3 Events since the Society entered administration
49. At the time of the last annual return filed
in March 2008, the Society had 10,503 members. Assets held by
the Society totalled £309m. The book value of the mortgages
and investment property held by the Society at that time totalled
£304m. In his report of 12 January 2009, the Administrator
estimated the value of realisation of the same to be £178m.
There is a funding gap of some £100 million. However, the
assets of the Society are high-quality, and already recovering
some value. Last year they produced an income of £20 million,
and they can be expected to generate £10 million a year in
future.
50. At the time this Report is being written,
the Administrator has proposed that the administration be extended
for five years, to enable the assets to be wound down in a way
which would maximise the returns to members. While increasing
returns in this way would be welcome, for some members delay would
be disastrous. Our correspondence and private meetings with savers
have demonstrated that many are elderly, or in ill-health, and
need the money now, for their daily life.
Shareholders
or creditors?
51. Now that the Society is in administration,
the Administrator has a duty to determine when and how a distribution
of funds is made to the members. All members of the PMS have equal
control over the Society, pursuant to its Rule 41(6), and there
is no separate insolvency regime for mutual societies: they are
subject to normal insolvency rules which stipulate that holders
of loan capital have priority over the holders of share capital.
This means that the withdrawable shares of up to £20,000
should be paid only after the larger loan holdings have been repaid.
Figures provided by the Northern Ireland Executive suggest that
roughly £100 million is held in withdrawable shares, whereas
£204 million is in loans. Given the funding gap identified
above, normal insolvency rules would wipe out the withdrawable
shares, if the Society were liquidated immediately.
52. The Administrator has gone to court to seek
a ruling as to whether or not he can treat all members equally,
regardless of their status as shareholders or borrowers. Some
of those with large loan holdings have opposed his application.
Mr Clay explained the dilemma:
on the one hand you have the lobby of the churches,
shall we say, wanting to say withdrawal of shares should be treated
in exactly the same way as creditors. Then, in the context of
a private individual, with respect, at the present moment the
PMS in administration is the custodian of a very large sum of
money belonging to a young person who suffers daily from catastrophic
injuries received as a result of an accident in which neither
that individual nor any family member was an at-fault party. You
are involved therefore in a Solomon's choice scenario. You want
to benefit or keep faith with your share capital holders of less
than £20,000, and you also want to keep faith with someone
who trusted the PMS with big money, and it is repugnant therefore
to get into this dialogue about whether one should benefit somebody
with £700 and not extend the same benefit to somebody with
£2 million.[44]
For this reason, he supported the proposition that
the court should decide what was fair.
53. In evidence the Treasury told us:
The Banking Act 2009 provides special resolution
and insolvency arrangements for all types of UK institution which
have a Financial Services and Markets Act (FSMA) permission to
accept deposits.
The Act includes provisions for extending the Special
Resolution Regime (SRR) stabilisation tools to building societies,
and adapting them to reflect the different legal framework of
building societies. The Act also includes a power to extend the
resolution and insolvency arrangements to credit unions in the
future, should this be considered appropriate.[45]
The Banking Act 2009 applies to all institutions
which have permission under Part IV of FSMA to carry on the regulated
activity of accepting deposits. Industrial and provident societies
are exempt from the requirement to apply for permission (if their
deposit taking activities are only in the form of withdrawable
share capital). We note that the Treasury has not indicated whether
it has powers to extend the Special Resolution Regime to IPSs
if it wishes.
54. It is for the courts to
determine the relative rights of shareholders and lenders under
current law. We recommend that for the future the Treasury should
introduce a distinct form of insolvency regime for mutual societies.
Many of those who have only shareholdings in such an organisation
may have urgent need for that money, and may not realise that
their claims will be subordinate to those of lenders.
HMRC
55. Some members placed funds in the PMS specifically
to meet expected tax bills. Now that their money is frozen, they
are unable to pay those bills. Arlene Foster told us that she
had been able to intercede successfully with HMRC in at least
one such case, but from our private correspondence we are aware
of cases in which HMRC is imposing penalties and charges on those
who cannot access their money. In written evidence, HM Treasury
told us:
There is clearly considerable complexity in the position
of those involved in PMS, deriving from the nature of the society's
status, the manner in which insolvency legislation works and differences
between compensation arrangements in NI and the UK. However, their
standing with regard to their tax liabilities is the same as for
anyone in temporary financial difficulties, which is that HMRC
is committed to working with those who contact them about problems
in making tax payments.[46]
This is very far from an assurance
that there will be consistent treatment of PMS members.
56. The Government should not
worsen the situations of PMS members. We recommend that HMRC takes
a consistent approach to those who are unable to meet their tax
liabilities simply because money is locked up in PMS.
Takeover
by a bank
57. At several times since the Society went into
administration there have been rumours or suggestions that it
should be taken over by a bank which would be able to hold the
assets for long enough to bridge the funding gap, while allowing
PMS members access to their savings. In addition the bank would
gain access to 10,000 accounts. Mr Macginnis, current Chair of
the Northern Ireland Enterprise, Trade and Industry Committee
told us "the committee's view is that the assets and liabilities
could be absorbed by a financial institution in an enhancement
fund, and that should be the target".[47]
Mr Durkan agreed:
I know from meetings I had when I was Chair of the
committee with the Administrator that he certainly would favour
moving to an enhancement fund-type solution, which would mean
then that all the money would not be withdrawn because people
would know their money was guaranteed and they could still leave
it there for the purpose for which it was there, but he cannot
achieve that on his own just by negotiating with banks. Any of
the banks involved need to know that there is real political will
and weight behind it.[48]
Government action
58. As we noted in the introduction, on 17 July
2009, HM Treasury announced:
The Prime Minister recently announced that a working
group of Ministers would be formed to look specifically at problems
at the Presbyterian Mutual Society. The working group had its
first meeting on 16 July and is scheduled to report back to the
Prime Minister in the autumn.
59. However, no draft report was submitted to
the Prime Minister at the end of September as scheduled. The position
of the Government on these matters has still not been made clear.
60. Indeed, the only tangible result of the Ministerial
Working Group may have been to delay the Administrator's work:
the Administrator reported in September 2009 that he would slow
progress, as he did not "believe it would be in your [creditors/members]
interests to proceed with a formal arrangement until the Government
position as to assistance is made clear."[49]
61. There appears to have been a period in which
the working group was waiting for the Administrator, and the Administrator
waiting for the outcome of the group. Sammy Wilson told us that
"whilst he [the Administrator] is seeking that [commercial]
resolution with other financial institutions, the report cannot
be completed".[50]
When pressed as to what assistance was being given to the Administrator
in his seeking of a commercial resolution, Sammy Wilson admitted
that "there has been no request made for any financial support
or input from the Northern Ireland Executive in those discussions,
but Treasury officials have been working with the Administrator."[51]
Arlene Foster outlined the role of the Northern Ireland Executive
as "standing ready right from the time that the order was
made allowing the Administrator to be appointed",[52]
in order to "help in whatever way we can".[53]
In response to this, we heard from Mark Durkan MP MLA, former
Chair of the Northern Ireland Enterprise, Trade and Investment
Committee, who stated that "we [the Committee] would maybe
have more confidence in believing that [the Ministers were doing
as much as they possibly could] if we saw things being a bit more
productive."[54]
We note with concern that the Northern Ireland Executive considered
their passive approach to assisting the Administrator to be satisfactory.
62. We accept that the Administrator felt it
prudent to wait for the outcome of the Ministerial Working Group
prior to a decision whether to proceed with an orderly wind down.
We consider it unacceptable and farcical that both the UK Government
and the Northern Ireland Executive appear to have suggested some
responsibility for solutions but have failed to act. The Administrator
has understandably hesitated, awaiting possible assistance. Members
of the Presbyterian Mutual Society face severe hardship: there
will not be a solution until a political lead is given.
Government
support for PMS members
63. As a matter of law, members
of the Presbyterian Mutual Society are not eligible for any compensation
or support. We would like to move to a system in which there is
no need for such restitution in cases like this, because it is
crystal clear that deposits are made at the depositor's own risk.
We do not believe that, as a general rule, the taxpayer should
stand behind any financial institution.
64. Nonetheless, this case is
different. People in Northern Ireland could not be expected to
understand that their savings were subject to a very different
regime from that which applied in Great Britain. There appear
to have been no attempts to publicise this, or to fill the regulatory
gap. It is possible that a society which was mutual in life will
prove to be far from mutual in death, and that small savers will
lose out most heavily. The United Kingdom Government and Northern
Ireland Executive have already set up a Ministerial Working Group.
It must report swiftly to ensure that individual PMS members do
not suffer unduly.
65. This is not a case where
recourse to the funds of the Financial Services Compensation Scheme
is appropriate. The PMS was not a bank or building society; it
was not regulated and paid no levy while it was operating normally;
the FSCS should not be expected to support it after its administration.
66. As we noted above, there
have been suggestions that PMS could be taken over by a bank,
possibly with some government guarantee or support. It is possible
some other support could be offered. Any acceptable solution must
ensure that PMS members get swift access to their money. A solution
must be found, and must be found quickly.
44 Q 110 Back
45
Ev 21 Back
46
Ev 21 Back
47
Q68 Back
48
Q 70 Back
49
Letter from Administrator to members, 15 December 2009 Back
50
Q26 Back
51
Q27 Back
52
Q38 Back
53
Q35 Back
54
Q77 Back
| 
