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Regulator wins battle for control at medical scheme

07 June 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

It takes time to resolve regulatory disputes in the financial services space. The ‘battle’ between the Council for Medical Schemes (CMS) and Bonitas Medical Fund (Bonitas) is a case in point. Almost two years have passed since the 16 July 2009 CMS press release to quell industry fears over investigations into Bonitas and its administrator, Medscheme Holdings (Pty) Ltd (Medscheme). This release followed the regulator’s Johannesburg High Court application, lodged a week earlier, to investigate various governance concerns at the scheme and its administrator.

The CMS assured healthcare brokers and beneficiaries that the scheme was stable and financially sound. At the time the scheme had more than 566 000 beneficiaries and boasted a solvency ratio of 45%, well above the 25% reserve set out in the Medical Schemes Act (Act 131 of 1998). By the end of 2009 Bonitas had more than 650 000 beneficiaries and a solvency ratio of 35.7%. And Bonitas’ 2010 audited financial results saw year-on-year surpluses increase sharply by more than R500-million and the solvency ratio strengthen to 36.5%.

A protracted battle!

A few months after the July 2009 press (on 26 January 2010) the acting Registrar of Medical Schemes, Craig Burton-Durham, approached the South Gauteng High Court in Johannesburg asking for an urgent hearing to place Bonitas under curatorship. The court was expected to hear the matter on 9 March 2010, but Bonitas opposed the application and approached the CMS with a proposal to settle the matter out of court. The CMS responded with a counter-offer which Bonitas subsequently rejected! At this stage Medscheme entered the fray by requesting the court to disregard the CMS inspection report...

In a press release dated 16 April 2010 the CMS said that its initial investigation – as outlined in the inspection report – detailed a number of governance irregularities at Bonitas. These included:

1. Material irregularities in the governance of the scheme – Bonitas was not run as prescribed in the Medical Schemes Act or in its own registered rules.

2. The Board of Trustees was neither fit nor proper to manage or control the affairs of the Scheme.

3. The Board also:

3.1. did not appreciate the nature and extent of its duties;

3.2. did not discharge its functions;

3.3. did not act with the necessary care, diligence, and skill required by the Medical Schemes Act;

3.4. failed to act when action was required;

3.5. never had proper control of the scheme;

3.6. had been negligent;

3.7. had breached its fiduciary duties towards the scheme and its beneficiaries;

3.8. had contravened various provisions of the Medical Schemes Act as well as the rules of the scheme; and

3.9. failed to protect the interests of beneficiaries.

At the time the registrar stated: “The CMS remains of the opinion that the governance structure at Bonitas is fundamentally flawed and that the Board should be removed. We believe it is necessary, desirable, and in the best interests of the beneficiaries of the scheme to appoint a curator at Bonitas to address the problems at the scheme and introduce good corporate governance!”

Winding the clock forward another 14 months

It seems the feuding parties have finally settled the matter. In their Press Release 3 of 2011, dated 1 June, the CMS announced that their application for curatorship had been granted and that a settlement agreement had been reached with Bonitas. The South Gauteng High Court appointed Joseph Maluleke as the curator of the medical scheme on 27 May 2011. “This is a victory for the regulator but more importantly, for the hundreds of thousands of Bonitas beneficiaries and their families,” said Dr Monwabisi Gantsho, Registrar and Chief Executive of the CMS. “We can all rest assured that the problems which had been plaguing the medical scheme are being addressed in a concrete way!” In granting the curatorship order Mr Justice Nigel Willis emphasised that he was not placing the Scheme under curatorship due to financial or other difficulties, but to regularise the governance of Bonitas.

Effectively the scheme’s Board of Trustees and acting Principal Officer have been removed from office and replaced by the curator. These office bearers have been barred from acting as trustees or Principal Officers “ever again”. The good news is that all the parties to the settlement agreement, concluded and made an order of the Court on 27 May 2011, have withdrawn their legal processes against one another. This agreement frees up Maluleke to operate the scheme in accordance with the Medical Schemes Act and go about electing a new Board of Trustees and restoring proper governance structures to the scheme. Acting Principal Officer, Gerhard van Emmenis, will revert to his former position of Chief Operating Officer.

Advice to medical schemes brokers

The CMS had the following advice for medical schemes brokers. “Brokers are advised to act with restraint. Any advice they give must accord with the principles of best advice, have the best interests of their clients at heart, and be based on a proper assessment of the situation. As financial advisors, brokers are also reminded of the Financial Services Board (FSB) legislation which clearly stipulates that consumers are entitled to best – independent – advice at all times.” After reading this paragraph we asked the CMS and the FSB whether there was any reason for medical schemes brokers NOT to introduce new business to the Bonitas medical fund.

The CMS advises: “Throughout our communication endeavours on the Bonitas matter, including our latest press release, we have emphasised that the scheme is financially sound and perfectly capable of paying out claims. The CMS does not believe there is any reason why brokers should not bring new business to the scheme, bearing in mind that consumers are entitled to best and independent advice, as stipulated in our latest press statement.” They added that Bonitas remains as solid and viable a business under curatorship as before the application.

And the carefully worded response from Logan Ramalu, Client Liaison Officer: Communication & Liaison Department at the FSB, reads: “We do not prescribe as to which product is suitable in a specific sector, because to do so would indicate partiality towards products. However, to our understanding, the dispute between the Office of the Registrar of Medical Schemes and Bonitas has been settled. Given the financial soundness of Bonitas, any member of its scheme has more than adequate protection. So provided the intermediary or advisor on medical health benefits adheres to the requirements in terms of the FAIS regulatory framework, there is no reason for them not to offer products of Bonitas Medical Scheme to their clients.”

Editor’s thoughts: The 27 May 2011 settlement seems to have put the Bonitas / CMS debacle to rest. Do you think that the legal wrangle between Bonitas and the CMS has hurt the scheme over the past two years? Please add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Ricky, 08 Jun 2011
When two elephants fight grass gets bruised. There is not doubt in my mind that a battle of this nature would leave the scheme unscathed. This will etch some doubt in the minds of the members going forward and as Bonitas member I sincerely hope the dust is settled for good and the the curator will be given sufficent space and resorces to place the scheme on a solid governance footing moving forward. As a survivor of the previos scheme that folde up, I remain positive about the future.
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Added by Cynical Simon., 07 Jun 2011
Not so much the legal wrangle as the obvious lack of skills at board and management level has done damage to the scheme. I would be sure not to bring any new business to this entity and in fact I will move existing clients.
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Added by Pretenders, 07 Jun 2011
Bonitas might be financialy sound and on paper looks good value for money, but their service is diabolical. All the good about them is plunged into dispair trying to get a claim paid or get some sort of intelligent answers. They are pretenders in the medical scheme arena and do not desreve to be around.
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