Insurance Bill deliberations; South African Airways bailout

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Finance Standing Committee

05 October 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

National Treasury, the Financial Services Board and the South African Reserve Bank took the Committee through amendments to the Insurance Bill. The major highlights were as follows:

Clause 69- Offences
An auditor commits an offence and is on conviction liable to a fine not exceeding R10 million if that auditor contravenes or fails to comply with a provision of sections 16(5), 32(4), 32(5) or 32(6).

The Chairperson was not impressed by the R10 million maximum fine given the amount of money big insurers make. R10 million was a ‘drop in the ocean’ for them. He suggested the clause be flagged for discussion on a later date. Also, recognising the enormous frustration within communities, there was need to expedite the transformation agenda. He requested Treasury to furnish the Committee with all the transformation clauses.

Clause 62(2) - General powers, functions and duties of Prudential Authority
The amendments incorporated public comments which pointed out the need to explicitly clarify that the Promotion of Administrative Justice Act applies to administrative actions by the Prudential Authority.
Clause 62(4) elaborated on matters to be considered by the Prudential Authority when taking administrative action.

The ANC felt the term “South African context” was too generic and suggested the use of, “with due consideration to the needs for transformation of the financial sector”.

The Committee accepted clauses 60 to 64 as presented and agreed to all amendments.

Secondly, the Committee deliberated on the recent South African Airways bailout. The Chairperson stated that the Democratic Alliance had written a letter to the Committee contending that the Finance Minister may have tried to side-step Parliament when he approved the 11th-hour bailout, designed to prevent the airline defaulting on one of its loans, because National Treasury had known at least a month earlier that SAA would not be able to make its repayment to Citibank. He asked for the parliamentary legal advisor’s opinion.

The Parliamentary Legal Advisor advised that section 16 of the Public Finance Management Act (PFMA) stipulated that a special allocation could be made in “exceptional circumstances”. The concern in the letter from the DA was that this was not unexpected. But section 16 does not speak of unexpected but of exceptional circumstances. He believed the Committee must take that into account. It was a critical difference. He added that he would not like to rule on the legality but cautioned Members not to “jump up and down about it”, given that the Minister had an obligation to report on the matter to Parliament next week and that his submission, and whether the lifeline complied with the PMFA, would be scrutinised by the Auditor-General.
National Treasury said there were several factors at play that made the allocation a last-minute step. There were protracted negotiations on how SAA could recapitalise and that took a long time, and also protracted negotiations with lenders, with Citibank, as well as with domestic lenders and that was concluded only very late in September.
The Committee reiterated its views that the turnaround strategy should be significantly improved and effectively implemented. The SAA’s Annual General Meeting (AGM) should be held on 3 November as proposed by Treasury, and the current Board Chairperson’s term should end with the AGM. People with appropriate aviation experience and expertise should be appointed to the Board, management strengthened and allegations of corruption should be tackled speedily.

The Committee gave Parliament’s Legal Services Unit until 17 October 2017 to decide on the legality of National Treasury’s use of section 16 of the Public Finance Management Act (PFMA) for the R3 billion bail-out for South African Airways (SAA). The Unit must also consult on the role of the Appropriations and Public Accounts Committees and the Auditor-General’s Office before reporting back to the Committee.  The Committee noted that Section 16 of the PFMA allows the Finance Minister to authorise the use of funds to “defray expenditure of an exceptional nature, which is currently not provided for, without serious prejudice to the public interest.”
 

Meeting report

Mr Roy Havemann, Chief Director: Financial Markets and Stability, National Treasury, took the Committee through amendments clauses 50 to 69.

Clause 50- Transfer, fundamental transaction or change of institutional form
(4) The Prudential Authority must only grant an approval referred to under subsections (1) to (3) if the Prudential Authority is satisfied—
(a) that the transfer, transaction or change will not impede the financial soundness of an insurer or controlling company that is a party to the transfer, transaction or change;
(b) in the case of an insurer, that the transfer, transaction or change does not negatively impact on the interest of policyholders;
(c) in the case of a controlling company, that the transfer, transaction or change does not negatively impact on the interests of policyholders of the insurers that are part of the insurance group.

The Chairperson commented on subsection 4(b). He felt consideration should be given to prioritising low income creditors in the event of an insurance company failure.

The Prudential Authority may—
prescribe the processes that an insurer and controlling company must comply with in respect of transfers, transactions or changes, which may include processes for informing and consulting policyholders.

The Chairperson commented that the Prudential Authority should consider prescribing various information dissemination mediums in 11 languages to ensure that all policyholders belonging to different economic strata were well informed. He emphasised the need for a balanced approach to transformation. It should be in a holistic sense; having new entrants should not be at the expense of current policyholders, who are predominantly low income earners.

The Committee agreed with the Chairperson.

Clause 52- Application of Chapter
The Prudential Authority, in addition to any other action that the Prudential Authority may take under this Act, may act in accordance with this Chapter—
if an insurer or controlling company fails to—
submit any plan, scheme or strategy required under this Act; or
comply with any plan, scheme or strategy approved under this Act;

Mr Havemann said the amendment was meant to link the existing mechanisms and tailor them for applicability within an insurance context.

Members agreed to the amendments.

Clause 53- Appointment of statutory manager
Treasury said amendments made it clear how the appointment of statutory manager who would deal with governance failure and financial soundness failures be effected.

The Chairperson suggested that the term “statutory manager” find expression in the definitions section of the Bill as well.

Mr Havemann noted that it had also been articulated in clause 48

Clause 55- Application of Companies Act to business rescue of insurers and controlling companies
(1) Despite any other law under which an insurer or controlling company is established or incorporated, Chapter 6 of the Companies Act applies, subject to this section and with the necessary changes, in relation to an insurer or a controlling company, to the exclusion of any similar provisions under the Co-operatives Act or any other law under which an insurer or controlling company is established or incorporated, and in such application the Prudential Authority must be deemed to be an affected person.
in addition to any question relating to the business of an insurer, it must be considered if any proposed action is in the interests of policyholders of an insurer or, in the case of a controlling company, the interests of policyholders of the insurers that are part of the insurance group.

The Chairperson suggested that policyholders, particularly those who, as determined by some regulation and earn below a certain income threshold, become the priority while recognising the inherent complexities. Treasury would bring suggestions to be considered in a Committee report.

Clause 56- Business rescue applications and resolutions

(1) The Prudential Authority may make an application under section 131 of the Companies Act in respect of an insurer or a controlling company, if the Prudential Authority reasonably believes that it is in the interests of the insurer’s policyholders or, in the case of a controlling company, the interests of policyholders of the insurers that are part of the insurance group to do so.
(a) If an application to a court for an order relating to the business rescue of an insurer or a controlling company is made by an affected person other than the Prudential Authority—
it shall not be heard unless copies of the notice of motion and of all accompanying affidavits and other documents filed in support of the application have been lodged with the Prudential Authority at least 14 days before the application is set down for hearing;
the Prudential Authority may, if the Prudential Authority reasonably believes that the application is not in the interests of policyholders of the insurer, or, in the case of a controlling company, the interests of policyholders of the insurers that are part of the insurance group, join the application as a party and file affidavits and other documents in opposition to the application.
(b) Any order granted by the court in circumstances where paragraph (a) (i) has not been complied with is void.

The Chairperson asked the parliamentary legal advisor and Treasury legal counsel to look into whether clause 56(1) was legally tenable; enforceable; or if there was a possibility of a softer version.

Clause 62(2) - General powers, functions and duties of Prudential Authority

The amendments incorporated public comments which pointed out the need to explicitly clarify that the Promotion of Administrative Justice Act applies to administrative actions by the Prudential Authority.
Clause 62(4) elaborated on matters to be considered by the Prudential Authority when taking administrative action.

Mr D Hanekom (ANC) felt the term “South African context” was too generic and suggested “with due consideration to the needs for transformation of the financial sector”.

The Committee accepted clauses 60 to 64 as presented and agreed to all amendments.

Clause 69- Offences
An auditor commits an offence and is on conviction liable to a fine not exceeding R10 million if that auditor contravenes or fails to comply with a provision of sections 16(5), 32(4), 32(5) or 32(6).

The Chairperson was not impressed by the R10 million maximum fine given the amount of money big insurers make. R10 million was a ‘drop in the ocean’ for them.

Treasury said the sum did not apply to the insurance companies but individual auditors or any other legal person.

The Chairperson suggested the clause be flagged for discussion on a later date. Also, recognising the enormous frustration within communities, there was need to expedite the transformation agenda. He requested Treasury to furnish the Committee with all the transformation clauses

Deliberations on SAA bailout
The Chairperson stated that Mr A Lees (DA) had written a letter to the Committee contending that Finance Minister Malusi Gigaba may have tried to side-step Parliament when he approved the 11th-hour bailout, designed to prevent the airline defaulting on one of its loans, because National Treasury had known at least a month earlier that SAA would not be able to make its repayment to Citibank. He asked for the parliamentary legal advisor’s opinion.

Adv. Frank Jenkins, Parliamentary Legal Advisor, advised that section 16 of the Public Finance Management Act (PFMA) stipulated that a special allocation could be made in “exceptional circumstances”. The concern in the letter from Mr Lees was that this was not unexpected. But section 16 does not speak of unexpected but of exceptional circumstances. He believed the Committee must take that into account. It was a critical difference. He added that he would not like to rule on the legality but cautioned Members not to “jump up and down about it”, given that the Minister had an obligation to report on the matter to Parliament next week and that his submission, and whether the lifeline complied with the PMFA, would be scrutinised by the Auditor-General.
Ms Empie van Schoor, Director of Legal Services: National Treasury, said there were several factors at play that made the allocation a last-minute step. There were protracted negotiations on how SAA could recapitalise and that took a long time, and also protracted negotiations with lenders, with Citibank, as well as with domestic lenders and that was concluded only very late in September.
Mr Lees said he was not convinced. He did not believe the drafters of the legislation would have thought that protracted negotiations were exceptional circumstances.
The Chairperson said he tended to agree with Mr Lees but thought the fact that Parliament was in recess played a role in the Minister’s reasoning. If SAA had not been helped, the outcome would have been a call on guarantees of R16.4 billion guarantee exposure, but National Treasury needed to explain the conditions for the lifeline. The Committee reiterated its views that the turnaround strategy should be significantly improved and effectively implemented. The SAA’s Annual General Meeting (AGM) should be held on 3 November as proposed by Treasury, and the current Board Chairperson’s term should end with the AGM. People with appropriate aviation experience and expertise should be appointed to the Board, management strengthened and allegations of corruption should be tackled speedily.

Mr Hanekom stressed that had SAA been left to default the consequences for the country would have been catastrophic. But he added it was troubling that it happened without concerns about the current board, and particularly the board chair, being addressed. He expressed concern about the prospect of further transfers to SAA in the absence of a board in which investors will have confidence. He was worried about the extension of the November 3 date for the AGM and the extension of the contract of the chairwoman given the very low level of public and investor confidence in the board and the chairperson.

The Committee gave Parliament’s Legal Services Unit until 17 October 2017 to decide on the legality of National Treasury’s use of section 16 of the Public Finance Management Act (PFMA) for the R3 billion bail-out for South African Airways (SAA). The Unit must also consult on the role of the Appropriations and Public Accounts Committees and the Auditor-General’s Office before reporting back to the Committee.  The Committee noted that Section 16 of the PFMA allows the Finance Minister to authorise the use of funds to “defray expenditure of an exceptional nature, which is currently not provided for, without serious prejudice to the public interest.”

The meeting was adjourned.
 

Present

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