27 May How to best manage a community scheme’s funds and investments
As a body corporate cannot function without funds, managing the scheme’s funds is one of the most important responsibilities the trustees have.
While the trustees make decisions on how and when the funds must be allocated, they do not actually manage the funds themselves – this function falls on the managing agent. This is where problems sometimes arise and it is also why trustees must stay on top of how their funds are being managed.
What are the pitfalls of managing the scheme’s funds and what trustees must look out for?
The role of the managing agent
The managing agent’s role is to assist the trustees in their responsibilities and to provide an administrative service which includes tasks like keeping a record of all scheme documents such as minutes of meetings, resolutions, plans and most importantly, the management of the scheme’s funds.
Most of the banks in South Africa do not have very attractive products when it comes to interest earning current accounts; generally, no interest is earned on positive bank balances.
The Prescribed Management Rules contained in the Sectional Title Schemes Management Act (STSMA) requires that funds are held in an interest bearing account. Although interest can be earned on a trust account, the interest accrued is not always distributed to the respective schemes.
Not all managing agents operate in the same manner in terms of how they manage the funds and where it is being kept. Some managing agents receive the funds in one central trust account and have separate sub-accounts linked to the trust account. The surplus funds of each scheme are then transferred to the linked accounts.
Other managing agents choose to have independent call accounts where surplus funds are transferred. In both instances – linked and call accounts – interest is earned on the balances in the accounts.
The preferred way of managing a scheme’s funds is to have individual bank accounts for each scheme under management. This provides far better transparency to the scheme trustees and is easier to manage from an accounting perspective.
The role of the trustees
Unless a scheme is self-managed, the trustees will not attend to the payments of service providers. The trustees will give instructions to the managing agent to make payment of invoices on their behalf and check that it has been done correctly.
The body corporate can decide how to invest the funds of the scheme and this process does not involve the managing agent except for when they need to transfer the funds.
There are a number of products and institutions where the body corporate can elect to invest their scheme’s surplus funds. These types of investments can only be made once a written majority resolution by the trustees has been signed.
Prescribed management Rule 3 (d) states that the trustees may:
“…invest any moneys in the reserve fund referred to in sections 3(1)(b) of the Act in a secure investment with any institution referred to in the definition of “financial institution” in section 1 of the Financial Services Board Act, 1990 (Act No. 97 of 1990)”
The list is quite exhaustive with various investment options available from attorneys that can manage individual accounts to investment brokers.
Summary
When appointing a managing agent for their scheme, the trustees must – as part of their due diligence – check how the managing agent will manage the funds of their scheme. This will allow them to assess whether they will be compliant with the Prescribed Rules of the STSMA.
A further important item to check with their managing agent is to have them provide copies of their company fidelity and indemnity insurance cover. This cover will protect the managing agent and as well as the body corporate should their funds be misappropriated.
Before making any investment decisions, it will be prudent for trustees to discuss their options with a financial investment specialist. This will avoid a situation where the scheme’s funds are invested in high-risk products that may lead to devastating losses for the scheme.