The Insurance Act prohibits a person from conducting insurance business in South Africa unless that person has been licensed. Although authorised financial services providers (FSPs) are licensed in terms of the Financial Advisory and Intermediary Services Act (FAIS) there may be regulatory consequences if they render financial services in respect of the products of an insurer that is not licensed to conduct insurance business in South Africa.
To ensure that they do not fall foul of legislation, FSPs must have an understanding of the relationship between this section of the Insurance Act and the FAIS Act in particular. The Prudential Authority and the Financial Sector Conduct Authority have published a joint guidance notice – Joint Guidance Notice 1 of 2019 – which explains this and gives some practical examples for FSPs.
A person is regarded as conducting insurance business in South Africa if:
a) The person conducts business similar to insurance business outside the Republic (i.e. an insurer that operates in a foreign jurisdiction); and
b) That foreign insurer or another person, in relation to such insurance business, acts directly or indirectly in South Africa on behalf of the foreign insurer. This includes the rendering of a financial service as defined in the FAIS Act in respect of that insurance business.
This means that for a person to be regarded as conducting insurance business in South Africa, both of these criteria must be met.
The second requirement has specifically been put in place to ensure that a foreign insurer doesn’t avoid having to be licensed in South Africa. This includes situations where a foreign insurer, for example, does not contract or conduct insurance business within South Africa but still directly or indirectly solicits insurance business in or from South Africa, or influences the placement of insurance business from South Africa to the foreign jurisdiction.
Direct or indirect acts are very broad terms and it is not possible to provide an exhaustive list of ‘acts’ which fall within the scope of paragraph (b) above.
What must be considered in determining whether a foreign insurer is conducting insurance business in South Africa is (1) on whose behalf the ‘act’ is being performed and (2) whether the ‘act’ is being performed directly or indirectly by a foreign insurer.
If, for example, an FSP seeks and secures insurance from a foreign insurer on behalf of a South African based customer, regardless of whether the FSP is acting on the instruction of the customer or whether the FSP is recommending the specific foreign insurer to the customer, then the FSP is rendering an intermediary service in terms of FAIS and must, therefore, comply with the requirements of FAIS. However, the fact that the intermediary services are conducted in relation to a policy placed with a foreign insurer does not automatically mean that the foreign insurer is conducting insurance business in South Africa. It will depend on whether the foreign insurer has appointed, instructed or influenced the FSP to place the customer’s business with the foreign insurer. Therefore, if the FSP is acting on behalf of the foreign insurer then the foreign insurer would be considered to be conducting insurance business in South Africa and would need to be licenced. If the FSP is acting for the customer and not on behalf of the foreign insurer, then this may not be the case.
FSPs that deal or wish to deal with foreign insurers should ensure that they are not doing business with an insurer that is not properly licenced in South Africa. Neglecting to do the necessary homework before entering into any form of business arrangement could inadvertently result in being a party to a contravention of legislation. This could have reputational implications for the Key Individuals and the brand of the FSP.