The failure of the Presbyterian Mutual Society - Treasury Contents

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 IPSs—almost 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 societies—defined in section 417 FSMA as one registered or deemed to be registered under the Acts—as 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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 18 February 2010