Insurance Bill [B1-2016]: briefing; Committee programme

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Finance Standing Committee

24 January 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The National Treasury and the Financial Services Board (FSB) in their briefing on the Insurance Bill [B1-2016] said insurers and banks had different business models and risk profiles. The Bill was aligned with the Twin Peaks distinction between prudential and market conduct regulation. New insurance legislation had to attend to inclusion and transformation. The Insurance Bill would not address market conduct, which was dealt with in the Conduct of Financial Institutions (CoFI) Bill. The Insurance Bill gave effect to Treasury's microinsurance policy document. The Bill would aid financial inclusion and transformation through introduction of a microinsurance regulatory framework. It introduced a framework for insurance group supervision, and enhanced the protection of policyholders. Foreign insurers could establish branches in SA if licensed. The Bill required disclosure on beneficial interests, annual disclosure to the public, and the submission of annual financial statements.

In discussion, there were remarks and questions about insurance and climate change; reports to the public and regulators; trading at the subsidiary level; multinational branches; internal auditing; the scope of the Bill; NGOs and consumer bodies; consumer protection; re-licensing; the role of insurance in the 2008 crisis; external companies and taxation; differences with the industry; inclusion and transformation, and state owned entities and insurance.

Treasury and the FSB managed a clause by clause read-through of Chapter 2 up to Part 4.

During the read-through there were remarks and questions about what insurance companies could outsource; why Lloyd’s had to be designated by a name rather than by what it did; the scoping of organisations for remedial access, and the responsibilities of the board of directors of a controlling company or insurance group.

In the discussion of the Committee programme, the Chairperson urged that an effective format be established for oversight meetings. The Committee should together identify the discussion themes and Members had to cooperate with this structured approach rather than insisting on free discussion so as to make these meetings more productive.

Meeting report

Financial Intelligence Centre Amendment  Bill: comments by Chairperson
The Chairperson noted that he had sought legal opinions about the Financial Intelligence Centre Amendment  Bill. There would be submissions tomorrow on the FICA Bill. Members would have to prepare themselves to remain until 16h30, as there were a large number of submissions. There were misunderstandings about the Standing Committee. It was alleged that Parliament was being turned into a court of law, which was unconstitutional. It was said that the Committee did not want to hear the public, which was not true. The public was allowed to make submissions. He did not design the rules, and he was being battered by people in the public domain. He had written statements to the effect that after the following day, the Committee would not be abused. More than any other Committee, this Committee allowed public hearings until the last minute. He had tried since 1998 to make rules for Parliament on this; there was agreement at every ANC Lekgotla, but to little effect. It had to be asked why trade unions or rural women's organisations could not manage to come and comment. He had never before witnessed the holding of public hearings for a Bill which the President had returned to Parliament. It was said that the Committee was not responsive to the public. There was a narrative out there, and people were phoning him. The question was who "the public" were. There were important agencies, but it was in fact Parliament which represented the public. However, it was not policy issues that were being looked at in the FICA Bill on it return, but constitutional and legal and rules issues. It would not do to discuss the Bill's policy issues in caucus. It was not in order to have parties come in who wanted to discuss policy issues of the FICA Bill. Policy issues were not to be discussed with the public on the Bill's return. Latitude was allowed for the public, who might not understand, but not for MPs. The question was if search powers granted to inspectors were too wide, and therefore unconstitutional.. Adv Frank Jenkins, Senior Parliamentary Legal Adviser, would set out the rules, followed by an independent legal opinion from Adv Semenya, and then by National Treasury. Government officials could speak. Everyone would get 15 minutes. Adv Jenkins and Adv Semenya would each get half an hour. After that it would be thrown open. A programme would be sent to Members that evening. Policy issues arising from the Bill could be dealt with later on 14 March. Then the executive could be asked for another Bill, and desired changes could be made. The Committee had to guard against making itself vulnerable to a Constitutional Court action. Members would receive eight written submissions that evening. Statutory authorities would be granted half an hour to speak, and stakeholders 15 minutes.

Mr Ismail Momoniat noted that National Treasury would bring a legal opinion.

Ms T Tobias (ANC) advised that Treasury bring its Senior Counsel.

The Chairperson asked who the Senior Counsel for Treasury was.

Mr Momoniat replied that it was Adv Gauntlett.

In reply to the Chairperson asking if he could come, Mr Momoniat saidd that he was on standby, and could attend.

The Chairperson said that Treasury could bring Adv Gauntlett, and the Committee would bring Adv Semenya. Everybody was welcome to bring lawyers.

Mr Momoniat noted that lawyers who were brought in the past had to be reminded that it was not a court of law. The Chairperson would have to remind lawyers that he was not a judge.

Insurance Bill [B1-2016]: briefing by National Treasury and Financial Services Board
The Chairperson remarked that the Insurance Bill was introduced in November 2015 and was only being looked at now. He had never seen such a wide gap between introduction and deliberations on a Bill. It hurt his sense of pride and it was embarrassing and disappointing. Usually the Committee moved fast with bills. People used terms like fast-tracking or the horrible word railroading. The Bill was dumped on the Committee. The President gave him a pat on the back about it, in a manner of speaking. The Bill could be proceeded with after the Budget.

The briefing was presented by Mr Ismail Momoniat, Treasury DDG: Tax and Financial Sector Policy; Mr Roy Havemann, Treasury Chief Director (Policy); Ms Reshma Sheoraj, Treasury Director; Mr Jonathan Dixon, FSB Deputy Executive Officer (Insurance); Ms Jo-Ann Ferreira, FSB (Insurance Prudential); and Ms Suzette Vogelsang, FSB (Head: Insurance Prudential). The briefing provided an overview of the insurance market in South Africa; an approach to prudential regulation in insurance, and an overview of the 2016 Insurance Bill. Insurers and banks had different business models, with the balance sheet of insurers being the more stable. Risk profiles of insurers and banks were very different. Current insurance legislation needed to align with the Twin Peaks approach, in distinguishing between prudential and market conduct regulation. The new legislation had to attend to inclusion and transformation.

The Insurance Bill did not address market conduct in insurance. The Conduct of Financial Institutions (CoFI) Bill would address market conduct challenges. The Insurance Bill would give effect to Treasury microinsurance policy document. The insurance sector had to play a role in dealing with climate change. The Insurance Bill would aid financial inclusion and transformation through the introduction of a microinsurance regulatory framework. It provided for the powers necessary to regulate insurers. A new Solvency Assessment and Management (SAM) regime would enhance safety of insurers. The Bill introduced a framework for insurance group supervision. The Bill was aligned to the Financial Services Regulation Bill (FSRB) as tabled. It enhanced the protection of policyholders. Foreign reinsurers could establish a branch if licensed. Insurers had to maintain a governance framework. The Bill specified what constituted a financially sound condition. It required disclosures on beneficial interests, annual disclosure to the public, and submission of annual financial statements. The Bill was developed over a seven year period, through a consultative approach. An economic impact study has been done. Pilot testing of SAM commenced in July 2014 to test insurer readiness for implementation (see document).

Discussion
Ms T Tobias (ANC) remarked that she did not have pronounced views on the Bill, but had some questions. She asked how it could be ensured that insurance companies dealt with climate change. She asked about deferment of preferential creditor status. She noted insurers would have to report to both the public and regulators. Reports to the public were to be on certain matters but the scope of that had to be broadened. She referred to the trading activities of insurers. Trading activities remained hidden, as it took place at the subsidiary level. If an activity was not in accord with legal prescripts, it was given to a subsidiary. There were activities related to acquisition and disposal that were not reported to the Prudential Authority (PA), but given to subsidiaries. The regulator would only have access to annual reports directly from the company. Subsidiaries were often not classified as insurance companies. She referred to operations of insurance companies not classified in terms of the Insurance Act. She asked how companies not adhering to reporting standards would be looked into when the Bill was in effect. There were multi-national companies based in South Africa that were not aligned to international standards, by being licensed in South Africa. She asked about the position with regard to Old Mutual. She asked about instances where pension funds were invested at high or low risk. She asked about the role of companies like Lloyds. She asked about penalties for insurance companies that undermined the Competition Act. It could be that companies budgeted for that and simply paid penalties. The question was how the Competition Act could be strengthened through application of stringent rules. Some insurance companies were established by an Act of Parliament, and some not. She asked about challenges, for instance what would happen if AVBOB and South African Funeral Services (SAFS) were to provide similar products. Companies who offered the same products could want recognition through an Act of Parliament. Certain companies had internal audit units, and others outsourced auditing. It was essential to have an internal audit function. Outsourcing could create the impression that a company was doing well, until a crisis occurred.

Mr B Topham (DA) thanked the Committee for best wishes received for his health event in December. He noted that he was a non-executive director of an insurance company. He asked about the scope of the Act, and what it covered. He asked how an 'insurance event' was defined. The non-insurance policy definition was any arrangement that offered payment or service on the happening of an event. He asked if it was the intention of the Bill to sort out the Medical Schemes Act. The definition of a life insurance policy included a health event. He asked if it was still mentioned in the Medical Schemes Act. The question was how to prevent a retainer agreement in a law firm from not being an insurance event.

Mr D Maynier (DA) remarked that Treasury had had detailed consultation with the industry for years. He asked if there had been any major issues of disagreement with the industry. He asked for the five entities operative in the state owned sector to be named. AVBOB had been mentioned.

The Chairperson asked who the NGOs and consumer bodies referred to were. NGOs usually had to be persuaded to participate in public hearings. Consumer bodies had to be present. Cosatu would be drawn in but would be too busy to come again. He asked if the Consumer Council was involved in protecting consumers. People would take out more than one policy. The question was what happened if one insurance cover cancelled out another. There were 13 black owned insurers. He asked about the current policy with regard to re-licensing every two years. He asked if insurance industries were a contributing factor to the 2008 crisis, and what the lessons were.

Mr Momoniat elected to start with the last question. There had been a raging debate in Basel and the Financial Stability Board about AIG and Monoline Insurance. Insurance companies had their own committees. An agency like Basel was full of bankers. Central banks did not regulate insurers. At Basel most people were central bank officials. There was a battle to find banks that knew insurance risks. Mr Jonathan Dixon knew the debates and could cite examples. Insurance was not as dangerous as banking. A lot of finance companies were conglomerates that engaged in banking and long and short term insurance. It could be hard to know whether companies were in trouble because of insurance or trading. Until then entire holding companies had not been looked at. The question was how regulators had to come together to regulate the entire entity. Part of the process was to ask for comments. The industry responded quickly. There was some initial resistance, but people could see where international trends were going and came to accept it. Treasury had attached all comments received up to the point where implementation was awaited. NGOs were reluctant to come forward because the issues were so technical. Consumer groups were more interested in market conduct practice. A lot of people were coming in from the micro funeral insurance industry.

Mr Dixon added that there was acceptance among traditional standard sectors. There was acceptance by the FSB. Traditional models did not introduce systemic risks. Insurance could add stability as it was able to make long term investments, and did not have to change quickly in response to markets. Insurers went into non-traditional insurance and started to do banking or to play in perimeters like AIG through subsidiaries that were not in the insurance company. There was a focus on insurance group supervision in the Insurance Bill. Much depended on interconnectedness with the rest of the system. A shock to insurance could impact on banks if there was a high degree of interconnectedness, through a contagion effect. It could cause a stability problem. The Bill dealt with insurance group supervision, and the Financial Services Regulation Bill dealt with conglomerate supervision. Insurance happened slowly. There were penalties for withdrawal of policy. But there had to be a forward look at stability and the financial position of insurers. In Europe it was said that interest rates had been too low for too long, and even negative in Switzerland. Insurers struggled to invest their money to support long term liabilities. The financial health of insurers had to be looked at, with major risks identified, and capital based on that calculated. SAM supplied a forward looking vision. There had not been much engagement with NGOs. The closest was engagement with the Ombud. The long and short term Ombuds dealt with consumer problems. Policy holder protection rules were more on the conduct sides. Changes were proposed. Much of the Bill was technical and capital related.

Ms Sheoraj replied that on climate change, saying the agricultural sector was directly impacted on in the short term. Insurers were taking a knock. The Insurance Bill required that capital had to be held. Government had to play a role, as some insurers were pulling out of the agriculture market, as they did not want to play in the drought space. There had to be partnership between government and the private sector to make premiums more affordable. The problem was how to mobilise the insurance sector to invest in green, as South Africa was also part of the G20.

Ms Ferreira replied that group supervision not only looked at who owned, but also at what was owned. Government could play a part in what insurers were investing in. Once a group was scoped it could be defined what else it was involved in. Different subsidiaries had different rules. The question was if subsidiaries were doing what could not be accounted for, by placing it in a different entity.

Ms Tobias asked if subsidiaries had to be disclosed.

Ms Ferreira replied that it was done by and large. If it was not done, action could be taken. According to the classification on insurance companies, if it was a private company or cooperative, all reporting requirements had to apply. There had to be audited financial statements and compliance with essential issues. Companies created different regimes, because of the business of insurance. No matter what corporate form was taken, all types had to comply with some requirements. A big study was done to especially look at reinsurers. Foreign insurers were establishing branches in SA. It could be a good policy option. There were few requirements of external companies in terms of the Companies Act. The same legal entity was allowed to set up a local division. It was done in most parts of the world.

Ms Tobias asked about the limitations of the South African tax regime, with regard to external companies. There were a lot of unlicensed branches in South Africa. She asked if care was taken about what tax incentives it might give limitations to. She asked if insurance issues were addressed in terms of taxation. It was not necessary to answer the question for the moment, but it would be an ongoing concern how to deal with externals in relation to the local tax regime.

Mr Momoniat replied that multi-nationals could be taxed by looking at operations. In the finance sector there was pressure for taxing of subsidiaries to be done by SARS. There was a lot of anti-avoidance legislation.

Mr Dixon replied that with regard to SARS, the SAM process required a steering committee to govern the process. The FSB and Treasury were on the steering committee, as well as the Actuarial Society, the Industry Association and SARS. As yet there had not been a red flag about foreign branches. It was better for the South African system to have subsidiaries. But it had to be delineated so that incentives would remain for operating as a subsidiary.

Mr S Buthelezi (ANC) asked if financial inclusion was promoted. He asked if areas of inclusion could be pointed out. It was pointed out that insurance industries were safer than banks. He asked if there were restrictions for insurance companies to invest in equity for example.

Mr Momoniat replied that the question with regard to financial inclusion was whether to allow micros to come in on the supply side. A stronger line could be taken than with banking. Compliance was not so high because of lower risk issues. The question was whether products were accessible. Only one in three cars on the roads were insured. The industry was asking that it be made compulsory. Government was asking what their fees were. The industry had to be innovative to provide products. The poor was getting funeral cover, but there was also legal cover. There was an agreement with the industry in the Western Cape about how to assign companies when a car had to be panel beaten. If the car was stuck in a township, a different agency would attend to it. The industry could do better. The Insurance Bill dealt with prudential and licensing. It was not necessary to wait for the CoFI Bill to push initiatives.

Mr Dixon added that to include micros it had to be ensured that products were affordable and appropriate. Entrance barriers had to be lowered. Requirements could be phased in over time. The question was how the supervisor implemented requirements. The Twin Peaks legislation spoke of regulatory sandboxes and innovation hubs, with regard to how support was provided for new entrants.

The Chairperson remarked that inclusion was government policy. It had to be thrown in. Departments would do that. It had to be seen what government could do towards transformation of the insurance sector through legislation. It would not do to include only more black insurers. Consumers also had to be protected, and benefits ensured for them. The insurance sector had to look at prudential and market factors. Elements of the CoFI had to be looked at together with the Insurance Bill.

Ms Tobias remarked with regard to prudential conduct, that the issue of transformation had to be flagged, to be dealt with separately. She referred to the role of SARS. The aim of regulation was not to establish insurance companies. The debate had to be located in the right context. A way had to be found to have a discussion. There were important issues. The question was at what level the conduct of companies would be regulated. Banks had to be engaged to come on board. There had to be agreements to get banks to invest money in government programmes. Besides micro financing, bigger institutions could play a role. New approaches had to be found. The current discussions were preliminary but it would lead somewhere. Institutions would contribute if shown that it would be to their benefit.

Mr Momoniat referred to the transformation discussion. It had to be defined what was meant by transformation. The black issue had come up: 50 to 60% of multinationals were foreign owned abd 80 to 90% of that was institutional finance. There was uncertainty about small black owned companies being listed. If listed, there were questions of ownership. Focus not only had to be on ownership as with foreign finance. The country was dependent on foreign funds. There also had to be a focus on management. More could be done to promote small black business. There was an opportunity in March to discuss that. Black members had pensions. The Public Investment Corporation (PIC) was massive. The question was how to score them. It had to be established what the hard data was. Investment capital in the insurance companies was largely related to retirement.

Mr Dixon referred to asset spreading requirements, with regard to limitations to types of investment. There were few absolute restrictions. There were limits on holding company shares. The new system rather focused on making it too expensive to make investments. Capital charges for certain investments were higher. Capital charges were higher than for investment in government bonds. Insurers had to take different capital charges into account.

The Chairman advised Mr Dixon that as the Bill was looked at clause by clause and public hearings were held, there would be an opportunity to discuss issues comprehensively.

Mr Dixon replied about the deferment of preferential creditor status. It was at the request of the South African Reserve Bank (SARB), and had to be looked at within the broader context of a resolution framework. The SARB cooperated with the Treasury. Disagreement with the industry was limited to ASISA, and related to comments about alignment with the FSRB. The Insurance Bill would be aligned to that. Re-licensing would not have to be done every two years. It was a once-off. Things had to be done within two years of the Bill taking effect, as the segmentation of insurance had changed. Funeral policies were sometimes acquired for several family members. One brother would take out a funeral policy on the parents without his brothers and sisters knowing. There had to be policy holder protection. People would not get paid out twice. Often the benefit was described as a funeral service. People’s consent for policies in their name could be obtained, but that could be difficult. Otherwise the industry had to get a database. Medical schemes continued to exist. It was a form of indemnity insurance, to cover the cost of medical treatment. It acted as assurance against health events. It could be a once-off payment for treatment of a critical illness, a lump sum or an annuity. There was a range of products. In the demarcation regulation it was stated that insurers could continue to provide medical schemes. The degree of overlap with medical insurance was not great. The transformation of the insurance sector was highly important. It was mentioned that 13 out of 180 insurers were black owned. There were legacy issues. In the preceding couple of years most new licences had been black, but more could be done.

Mr Dixon replied about State Owned Entities and insurance. The Land Bank had an insurance company. There was also SASRIA, and Khula had an insurance scheme. There was secondary risk sharing to support the primary aim of Khula. There were risk sharing arrangements through support companies.

The Chairperson noted that the Bill had to be gone through before public hearings. He related how he got home and decided to watch the Parliamentary Channel 408 on the previous Friday. He was amazed to see the SABC Board Inquiry committee fully present at 17h53 on a Friday afternoon. He saw Mr Vincent Smith yesterday and told him that they all were proud of him, and asked how it was possible to assemble everyone at that time. Mr Smith simply replied: “Yunus, they have to be there”. The Chairperson told Mr Smith that he had to take over the Finance Committee, as his own attempts to get members together had been a failure. It would be best if Mr Smith could take over as Chairperson of all the oversight committees. He reminded Committee Members that they would have to prepare themselves to sit late the following week.

Read-through of the Insurance Bill
The Chairperson advised that definitions not be read through. The read-through could start with Chapter 2.

Ms Ferreira took the Committee through a clause by clause reading of chapter 2, which dealt with conducting insurance business and insurance group business. Due to time constraints, the reading could only proceed to Part 4 of Chapter 2.

Headings covered were insurance business and limitations on other business; conducting of insurance business by branches of foreign reinsurers and Lloyd’s underwriters; claims against branches of foreign reinsurers or Lloyd’s underwriters; notification by insurer on becoming part of a group of companies; designation of an insurance group and licensing of a controlling company; the responsibility of the board of directors of a controlling company, and transparent insurance group structure.

Remarks and questions during the read-through
Mr Buthelezi asked what insurance companies could outsource.

Ms Ferreira replied that if the control function, claims or management was outsourced, the insurer remained responsible, but the person outsourced to was also conducting insurance business. It was not necessary to hold that person responsible to register for insurance.

The Chairperson noted that what was required of private sector insurers might not necessarily be required of public sector ones. He asked about the position with regard to stokvels.

Ms Ferreira replied that it was under bank legislation.

The Chairperson asked why it was only Lloyd’s that was referred to.

Ms Ferreira replied that Lloyd’s was not an insurance agency. It created a market where insurers could play, especially re-insurers. Entities could place their risks there.

The Chairperson asked if Lloyd’s was a global presence, mentioned in every country.

Ms Ferreira replied that it was similar in the UK, Namibia and Hong Kong.

The Chairperson asked what would happen if someone provided the same service. He asked why a name was used, rather than a reference to what it did.

Ms Tobias remarked that the law should be made broad enough to cover anything that could emerge.

Ms Tobias asked about measures to determine the scoping of organisations for remedial access.

Ms Ferreira replied that consultation was provided for in the Bill at each point. The FSRB provided overarching legislation that ensured that for any action by a prudential authority that constituted administrative action, the requirement would apply. It did not have to be included in each provision.

Ms Tobias asked what the situation would be if a person were to say that the Bill did not consider the importance of the FSRB in relation to the Promotion of the Administration of Justice Act (PAJA). She asked if there was anything in the Bill that referred to the FSRB.

Ms Ferreira replied that it was relied on that the FSRB was in place in the PAJA. There was no provision in the Bill that dealt specifically with the FSRB.

Mr Buthelezi noted that it was said that the board of directors were responsible for meeting the requirements of a controlling company or insurance group. He would assume that there were other responsibilities beyond notifying the Prudential Authority of a risk profile change.

Ms Ferreira replied that in terms of the Insurance Bill there were additional roles and responsibilities.

Committee programme
The Chairperson noted that the 26 January meeting on the FICA Bill was not feasible. There was increased interest in the Bill, and more submissions than anticipated. Adv Jenkins had to take responsibility. It was mostly a legal matter. He asked if there were any objections to 26 January being called off. There was also a party political meeting on 26 January. There was not enough time. The question was how much time was needed. It could be dealt with in a subcommittee with a lawyer.

Day Two public hearings on FICA could be on 2 February in the morning, and the Insurance Bill briefing could be finished in the afternoon. There would be a meeting with the Independent Regulatory Board for Auditors (IRBA) on 15 February. On the Insurance Bill hearings, he commented that big companies would come. The question was where the small companies were. Parliament had to be pro-active to ensure that big stakeholders did not dominate. He advised that members take that to their constituencies.

Mr Maynier advised that big companies bring their CEOs, and not count on lawyers and associations to represent them. The Committee had to go eyeball to eyeball with CEOs and CFOs, not shadowy associations.

The Chairperson said that it was agreed to meet with SAA every quarter until it was back on its feet. The SARS Commissioner had to be called in to answer questions. That was best done when the budget came in. He had a mandate from the Committee to ask questions and had meant to write to him but had not done so.

Mr Maynier noted that the Committee had agreed that SARS appeared worrisome. The Chairperson had suggested a two hour session, but he would prefer to engage for a full day. There were red lights flashing. If not there could be a three hour engagement, with prior warning that it could roll over after lunch.

Mr Buthelezi remarked that Mr Maynier had many questions. The questions could be written and sent to the Commissioner.

The Chairperson felt that three hours was enough. The only real issues were Makwakwa and Symington. The entity could be told that it might have to stay longer. But a whole day was not needed. SARS performance could be interrogated in the quarterly report. SARS would be met with twice in the space of a month. Questions had to be supplied within a week.

Mr A Lees (DA) said that he agreed with meeting SAA on 29 March. It might be necessary to stay on after lunch.

The Chairperson said that the Committee had to come up with ideas about how to approach oversight meetings. In the past whole days were spent with departments. Then it was decided that the Chairperson had to act as facilitator. Six or seven issues would be focused on, with two minutes for each theme. For the SAA strategic plan, five minutes would be granted. He had been criticised for stifling Members by steering the meeting. A compromise had to be found between free questions and a structured session. Structure did not need to refer to the Chair’s ideological bias; the Committee could sit together and eight themes could be identified for when the Committee was to meet with the SARS Commissioner or SAA. Everybody could get two minutes. Members could write to him to suggest ways of making meetings more productive and efficient. The Committee could decide that the Chairperson was not to be allowed to make stupid remarks for more than five minutes. An ANC Member could monitor him. People were condemning him in study groups for suppressing them so he monitored them in the next meeting. One person spoke for 22 minutes and 4 seconds. The next one took 18 minutes. There had to be a compromise between a free for all and Chair-facilitated discussion. The Committee could spend the last ten minutes of each meeting deciding on what the approach would be for the following day.

The Chairperson noted that the time was 13h06, and adjourned the meeting.

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