Over US$53m in alleged breaches and a failed bet on the World Cup: Inside IPEC’s contested FML audit

The Insurance and Pensions Commission (IPEC) wants insurer FML to pay US$53.7 million and Z$209 million to compensate policyholders for what the industry regulator claims are violations of rules and bad investment decisions.

In 2020, IPEC launched an audit into asset separation across the sector from 2009 to 2019. These are regulations meant to prevent the transfer of assets from policyholders to shareholders and vice versa. This followed findings by the Justice Smith Commission of Inquiry into the insurance industry in 2015.

In 2021, the auditors told FML that the information it had supplied during the audit was inadequate. BDO was then engaged to do a forensic audit, whose mandate was to look into compliance and to examine if FML’s investments prejudiced policyholders. IPEC then issued a corrective order in December last year.

The order says FML must pay Z$209,386,885 and US$21,141,686 to policyholders by May this year. IPEC also said there are potential losses of US$32,539,327, which must be signed off by an independent auditor and paid off by June.

FML is disputing the order and is fighting it in court. The company calls the decision “grossly irrational and unlawful”. IPEC and the Ministry of Finance, which ordered the audit, “failed to act in a fair and reasonable manner” when they did not respond to FML’s counter to the BDO report, FML charges.

Below are some of the key findings in the BDO audit into FML.

Shareholder payments from policyholder accounts

The audit says there were “regular bank transfers and payments” made from the bank accounts of both employment benefits and individual life benefits on behalf of shareholders. The audit says the payments were not supported by reconciliations as required.

“We compared the actual funds earned by the shareholder with the total bank transfers and payments on an annual basis and established that employment benefit policyholders were exposed to a potential financial prejudice of US$31 million due to potential overdrawing of the policyholder bank account,” reads the audit.

Losses from related parties

In 2011, IPEC ordered that US$5.8 million in failed money market placements between FML and related parties Renaissance Merchant Bank, Bethel Finance and Afre be converted into a term loan and repaid to policyholders. This took six years, the audit says, because of cash flow problems. Because unpaid interest on the loan was not being capitalised, this resulted in a loss of US$723 279.

Policyholder funds tied in staff mortgages

BDO says FML set up a staff mortgage scheme in 2013 and a loan scheme in 2019. For each dollar lent to staff, a dollar would be invested in the money market. The audit says there was no board approval for the scheme. When the market turned, BDO says, FML could not disinvest the funds. This resulted in lost value of US$3,55,086 on the mortgage plan and US$563,767 on the loan scheme. FML says rules allow insurers to invest in staff loans within a 10% limit and the board authorised the loans. Any losses were due to currency changes, FML says, and not of its doing.

Shares in RTG

Ahead of the 2010 World Cup, FML’s then parent company, Afre, bought a 9.44% stake in Rainbow Tourism Group, betting that the company’s share price would rise. This took its shareholding in RTG to 26%. IPEC ordered Afre to cut its shareholding in 2012. However, while the company delayed on the sale, RTG’s share price fell, resulting in a loss of US$1,991,596. FML, in response, says the sale took time as there was “little appetite on the market for said shares”. The company insists it eventually sold the stock to NSSA at market value.

Tristar investment

In 2012, IPEC issued a corrective order on FML’s shareholding in insurer Tristat, saying it was “opaque and confusing”. The shares were only sold in 2018, but BDO questions the valuation and how the proceeds were accounted for.

“We, however, noted that the investment in Tristar had a carrying amount of US$819 000 when the corrective order was issued in 2012 and the amount had dropped to US$23 129 when it was eventually sold six years later. This means the delay in the disposal resulted in a financial loss to the policyholders of US$795 891,” reads the report. FML denies there was such a loss of value, and also counters a BDO claim that Tristar was capitalised by a building owned by policyholders.

Failed investment in RMB

FML made money market investments in 2012 in Renaissance Merchant Bank, valued at US$464,357. Renaissance and FML had a common shareholder, Afre. The investment was made when RMB was in trouble and had just come out of curatorship. The bank shut down in 2013 and policyholders lost out.

“If RMB was not a related party, it is unlikely that FML would have made placements due to the risk profile of the bank at the time,” BDO says. In its response, FML said “RMB experienced corporate governance failures and regulatory capital challenges resulting in the closure of the bank.”

FML says it didn’t make any investments after 2012 and the amounts pointed out by BDO were maturities that RMB was rolling over.

‘Lessons learned’

FML, in its response to BDO, says it is not liable for “most of the amounts” in the BDO report. It acknowledges just three payments that it says were a result of errors – amounting to a total of Z$2.2 million. “As a business, we have learnt certain lessons from the investigation and the events leading up to it, some of which are already being implemented.”