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The failure of the Presbyterian Mutual Society - Treasury Contents

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.


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

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Prepared 18 February 2010