DEVELOPMENTS FOR UNDERWRITTEN FUNDS IN TERMS OF CHANGES TO INSURANCE LAWS

1. DEVELOPMENTS FOR UNDERWRITTEN FUNDS IN TERMS OF CHANGES TO INSURANCE LAWS Zelda Swanepoel

2. INTRODUCTION • Recent development in financial services laws affecting various role players – shift both locally and internationally on – • product supplier liability; and • customer focused products and services. • Impact of the changes in insurance regulation (prudential and market conduct): • Indicates what is to come for other financial services players; and • The impact thereof on underwritten funds.

3. CASE STUDY ASSET MANAGERS 13B ADMINISTRATOR Fund policy / Fund linked policy INSURER PENSION FUND Portfolio of assets Pension fund rules PARTICIPATING EMPLOYERS (umbrella funds) MEMBERS

4. QUESTIONS • Does the pension fund have any right to the assets maintained by the insurer? • What risks do the pension fund take against the insurer, in the case of a fund policy and a fund linked policy? • What is the relevance of this in the context of the new insurance laws? • What is the duties of the insurer towards the members? • Does the asset manager of the insurer owe any duties towards the pension fund or the members?

5. DEVELOPMENT #1: REGULATION 28 AND THE PPR • In the preamble to Regulation 28 the following is stated: • A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.

6. DEVELOPMENT #1: REGULATION 28 AND THE PPR • Under the principles, the following principles are of importance: • (v) before making a contractual commitment to invest in a third party managed asset or investing in an asset, perform reasonable due diligence taking into account risks relevant to the investment including, but not limited to, credit, market and liquidity risks, as well as operational risk for assets not listed on an exchange; • in performing the due diligence referred to in (v) and (vi), a fund may take credit ratings into account, but such credit ratings should not be relied on in isolation for risk assessment or analysis of an asset, should not be to the exclusion of a fund’s own due diligence, and the use of such credit ratings shall in no way relieve a fund of its obligation to comply with all the principles set out in paragraph 2(c). • [See also principle viii and ix]

7. DEVELOPMENT #1: REGULATION 28 AND THE PPR • What is the relevance of this? • Regulation 28 entrenches the fiduciary duty of the fund towards the members. • Regulation 28 places a statutory duty on a fund, in compliance with its fiduciary duties, to – • conduct a due diligence into the assets it invests in; • take all factors that may materially affect the risks into account; and • understand the changing risk profile of the assets.

8. DEVELOPMENT #1: REGULATION 28 AND THE PPR • Does the due diligence extend to a due diligence obligation in respect of the assets in which the insurer invests? • Taking the case study into account, the position would be different under a fund policy vs a fund linked policy. • In the case of a fund policy? No • In the case of a fund linked policy? Yes •  This places significant duties on pension funds and mostly pension funds rely on insurers and their asset managers to fulfil this duty, however this does not satisfy compliance with Regulation 28.

9. DEVELOPMENT #1: REGULATION 28 AND THE PPR • Developments under the PPR alleviates these duties: • PPR Rule 2.2 provides that an insurer must, in developing products, undertake a thorough assessment to ensure that the product, distribution methods and disclosure documents are consistent with the insurer's business model and risk management approach.

10. DEVELOPMENT #1: REGULATION 28 AND THE PPR • Developments under the PPR alleviates these duties: • It also provides that products must be appropriate for the policyholders or members. • Additionally, it provides that the insurer must undertake a due diligence assessment of the underlying financial instruments and assets to ensure compliance with the rule.

11. DEVELOPMENT #1: REGULATION 28 AND THE PPR • Take-away from this: • The Regulation 28 duties are alleviated through the amendment in terms of the PPR and places enhanced duties on insurers to – • ensure that products are appropriate to policyholders and members, and • conduct due diligence investigations into the underlying assets. •  The new solvency calculations of insurers should be considered when making investment decisions since the risk based approach takes various risks into account.

12. DEVELOPMENT #2: ENHANCED INSURER DUTIES • As part of the market conduct regulation, significant changes have been made in the insurance space regarding the treatment of policyholders. • Some important changes that are noteworthy: • Under the new Insurance Act, the following new definitions are important: • "‘‘policyholder’’ means— • (a) the person with whom or with which an insurer enters into a life insurance policy or a non-life insurance policy; (b) the successor in title of the person referred to in paragraph (a);"

13. DEVELOPMENT #2: ENHANCED INSURER DUTIES • "‘‘beneficiary’’ means— • (a) in the case of an insurance policy other than a group insurance policy, the person stated in the insurance policy or a person nominated by the policyholder as the person in respect of whom the insurer should meet the insurance obligations; or • (b) in the case of a group insurance policy— • (i) a member of the association or fund, or an employee; or • (ii) a person nominated by the member referred to in subparagraph (i) in respect of whom the insurer should meet the insurance obligations, which person is not the association, fund or employer;

14. DEVELOPMENT #2: ENHANCED INSURER DUTIES (Insurance Act) • ‘‘group’’ in respect of the classes of insurance business, relates to an insurance policy entered into with— • (a) an autonomous association of persons united voluntarily to meet their common or shared economic and social needs and aspirations (other than obtaining insurance), which association is democratically-controlled; • (b) an employer; or • (c) a fund, • where the association, employer or fund holds the insurance policy exclusively for the benefit of a beneficiary;" • If the policy qualifies as a group policy, Schedule 2 to the Insurance Act provides "Lump sum or, specified or determinable equal or unequal sums of money payable at specified intervals payable to a beneficiary on the happening of a death event"

15. DEVELOPMENT #2: ENHANCED INSURER DUTIES (Insurance Act) Policyholder Group policy INSURER PENSION FUND Holds policy for exclusive benefit of beneficiary Beneficiary Payment to beneficiary MEMBER

16. DEVELOPMENT #2: ENHANCED INSURER DUTIES (Insurance Act) • This holds significant implications for insurers, pension funds and employers: • Payments must be made to beneficiaries and no longer to the fund or the employer. • Details of beneficiaries are accordingly required. • Insurers are required to perform towards beneficiaries with whom they have no contractual relationship. • Funds / employers are policyholders but their roles are limited to "holding the policy for the exclusive benefit of the member".

17. DEVELOPMENT #2: ENHANCED INSURER DUTIES (Insurance Act) • The above affects only group life cover and not fund policies as fund policies are dealt with separately. • However, all group life policies must be carefully structured to meet the requirements of a group policy. • In particular, if the policy is a group policy, the benefits must be paid to the beneficiary and not to the fund.

18. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • Traditional (previous) approach • PPR – Policyholder Protection Rules. • Fund policy = Fund is the policyholder. • Therefore protection in terms of the PPR is towards the policyholder. • PPR developments • Although the Insurance Act has a definition for policyholder and beneficiary, enhanced market conduct insurer duties are imposed in respect of members. • These duties stem from TCF and RDR principles.

19. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • PPR has separate definitions, such as beneficiary, which includes in a fund policy for instance a person nominated by the fund or a person towards whom an insurer must pay benefits in accordance with the rules of the fund. • Includes a definition of a member and extends not only to members under fund member policies but also to members under a fund policy. • Additionally, broadens the definition of a policyholder to include members under fund member policies.

20. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • Who does the PPR therefore seek to protect? • Policyholders – being policyholders as defined (such as a fund under a fund policy) and members under fund member policies; • Members – being members of group schemes and members under fund policies irrespective of the lack of a contractual relationship with such members; • Beneficiaries in limited instances (information disclosure and complaints). • * In some instances also to potential policyholders and members.

21. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • What are the implications? • TCF principles are extended to policyholders and members. • Insurers must act with due care, skill and diligence when dealing with both policyholders and members. • These objectives towards policyholders and members must be met: • Fair treatment central to culture; • Products are designed to meet needs; • Clear information are provided through the life cycle of the policy;

22. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • advice must be suitable; • products must perform as believed / advised; • no unreasonable post-sale barriers. • Caveat to meeting these objections towards members? [Rule 1.6] • Where not reasonably practicable to communicate directly with members due to nature of the fund can rely on fund / policyholder and their information or knowledge and communication with members. • Factual assessment if this is the case.

23. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • Notwithstanding, insurers must monitor how fair treatment towards the members are achieved. • Implications for insurers and pension funds and employers? • Regulation 28 duties mitigated due to insurer due diligence duties. • Insurer duties enhanced towards members – also on a look-through basis. • In voluntary group scheme policies – cooling off rights are afforded to the members also.

24. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • Premiums must take reasonable benefit expectation of members into account; • Waiver of PPR rights are void – check fund rules; • Advertising rules extend also to members; • Disclosure of information also to members where it is reasonably practicable do so. • If not reasonably practicable – • identify information that should be disclosed to members; • support provision of information by policyholder to members.

25. DEVELOPMENT #2: ENHANCED INSURER DUTIES (PPR) • Data requirements extend to information of members. By January 2020 insurers must have access to name, ID numbers and contact details of members; • Replacement / termination rules apply also to fund policies, however replacement advice only provided to the policyholder (which includes members under fund member policies).

26. DEVELOPMENT #2: ENHANCED INSURER DUTIES • What is the take-away? • Enhanced insurer duties in the Insurance Act towards beneficiaries irrespective of absence of contractual relationships under fund policies. • Group life policies require structuring and payment directly to beneficiaries. • PPR duties extended to members – TCF duties also towards members and in certain instances limited to policyholder. • Regulation 28 duties are alleviated on pension funds and duties increased on insurers.

27. DEVELOPMENT #3: EXTENSION OF FIDUCIARY DUTIES • RDR 2014 DOCUMENT: • "The primary aim of the RDR is to ensure that financial products are distributed in ways that support the delivery of TCF outcomes -…" • "The FSB's concerns with the current framework are discussed in more detail in Chapter 3. In summary, our primary concerns relate to significant conflicts of interest in the way financial products are distributed and the way financial advice is provided." • "FAIS has clearly raised the standard of professionalism and the management of conflicts of interests in the financial advice and intermediary services sector. In particular, FAIS already provides for: • A statutory fiduciary duty for intermediaries, requiring them to act in the best interests of their clients and to place the interests of their clients ahead of their own when providing advice or services."

28. DEVELOPMENT #3: EXTENSION OF FIDUCIARY DUTIES • Characteristics of a relationship where a fiduciary duty arises? • Phillips v Fieldstone Africa (Pty) Ltd & another [2003] JOL 12155 (SCA). • "There is no magic in the term "fiduciary duty". The existence of such a duty and its nature and extent are questions of fact to be adduced from a thorough consideration of the substance of the relationship and any relevant circumstances which affect the operation of that relationship (cf Bellairs v Hodnett and another 1978 (1) SA 1109 (A) at 1130F). "

29. DEVELOPMENT #3: EXTENSION OF FIDUCIARY DUTIES • Characteristics of a relationship where a fiduciary duty arises? • The SCA in the Phillips case recognised that a helpful (albeit not decisive) analysis of relationships in which a fiduciary relationship arises are those marked by three characteristics: • scope for the exercise of some discretion or power; • that power or discretion can be used unilaterally so as to effect the beneficiary's legal or practical interests; and • a peculiar vulnerability to the exercise of that discretion or power.

30. DEVELOPMENT #3: EXTENSION OF FIDUCIARY DUTIES • Local and international developments indicates enhanced product provider duties and duties of providers across the value chain. • Impression that FAIS imposes a statutory fiduciary duty. • It is questioned – whether the enhancement of product supplier duties has not also extended fiduciaries duties towards members by insurers and their asset managers. • Implications would be far reaching.

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