First Mutual ordered to refund US$53m
FIRST Mutual Life Assurance Company must pay about US$53 million and $209 million to policyholders after a forensic audit unearthed prejudice through non-compliance with rules which resulted in losses to clients.
The company is appealing against the payment order from the Insurance and Pensions Commission (IPEC).
IPEC made the order after it was discovered that losses to policyholders arose from non-compliance with rules that include failure to separate accounts of different businesses units, abuse of management fee claims, policyholder funds being used to fund FML funeral services, no independent directors for the assurance company, and a greater than prudent block of money invested in Rainbow Tourism Group in anticipation that the share price would rise ahead of the soccer World Cup in South Africa in 2010.
The forensic audit and other material now form part of the High Court documents that FML has filed challenging the findings of the audit. They have cited the commission and Finance, Economic Development and Investment Promotion Minister Professor Mthuli Ncube as respondents.
The firm is also challenging a corrective order issued by IPEC outlining corrective measures it was supposed to carry out.
“First Mutual Life Assurance intends to challenge IPEC and the Honourable Minister’s decision on the following grounds: The decision is tainted with both procedural and substantive irregularities in that IPEC had no jurisdiction to issue the corrective order and the Hon Minister did not have any statutory authority to mandate IPEC to issue the corrective order as it did.
“The decision is grossly irrational and unlawful and First Mutual Life’s right to administrative justice to be heard was violated in the issuance of the corrective order,” reads the court papers filed by the firm.
The forensic audit, carried out by BDO Chartered Accountants Zimbabwe, noted as an anomaly that shareholder payments were being made from policyholder bank accounts.
It was noted that there were clients, from either business unit of employment benefits, which are generally pension funds, or individual life benefits, with both products leading to instances where, on payment of premium, the clients paid the combined premiums into the policyholders’ bank accounts.
The company’s procedure manuals require that risk product premiums, together with fees, would be transferred to the shareholder bank account.
“We noted that regular bank transfers and payments were being made from the policyholder bank accounts of both employment benefits and individual life benefits on behalf of the shareholder. The payments were not supported by computations or monthly reconciliations as required by the company procedure manual as proof that these were earned funds by the shareholder.
“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.
“The analysis done on employment benefits to determine if there was a financial prejudice to the policyholder could not be performed on individual life benefits due to the unavailability of required information.”
The audit also noted that there was financial prejudice to policyholders arising from a delay in implementing an IPEC corrective on Tristar in 2012 whose shareholding structure had been deemed as opaque and confusing by IPEC.
The corrective order stated that there was a need to rationalise FML shareholding in Tristar and transfer Tristar shareholding to AFRE Corporation as the rightful owner of the business.
When the shares were eventually sold in 2018, the auditors did not get information to show how the selling price was determined and if it reflected fair value.
“We, however, noted that the investment in Tristar had a carrying amount of US$819 000 where the corrective order was issued in 2012 and the amount had dropped to US$23 129 when it was eventually sold 6 years later. This means the delay in the disposal resulted in a financial loss to the policyholders of US$795 891,” reads the report.
Responding to audit inquiries on Tristar, management stated that FMHL sought to capacitate Tristar through investment by its group companies and eventually policyholders became shareholders.
Regarding delay in implementing the IPEC corrective order, management said that the company made sure that FML policyholders did not follow their rights in all subsequent rights offers and this resulted in the FML policyholder interest in Tristar being diluted from 35 percent to 1,06 percent over six years,
The audit investigation also established that there were payments made direct from the policyholder bank accounts to support operations of First Mutual Funeral Services, another wholly owned subsidiary of the FML holdings group.
It was also noted that during the period leading to the 2010 World Cup tournament in South Africa, FML bought a 9,44 percent stake in Rainbow Tourism Group in anticipation of growth of the tourism sector.
“Investment values can either go up or come down and this is especially so with listed stocks.
“To manage that risk, investors, or fund managers on behalf of investors, limit their concentration in individual stock or group of stocks. This does not seem to have happened in the case of FML’s exposure on the RTG Ltd shares and as a result policyholders suffered significantly,” reads the audit.
It was also noted that while the FML board was made up of both executive and non-executive directors, the non-executive directors comprised executive directors of FML Holdings.
“By virtue of the organisational structure of the group, these directors wielded a lot of power, and they had dominance over the deliberations at the FML board meetings. Pursuit of wider group interests meant that policyholder interests were subdued,” read the audit.