FIRST Mutual Life Assurance (FML) managers set up an employee mortgage scheme and an employee staff loan scheme without the knowledge of the board, resulting in policyholders being prejudiced of more than US$3.5 million, an audit has revealed.
RUVIMBO MUCHENJE
FML is a wholly-owned subsidiary of First Mutual Holdings Limited (FMHL). The Insurance and Pensions Commission (Ipec) launched an investigation into FML after the company failed to comply to with asset separation and the law.
The investigation report shows that management set up an employee mortgage scheme and an employee staff loan scheme that acted as a feeding trough for them without the knowledge of the board.
“FMHL set up an employee mortgage scheme and an employee staff loan scheme in 2013 and 2019 respectively. For every dollar lent out by the banks as either a mortgage loan or staff loan, there would be a corresponding dollar invested in a money market deal. The FML board was in the dark on this arrangement as there was no evidence as to board approvals,” reads the report.
“As a result of backing long-term mortgage and staff loans, management could not disinvest the funds in response to the changing economic environment and as a result policyholders lost value to the tune of US$3 557 086 and US$563 767 under mortgage and staff loan schemes respectively,” reads the report.
The report also flagged a US$700 000 loss in interest which was not paid back to the pension fund.
“In 2011, IPEC directed that failed money market placements between FML and RMB, Bethel Finance, and AFRE amounting to US$5.8 million as at 31 December 2010 be converted into a term loan and repaid back to the policyholders by FMHL,” reads the report.
The report also shows that all the transactions were handled with little discretion.
“Management fees were being charged on money market deals backing long-term mortgage and staff loans despite the fact that the fund manager did not exercise any discretion in placing the funds,” reads the report.
The firm was supposed to pay back the loan with interest amounting to US$700 000 which had not been paid by the time the investigation was concluded.
“The term loan took six years to be repaid back to the policyholders because the shareholder was experiencing cashflow problems. Unpaid interest within the terms of the loan was not being capitalised and this resulted in underpayment of the loan by an amount of US$723 279 as at 31 December 2017 and was still outstanding at the time of finalising the investigation,” reads the report.
“The tenure for mortgage loans ranged from 15 to 20 years, while for staff loans the tenure was for up to 82 months. We were not availed with evidence of FML Board approval for these investments as required by the investment mandate.”
While the rate of asset growth was below inflation, Ipec managed to ensure that the fund members enjoyed the nominal growth in asset value through enforcing the requirements of the Guideline for the Insurance and Pensions Industry on Adjusting Insurance and Pension Values in Response to Currency Reforms.
This saw pensioner values being adjusted upwards to reflect the revaluation gains realised by the funds.
Firm’s audit highlights
- IPEC launched an investigation into FML after the latter failed to comply with asset separation and the law;
- The audit, carried out by BDO and with RIMCA Solutions, determined that policy holders could have lost up to US$53 million;
- Loss of value to policy holders due locking funds in staff mortgage deals amounted to US$3.5m); l Policy holders could have been prejudiced of US$5.9 million due to overstatement of capital guarantee fees;
- Management set up an employee mortgage scheme and an employee staff loan scheme that acted as a feeding trough for them without the knowledge of the board;
- As a result of backing long-term mortgage and staff loans, management could not disinvest the funds in response to the changing economic environment and policyholders lost value to the tune of US$3 557 086 and US$563 767 under mortgage and staff loan schemes; and l The report flagged USD$700 000 loss in interest which was not paid back to the pension fund.
