Conclusions and recommendations
Roles and responsibilities
1. The assets of the PMS were badly affected by the general financial crisis and by its non-residential lending strategy. The Administrator has submitted a confidential report on the Board's conduct to DETINI, which now has to decide whether to start disqualification proceedings. It is early to judge the degree to which the directors were culpable rather than unlucky, but nothing we say later in this Report should detract from the fact that it is the duty of directors to ensure their companies are properly run.
(Paragraph 24)
2. The Government
guarantee of bank deposits may have alerted members of the Presbyterian
Mutual Society to the risks they faced, but it did not create
those risks. Moreover, although it is theoretically possible that
the Society might have survived the run and continued to prosper,
it is more likely that the gap between its assets and its liabilities
would have emerged in due course. Members would have been exposed
to even greater losses. (Paragraph 25)
3. Companies which
are carrying out activities which should be regulated by the FSA
have the primary responsibility for identifying that fact, and
seeking the necessary authorisation. (Paragraph 34)
4. We understand that the Registrar had no regulatory functions in relation to industrial and provident societies, and could take no action. But we do not believe that the Department of Enterprise, Trade and Investment NI was so circumscribed. We note DETINI's opinion that it was not their legal responsibility to regulate the PMS or manoeuvre them into regulation. We are dismayed, however, that the Department had access to all the relevant information and yet this did not result in any preventative action or further examination being undertaken. We are surprised that DETINI did not consider whether the regulatory gap needed to be filled. This might well have entailed action in London as well as in Belfast, but as the department closest to the problem, DETINI should have taken a lead in identifying the problem, and in seeking a solution.
(Paragraph 38)
5. The growth of the
Society should have been accompanied by a review of its governance.
(Paragraph 39)
6. The congregations of Presbyterian Church in Ireland have suffered as a result of the PMS collapse, both as individuals, and collectively. Legally, it appears that the Church has no liability. However, the Society was linked to the Church, its role was advertised at the General Assembly, it was the subject of pulpit calls and it enthusiastically endorsed by many of its ministers. We consider that the Church cannot evade responsibility for what happened, and should consider whether it can help in any way.
(Paragraph 42)
Should members of the Society have known?
7. If the Chairman of the Northern Island Assembly Committee on Enterprise, Trade and Investment believed the PMS was regulated, it is no surprise that ordinary people made the same assumption.
(Paragraph 46)
8. We note that PMS shares were withdrawable on demand, and fixed in value: it is understandable that PMS members considered them as analogous to deposits in a building society.
(Paragraph 47)
Investor information
9. In our Report on Northern Rock we noted that depositor protection schemes should be simple and well advertised. The case of the Presbyterian Mutual Society has demonstrated, once again, how little information was available to ordinary people about the organisations to which they entrusted their money. We consider that in future there has to be far clearer information given to those who make savings and investments about the way in which organisations are regulated, and the extent of any guarantee provided.
(Paragraph 48)
The insolvency regime for mutual societies
10. 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.
(Paragraph 54)
Tax liabilities
11. 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.
(Paragraph 56)
The way forward
12. 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. (Paragraph
62)
13. 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.
(Paragraph 63)
14. 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.
(Paragraph 64)
15. 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.
(Paragraph 65)
16. 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.
(Paragraph 66)
17. We support the
principle of FSA regulation of credit unions in Northern Ireland.
Credit unions are prominent in the society of Northern Ireland
and it would benefit their many members if they were able to offer
some of the services provided by their counterparts in Great Britain.
Moreover, there is a regulatory gap which needs to be filled.
Allowing credit unions in Northern Ireland to be regulated by
the FSA would fill that gap. (Paragraph 74)
18. However, we note
that the registration function is to be retained by the Northern
Ireland Department of Enterprise, Trade and Investment. While
we understand the rationale for this, we recommend that the Department
and the FSA be given powers to exchange information and work together
to ensure that no future regulatory gaps arise. (Paragraph 75)
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