Further Comments by David Wilkie on the proposed Charter for the “CAP”

(see here, here, here, here, here and here for Parts 1, 2, 3, 4, 5 and 6 of David’s previous comments on the proposed new Charter, or click the Charter tag at the top of this article to see all articles related to the Charter)

This is a suggestion that would apply to both existing and proposed charters, and which I think deserves consideration

Unlimited liability

I discovered only recently that the members of the Faculty and the Institute, and presumably also those of the new body, do not have limited liability.  If any of those bodies run into debt, members are obliged, to the extent of their wealth, to pay those debts.  Others may have been aware of this for a long time.

I hope that this is an unlikely event, but we are all being expected to consider unlikely events for the financial institutions we advise, so we should also do so for our own institution.  I have never heard of this being thought about before, so there are many uncertainties.

I suppose the liability is joint and several, so that if poor members can’t pay, wealthy ones would have to.  Is this correct?

Who, exactly would be liable?  In the Faculty the members are Fellows, Associates and Honorary Fellows (Rule 1).  Students and Affiliates are not members.  I suppose that all members would be liable for any debts, though in the first place contributions would presumably be levied in some way proportional to present subscription levels.  Honorary Fellows pay no subscriptions, but I don’t expect that many of them thought of the liability aspect when they agreed to join.

All Faculty members have votes, and non-members do not.  This would match their liability, and seems fair.  (Incidentally, I notice that, according to Clause 1 of the proposed Charter, Faculty Affiliates are not transferred to the new body; only members and students are; is this intentional, or an oversight?)

In the case of the Institute it is more complicated.  Members include all five categories: Fellows, Associates, Students, Honorary Fellows and Affiliates (Charter Clause 14).  So I suppose all would be liable.  Honorary Fellows cannot be asked to pay subscriptions (Clause 22), would they be exempt from any liability for debts?

Not all members have votes.  Fellows have votes in effectively all cases (Clause 24).  Associates have votes in most cases (Clause 25).  Students normally have no votes (Clause 26, but could have if the Byelaws allowed – which at present they do not; see Byelaw 41).  Honorary Fellows and Affiliates have no votes (Clause 27, repeated in Byelaw 44).

This is much the same in the proposed charter (Byelaw 37), except that Honorary Fellows there would have the right to vote, and Students would in no circumstances have the right to vote.

Votes for financial matters

Would it not be reasonable, however, that all members who would have (even in exceptional circumstances) a liability to pay any of the debts of the body, should have the right to vote on all financial matters?  The matters at present that I would call financial are:  approving the Accounts, appointing the Auditors, and Byelaws and Regulations relating to fees and subscriptions.

An alternative would be to structure the body on Faculty lines so that Students and Affiliates are not members and it is made clear that they would have no liability.

Investment Regulations

The immediate risk to both the Faculty and the Institute, and to the new body, is through the pension fund.  I leave others to comment on that.  Any deficit that had to be paid would probably be a small number of times the annual subscription per member, so although it would be nasty, it would not be catastrophic.

I have in mind a much worse possible disaster.  We might at some stage have a Treasurer who was a follower of Nick Leeson’s approach, and was able, perhaps with others whom he could persuade to assist, to “invest” in such a way as to turn the assets of the body from say a positive £20 million to a negative £2,000 million.  This may seem unlikely, but I have no doubt that the Directors of Barings Bank thought that Leeson’s actions were also unlikely.

What we should have are a number of Regulations, approved by members, and changeable only by a vote of members, to control how the body may invest. I would not expect that these would in any way constrain the present investment policy, but they would avoid an improper one.  Or if they did constrain the present policy, I would be worried about whether it was appropriate.

A first suggestion would be on the following lines, changes to which would need the approval of members:
(a)    No borrowing or overdrafts;
(b)    No entering into investment contracts that are, or could be, liabilities (so no writing of options, or futures, forwards, swaps, contracts for differences; also no partly paid shares, shares of unlimited liability companies, investment in unlimited liability hedge funds);
(c)    Investment only in “safe” securities and contracts, such as:
UK government bonds
UK corporate bonds of a suitable grade (at least at the time of purchase);
Shares in UK listed companies, with a suitably wide definition, which could include overseas companies listed on the LSE; and perhaps AIM companies;
Deposits with UK banks;
and others as appropriate, but without going too far.
(d)    In all cases limits on the percentage deposited with or invested in or lent to any one company (as insurance companies have or used to have).

Such regulations need to be designed that they do not constrain sensible investment of the body’s funds, without being excessively prudent, but clearly avoiding the possibility of the investments becoming liabilities, and preferably avoiding catastrophic losses of the assets.  Such Regulations would also be subject to votes of all members, including Students and Affiliates.

I think that this is worth considering.

David Wilkie, FFA, FIA
21 June 2009, 11.15 a.m.