Financial Matters Amendment Bill: briefing; Committee Report on Fiscal Framework

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Finance Standing Committee

20 November 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

Committee Report on 2018 MTBPS

The Committee held a briefing by National Treasury on the Financial Matters Amendment Bill.

National Treasury, in briefing, said the Financial Matters Bill sought to amend five Acts as follows: the Insolvency Act, the Military Pensions Act, the Government Employees Pension law, the Banks Act and the Auditing Profession Act. The Bill was open for public comment between August 24 and September 14, 2018, and had been submitted to Cabinet for approval. On amendments to Banks Act, under the Companies Act, state-owned companies were no longer classified as public companies. Currently, the Banks Act only allows for public companies to establish a bank. As a result, state-owned companies meeting prudential and other requirements of Banks Act were unable to apply for authorisation to establish bank. To limit fiscal risks of state-owned banks which may, in terms of its founding legislation, be able continue to operate despite being not a going concern, it was proposed that only qualifying state-owned companies that are financially sound may apply for authorisation to establish bank. Therefore, the Bill proposed that: state-owned company must first obtain approval of Minister of Finance, acting with concurrence of Minister responsible for state-owned company to apply for authorisation to establish bank; assets of company, its holding company and, if applicable, holding company of its holding company, must exceed its liabilities. Further, with the Military Pensions Act providing for, among others, pensions and gratuities for certain persons in respect of disability caused or aggravated by military services, the Act recognises certain marriages and male gender for purposes of benefits in manner contrary to section 9 of Constitution. For instance, section 1 defines "dependant" in relation to member, to be his wife or child. This definition assumes that members are only husbands in heterosexual relationships and furthermore perpetuates discriminatory stereotypes that only heterosexual relationship is acceptable. The Act disregards fact that military service comprises of both men and women who are in different types of relationships which are treated equally in terms of Constitution and recognised in other laws, such as Marriages Act and Civil Union Act. Therefore, the Bill proposed, among others, amendment of word "spouse" to include members in different types of relationships and deletion of definition of "wife" and "widow“. To ensure gender neutrally, Bill also proposes replacing term "widow" for "spouse".

Members said the Committee would not want to have a situation where depositors lose money because of problems with the Post Office. For this reason separate boards and management are necessary to ensure one does not affect the other. A DA Member asked Treasury what the rationale to amend the Banks Act was. Was it the same as the one given by the EFF? Notably, there was nothing stopping the formalisation of Postbank’s adherence to the Banks Act if it was already operating as a bank instead of seeking to create an entirely separate piece of legislation. Why was this the best way to achieve the Twin Peaks dispensation? Was having a state bank the best way to resolve the problems being raised? The Chairperson said unless convinced otherwise, the majority believed management of Postbank must be separated from the Post Office in a way that would ensure it does not go down in an event that the Post Office fails. The need for financial sector transformation and diversity largely informed the majority’s support of the Banks Bill. He implored Treasury to mull over the issues raised and provide clear enough responses. The Committee Chairperson said the majority had more than eight reasons why they would want the licensing of Postbank, and even more reasons why they would want a broad dispensation which would allow, under specific circumstances, the licensing of state-owned banks as and when necessary. Treasury proposals were in order for now but certainly there was need to strengthen the Bill as a whole.

In addition, the Committee adopted the Proposed Fiscal Framework Report, and the DA reserved its position. The Proposed Fiscal Framework for the next three years has to be linked to the report on the Revised Fiscal Framework adopted on 6 November. The two reports overlap in several respects.  In any case, the submissions to the Committee from stakeholders and the public on the hearings mostly do not draw a distinction between the Revised and Proposed Fiscal Frameworks and none of them provides two separate submissions on the Revised Fiscal Framework and the Proposed Fiscal Framework. The matter of how to treat these two reports in future has been addressed in the amendments to the Money Bills Amendment Procedure and Related Matters Act to be finalised soon.

Meeting report

Adoption of Proposed Fiscal Framework Report
The Chairperson welcomed everyone and took the Committee through the observations and recommendations of the Proposed Fiscal Framework Report. The Proposed Fiscal Framework for the next three years has to be linked to the report on the Revised Fiscal Framework adopted on 6 November. The two reports overlap in several respects.  In any case, the submissions to the Committee from stakeholders and the public on the hearings mostly do not draw a distinction between the Revised and Proposed Fiscal Frameworks and none of them provides two separate submissions on the Revised Fiscal Framework and the Proposed Fiscal Framework. The matter of how to treat these two reports in future has been addressed in the amendments to the Money Bills Amendment Procedure and Related Matters Act to be finalised soon. He put the report up for adoption.

The Proposed Fiscal Framework Report was adopted.

The DA reserved its position on the Report.

Briefing by National Treasury on the Financial Matters Amendment Bill
The Chairperson indicated that the Committee was hoping to hold public hearings on the Financial Matters Bill but gathered that bill was still in the Cabinet cycle and thus hearings could not be held at this stage. The Committee has a very strong stake in two aspects of the Bill: the establishment of a state-owned bank and the view that the Independent Regulatory Board of Auditors (IRBA) should have far more teeth to deal with errant auditors. If the Committee runs into clashes over highly contested aspects of the Bill, these would have to be deferred so that attention is given to the two aforesaid priority areas. The Committee would try to do as much as it could during this term and the next, depending on its programme and the number of sitting days next year.

Ms Empie van Schoor, Chief Director: Legislation, National Treasury, said the Financial Matters Bill sought to amend five Acts as follows: the Insolvency Act, the Military Pensions Act, the Government Employees Pension law, the Banks Act and the Auditing Profession Act. The Bill was open for public comment between August 24 and September 14, 2018, and had been submitted to Cabinet for approval.  

Amendments to Insolvency Act
Mr Langelihle Nkabinde, Directorate: Financial Markets and Competitiveness, National Treasury, said amendments to the Insolvency Act sought to ensure that South Africa complies with its G-20 international obligations on exchange of margin in accordance with the 2015 Margin Rules Framework. Amendments also sought to ensure that collateral exchanged as margin is easily and readily realisable upon default of one of the counter parties to an over-the-counter (OTC) Derivatives Transaction and is immediately available to the non-defaulting counter party; and to alleviate the conflict of laws and ensure alignment of the Insolvency Act with the Draft Margin Notice (to be published in 2019). The amendments further provide for a process to be followed when a master agreement creditor realises his/her security in terms of the master agreement and for the Office of the Master to deal with disputes of preference under those agreements.
Amendments to Military Pensions Act
Adv Ailwei Mulaudzi, Director: Fiscal and Intergovernmental Legislation, NT, said that according to sections 9(1) and (3) of Constitution the state may not unfairly discriminate directly or indirectly against anyone on any grounds such as gender, sex and sexual orientation. With the Military Pensions Act providing for, among others, pensions and gratuities for certain persons in respect of disability caused or aggravated by military services, the Act recognises certain marriages and male gender for purposes of benefits in manner contrary to section 9 of Constitution. For instance, section 1 defines "dependant" in relation to member, to be his wife or child. This definition assumes that members are only husbands in heterosexual relationships and furthermore perpetuates discriminatory stereotypes that only heterosexual relationship is acceptable. The Act disregards fact that military service comprises of both men and women who are in different types of relationships which are treated equally in terms of Constitution and recognised in other laws, such as Marriages Act and Civil Union Act. Therefore, the Bill proposed, among others, amendment of word "spouse" to include members in different types of relationships and deletion of definition of "wife" and "widow“. To ensure gender neutrally, Bill also proposes replacing term "widow" for "spouse".

Amendments to Banks Act
Adv Mulaudzi said under the Companies Act, state-owned companies were no longer classified as public companies. Currently, Banks Act only allows for public companies to establish a bank. As a result, state-owned companies meeting prudential and other requirements of Banks Act, were unable to apply for authorisation to establish bank. To limit fiscal risks of state-owned banks which may, in terms of its founding legislation, be able continue to operate despite being not a going concern, it was proposed that only qualifying state-owned companies that are financially sound may apply for authorisation to establish bank. Therefore, the Bill proposed that: state-owned company must first obtain approval of Minister of Finance, acting with concurrence of Minister responsible for state-owned company to apply for authorisation to establish bank; assets of company, its holding company and, if applicable, holding company of its holding company, must exceed its liabilities.
Amendment to Government Employees Pension (GEP) law
Adv Mulaudzi noted that the GEP Law regulates the Government Employee Pension Fund (GEPF). Non-member spouses of GEPF members were denied their share of pension benefit immediately upon divorce or dissolution of customary marriage and had to wait until their member former spouses became entitled to their own benefit. The Pension Funds Act entitled non-members spouses to their pension interest in funds, governed by that Act, upon divorce or dissolution of customary marriage, so-called "clean-break principle". Parliament amended the GEP Law in 2011 by inserting section 24A to provide for "clean-break principle". A portion of member's pension interest assigned to non-member spouse is deemed to accrue as debt to member on date on which decree of divorce or for dissolution of customary marriage is granted. The amount paid to a non-member spouse in giving effect to clean-break principle is regarded by GEPF rules as debt due by member ("the divorce debt approach") to GEPF. Rules of GEPF (rule 14.10.9) require that divorce debt be created at time member divorces or at dissolution of customary marriage in respect of amount paid to former spouse. Members have opportunity to settle portion or full debt over period of membership should they so wish, but if unsettled amount remains at time member exits GEPF, debt is deducted from benefit payable retirement of member, in terms of current GEPF rules; divorce debt is offset against member's gratuity entitlement. Should gratuity be less than outstanding divorce debt, the balance of debt is recovered by reduction in annual pension, that member will retire and not receive any cash on retirement. This approach imposes unjustifiable burden on members of GEPF, hence to address prejudice to members resulting from debt approach, Bill proposes replacement of debt approach with reduction of member's year of pensionable service ("the service reduction approach"). The Bill has transitional measure allowing members whose amount of pension benefit is subject to reduction because of debt approach (immediately prior to amendment), to choose whether divorce debt approach or service reduction approach must be applied to benefit.
Amendment to Auditing Profession Act
Adv Mulaudzi said the Auditing Profession Act currently empowers disciplinary committee to impose fine not exceeding amount calculated according to ratio for five years’ imprisonment prescribed under Adjustment of Fines Act on registered auditor found guilty of improper conduct. Since this fine is an inadequate deterrent, the Bill proposes that the Minister determines the maximum amount to strengthen IRBA’s independence, address conflict of interest of board members, prohibit registered auditors and candidate auditors from being appointed as board members and prohibit board members from: sharing directly or indirectly, in profits of registered auditor or candidate auditor; receiving payments from registered auditor or candidate auditor; conducting business with registered auditor or candidate auditor.

Discussion
The Chairperson suggested that Members - rather than dissecting the Bill in its entirety - should signal their initial responses to policy issues.

Mr F Shivambu (EFF) suggested that the approach be that Treasury presents the Bill in its entirety. A presentation of the entire legislation would help the Committee do justice. He added Members have a right to address all the fundamental aspects of the piece of legislation. 

Ms T Tobias (ANC) pointed out the difference between general and consequential amendments. Treasury proposals were consequential and thus Mr Shivambu would need to provide reasons why he believed the Committee should adopt his approach of wanting to bring additional proposals.

The Chairperson said nothing stops Members from proposing additional amendments apart from those brought forth by the Executive, provided they are relevant to the Committee. However, whether they are processed or not is determined by how relevant they are to the amendments before the Committee and, most importantly, if they fall under its portfolio. The Committee could not seek to amend a Bill which is dealt with by the Ministry of Defence and Military Veterans. What the Committee could do was to refer the additional proposals to the Chairperson of the Portfolio Committee on Defence and Military Veterans. He assured Mr Shivambu that the Committee would not scratch the Bill on the surface. On the Banks Bill, there is a strong case for the establishment of a state-owned bank, flowing from views of the majority in the Committee. The ANC had no difficulties with the Private Member Bill but the position was the Committee would wait for proposed amendments from Treasury and then see if the two could be reconciled. He asked Treasury to highlight the differences between its proposed amendments to the Banks Act and those from the EFF.

Mr Shivambu said the mooted state-owned bank must have a life of its own. The Postbank is currently operating like a bank but not subject to bank regulations as provided for in the Financial Services Regulation Act. Hence, the only way to insulate it from failure as a deposit-taking institution would be to put it under the bank supervisory system. This would be done by giving provision for the Postbank to obtain a banking license and operate independently.

The Chairperson asked what the relationship between the South African Post Office and the Postbank would be if the latter gets a banking licence. Was there a policy that the Treasury would implement on this matter? The majority had been asking for this Bill for a long time and this idea of having the Executive determine Parliament’s legislative programme was unbecoming. He invited Members’ comments on the state bank proposal.

Ms G Ngwenya (DA) asked Treasury what the rationale to amend the Banks Act was. Was it the same as the one given by the EFF? Notably, there was nothing stopping the formalisation of the Postbank’s adherence to the Banks Act if it was already operating as a bank instead of seeking to create an entirely separate piece of legislation. Why was this the best way to achieve the Twin Peaks dispensation? Was having a state bank the best way to resolve the problems being raised?

Mr Shivambu pointed out that the Postbank has certain functions that it could not handle. The Postbank should be properly supervised by ensuring that it is clearly accountable in terms of the existing legislation. In principle, the EFF was not opposed to Treasury’s proposed amendments to the Banks Bill. The only way to bring the Postbank in compliance with the so-called Twin Peaks would be to issue it with a banking licence. We do not want have a situation where depositors lose money because of problems with the Post Office. For this reason separate boards and management are necessary to ensure one does not affect the other. Further, there must be a mechanism to deal with unscrupulous practices within the auditing space. IRBA’s oversight function within the private sector needed to be strengthened. The collusion between auditors and corporates should be addressed to ensure the law is properly upheld, and the proposals by Treasury did not articulate this clearly. Legislation would require more time to process rather than this superficial approach by the Committee.

The Chairperson said the debate between the DA and the EFF as well as the ANC on the Banks Bill was an ideological, probably value-laden policy one. The parties were never going to agree. The ANC has a position on this matter.

Mr Roy Havemann, Chief Director: Financial Markets and Stability, National Treasury, spoke on the rationale to amend the Banks Act. The reasons were part of the idea of the Twin Peaks model of the financial sector to have all entities doing similar business regulated in a similar way. This applies to privately owned entities and state-owned entities. In the past state banks have not been supervised in the same way as other banks. For example, when the Banks Act was first passed by Parliament in 1990, the framework for the Postbank had allowed for it to operate under exemption. But given that Postbank has a growing footprint, beyond just distributing grants and now taking deposits from account holders, Treasury recognised it is necessary that it no longer operates under exemption if it is doing the same business of other banks. The Postbank particularly has made progress and has become a "well-run" bank. The bank has strengthened its risk management systems and has gone through a technology upgrade over the past year, among other things. Process-wise, Treasury had done a lot of behind-the-scenes work together with the Reserve Bank and other relevant line departments. He agreed that separating the Post Office and Postbank as far as possible would ensure that the two do not affect each other in terms of financial problems.

Mr A Lees (DA) asked if there had been any consultation processes preceding the proposal to amend the Financial Management Bill. What was the extent of consultation processes?

Ms van Schoor replied that stakeholders consulted were outlined in the Bill as follows: the Department of Telecommunications and Postal Services; Department of Justice and Constitutional Development; Government Pensions Administration Agency; GEPF; Financial Sector Conduct Authority; South African Post Office; KZN Department of Economic Development; Tourism and Environmental Affairs; Ithala Limited; and the South African Reserve Bank. 

The Chairperson said unless convinced otherwise, the majority believed management of the Postbank must be separated from the Post Office in a way that would ensure it does not go down in an event that the Post Office fails. The need for financial sector transformation and diversity largely informed the majority’s support of the Banks Bill. He implored Treasury to mull over the issues raised and provide clear enough responses. The Committee majority had more than eight reasons why it would want the licensing of Postbank, and even more reasons why they would want a broad dispensation which would allow, under specific circumstances, the licensing of state-owned banks as and when necessary. There was nothing Mr Shivambu had said that was inconsistent with what the Committee had been saying. Treasury proposals were in order for now but certainly there was need to strengthen the Bill as a whole.

The meeting was adjourned.

 

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