Francois Barnard and others v The Registrar of Medical Schemes

The Registrar of Medical Schemes applied to place Medshield Medical Scheme (the fourth largest medical scheme in South Africa with approximately 207,000 beneficiaries) under curatorship. The application was brought in terms of s 56 of the Medical Schemes Act 131 of 1998 and s 5(1) and (2) of the Financial Institutions (Protection of Funds) Act 28 of 2001. The Registrar raised concerns about material irregularities in the scheme's governance, including: (1) unlawful broker management agreements with Medshield Broker (Pty) Ltd that contravened s 65(6) of the MS Act by compensating brokers indirectly; (2) improper payment of approximately R28 million in 'research fees' to brokers via intermediaries, exceeding prescribed maximum fees; (3) appointment of the BOT chairperson who was not a member at the time of election, contravening scheme rules; (4) appointment of the BOT chairperson as CEO, creating incompatible dual roles; (5) contracts with MDS and then Sapling (valued at R132 million over three years) for distribution services of questionable value; (6) orchestrated election of five trustees in June 2012 using proxies controlled by Sapling representatives, who joined the scheme only shortly before the election; (7) Sapling's indemnification of trustees' legal costs; and (8) the BOT's confrontational stance and refusal to comply with regulatory requirements. The North Gauteng High Court granted a final order of curatorship, which the trustees appealed.

• What constitutes 'material irregularities' justifying the appointment of a curator to a medical scheme under s 56(1) of the Medical Schemes Act 131 of 1998?
• What constitutes 'good cause' for the appointment of a curator under s 5(1) of the Financial Institutions (Protection of Funds) Act 28 of 2001?
• What is the test for determining whether a curator should be appointed to a medical scheme?
• Whether the Registrar was required to pursue less intrusive remedies (such as removal of individual trustees under s 46 of the MS Act) before seeking curatorship?
• Whether the Board of Trustees' conduct constituted material irregularities sufficient to warrant curatorship in the interests of beneficiaries?
• What is the relationship between the subjective opinion of the Registrar and the objective grounds required for curatorship?

The appeal was dismissed with costs, including the costs of two counsel where employed. The final order of curatorship granted by the North Gauteng High Court was confirmed.

A curator may be appointed to a medical scheme under s 56(1) of the Medical Schemes Act 131 of 1998 where the Registrar holds a subjective opinion (on objective grounds) that it is in the interest of beneficiaries or desirable due to material irregularities. Under s 5(1) of the Financial Institutions (Protection of Funds) Act 28 of 2001, good cause for curatorship exists where the court is satisfied that it is desirable to appoint a curator to address identified problems with beneficial consequences for investors/beneficiaries, and there are no preferable alternatives. Material irregularities justifying curatorship include: unlawful contractual arrangements that breach statutory provisions; payments that benefit third parties rather than adding value to the scheme; governance failures including conflicts of interest and compromised independence of trustees; unwillingness to comply with regulatory requirements; and conduct that frustrates regulatory oversight. The interests of beneficiaries are paramount in determining whether curatorship should be ordered. Where a Board of Trustees is compromised and unable to execute its statutory mandate to protect beneficiaries' interests and avoid conflicts of interest, curatorship is appropriate. Less intrusive alternatives need not be pursued where they would be impractical, time-consuming, or ineffective in protecting beneficiaries' interests.

The court observed that the inability or unwillingness of a financial institution to comply with regulatory requirements applicable to protected funds will normally provide a reason for appointing a curator (citing Dynamic Wealth). The court noted that the relationship between the Registrar and the BOT was strained, with both parties blaming each other, but found that objectively the scheme was unwilling to acquiesce properly to regulatory intervention and instead resorted to posturing, frustrating and delaying the investigation. The court commented that the BOT's allegations that the Registrar had ulterior motives and was abusing power were unjustified given the serious concerns raised by the facts. The court noted approvingly that s 5(1) of the FI Act permits ex parte applications for curatorship, and found no prejudice resulted to the trustees who had ample opportunity to oppose. The court expressed concern about the perception created by Sapling's orchestrated election of trustees and indemnification of their legal costs, noting this strengthened the view that the BOT was compromised and would do Sapling's bidding rather than act in the scheme's best interests. The court commented that millions of rand had been diverted to third parties to the financial detriment of beneficiaries, which was particularly disconcerting.

This case is significant in South African medical schemes law as it clarifies the statutory framework and tests for appointing a curator to a medical scheme. It establishes that material irregularities in governance, particularly those involving conflicts of interest, unlawful payments, and regulatory non-compliance, can justify curatorship even where the scheme is financially sound. The judgment emphasizes that the paramount consideration is the protection of beneficiaries' interests. It confirms that curatorship is appropriate where a Board of Trustees is compromised and unable to execute its statutory mandate under s 57(6) of the MS Act to protect beneficiaries' interests, act in good faith, and avoid conflicts of interest. The case also clarifies the interaction between the Medical Schemes Act and the Financial Institutions (Protection of Funds) Act, and demonstrates the court's willingness to intervene decisively where regulatory oversight is frustrated and beneficiaries' funds are at risk. The judgment reinforces the broad powers of the Registrar of Medical Schemes to protect beneficiaries and confirms that less intrusive remedies need not be exhausted where they would be ineffective or impractical.