategory in terms of the Fit and Proper Requirements.
In instances where such FSP’s representatives and key individuals were not also authorised to operate under the long-term insurance B1 or B2 subcategories, the change in the Insurance Act relating to the reclassification of credit life policies inadvertently resulted in a situation where such FSP’s, representatives and key individuals are no longer authorised for the correct FAIS subcategory when rendering financial services in respect of credit life products, or managing and overseeing the rendering of such services (i.e. their authorisation for short-term insurance personal lines is no longer appropriate and they need to be authorised for long-term insurance subcategory B1 or B2).
Funeral products
Prior to the Insurance Act, funeral products below R30 000 were written under the assistance business “class” in the LTIA and funeral products above R30 000 were written under the life insurance “class” under the LTIA.
Funeral products that were written under the assistance business “class” under the LTIA were classified as long-term insurance subcategory A under the Fit and Proper Requirements, whilst funeral products that were written under the life insurance “class” under the LTIA were classified as long-term insurance subcategory B1.
With the advent of the Insurance Act, all funeral products below R100 000 now fall within the Funeral Class in the Insurance Act.
Before the Insurance Act, where FSP’s and representatives were rendering financial services in relation to funeral products offering policy benefits between R30 000 and R100 000, and key individuals were managing and overseeing the rendering of such financial services, they were licensed to operate under long-term insurance subcategory B1.
In instances where such FSP’s, representatives and key individuals were not also authorised to operate under long-term insurance subcategory A, the change in the Insurance Act relating to the reclassification of funeral products inadvertently resulted in a situation where such FSP’s, representatives and key individuals are no longer authorised for the correct FAIS subcategory when rendering financial services in respect of funeral products, or managing and overseeing the rendering of such services (i.e. their authorisation for long-term subcategory B1 is no longer appropriate and they need to be authorised for long-term insurance subcategory A).
In February 2020, the FSCA published the draft proposed exemptions regarding credit life and funeral products and invited interested parties to submit comments on the draft exemption notice. The comments received have since been considered and the FSCA has published FSCA FAIS Notice 16 of 2022 exempting particular persons from compliance with certain competency requirements.
What this means for FSPs, Key Individuals and Representatives that render financial services in respect of credit life products and/or funeral products:
Credit Life Products:
- An FSP and its representatives, excluding a supervised representative, approved in respect of short-term insurance personal lines are exempted from the class of business (COB), experience and qualification requirements applicable to long-term insurance subcategory B1 and/or long-term insurance subcategory B2, to the extent that the requirements referred to above relate to financial services in respect of credit life products.
- Key Individuals approved in respect of short-term insurance personal lines are exempted from the COB and qualification requirements applicable to the subcategories mentioned above, to the extent that the requirements referred to above relate to the management and oversight performed over the financial services rendered in respect of credit life policies.
Funeral
An FSP and its representatives, excluding supervised representatives, approved in respect of long-term insurance subcategory B1 are exempted from the experience requirements applicable to long-term insurance subcategory A, to the extent that that it relates to the financial services rendered in respect of funeral products.
What are the conditions for the exemptions?
FSPs must, within 6 months after the publication of this notice, submit the following to the Authority:
- A notification that the FSP renders financial services in respect of credit life and/or funeral products.
- A request for the Authority to amend the subcategories of financial products in respect of which the FSP is authorised to render financial services to include:
– Long-term insurance subcategory B1 and/or long-term insurance subcategory B2 where financial services are rendered in respect of credit life products; and/or
– Long-term insurance subcategory A, where financial services are rendered in respect of Funeral products.
Approval of the FSP’s Key Individuals must also be requested for:
- Long-term insurance subcategory B1 and/or long-term insurance subcategory B2 where financial services are rendered in respect of credit life products; and/or
- Long-term insurance subcategory A where the financial services are rendered in respect of Funeral products.
There is no prescribed format and for the submission of the above. A letter, signed by the authorised person, on the FSP’s letterhead will be sufficient.
FSPs must, within 3 months after the amendment of the subcategories, submit to the FSCA an updated central representative register to correctly reflect long-term insurance subcategory B1 and/or long-term insurance subcategory B2, and/o long-term insurance subcategory A, in respect of which its representatives are appointed to render financial services in relation to the credit life and/or funeral products. The updated central representative register can be submitted through the FSCA online e-portal.
Supervised representatives
From the date on which the supervised representatives comply with the COB, experience and qualification requirements in terms of short-term insurance personal lines, the supervised representative is exempted from said requirements as applicable in respect of long-term subcategory B1 and/or long-term insurance subcategory B2 in respect of financial services on credit life products.
From the date on which the supervised representative complies with the experience requirements applicable to long-term subcategory B1, the supervised representative will be exempt from the COB, experience and qualification requirements in respect of long-term insurance subcategory A in respect of funeral products.
This exemption also sets out that FSPs will not be required to pay the usual profile change fees that are prescribed. Failure to comply with the conditions referred to in the notice within the specified timeframe will automatically result in the exemption no longer being applicable to that FSP, its Key Individuals or Representatives. This exemption is effective from 26 June 2020.