Investment Clubs Should Be Legally Registered-Zambia

 

Investment clubs (investment clubs) have become a common savings vehicle in Zambia whereby a group of friends contribute a set amount of money periodically into the fund.

Some investment clubs operate as investment vehicles whereby after a long period of time the savings are re-invested for the members’ benefits.

However most of them do not invest and the few that do make investments without the necessary financial knowledge and this leads to losses.

Rarely do investments made by investment clubs lead to an optimum return for the members as most of the options are made on a speculative basis.

Other investment clubs operate in a cyclical manner whereby each member receives the entire funds of the group after a set period of time.

There is usually no legal entity formed and neither is there any documentation regarding the group’s activities.

Many have contributed into the fund faithfully only to loose their entire savings at the last minute due to fraud and dishonesty by other members.

Other members do not faithfully honour their obligations to contribute, yet expect a piece of the cake when the group posts any returns.

Most investment clubs operate on good faith and in the event of a dispute recovery becomes difficult. These clubs face a number of unique challenges.

Other than the internal legal weaknesses, a lack of a legal mechanism to regulate investment clubs is a great challenge.

Another problem is the lack of technical expertise by the members.

The most common way that investment clubs operate in Zambia is as SACCOS.

Though only a few are registered under the Act, their mode of operation qualifies them as SACCOS.

Contributions are made by members periodically and loans are also offered to members.

However investment clubs which are formed with the object of investment of pooled funds may overcome the unique challenges faced by investment clubs by pursuing registration as a Collective Investment Scheme under the Capital Markets Act.

The benefits to be derived by registration as a Collective Investment Scheme are numerous.

Firstly the investment club will be regulated by the Collective Investment Scheme Regulations of 2001 and will be governed by the SECURITIES EXCHANGE.

The regulations are made with a view to protect investors from any fraudulent activities by fund managers amongst other protective provisions.

Collective Investment Schemes by their very nature operate as trusts.

With a investment club the absence of a trust deed means that the managers who are charged with running the it are not regulated by any laws and do not owe the members a fiduciary duty.

With a Collective Investment Scheme, if the fund manager is negligent or over steps his mandate then other than the penalties under the Regulations, the members can still recover against him for breach of fiduciary duties.

Registration under the SECURITIES EXCHANGE would be very advisable if the investment club’s capital base is very large.

Some investment clubs hold a lot of money in cash and there is therefore need for the members’ interests to be well protected.

A second benefit to be derived from a SECURITIES EXCHANGE registration is the fact that running of the investment club will done by an expert.

The Regulations provide that the Fund Manager must be one that is licensed by the SECURITIES EXCHANGE.

Licensed Fund Managers have expert financial advisors in their employment and therefore the likelihood of suffering any financial losses due to lack of knowledge is minimised.

The downside of a SECURITIES EXCHANGE registration is the fact that there is a loss of control of the Scheme.

The investment activities are run by the Fund Manager and the individual members rarely participate in the day to day affairs of the Scheme.

The Scheme is also governed by the trust deed.

Lack of control may be unattractive for some people but if the main purpose of forming the investment club was to invest then this disadvantage is overrun by the attractive features of a SECURITIES EXCHANGE registration.

Other minor disadvantages include loss of privacy for the members and it is also more expensive to maintain a Scheme registered under the SECURITIES EXCHANGE as the Scheme has to pay the Fund Manager’s fees, the Custodian’s fees and also the Trustee’s fees.

Registration under the SECURITIES EXCHANGE is only advisable for investment clubs with a very large capital base amounting to millions of Kwacha.

For smaller investment clubs registration under the SECURITIES EXCHANGE would add more problems than solutions.

A few issues that the promoters need to consider before getting the SECURITIES EXCHANGE license is, the valuation of a share in the scheme and the investment policies and goals.

A number of private equity funds registered under these SECURITIES EXCHANGE regulations are run for the benefit of a few members.

These equity funds have posted very high returns and are even considering making offshore investments.

It is said that investment clubs hold billions of Kwacha in assets.

It might be time to cede control and management of your investment club to a fund manager so as to enjoy maximum returns.

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