South Africa’s FSCA proposes new rules for cell captives

South Africa’s Financial Sector Conduct Authority (FSCA) has published a revised draft of its conduct standard outlining the requirements relating to third party cell captive insurance business.

The FSCA is concerned about the risks associated with cell captives, which it hopes will be addressed by its proposed draft conduct standard.

Among other concerns, the regulator highlighted the potential for a conflict of interest risk where the cell owner is a non-mandated intermediary; the risk of regulatory arbitrage resulting in uneven playing fields for non-mandated intermediaries and underwriting managers; and the risk exacerbated by the nature and business models of cell captive insurers.

It calls for “the imposition of stringent proactive governance and oversight requirements on cell captive insurers, including that a cell captive insurer undertakes due diligence investigations in respect of a cell owner prior to entering into a new cell structure,” explained  Ernie Van Der Vyver and Nicole Britton, a partner and senior associate, respectively, at Clyde and Co, in a note.

Where the cell owner is a non-mandated intermediary, the cell owner must meet the Fit and Proper Requirements, in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002, Clyde added.

The Draft Conduct Standard states that a non-mandated intermediary and its associates that are cell owners will be restricted to rendering services as an intermediary, including advice, in respect of only policies underwritten in the cell structure of that cell owner, Clyde explained. This means the non-mandated intermediary must be a tied agent of the cell captive insurer.

Cell owners that are non-mandated intermediaries must be registered as financial services providers, as contemplated in the FAIS Act. Accordingly, cell owners who are non-mandated intermediaries will not be allowed to be a representative on the cell captive insurer's license.

The new rules would impose a number of new reporting requirements on cell captive insurers, including disclosing the nature of their relationship and remuneration arrangements to policyholders prior to inception of any policy and when arrangements change.