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The CII v the PFS: separating fact from fiction

“I think the whole thing stinks and one side is clearly lying,” a regional PFS chairman says. It’s hard to see how they’re wrong about current relations between the PFS and the CII. The pair have traded claims and counter claims ever since the CII said it would take control of the PFS board in a dramatic announcement over Christmas. A month later and not much is clearer. Many of the CII’s and PFS’s claims still directly contradict each other. To put it simply: both can’t be right. But how to separate the fact from the fiction? I’ve been on a journey to do just that.

Breach or not?

In its 21 December statement, the CII pointed to no fewer than seven governance failings that justified the decision to give itself a majority on the PFS board. We summarise them as follows:

  • a failure to act in line with the Articles of Association approved by PFS members
  • a lack of collective decision making by the PFS Board
  • the exclusion of Institute-appointed directors from PFS Board meetings and decision-making processes
  • the inappropriate establishment of at least one sub-committee, which is directing work without proper authority from the PFS Board or input from the CII as required under the PFS Board’s Terms of Reference
  • a group of PFS Board members pursuing actions without full Board authority that have led to significant expenditure on external advisers substantially above agreed limits
  • the PFS Board seeking to exclude the CII Group Audit and Risk Committee from oversight of audit and financial statements
  • the PFS Board reappointing expired Board members by co-option rather than rotating the membership of the Board.

A key claim is that the PFS failed to act in line with the Articles of Association by exceeding the number of co-opted directors allowed on its board. Co-opts to the board – those appointed by invitation of the existing members – are permissible under the Articles, up to a maximum of two, though they have no voting rights. (That’s clause 12.4 of the PFS’ Articles of Association, in case you’re interested).

Trouble is, even PFS insiders can’t seem to decide if they breached this.

One told me that elected directors have a maximum term of six years which cannot be extended. To support the change from executive leadership after Keith Richards stepped down, it was agreed that two directors who had completed the maximum term could continue as co-opted directors for a further period to provide continuity. John White and Jonathan Rees stayed on after the PFS AGM in October 2021, they said.

Both were still in post, but the PFS board then allowed Sarah Lord to remain after she had completed her maximum term at the last AGM. While they didn’t need CII permission to appoint co-opted directors, that would still have been a governance breach under the Articles, according to the PFS insider.

They then reflected, and said that when John White officially stepped down at the last AGM and Sarah Lord was voted in to take his place, that technically meant they were not actually in breach — and that the CII directors on the PFS board voted in favour, and so were aware of the situation.

Debates can and are still raging about whether any additional co-opt was justified — a group of past PFS presidents including Caroline Stuart, who resigned in January citing health issues, recently met with the interim CEO of the PFS, Don MacIntyre, according to a person present where such matters were discussed. The rest of the saga remains equally devoid of conclusive evidence, but replete with intrigue.

The CII’s 21 December note cites failed mediation in the run-up to the appointment of the CII directors. Very little further detail has since been given on what form this took and when. As part of her response to the CII’s 21 December salvo, former PFS president Sarah Lord said the PFS “have engaged in mediation at [the CII’s] request” and “conversations were still underway”. But the CII has since said it was the PFS’s decision to stop talks. A seasoned mediator suggests that both sides could benefit from getting back around the table. “Nobody seems to know what either side wants and fears, which is half the problem,” they say.

Governance failures

Another claim made in the 21 December statement was that the CII had to take board control because it had warned the PFS’s top dogs on multiple occasions they were falling short. But the CII has been reluctant to provide exact dates or formats for how these warning(s) were delivered.

“I can categorically say that no failings were brought to my attention individually or at a board meeting,” a PFS director says. “I had seen no communications in this regard of any sort until the 21 December statement which completely blind-sided me.”

According to a statement from CII group CEO Alan Vallance on 27 January, the CII’s evidence was sent over to the PFS board again on 25 January, and it was “simply incorrect” that issues had not been raised earlier.

The CII group board had scrutinised a document in its board meeting on 14 December, according to Vallance’s statement, but no further detail was given on the evidence itself, or the nature of the PFS’s awareness of it.

Every PFS board meeting is attended by a member of the CII governance team and minutes and agendas are produced by them, a PFS director says, who questions why the CII didn’t want to fix the supposed problems in-house.  “If it had identified failings – surely the main aim would be to educate/support and direct through the governance oversight team?” the director said.

Governance failures

Among the other CII allegations was that the PFS board was “seeking to exclude the CII group audit and risk committee from oversight of audit and financial statements.”

But the CII’s audit and risk committee never had any formal governance role or oversight of the PFS, according to a former senior PFS staffer – the PFS does buy in secretariat services from the CII to support its governance requirements, but that’s a different issue.

The former staffer says they aren’t aware of any PFS board member being on the CII’s audit and risk committee, certainly not during their time at the organisation. Another ex-PFS leader says they aren’t aware of any overlapping seats either.

If an oversight function that was meant to be there was missing, should this have not have been picked up by external auditors or mentioned in previous financial statements? The CII has rejected calls to include motions for an independent audit of its accounts to be heard at its AGM, further reducing the chances of clarity.

The CII’s finances

Regarding the CII’s supposedly precarious financial position, we know that as at 31 December 2021, the CII had total cash reserves £29.9m (down from £34.3m). That much is in black and white in its full-year accounts. A memo was reportedly sent to local CII institutes in 2021 informing them a deficit between £6m was likely in £7m in its 2021 financial statements. The journalists involved appear to have actually seen this memo, so we are on firmer ground there.

That expected deficit was also referenced in the CII’s results for the 2021 calendar year: “Those [local institutes] that had significant financial reserves were asked to voluntarily utilise these before taking additional grant payment,” the CII wrote. The CII’s deficit for 2021 ended up being £4.4m. But those figures were published in August. Plenty could, and probably has happened since then.

While losses were and may well still be being made, there may appear to be at least some cushion to fall back on from the £29.9m. Except that the CII can’t use the PFS member reserves. Of that £29.9m, just under £20m was PFS reserves, Citywire has reported. Take a potential multi-million pound tax bill out as well — again proveable in the accounts — and the CII is certainly skating on thinner ice.

Though several people close to the matter have told me that the CII did indeed ask the PFS for a £4m-£5m loan, the CII does not appear to have confirmed the exact amount itself.  A person there at the time says that when Covid struck, the CII was looking for a £4m loan. The bank wanted guarantors, and asked the PFS to put up £3m, they say. Top PFS staff were told by the CII that the funding was precautionary rather than necessary, but the person familiar with the matter says questions were asked about the £90,000 the bank was looking to charge to set up the facility if it was in fact only precautionary.

As far back as 2017 there were issues with how funding was divided up; a review that year of the relationship between the CII and PFS resulted in a £1m reduction in cross-charge to the PFS, according to a PFS leader at the time. What we do know is that the process of taking control of the board has landed the CII with its own costs. If the CII had to pay for the services currently offered on a volunteer basis by PFS board members, that would be another bill to field.

Based on the PR support brought in by the CII – top City firm Lansons – a former top PFS staffer asked an acquaintance in the PR world what that might cost. They came back with an estimate of £500,000. As for the costs of mediation, they estimated that would be in the region of £300,000.  Another former senior PFS staffer described the costs of PR advice as “certainly not inexpensive”.

“It is bizarre that a qualifications body should need such extensive external PR support, and Lansons are not the first over the past 18 months,” they add.

The PFS’s financial decisions

In turn, the CII has shifted the attention to the PFS’s financial decisions. The CII claimed that “a group of PFS board members pursuing actions without full board authority…led to significant expenditure on external advisers that is substantially above agreed limits”.

Reports suggests that when the PFS board sought legal advice from London-based law firm Farrer & Co, and corporate advice from Evelyn Partners, which audited the CII’s loan request to PFS, it set them back £800,000. But again, the neither side has officially disclosed what this spending was, and how much it exceeded the agreed caps.

“When it comes to external adviser spend, the PFS board must always act in the best interest of the organisation. Any investment of funds by the PFS board are always made in the interests of the members and the organisation,” PFS interim chief executive Don MacIntyre told me.

We are left to reply on a former senior PFS staffer, who believes the agreed limit would have been “blown out of the water” by the spending.

The PFS has certainly made its own errors during the process. The PFS board sets its own expenditure limit, not the CII, according to a person familiar with the matter.

Its calls for an emergency general meeting also failed to get through. There was no sign of a motion that normally would have accompanied the request for an EGM. As an ex-top PFS staffer says, this left people with “no idea of what they were actually trying to achieve”.

“Yes, there was outrage, but what exactly was the plan of action?” another says.

PFS acting without authority

The real reason we don’t have definitive answers on so many of these questions, according to several individuals close to the rift, is due to confidentiality agreements imposed on PFS board members and the threat of legal action if they go public. The existence of NDAs on specific issues was not denied by a person familiar with the CII’s thinking.

“If you can encourage the PFS board to put it out on the table that would be great. When you are a company legal threats are okay, but when you are an individual you panic, it’s a massively threatening,” says one former leading PFS staffer.

The CII could publish the information provided to the PFS Board, but has chosen not to, according to the person, who said the decision lies with the PFS Board, and that it would be inappropriate to release materials into the public domain without its consent.

Interim PFS boss MacIntyre said: “No matter how they are appointed, all directors are held to the same standards and duties of any company director which includes confidentiality and fiduciary duties to the organisation.

“The PFS board will require time to respond to the CII’s allegations…it would not be appropriate for me to comment on specifics at this stage.”

A CII spokesperson said the institute does not intend to prove any further comment at this time, referring me to the public statements already made that do not include the details that I have raised here.

“If the CII aren’t the baddies, they should come clean,” says the regional PFS chair.

Again, it’s hard to disagree with them.

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About the Author:

Justin Cash is online editor at Dow Jones’s Financial News title. He was previously editor of Money Marketing magazine, and has also worked for titles including Legal Week and Citywire. His work has featured in publications ranging from The Financial Times, The New Statesman, Total Politics and The Independent, to CityAM and The Huffington Post. During his time running Money Marketing, the magazine has won the Headline Money B2B Title of The Year Award. Individually, he has been shortlisted in the Press Gazette Specialist Media and Santander Media Awards, and has won a James Hay Award and the Personal Finance Awards’ Trade Journalist of the Year Award. Cash graduated with a 2.1 in Politics, Philosophy and Economics from Durham University and has a masters in Investigative Journalism from City University, London.

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