State-owned Ithala Bank has fallen foul of the regulators for failing to safeguard its clients’ insurance premiums, putting its decade-long quest to obtain a permanent banking licence in question.
The Durban-based bank is also under fire from the Financial Services Conduct Authority (FSCA) for failing to submit financial reports for two years. But the regulator stopped short of sanctioning it, directing it instead to remedy its breaches of the law if it wants to avoid having its licence suspended or withdrawn.
The stern warnings come at a time when Ithala is scrambling to retain its access to SA’s national payments system after its arrangement to clear and settle payments through Absa was terminated in 2022.
Ithala, a subsidiary of KwaZulu-Natal’s development finance arm, funds small businesses, co-operatives and infrastructure projects. It has yet to gain a banking licence, operating instead under a temporary exemption granted by the Prudential Authority (PA) which allows it to take deposits. The most recent exemption is due to expire at year end.
The ANC reaffirmed at its policy conference almost a year ago that it was committed to setting up a state-owned bank, despite the woes at existing state-owned entities including Ithala and the Postbank, the centre of a crisis when it failed to pay social grants earlier in 2023.
The FSCA found that Ithala did not keep clients’ short- and long-term insurance funds in separate, ring-fenced accounts, as required by the Financial Sector Regulation Act.
“The accounts were not specifically used and ring-fenced for premium receipts and payments of net premiums. Depending on the type of insurance product and payment method, the premium received from the policyholder ended up in various bank accounts,” the FSCA said in an enforcement undertaking made by the bank to remedy the breach.
“The premiums received in these various accounts were not subsequently transferred to one of the designated insurance bank accounts.”
Contraventions
Ithala also failed to submit a report of its financial affairs for 2019 and 2020.
A spokesperson for the FSCA said the contraventions were picked up by the regulator during continuing supervision.
The FSCA regulates financial institutions’ conduct, while the PA regulates their financial soundness.
Ithala spokesperson Thembekile Mdletshe said the delay in submitting the 2019 and 2020 reports was due to technical glitches.
“The production of the section 19(3) report includes various stakeholders [of] which two are external (our sponsor bank and auditors). There were technical delays from the external stakeholders and therefore we duly requested for an indulgence from the FSCA ... which was duly granted subject to us signing the enforceable undertaking,” said Mdletshe.
On its failure to make use of separate account for insurance premiums, Mdletshe said: “Ithala has always had separate bank accounts and can account for insurance premiums. As indicated, an audit report has been produced by the auditor-general confirming compliance with the section 19(3) requirements which includes maintaining the separate bank accounts.”
The FSCA said, however, that Ithala did not submit reports for 2019 and 2020 giving that assurance that it had separate bank accounts. The FSCA is now analysing Ithala’s 2023 financial statements, which include a report on its compliance with the requirement for separate accounts.
Business Day reported in October that Ithala was trying to secure a sponsorship agreement with a bank authorised to clear and settle payments in the national payment system after Absa informed it of its intention to terminate their nearly 20-year agreement.
In a letter from the Prudential Authority to Ithala, obtained by Business Day, Absa notified the entity a year ago that it would end the agreement by the end of 2023. Several issues about its governance structures were raised in the letter.
The document also shows that after Absa’s notice to terminate the partnership, Ithala tried unsuccessfully to woo Standard Bank to replace Absa.
Mdletshe said the company has not secured a sponsor yet.
“Given the transition plan and processes under way to secure another sponsor bank, Ithala will continue to have access to the national payment system. We are confident that we will secure a new sponsor bank subject to regulatory approval and implement a smooth transition while continuing to service our clients,” she said.
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