CIRCULAR 38 Personal Medical Savings Accounts

1. CIRCULAR 38Personal Medical Savings Accounts SAICA SUBMISION TO CMS

2. BACKGROUND • Section 30(1)(e) rules may make provision for PMSA • Regulation 10(3) PMSA funds for exclusive benefit for member and dependants • Schemes kept details of individual member PMSA accounts • All monies and income pooled with risk/scheme investment programmes

3. OMNIHEALTH CASE -2007 • Liquidation scenario • PMSA constitute trust money as defined in the Financial Institutions Act (Protection of Funds) Act 28 of 2001 • Interest accrued on these PMSA amounts must be paid to members • If members cannot be located then balance on PMSA to be paid into Guardians Fund.

4. LEGAL CONSIDERATIONS • Who is the legal entity holding the account? • Is there envisaged a separate vehicle to house the trust bank account? • Omnihealth PMSA monies constitute “trust property” • Up to now the impact of the case - PMSA claims have preference in liquidation • CMS disagrees as per circular 38

5. TRUST PROPERTY • Financial Institutions (Protection of Funds)Act 28 of 2001 • Any corporeal or incorporeal, movable or immovable asset invested, held, kept in safe custody, controlled, administered or alienated by any person, partnership, company or trust for or on behalf of, another person, partnership, company or trust, and such other person, partnership, company or trust is hereinafter referred to as the principal;

6. TRUST PROPERTY • Trust Property Control Act 57 of 1988 • Trust property or property means movable or immovable property, and includes contingent interests in property, which in accordance with the provisions of a trust instrument are to be administered or disposed of by a trustee.

7. TRUST INSTRUMENT • Trust Property Act • Trust instrument means a written agreement or a testamentary writing or a court order according to which a trust was created. • The rules become a trust instrument?

8. ACCOUNTABLE INSTITUTION • Section 43B of the Financial Intelligence Centre Act requires accountable institutions to register with the Financial Intelligence Centre. • A board of executors or a trust company or any other person that invests, keeps in safe custody, controls or administers trust property within the meaning of the Trust Property Control Act

9. TRUSTEE REGISTRATION • Financial Intelligence Centre Act • Does this mean that trustees will have to register with the Centre? • SAICA seeks CMS view on this!!

10. ACCOUNTABLE INSTITUTION • FIA Act • Refers to FSB Act 1990 Financial institution is defined as “ 1(b)any Medical Scheme contemplated in section 1 of the Medical Schemes Act 131 of 1998”

11. DEPOSIT TAKING INSTITUTION • As the scheme receives monies from members and pays them into a bank account does this not mean that the Banks Act 94 of 1990 applies?

12. REQUESTS FOR CLARITY • Just a bank account –or- a separate entity to house the bank account? • Does the Financial Institutions (Protection of Funds) Act 28 of 2001 apply? • Does the Financial Intelligence Centre Act No 38 of 2001 apply? • Do the provisions of the Trust Act apply? • If not which acts should be complied with, if any?

13. ACCOUNTING ISSUES • PMSA trust monies are not scheme assets nor are the sums due to members liabilities. • Therefore not included in either Statement of Financial Position or Statement of Comprehensive Income • Details to be reflected as notes for information of members

14. ACCOUNTING ISSUES • Raises questions regarding IFRS disclosures • and Auditor obligations in their Audit Reports. • The scheme does not receive any reward or flow of economic benefits from the trust monies. Trust principles should be applied. Not a combination of IFRS and trust monies as is currently proposed.

15. ACCOUNTING ISSUES • PMSA to be derecognised as it will be administered as a separate trust account. • Two contracts required • Insurance contract for risk component • Savings contract for PMSA component • Transfer of significant risks and rewards from scheme to beneficiaries of the trust account • Derecognised applies with entries ito IAS39

16. ACCOUNTING ISSUES • We need to understand the implications of IAS32 on the disclosure of the transfer of funds to and from the trust account. • Do we recognise the asset and liability in the Statement of Financial Position at 31 December 2011 and derecognise them on the 1st January 2012? • Is this an error or change in accounting policies?

17. ACCOUNTING ISSUES • Calculation of trust investment income and direct expenses and the allocation to members PMSA accounts requires system changes. • Rule changes will also be required.

18. SOLVENCY • CMS requires solvency ratio to be determined on gross annual contributions inclusive of savings portion despite the fact that PMSA credits are secured by a Trust investment.

19. GUARDIANS FUND • Contradiction between Circular 41 of 2006 and Circular 38 of 2011 regarding payments to Guardians Fund. • Proposal that CMS consider establishing a controlled fund to receive unclaimed savings amounts similar to the Unclaimed Benefits Fund in the pension fund industry.

20. EFFECT ON OPERATIONS • Cash flows • Savings receipts • Claims from savings • Advances to members against savings • Investment strategy • Costs • Audit • Scheme rules • Effective date and extension applications

21. INTEREST CHARGE ON PMSA “ADVANCES TO MEMBERS” • Interest charges to off set costs • Rules must allow • Does NCA apply? • If so FICA documentation for each member required.

22. QUESTIONS