1 Introduction
The Presbyterian Mutual Society
in Northern Ireland
1. The Presbyterian Mutual Society is an industrial
and provident society (IPS) with some 10,000 members. Its aims
are:
- to promote thrift among its
members by the accumulation of their savings:
- to use and manage such savings for the mutual
benefit of members;
- to create a source of credit for the benefit
of its members at a fair and reasonable rate of interest;
- to procure or provide legal, accountancy, consultancy
or secretarial services and advice to members towards assisting
them in the establishment, improvement or expansion of their business
or financial affairs and generally to undertake all or anything
expedient for the accomplishing or incident or conducive to or
consequential upon the attainment of all or any of the objects
including the acquisition of property and any rights or interest
therein.[1]
Membership of the Society was obtained by the purchase
of shares (in minimum parcels of £100). The maximum shareholding
was £20,000, but members who wanted to place more money with
the Society could do so by making loans. A dividend was paid on
shares, and those who made loans received interest. In this report
we use the term "member" to refer both to those who
only held shares and those who had also made loans to the Society.
The Society grew very rapidly from 2002, its assets rising by
more than 12 times from £24 million in 2002 to £309
million in 2008. It made significant advances for buy to let properties
and development and agricultural land.
2. The Society's Annual Report for the year ended
31 March 2008 reveals that at the fiscal year end the total members'
interests it held were over £309 million. Figures subsequently
provided by the Department of Finance and Personnel, Northern
Ireland suggest that some two thirds of this was loans, and the
remaining third withdrawable share capital.[2]
On the asset side, some £175 million was held in mortgages,
£131 million in fixed and other assets, and nearly £6
million in current assets. The Society kept some money on deposit
in conventional banks, but also advanced money to members on security
and had a commercial property portfolio.
3. As a result of the collapse of the Icelandic
banks, the Government effectively guaranteed all deposits in conventional
banks. While this largely had a stabilising effect on the wider
financial system, it prompted many PMS members to move their money
from the Society. During the first three weeks of October 2008,
the PMS responded to many members' requests for withdrawal which
reduced the balance of the PMS's current account from £25
million to just £4 million. On 25 October, the Board met
and decided that no further payments should be made to members
until the Board was professionally advised with relation to the
current illiquidity of the Society. By the time it met at a subsequent
meeting on 6 November a further £50 million of
requests had been made and three members had announced their intention
to commence legal proceedings for the recovery of their investment.
Faced with this problem, the priority of the board became asset
protection and it was resolved to place the Society into administration
to achieve this.
4. As the PMS was registered under the Industrial
and Provident Societies Act (Northern Ireland) 1969, the Northern
Ireland Department of Enterprise, Trade and Investment (DETINI)
was required to make an Order under Article 10(2) of the Insolvency
(Northern Ireland) Order 2005 to apply company administration
rules to it. This Order, which was made on 14th November, applied
Part III of the Insolvency (Northern Ireland) Order 1989 to PMS.
Accordingly, the Society entered administration on 17 November
2008.
The
non-bank sector in Northern Ireland
5. As in the rest of the United Kingdom, banking
services in Northern Ireland are regulated by the FSA. However,
financial services are also commonly provided by two legal entities
which are not banks: industrial and provident societies, and credit
unions. Industrial and provident societies carry on various forms
of business, but their uniting feature is cooperation. Societies
can be agricultural cooperatives, which trade for the benefit
of their members, housing associations, or, as in the case of
the PMS, a mutual society. Credit unions provide co-operative
banking to their members, who both own and control them. Many
credit unions are founded by members of one community and their
objects are usually to promote thrift and provide loans to their
members at a beneficial rate.
6. Credit unions hold a more prominent position
in Northern Ireland than in Great Britain. A significant portion
of basic financial services to middle and lower income groups
are provided by the credit unions and IPSsalmost a quarter
of the adult population is a member of such a body.[3]
While credit unions have their own deposit protection scheme,
there is no such scheme for industrial and provident societies.
7. As PMS was not regulated by the FSA it had
not been contributing to the Financial Services Compensation Scheme,
which is a requirement for those bodies that are governed by the
Financial Services and Markets Act 2000 (FSMA). This meant that
its members were not entitled to take advantage of the protection
offered.
8. The reason for the run on the Society was
that members realised that there was no protection for their money,
and were moving it to safer institutions. Although the summary
financial statements for the year ended 31st March
2008 showed that assets more than covered liabilities, the plunge
in commercial property values meant that in January 2009 the Administrator
found a £100 million shortfall. Currently the Society remains
in administration, and members have no access to their money.
9. The Treasury Committee has been aware of the
difficulties the collapse of PMS has caused to its members for
some time. We have received regular and extensive correspondence.
The Chairman raised the matter in Northern Ireland Questions on
3 June.[4] When we visited
Belfast in early 2009 we heard first-hand from those directly
affected. Many people cannot gain access to the money that they
need to pay their taxes, fund their retirements, or simply meet
the daily necessities of life. A significant number of those affected
are elderly or disabled.
10. In recognition of the plight of the PMS members
a Working Group was set up by the UK Government in June 2009 to
consider potential assistance for the Society and its members.
The Working Group comprises the Chief Secretary to the Treasury,
the Economic Secretary to the Treasury, the Secretary of State
for Northern Ireland, the Northern Ireland Minister for Finance
and Personnel, the Northern Ireland Minister for Enterprise, Trade
and Investment, and the First Minister and Deputy First Minister
of Northern Ireland. We decided not to recommend early action
on PMS because we hoped that the Working Group would find a resolution.
However, the Working Group has not reported, and the Pre-Budget
Report, which might have announced measures to help PMS members,
contained no such proposals. Accordingly, we decided to conduct
a brief inquiry "to find out how the problems happened, the
impact this has had and whether UK law needs to be changed to
stop something like this happening again."
11. Members of the Treasury Committee travelled
to Stormont to take evidence. We heard from Sammy Wilson MP MLA,
Minister of Finance, Mike Brennan, Head of Strategic Policy Division,
DFP, Peter Jakobsen, Strategic Policy Division, DFP, Arlene Foster
MLA, Minister of Enterprise, Trade and Investment, Sandy Williamson,
Northern Ireland Registrar of Industrial and Provident Societies,
Mike Bohill, Head of DETINI's Business Regulation Division, Alban
Macginnis MLA, Chairperson, Paul Butler MLA, Deputy Chairperson,
Mark Durkan MP MLA, former Chairperson, David Simpson MP MLA,
Leslie Cree MBE MLA and Séan Neeson MLA. We also put questions
to some members of the Presbyterian Mutual Society and representatives
of the PMS lobby group: Mr Derek Lynn, Mr Don McClay, Mrs Gwyn
Smyth, Mr Robin Manson and Mrs Hazel Russell. The Chairmen met
privately with representatives of the Presbyterian Church in Ireland;
Mr Arthur Boyd, the Administrator of PMS and some members of the
Society who wished to give private information about their circumstances.
We are grateful to all those who gave evidence. In particular,
we are grateful to the members of the Presbyterian Mutual Society
who gave us evidence about the impact of the failure, even though
to do so meant revealing intensely personal circumstances.
Legal
background
12. Credit unions and industrial and provident
societies (IPS) are regulated in Northern Ireland (NI) by the
Industrial and Provident Societies Act (Northern Ireland) 1969
(the Act) and its dependent statutory instruments. For an IPS
to register under this act it must carry on a business, industry
or trade and satisfy the Department for Enterprise, Trade and
Investment (DETINI) registrar that it is either a bona fide co-operative
society, or that it carries on business for the benefit of the
community and there are special reasons why it should be registered
under the 1969 Act rather than as a company under the Companies
(Northern Ireland) Order 1986. Rules 3 (a) and (b) of the Presbyterian
Mutual Society (PMS) provide that it was formed to 'promote thrift
amongst its members by the accumulation of their savings' and
'to use and manage such savings for the mutual benefit of members'.
Further to this it should be non-profit making and control of
the society must be vested in the members equally. This last is
provided for by Rule 41(6). Section 1(3) of the Act excludes from
the definition of co-operative society one which 'carries on
business with the object of making profits mainly for the payment
of interest, dividends or bonuses'.
13. Both credit unions and IPSs registered under
the Act are limited in the financial services they may carry out.
They may only provide basic savings and loan services by virtue
of Article 24 of the Credit Unions (Order) 1985 and section 7
of the Act respectively, both of which prohibit 'the business
of banking'. (The "business of banking" has no statutory
definition; as a matter of common law it entails running current
accounts for customers and providing access to cheques or the
equivalent).[5] Further
restrictions on the size of deposits apply. Rule 8 of the PMS
rules states that "no member shall have or claim any interest
in the shares of the Society exceeding that permitted from time
to time by or under [
] the Act". The Credit Unions
(Limit on Shares) Order (Northern Ireland) 2006 set the limit
for credit unions at the greater of £15,000 and 1.5% of the
total shareholding.
14. There are differences in the regulatory framework
for IPSs and credit unions between Great Britain and Northern
Ireland. With the advent in 2002 of the Financial Services and
Markets Act 2000, all activities of credit unions in Great Britain
have been regulated by the FSA. Section 19 of the Financial Services
and Markets Act 2000 (FSMA), which came into force on 1 December
2001, stipulates that no person may carry on a regulated activity
in the UK, or purport to do so, unless they are authorised or
exempt. However it was accompanied by the Financial Services and
Markets Act 2000 (Exemption) Order 2001 which provides for industrial
and provident societiesdefined in section 417 FSMA as one
registered or deemed to be registered under the Actsas
well as credit unions within the meaning of the Credit Unions
(Northern Ireland) Order 1985, to be exempt from regulation in
respect of accepting deposits, provided that these are in the
form of withdrawable share capital. We note that only one third
of the money held by PMS appears to be in this form.
15. This exemption follows from registration
under statutes which themselves stipulate the conditions a credit
union or industrial and provident society must fulfil in order
to be registered. A violation of any of those conditions would
result in the exemption no longer applying. Hence any society
registered under the Acts which subsequently decided to carry
on business with the object of making profit for the purpose of
paying interest and dividends would not only need to be regulated
in the areas into which it expanded, in accordance with the general
prohibition of section 19 FSMA, but would also lose the right
to exemption with respect to its deposit taking activity.
16. After its collapse, the FSA investigated
the PMS. Although it does not normally confirm or deny its investigations,
it published the results of this investigation on its website:
We have concluded our investigation and have decided
that it [PMS] was conducting regulated activities without the
necessary authorisation or exemption. However, on the basis of
the information currently available to us, and applying the criteria
in the Code for Crown Prosecutors, we have decided that it would
not be right for us to take a case against any of those involved
in running the PMS. However, we remain in touch with the administrator
and, if further information comes to light relating to the issues
we have investigated, we will look into it.[6]
In written evidence to us the FSA set out the legal
position in far more detail than in the published statement, concluding
"a society which used the capital raised by way of deposits
for the purpose of lending would need to be regulated as a credit
institution."[7]
Approach
taken in the report
17. One cannot clearly distinguish between reserved
and devolved matters in this case. The registration of PMS was
a devolved matter, but the Society was undertaking activities
which should have been regulated by the FSA, a United Kingdom
body. Our inquiry has been conducted when other processes related
to the collapse of the PMS are also happening. We understand that
the administrator has submitted a report on the activities of
the directors of the PMS to DETINI, and that is still under consideration.
There is a possibility that proceedings may be brought seeking
to disqualify the board of PMS as company directors. The auditors
of PMS are also subject to an investigation by their disciplinary
body. Although the Administrator paused in his work to see if
the Ministerial Working Group could produce a sensible outcome
for PMS members, he has now gone to court to ask for directions
on the distributions he is allowed to make. We do not wish to
trespass on other bodies' responsibility. In an ideal world, we
could have delayed our inquiry until these matters were settled.
However, the members of the Presbyterian Mutual Society cannot
wait that long. They need some certainty about the likely outcome,
and we believe that reporting now is in their interests.
1 Rules of the Presbyterian Mutual Society Ltd Back
2
Ev 20 Back
3
Report on the Committee's Inquiry into the Role and Potential
of Credit Unions in Northern Ireland, Northern Ireland Assembly
Committee for Enterprise, Trade and Investment (05/08/09) Back
4
HC Deb, 3 June 2009, col 259 Back
5
United Dominions Trust v Kirkwood [1966] 2QB 431 Back
6
FSA website, 9 April 2009 Back
7
Ev 25 Back
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