Rs one million penalty imposed on Takaful firm: Protection of interest of policyholders obligatory: SECP

While imposing a penalty of Rs 1,000,000 on a Takaful company, the Securities and Exchange Commission of Pakistan (SECP) has said that it is obligatory upon the commission to regulate the business of the insurance industry to ensure protection of the interest of the policyholders. According to an order issued by Commissioner Insurance SECP against a Takaful company, the order has disposed of the proceedings pertaining to the matter of Show Cause Notice under Section 11(1)(f) and Section 12(1) read with Section 158 of the Insurance Ordinance, 2000 served on the Chairman, Chief Executive, Directors of a Takaful Company Limited (Company).
The SECP stated that the directors have failed to maintain adequate systems of control of its business and accounting records of its business, as required under section 12 of the Insurance Ordinance. They were unable to present true and fair financial statements for the year ended December 31, 2012 and December 31, 2013. The policyholders, shareholders, creditors and other stakeholders including regulators were misled by the materially misstated Audited Financial Statements filed with the Commission under section 46 and 51 of the Ordinance. The representation made by the directors in the "Statement of Compliance" that the financial statements have been prepared in accordance with approved accounting standards in Pakistan, disclosed in the Audited Financial Statements, belied the underlying facts and veracity of the "Statement of Compliance" cannot be validated.
The directors have not performed their duties diligently and meticulously. The adequate internal controls coupled with Liability Adequacy Test and Claim Development information could have detected fraud and helped in the removal of material misstatements. They have breached trust of the policyholders and have not even fairly communicated issues encompassing "Restatement of Comparatives" in the financial statements for the year ended December 31, 2104. The importance of clear communications to investors regarding a restatement cannot be underestimated. Policyholders could have been more comfortable with news surrounding a restatement by thoroughly explaining the issues that gave rise to the fraud, misstatements and actions of the Company in this regard. Failing to do so may increase concerns about whether there is an ongoing weakness in the company or its management, which could lead to additional problems down the road.
The SECP said that ambiguity regarding how a company is responding to financial reporting errors can be the most damaging, because it may prompt the investment community to assume that the problem is more significant than it is in reality. The Directors Reports should have summarized the events leading to fraud, misstatement and the company plans to respond to the circumstances.
The SECP has carefully examined and given due consideration to the written as well as verbal submissions of the Respondents (Chairman, Chief executive and Directors of the Company and the Company) through the Authorised Representatives and have also referred to the provisions of the Ordinance. It is obligatory upon the Commission to regulate the business of the insurance industry to ensure the protection of the interests of the policyholders.
The SECP is of the view that the Respondents (Chairman, Chief executive and Directors of the Company and the Company) failed to ensure that the business is carried out with integrity, due care and professional skills appropriate to the nature and scale of its activities. Moreover, the accounts and returns submitted to the SECP, since 2012 were materially misstated. This attracts penal provisions provided in the Section 158 of the Ordinance, which provides that whoever, in any return, report, certificate, balance-sheet or other document, required by or for the purposes of any of the provisions of this Ordinance, wilfully makes a statement false in any material particular, knowing it to be false, shall be punishable by the Commission with fine which may extend to one million rupees. Therefore, in exercise of powers conferred upon me under Section 158 of the Ordinance, the SECP has imposed a penalty of Rs 1,000,000 on the Chief Executive and the Company with strict warning to the remaining directors to be careful and diligent in carrying out the business of the Company, the SECP maintained.
The statutory external auditors of the Company stated that the practice of incorrect reporting has been going on since 2012 to present positive results and to maintain solvency requirements, transpiring that business of the Company had not been managed in a sound and prudent manner and with integrity, due care and professional skills appropriate to the nature and scale of its activities. The aforesaid issues have had impact on the Regulatory Return of the preceding years and accordingly, the supervisory concerns were raised on the true and fairness of the information submitted to the Commission during the early years. The aforementioned contraventions and material misstatement necessitated action on adopting the deceptive accounting and not managing the business in a sound and prudent manner, failure to ensure that the business is carried out with integrity, due care and professional skills appropriate to the nature and scale of its activities and material misstatement in the returns submitted to the SECP since the year 2012. Thus the Notice was issued to the Chairman, Chief executive and Directors of the Company and the Company ("Respondents") who prima facie authorised the contraventions of the provisions of the Ordinance, the SECP added.