Insurance laws Amendment Bill [B26-2008]: National Treasury briefing & Financial Laws of Parliament Amendment Bill [B75-2008]: deliberations

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Finance Standing Committee

28 May 2008
Chairperson: Mr M Nene (ANC) (with Mr S Ralane (ANC, Free State) as co-chair for the second session)
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Meeting Summary

National Treasury briefed the Committee on the Insurance Laws Amendment Bill (the Bill), which had not been formally tabled in its present form, although it was explained that the alterations made were of a purely formatting nature. The Bill proposed amendments to the Long and Short Term Insurance Acts. It was intended to correct some problem areas, close regulatory gaps that had been identified, and update the legislation Some of the amendments were common to the Long term Insurance Act (LTIA) and Short Term Insurance Act (STIA). These included demarcation between health insurance and medical schemes businesses, regulation of binder agreements, the role of the auditor, the role of the Statutory Actuary, updating the role of the Audit Committee, maintenance of financially sound conditions, and capital adequacy arrangements. The Regulator would also be empowered to call for independent review. Those amendments relating only to the LTIA dealt with the process for awarding of bonuses, to ensure they did not bankrupt the company, and related issues around assistance policy benefits. The amendments relating to the STIA laid the basis for the introduction of financial condition reporting, the method of calculating the value of assets and liabilities under Schedule 2 and calculation of Lloyds security under Schedule 3. Each of the amendments was explained in detail, pointing out the problems that had been encountered to date and what the amendments sought to achieve. The demarcation was intended to create a better understanding of what was insurance, and what was a medical scheme, not by creating a definition but rather by creating a process to align policy decisions between the Departments of Health and Finance. The expansion of the role of the auditor was linked to the principle that the Registrar should be better informed of problems that pointed to the possibility that an insurer might be financially unsound. Extended reporting duties on the Statutory Actuary followed the same rationale. It was explained that it was the duty of insurers to maintain a financially sound condition, and they should value their assets on a fair value system but the Registrar of Insurance may require a spreading or readjustment. The Registrar was to be given powers to require reports to assist in calculating risk. It was explained that the amendments specific to the STIA included a move to a system of risk-based supervision, and although these would not be the final dictate on supervision, they would enable regulations to be put in place to set the basis for Financial Condition Reporting, which might be introduced later after full consultation with the industry.

Members raised questions on the causes of financial instability, restrictions on bonuses, reduction in vested bonuses, the obligations on short term insurers to appoint actuaries, the discretion given to the Registrar in relation to their appointment and removal, the effects of the amendment on informal insurance schemes, the distinction between funeral policies and funeral schemes, and the different functions and use of actuaries and assessors.

The Parliamentary Legal Advisor had been asked to remove from the Financial Management of Parliament Bill all references to the Public Finance Management Act (PFMA), after the Committee had expressed concerns that the Bill as drafted might not be violating the principles of separation of powers. He took the Portfolio and Select and Joint Budget Committees through the amended sections, explaining what had been done. He stressed that there were very few sections of the PFMA that applied specifically to Parliament in any event. That Act also set out that the treasury function would be carried out by the “Executive Authority” of Parliament, which was the Speaker of the National Assembly and Chairperson of the National Council of Provinces, acting jointly. He indicated, in relation to supply management chain policies and internal audit issues, that whereas the PFMA tended to put the broad basics in the Act and the detail in regulation the opposite should pertain to Parliament, in the interests of transparency, and more detail should appear in the main body of its own legislation.

Questions by Members addressed the definition and derivation of the Executive Authority of Parliament, whether this Act should not apply to provincial legislatures as well as Parliament, in which case it would require substantial amendment, the monitoring of legislation possibly created by the provinces, the need for consistency, the value of the formats in the PFMA and the problems that could arise through contradictory formats, and possible difficulties.  Further questions related to the need to define  “executive authority” and “oversight authority”, reporting functions, and the need for further clarity on the audit committee. It was noted that the National Treasury would be making further submissions later in the week.

Meeting report

Insurance Laws Amendment Bill (the Bill): National Treasury (NT) Briefing
The Chairperson asked the State Law Advisor to explain why this Bill had not been formally tabled.

Mr Sisa Makabeni, State Law Advisor, said that the Bill was certified on 19 May and was then forwarded to the printers, who essentially would re-type the Bill. The proofs were only given back to the State Law Advisors on 23 May, but the changes could then only be discussed on 27 May. He noted that there had been no changes in the content, and the changes were merely to align to the principal Act. 

Mr S Marais (DA) asked why this Bill was considered so urgent that the correct procedure was not followed.

The Chairperson noted that in terms of the Rules, the Bill was tabled, but not in precisely its current form, and that this session had been scheduled on the assumption that it would have been re-tabled with the changes. However, this was an initial briefing, and if Members felt there were substantial changes and that it should stand over, then it could do so. The State law Advisors would be held responsible for any consequences arising from that.

Ms Jo Ann Ferreira, Chief Director: Legislation, National Treasury, said that the corrections were all technical, arising from the re-typing, and corrected mistakes such as bolding or underlining of words. There were no substantive changes at all.

Mr Ismail Momoniat, Deputy Director General, National Treasury, noted that the Bill proposed amendments to the Long and Short Term Insurance Acts. It was intended to correct some problem areas, close regulatory gaps that had been identified, and update the legislation with the aim of strengthening the legislative framework for a sound and well regulated insurance industry, in the interests of providers and consumers. In order to be fully effective, attention must be paid to full and correct implementation of the changes.

Mr Momoniat summarised that the Bill had been submitted to Cabinet and approved in April 2008. The State Law Advisors had certified it in May 2008. It was published for public comment on 9 May 2008.

Some of the amendments were common to the Long term Insurance Act (LTIA) and Short Term Insurance Act (STIA). The first dealt with demarcation between health insurance and medical schemes businesses. The second most significant change dealt with binder agreements. The amendments also included the role of the auditor, the role of the Statutory Actuary, updating the role of the Audit Committee, maintenance of financially sound conditions, and capital adequacy arrangements. The process of the independent review was also being looked at. Those amendments relating only to the LTIA dealt with the process for awarding of bonuses, to ensure they did not bankrupt the company, and related issues around assistance policy benefits. The amendments relating to the STIA laid the basis for the introduction of financial condition reporting, the method of calculating the value of assets and liabilities under Schedule 2 and calculation of Lloyds security under Schedule 3.

Mr Momoniat explained this in more detail. In respect of the demarcation, he said that NT was trying to cover all insurance products, except medical schemes. It was difficult to draw the line between them - as shown by the recent Guardrisk case, as three pieces of legislation dealt with the products in different ways. The Medical Schemes Act dealt with the business of a medical scheme. The LTIA dealt with health insurance policies that were not necessarily medical schemes, but were triggered by health events, such as compensation for loss of income. Everything that was not a medical scheme would fall under those policies. The STIA dealt with accident and health policies – particularly those related to travel. This had caused confusion and it was necessary to decide what was covered by each of these schemes. Health policies usually attracted a “community” rating. NT was committed to trying to ensure that there was not a shift to gap-cover insurance policies. The Bill suggested the way forward on the demarcation process. The NT had met with the department of Health to discuss proposed amendments. A meeting with the Council for Medical Schemes had been planned, but needed to be postponed since the Department (which was responsible for policy) was not present.

Ms Katherine Gibson, Director: Financial Services, NT, added that the interpretation of the various definitions had created confusion, and the use of the word "and" in the definition of health policy had led to legal disputes. It was not the intention of NT to delineate between the products itself, but rather to enable a formal process to be set up where the policy decisions could be aligned between Departments of Health and Finance. The amendment would empower the Minister of Finance, after consultation with the Minister of Health, to make regulations to define a kind, category of a policy, and to take certain factors into account. Provision was being made for a dispute resolution process in which the Regulators from the Financial Services Board (FSB) and medical schemes would determine the policy types.

The role of the auditor would be expanded, and would be aligned with other legislation. There had been a number of problems with the current wording. There was a need to align to the revisions that had been made to the Companies Act, and the Public Accountants and Auditors Act referred to presently had been repealed and replaced.  The principle was that the Registrar should be informed of problems before the insurer became financially unsound, and the auditor was best placed to discover and report this. The name of the individual Auditor would now be provided and there were restrictions on how long an individual auditor could be appointed to audit any insurer. The LTIA and STIA would now specify the duty of the auditor to inform the Registrar of any circumstance that might affect the financial sound condition of the insurer.

The amendments also gave extended reporting duties on the Statutory Actuary (SA). Presently, the LTIA required the SA to report to the Board, but he was not entitled or required to attend meetings of the Board, while the STIA did not require appointment of a SA. The principle was that the SA was aligned closely to the financial management of the insurer and thus could play an important role in informing the Registrar of problems. Therefore the amendments would require the SA to attend and address the Board at its meetings, and the introduction of financial condition reporting (FCR) into the STIA would require an SA to be appointed. Other consequential amendments were made to the relevant sections.

Ms Gibson said that the audit committee requirements were now also to be brought in line with other legislation. Both long term (LT) and short term (ST) insurers had to appoint an audit committee, which was to ensure sound financial and risk management. Because the audit committee had important functions in relation to corporate governance, it was necessary to make amendments to ensure that both Acts reflected the recent amendments to the Companies Act of 2006, and the Corporate Laws Amendment Act.

Ms Gibson noted that it was the duty of insurers to maintain a financially sound condition. Insurers should be valuing their assets on a fair value system, as introduced in the Companies Act, but the Registrar, if not satisfied with this, may require a spreading and could re-adjust the value.

The STIA also presently provided for a contingency reserve. The proposals were to require a LT and ST insurer to provide for liabilities and capital requirement. There was a prohibition against declaring a dividend if this would not ensure that a financially sound condition was maintained. The current spread was only required on the minimum capital adequacy but should be on calculated capital adequacy. The obligation to hold a contingency reserve would be removed.

Neither of the two insurance Acts had previously provided that the Registrar could direct a report to be furnished to him. This had caused problems, in that the statutory returns did sometimes point to a matter that would need closer investigation. A report by an expert would assist the Registrar to make a correct risk calculation. This was therefore now being included in the powers of the Registrar.

Ms Gibson explained that binder agreements were now also flagged for attention. A binder agreement was a payment or statement making an agreement legally binding on the insurer until a forma l agreement had been concluded. It effectively put the company on risk. A binder agreement could be issued by the insurer or intermediary. Binder agreements were not currently regulated by the LTIA, although the STIA provided that an independent intermediary could render services, but in a limited form. There had been difficulties of interpretation. The functions that a third party might perform were not always clear, with the result that there could be arbitrage of commission regulations, or the possibility of conflicts of interest. Amendments would now be made to the LTIA and STIA to regulate these agreements, setting out the functions and powers. She tabled some examples. There would be obligations to disclose the name of the insurer, and restrictions on delegation or subcontracting of functions, and limitations on the form of remuneration and what could be required under the agreement, as well as the type of policy. Accountability and responsibilities remained with the insurer.

Ms Gibson drew attention to three other areas: the assignment of the powers to the Deputy Registrar, which aligned with other legislation, extending the conditions of registration with regard to the financially sound position, and consequential amendments.

Ms Gibson then proceeded to deal with the amendments that were specific to the LTIA (see attached presentation for more detail). These included the proposal that no bonus could be awarded unless the SA was satisfied that this was sound and that a surplus was available, and set out the way in which the award must be done. The principles were set out in detail.

In regard to Assistance Policy benefits, there was currently a provision that a party could require that a non monetary benefit (such as a funeral) be provided, except if the beneficiary was no longer in the area, and even then the monetary pay out would often be less than its true value. Henceforth, in terms of the amendment, the monetary equivalent of the non monetary benefit must be stated up front, and the beneficiary could request it in all circumstances.

The amendments specific to the STIA included a move to a system of risk-based supervision. The amendments proposed here would not be the final dictate of how supervision would take place but would enable regulations to be put in place, and to set the basis for financial condition reporting (FCR). The current STIA regulated the method of calculation of the value of assets, but did not take into account the risk and size of the insurer. The amendments would introduce a risk based approach to solvency calculations. There would be a prescribed rules-based method similar to the lines of the Basel II reporting introduced recently for banks.

Mr B Mnguni (ANC) asked, in relation to financial stability, how the insurance companies could cause financial instability. He asked what would happen if many people made claims, or if bonuses were paid.

Mr Billy Clarke, Senior Specialist: Finance, FSB, gave a general comment that most of the proposed amendments dealt with how to make regulation of the industry more effective, and how to allow the Regulator to exercise better supervision. The focus on supervision was important because insurers, like banks, could present a major problem to overall financial stability if they fell into a precarious financial position. The essence of insurance was that premiums were taken against a promise to pay in respect of a  defined future event, and the Regulator must ensure that the insurance company would remain financially sound enough to meet the future promises. If they paid out more than they received by way of premiums, then beneficiaries, who could be relying on a death benefit, would not be paid. Any problems in one financial company tended to spill over into the whole sector.

Mr Mnguni asked, in relation to the bonuses to officials, whether the proposed restrictions would not be  regarded as undue interference into the industry. He compared this with the State Owned Enterprises, where there were contractual arrangements.

The Chairperson confirmed that these were bonuses to policyholders. They could be declared but would not be paid out.

Dr D George (DA) referred to clause 11 of the Bill, restricting the payment of a declaration or payment of a dividend to shareholders, with the clear requirements set out under (c). He asked how this wording was decided upon

Dr George made reference to the reduction in a vested bonus for policyholders. In 1998, there was a distinct difference between vested and non vested bonuses, when the bonuses that were then vested were taken to zero. He asked what the situation was in this regard.

Mr Clarke reiterated that the bonuses were those paid to policy holders, under the "with profit" business, which tended to be the older style of policies, where returns would be made, but there was provision to pay a bonus if the market out-performed. Nothing new was being introduced by the current amendment; save that in the past the process of deciding on the bonus had often not been transparent and many consumer complaints were based on the lack of information. The amendments were introducing Principles and Practices of Financial Management (PPFM), which were an international standard, and insisting that the process be transparent. This related to vested versus non vested bonuses. If an insurance company found that it was not getting a good return on assets, and would struggle to meet its guarantees, it would retract the non-vested bonuses. Most insurers, knowing that this would cause unhappiness among policyholders would rather try to use shareholder funds as a buffer, but they were legally entitled to claw back vested bonuses
The same arguments would apply as to restriction on payments of dividends. The solvency standard was judged as liabilities-plus-buffer. The SA would now be required to certify that the company, in paying a dividend, would not be causing itself to dip below the standard. The amendment was intended to close the gaps.

Mr M Swart (DA) said that there would be an obligation on short term insurers to appoint actuaries. They tended to be conservative. He asked if there had been any study on the effect such appointments, bringing the risk of a more conservative approach,  were likely to have on the premiums paid by short term insurers.

Mr Clarke said that this was already covered in the LTIA, and it was considered desirable to bring the STIA in line. The FSB would like to have an economic impact study on the whole FCR principles before making final proposals on a move to the FCR system. These amendments were introducing an enabling provision for this type of process.

Ms N Mokoto (ANC) asked what the effects of the amendments would be on insurance schemes not run by formal insurance companies, such as general dealers who sold air time and general insurance products.

Mr Clarke said it would be necessary to decide in which capacity the seller was acting; whether as broker or underwriter. Where he was acting as n intermediary - only selling but having no obligation to pay claims - then he would be regulated under the Financial Advisory and Intermediary Services Act (FAIS). However, some funeral directors would sell the product, ostensibly as an intermediary, but would not pay over the premiums, instead keeping the premiums to meet subsequent claims, so in that sense they were self-underwriting as they paid from the retained funds. They would escape the solvency requirements. This, however, was unregistered and illegal insurance business and the FSB was clamping down on it.

Ms Mokoto asked why the discretion of appointing and removing actuaries was left to the Registrar.

Mr Clarke explained that the actuaries played an important role in the overall regulatory framework, picking up potential financial problems. The Registrar must be confident that the person selected by the company was fit and proper, and was competent to do the job.

Mr K Moloto(ANC) asked if there were transitional mechanisms, and what they would be.

Mr Clarke said that the amendments were not yet approving a move to FCR, but they would put in place enabling provisions in anticipation of a future move to FCR, some years into the future, after thorough consultation with the industry. FCR was similar to the introduction of Basel II for banks, as it introduced risk-sensitive approaches to measuring the capital that a short term insurer would need to hold against the risks. Basel II had allowed for a two to three year process for the banks, and there was an intensive process of regulations. A similar process would be involved here, and it would probably also take two to three years.

Mr N Singh (IFP) asked if funeral policies could be distinguished from funeral schemes, where directors of funeral services would take a monthly charge, and if they would be covered. He noted that these schemes were open to a lot of abuse, especially in those communities where funerals must take place within 24 hours. He was pleased to see the amendment to say that there should be a monetary benefit, since otherwise families would feel obliged to use the services of a particular funeral director who had sold the policy.

Ms Gibson explained that the amendments did not include burial schemes. She said that there was a broader process around abuses in the funeral business, as NT was looking to an overhaul of the entire space to ensure better consumer protection, extending to "micro insurance". There had been a discussion paper released on the future of micro insurance, proposing regulation and greater protection for consumers of these products. She added that a burial scheme was distinguished from an assistance policy because schemes were often informal, arising out of community groupings, and usually were done on the basis of trust between the members. They were similar to stokvel arrangements and were not really insurance, but instead a group savings arrangement. There was an expectation that savings would be used to meet the costs, but no formal promise was given, as would apply to insurance. These schemes tended to work well where there was trust within a small group. Regulation would not be able to address all the potential problems, and as the groups became larger so did the risk of problems. The micro insurance proposals would provide a way for the larger schemes to migrate to more formal arrangements, and also for funeral directors currently doing unregistered business to migrate. Part of the challenge was to enable more accessible formal arrangements.

Mr Momoniat added that there was a range of consumer issues, and although the Bill would not be dealing with these, NT was aware of them and was attending to them. Comments on the paper would be appreciated.

Mr Singh enquired, in relation to clause 23, whether the Minister of Finance should not be acting “in consultation with” rather than “after consultation” with the Minister of Health.

Mr Momoniat responded that NT was still looking further into the demarcations, and it was likely that “in consultation” could be used. 

Mr Singh asked why assessors should not continue to be used, and why actuaries had to be appointed.

Mr Clarke said that not all insurers would be required to appoint actuaries. This provision was inserted as one of the provisions that would, in time, enable the potential introduction of FCR.  Insurance companies would be able to use FCR principles to calculate their risk exposure. If they did so, they were at a different level, and would require actuarial skills. If they did not choose to take that route they would not need to appoint actuaries. Short term insurers would continue to use assessors to assess damages, whereas the actuaries tended to do projections into possible claims and future scenarios. *

Dr George noted that this was complex legislation. He wondered if this Committee would be able to deal with it in a suitable manner.

The Chairperson said that this Committee should probably engage with the Portfolio Committee on Health. He noted also that the Minister had signed a statement of intent recently, and that the Committee would be proceeding to public hearings.

Financial Management of Parliament Bill (the Bill)
Mr M Nene (ANC, Chairperson of Portfolio Committee) welcomed Members of the Joint Budget Committee and the Select Committee on Finance. He summarised that the Portfolio Committee had requested that the references to the Public Finance Management Act (PFMA) be removed from the Bill. National Treasury would be making a submission on the Bill on Friday.

Adv Frank Jenkins, Parliamentary Legal Advisor, dealt with the clauses that had been changed in line with the Committee’s request. In Clause 1, the textual references to the PFMA had been removed from the definition of "annual National budgets"

Clause 16 contained a substantial amendment. This clause stated that the draft budget must be drawn ten months prior to the start of the financial year. It had stated that it must be in the format under Section 76 of the PFMA, which in turn obliged compliance with a format prescribed by the Executive arm of government. The concerns of this Committee had been that parliament should not, because of the separation of powers, be dictated to by the Executive. Parliament’s own executive authority was the Speaker and Chairperson. However, he pointed out that the present PFMA, in section 3(2) noted that format prescription was a regulatory function of Parliament's Treasury (which was the Speaker and Chairperson acting jointly). The references to the PFMA had again been removed, and replaced with "the format prescribed by the Executive Authority".

Clause 17 referred to submission of draft plans and budget. Clause 17(2) had said that the Executive Authority was to determine a process for submitting Parliament's budget. There was therefore shared responsibility. The words "after consultation" had been used to show that although the Minister of Finance would be consulted, the Executive of Parliament would retain the power.

Similar amendments were made in respect of clause 17(2)(c), where the references to "a date agreed to with the Minister of Finance" had been removed. The question then remained by what date this should be submitted. That would be covered by (a), which required determination of a process, and such process should include a decision on the date. He stressed that there was no system for politicking: this was an administrative issue since if National Treasury informed Parliament of time lines, it would cause difficulties if Parliament did not comply. This could be compared to the position where Parliament asked that legislation be submitted by a certain date in order to get it processed. It was obviously in the interests of parliament to comply with time frames but this was not necessarily appropriate to put this in legislation.

Clause 18(2)(a) had also deleted the reference to the PFMA, as the national adjustments budget was clear enough to stand on its own.

Clause 29 had similar provisions. At the moment the Executive Authority must, "in consultation with the Minister of Finance" determine a process. The decision making power was shared. Proceeding from the Constitutional position that Parliament was in control of its own budget process, it would be preferable to use the words "after consultation".

Clause 40 related to the Supply Chain Management Policy. An amendment had been made to 40(f), where the reference to the "supply chain management framework issued in terms of the PFMA" was to be removed. The Executive should prescribe a supply chain management policy, but it would be unduly limiting to question whether it was consistent with the policy under the PFMA. Those supply chain management issues were covered in the regulations to the PFMA, which were not approved by Parliament.

Adv Jenkins said that when working with Parliament, there was much more detail in the legislation. Parliament would be its own Treasury, but must be bound by legislative provisions. The PFMA system created the National Treasury, which then provided for issues like supply chain management by way of regulations. The legislation of Parliament must exhibit a different type of discipline, under which more details would be put in the main body of the Act, thus being more transparent, with less detail being put into the regulations. 

Clause 47 related to the audits committee. This was determined partly in the regulations to the PFMA. The way it was worded currently would take the authority away from Parliament's Treasury, and so he proposed that the “Executive Authority “ (not the Minister of Finance) must determine the terms of appointment.

Clause 50 dealt with the internal audit unit. The PFMA required the accounting officer to establish a system, and the rest was captured in the PFMA regulations. Adv Jenkins, referring to his earlier comments about what should be in the main body of legislation,  and what in the regulations, proposed that the internal audit unit of Parliament be provided for in the Bill in greater detail, for the purposes of transparency. Some provinces did not have this capacity, and some outsourced or shared the functions. The standards should be established by the Executive Authority.

Clause 56 followed the same principle in relation to the annual financial statements and their format. He pointed out that perhaps a budget office would need to be established. Parliament did have certain structures already, but these would probably need to be strengthened.

Clause 64 currently referred to compliance with requests by National Treasury, amongst others. He was not sure what the NT would request from the Accounting Officer, and whether it was desirable to have such a broad statement. He suggested that the reference to the National Treasury be deleted, unless further information on the rationale could be given.

Clause 72 had been deleted in its entirety. This had dealt with the obligation of Parliament to comply with the PFMA, to the extent that this obligation was imposed. The PFMA, however, set out that it would only apply to Parliament in certain defined circumstances. The Committee had wanted to separate out the two pieces of legislation and remove the cross referencing. The deletion proposed to Clause 72 would be coupled with the original published wording, which repealed portions of sections 3 and 8 of the PFMA, the sections referring to Parliament. Clause 73 of the Committee’s original draft had dealt with the repeal of legislation.

Adv Jenkins noted, under the title provisions, that the Act would bear a 2008 date.

Finally, he noted that in Schedule 1, there were various instances in which the references to the PFMA were removed in relation to the provinces. In (k) the words "Accounting Standards Board" were removed, as this Board was appointed by the Minister, and was thus an executive function falling into the domain of legislative proceedings and procedure.

Mr Nene asked where the definition of the Executive Authority of Parliament was derived; whether from the Constitution or the PFMA.

Adv Jenkins said that Clause 3(2) of the PFMA set out the institutions to which this Act applied. This clause noted that “to the extent indicated in the Act” the PFMA would apply to Parliament, but that any controlling or supervisory functions of National Treasury would be performed by the Speaker and the Chairperson. The PFMA applied in only limited ways to Parliament, and Parliament abided by the spirit of it although perhaps not necessarily obliged to do so.

Although “Executive Authority” was referred to in the PFMA, it did not derive from it but from the parliamentary legislation, which, after 1994, had been interpreted to mean that references to “the Speaker” meant the presiding officers of the NA and NCOP, acting jointly. The nature of the Executive Authority in parliament differed from that of government departments. The Executive of government departments had official functions, but were subject to the authority of the houses, and could be removed by them. Only the President could remove a Minister, and the Cabinet could be removed by Parliament. He did not see any problem with the terms, but they had not been used in the context of parliament.

Ms J Fubbs (ANC) said that reference to the Executive Authority included a list of executive members, including the national public entities and Cabinet Members. There was also reference to the provinces. However, she queried where the PFMA referred to Parliament. The Constitution referred to Parliament and the Executive authority under Chapter 5, in the financial clauses, but there was an indication that the Joint Rules of Parliament were effectively covered by the Constitution. She was not sure whether those Rules defined the Executive Authority. She asked if the Constitution implied that the Joint Rules of Parliament would then govern this.

Mr B Mnguni (ANC) recalled that the reference to the Executive Authority came from a governance document issued some years ago.

Adv Jenkins added that this had been contained in the Financial Powers and Privileges of Parliament legislation.  He did not think it was defined in the Joint Rules. The old legislation governing Parliament had defined the Executive Authority as the Speaker; and now this was interpreted to mean the Speaker of the NA and Chairperson of the NCOP together. 

Mr T Ralane (ANC, Free State, Chairperson of the Select Committee on Finance) congratulated the Portfolio Committee for the work it had done. He said that the Select Committee would have a problem in dealing with this in isolation, because this would imply that the NCOP would be rubber stamping the Bill. During the previous consideration of this Bill there had also been discussions on a framework that would assist provinces to deal with the matter. If the Select Committee was to decide that provincial legislatures should be included, then this would mean changing all the references to parliament to reflect "legislatures". The NCOP Committee could have problems with legislation that used limiting terms as "the Minister of Finance" without reference also to the MECs of Finance. He said that perhaps the term "Parliament and legislatures" should be used, so that the title would be “The Financial Management of Parliament and Legislatures Bill”.

Mr Nene commented that the difficulty with this legislation was that it had been "on the shelf" for too long; the main product dated back to 2006. There had been some legal opinions as to whether parliament could legislate for provinces, and Schedule 1 was the result of the previous engagements between the provinces. He had joined this Committee only when the discussions around this Bill had been quite advanced. One of the reasons why the Bill was not passed then was that the NCOP would still have to have its say. If the Select Committee needed go back and consult in the provinces, then it should be give the opportunity to do so. He was not sure whether the Financial and Fiscal Commission (FFC) had dealt with this, as it would normally do.

Mr Moloto said that Mr Ralane had raised a complex issue that should perhaps be dealt with later. One complication would be that every legislature would have its own legislation, and consideration would need to be given to how that could be monitored. Some of the finer details might negate the "norms and standards" in the Schedule.

Adv Jenkins noted that in 2006 the provinces had indicated that they wanted more detail in the Bill. There was a real concern that they might draft their own legislation. From a legal point of view, he doubted whether they had the Constitutional authority to make their own arrangements, although he said that other legal advisors may hold a different opinion.

Mr Ralane agreed that part of the bigger challenge was that this legislation should not be rushed through, lest it did create problems in the provinces. Issues of consistency were very important.

Mr Moloto was concerned about the preparation of a budget in compliance with a format prescribed by the Executive Authority. Whilst he did not wish to suggest that power should not rest with Parliament, he pointed out that the PFMA did have certain consistent formats, and he wondered whether a prescribed format would compromise Parliament, and whether departure from prescribed formats would compromise the ability to exercise oversight, or whether problems might arise when National Treasury tried to consolidate accounts if the formats did not correlate. He understood and respected the separation of powers, but cautioned that the “positive aspects” of the PFMA baby should not be thrown out with the bathwater.

Ms Fubbs asked about the references to the annual and adjustments budgets. The PFMA, in Section 27, said that the minister "must" table the annual budget. However, Section 40 took a different approach, in relation to the adjustment budget, in which the word "may" was used. She asked which would apply, and whether the Joint Rules would override this.

Ms Fubbs noted that in Clause 64 National Treasury requests had been included. The requests for documents by National Treasury were not really a constitutional issue nor had anything to do with separation of powers. The Constitution implied that all agencies or departments receiving funds must take the economy of the country into account. It was theoretically possible to have a situation in which Parliament could tell Treasury that it was not sure what it would be requisitioning, then there could be a drop in the economy, and then Parliament could ask for a huge amount. This would give rise to a practical difficulty, since Parliament would be legally entitled to make the request, and did not require the agreement of Treasury, as the wording would be “after consultation”. She cautioned against constitutional crises arising out of sloppy legislation.

Adv Jenkins agreed that the hypothetical example would result in a Constitutional crisis; only the Minister of finance could introduce a money bill. It was a healthy democratic battle, but could lead to crisis, as seen in America, if not resolved.

Mr Marais asked about the "in consultation" and "after consultation" and asked if problems had already been experienced, or were foreseen. It was envisaged that the approval of the Minister was not required, and National Treasury must do what it was instructed to do, yet the Minister would eventually be held accountable. The Minister did not have to agree to a date, in terms of the proposed amendments, and Parliament could deal with the process. This could impact on financial management via Treasury. He asked how this would enhance separation of powers and financial management. The Executive Authority was very subjective, and was not obliged to have structures or do certain things, and he was not sure that this was the intention.

Mr E Sogoni (ANC, Gauteng) commented that the NCOP committee had been concerned about other matters, which had not been raised today. He thought that there might be some inconsistencies with the reference sometimes to "Executive Authority" and elsewhere to “Oversight Authority”. This needed to be clarified. He did not see requirements for quarterly reports, and wondered if these were necessary. He was concerned about what process the Committees should follow.

Adv Jenkins said that the Bill did have provision for monthly and annual reports and the reporting function was set out. In regard to the process, he said that the administration must draft the budget, and present it to the Executive Authority, who would table it and refer it to a Joint Committee. That Joint Committee would report on it and the houses would then have to adopt the budget.

Mr Nene said that the brief to Adv Jenkins had been simply to clean up the referencing to the PFMA, which he had done. The process was to be re-opened, and NT would be making a submission on Friday. Only after that could the Committees decide how to take the process forward. The previous process had been suspended for the NCOP to deal with the Bill, after this Committee had gone through clause by clause, and reached the point where it was about to adopt the Bill. That process had been re-opened, and perhaps, now that the Bill had been cleaned up, more input would be given. The Bill had been available, and should the FFC or others wish to comment, then it would be accepted. He suggested that the detailed answers to questions could stand over until after the National Treasury submission.

Mr Singh supported this. The intention of the PFMA was to ensure good financial management, and he thought, personally, that there was no objection to having the PFMA apply to any body.

Ms L Mabe (Chairperson, Joint Budget Committee) said that she was strongly in favour of separation of powers, and would not be comfortable that Parliament must subscribe to PFMA. She appreciated the clarification on the process. The provinces could not be left out in the cold and there must be consultation. She asked to whom the audit committee would be accountable and noted that this must be clarified.

Adv Jenkins gave a broad response to the issues raised. The issue of provincial legislatures had been discussed by the legal advisors. The Constitution said that a bill with "any provision" that affected the financial interests of provinces must be a Section 76 Bill, and that would include, to his mind, the norms and standards. The alternative would be to have a Section 75 bill to provide only for Parliament, and then have a separate Section 76 Bill applicable to the provinces, with the two to be combined later. This was similar to what had been done with the PFMA.

Adv Jenkins said that the oversight mechanisms created would need to be considered. The Committee on Public Accounts was a National Assembly committee - and the question was whether NCOP approved that the audit reports go through this Committee, or whether they wished to consider them also in the NCOP.

The questions of the format of accounts and whether this would infringe of separation of powers were academic questions, although it was possible that what the format could prescribe – such as a requirement for audit – could be an infringement.

It was in the nature of parliament that the Executive Authority would be subjective. A Government department, in order to receive money, required approval from National Treasury. Parliament doubled up as the Treasury of itself. However, Parliament consisted of multiple parties, and this gave the opportunity for questioning, raising matters and speaking to the media. If Parliament abused its power the five year election cycle was the ultimate power of the public.

The open part of the meeting was adjourned.

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