First Mutual Life Assurance Company is required to compensate policyholders between US$53 million and $209 million after a forensic audit revealed discrimination through rule non-compliance that cost clients money.
The Insurance and Pensions Commission’s (IPEC) payment order is being challenged by the corporation.
IPEC issued the order following the discovery that policyholder losses resulted from non-compliance with a number of rules. These included the failure to keep separate accounts for different business units, the misuse of management fee claims, the use of policyholder funds to pay for funeral services related to fatalities, the absence of independent directors for the assurance company, and an excessive amount of money invested in Rainbow Tourism Group in the hope that the share price would increase prior to the 2010 FIFA World Cup in South Africa.
The High Court documents that FML submitted to contest the audit’s conclusions now include the forensic audit and additional information. The commission and Professor Mthuli Ncube, Minister of Finance, Economic Development, and Investment Promotion, have been identified as responders.
The company is also contesting an IPEC corrective order that outlined the corrective actions it was required to take.
“IPEC and the Honourable Minister’s decision will be contested by First Mutual Life Assurance on the following grounds: Because IPEC lacked the power to issue the remedial order and the Hon. Minister lacked the statutory authority to compel IPEC to issue the order as it did, the decision is tainted with both procedural and substantive errors.
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The firm’s court filings state, “First Mutual Life’s right to administrative justice to be heard was violated in the issuance of the corrective order and the decision is grossly irrational and unlawful.”
The forensic audit conducted by BDO Chartered Accountants Zimbabwe identified the payment of shareholders using policyholder bank accounts as an irregularity.
It was observed that some clients from the business units of employment benefits—which are typically pension funds—or individual life benefits had cases where their use of both products resulted in the clients paying the total premiums into the bank accounts of the policyholders upon premium payment.
According to the company’s process manuals, fees and premiums for risk products must be deposited into the shareholder’s bank account.
“We observed that frequent payments and transfers of employment benefits and individual life insurance were being made from the policyholder bank accounts on behalf of the shareholder. The firm process manual needed computations and monthly reconciliations to substantiate that the payments were made from the shareholder’s earned cash; however, these were not provided with the payments.
The audit states, “We determined that employment benefit policyholders were exposed to a potential financial prejudice of US$31 million due to potential overdrawing of the policyholder bank account by comparing the actual funds earned by the shareholder with the total bank transfers and payments on an annual basis.”
“Due to the lack of necessary information, the analysis conducted on employment benefits to ascertain whether there was a financial disadvantage to the policyholder could not be completed on individual life benefits.”
The audit also found that policyholders suffered financial harm as a result of Tristar’s ownership structure’s 2012 delay in implementing an IPEC correction that IPEC had assessed to be unclear and opaque.
According to the corrective order, FML’s shareholding in Tristar needed to be rationalised, and Tristar’s stock should be transferred to AFRE Corporation, who is the company’s legitimate owner.
The auditors were not given any information regarding the methodology used to establish the selling price or whether it accurately reflected fair value when the shares were ultimately sold in 2018.
However, we pointed out that when the correction order was issued in 2012, the investment in Tristar had a carrying value of US$819 000; when it was subsequently sold six years later, the amount had decreased to US$23 129. This indicates that the policyholders suffered a financial loss of US$795 891 as a result of the disposal delay, according to the report.
In response to audit questions about Tristar, management said that FMHL tried to strengthen Tristar by having its group companies invest in it, and that policyholders finally became shareholders.
The company ensured that FML policyholders did not exercise their rights in any subsequent rights offers, which led to the FML policyholder interest in Tristar being diluted from 35 percent to 1,06 percent over a six-year period, according to management, explaining the delay in implementing the IPEC corrective order.
The audit probe also found that First Mutual Funeral Services, another fully owned subsidiary of the FML holdings group, received direct payments from policyholder bank accounts to sustain its operations.
It was also mentioned that, in anticipation of the tourist industry expanding, FML purchased a 9,44 percent interest in Rainbow tourist Group in the run-up to the 2010 World Cup in South Africa.
Investment values are subject to fluctuations, particularly in the case of public equities.
Investors, or fund managers acting on their behalf, should restrict their concentration in a single company or group of equities in order to mitigate that risk. According to the audit, policyholders suffered greatly as a result of FML’s exposure to RTG Ltd shares, which does not appear to have occurred in this instance.
Additionally, it was mentioned that although the FML board included both executive and non-executive members, FML Holdings’ executive directors made up the non-executive members.
These directors dominated the discussions at the FML board meetings and held a great deal of authority due to the group’s organisational structure. The audit stated that policyholder interests were muted due to the pursuit of larger group objectives.
