Letter from Derek Lynn on behalf of members
of the PMS Savers Lobby Group Northern Ireland to the Chairman,
PMS Officials Working Group
INTRODUCTION
I have been working closely with the PMS Savers
Lobby Group, Northern Ireland in their efforts to secure a solution
to the plight of PMS savers who have been so drastically impacted
by the circumstances surrounding the demise of the PMS. I am therefore
writing to you to as Chairman of the PMS Officials Working Group
to impress upon you the crucial importance of the Working Group
in bringing forward positive proposals for assisting PMS Savers.
The Lobby Group understands that the Working
Group, which was set up in July 2009, is scheduled to make a draft
recommendation to the Prime Minister later this month and we would
therefore like to ensure that you have been made fully aware of
all the salient issues which need to be taken into account in
reaching a solution which will compensate PMS Members for the
significant financial hardship which many of them are facing.
WORKING GROUP
TERMS OF
REFERENCE
We welcome the establishment of the Working
Group with such a wide ranging remit as set out in the attached
Terms of Reference which were advised to our Lobby group by HM
Treasury in August 2009. Additionally we are encouraged by the
support of the Prime Minister in his initiative in setting up
the Working Group to try to find a way forward which will alleviate
the distress in which PMS savers—through no fault of their
own—now find themselves. We also have the benefit of precedent
by the UK Government in providing rescue support for companies
and banks both pre and post devolution, particularly during the
current credit crunch.
We therefore believe that the Working Group
has an unique opportunity to bring forward innovative and positive
proposals which will recognise the abject failure of the UK regulatory
regime to protect PMS savers—in vivid contrast to the action
taken by the UK Government to rescue the banks at considerable
cost to the UK taxpayer—and which will provide the basis
for a just, fair and equitable compensation package for PMS savers.
While the Lobby Group have been told by HM Treasury
that the Working Group has held a number of meetings over the
summer with various parties, including the Administrator, it is
not clear at all how the actual process of consultation has worked—in
particular how consultation with PMS savers and stakeholders outside
the governmental regulatory framework has been operating. As those
people most affected by this whole debacle, it is absolutely imperative
that their views are fully taken into account in any recommendation
to the PM. It is also important that independent professional
advice has been taken from external advisors as part of the review
process to avoid the perception "policemen" are investigating
the "police". The process needs to be wholly transparent
and clearly seen to be so.
KEY ISSUES
FOR CONSIDERATION
Within the above context we would therefore
like to emphasise the key issues which the Lobby Group believes
need to be given proper consideration by the Working Group before
it can properly reach any viable conclusions.
Firstly, it is abundantly clear that the whole
UK Regulatory System has failed utterly to provide effective or
proper governance over the affairs of the PMS. The Society was
custodian of investment funds of some £350 million and how
it was allowed to operate for many years without any proper governance
or oversight is a complete mystery. Both the Financial Services
Authority (FSA) and the Department of Enterprise, Trade and Investment
in Northern Ireland (DETI) have distanced themselves from any
responsibility for ensuring that the PMS was registered with the
FSA.
As far as the FSA is concerned, its stated position
is (and I quote) that it was for the Society to establish—and
not for the FSA to advise—whether it was involved in regulated
activities and needed to apply for registration—but that
if any society is involved in regulated activities and remains
unregistered it is liable for financial penalties. The FSA's subsequent
investigation into the affairs of the PMS concluded in April 2009
that the PMS was conducting regulated activities without the necessary
authorisation or exemption. However, on the basis of the information
currently available to them and applying the criteria in the Code
for Crown Prosecutors, the FSA has decided that "it would
not be right for them to take a case against any of those involved
in running the Society". We have asked the FSA to explain
their decision but they have thus far failed to do so. Their position
only serves to underline the toothless nature of the regulatory
process and the absolute lack of any deterrent to misconduct against
those involved in running financial institutions.
It is also quite clear that there has been total
confusion within the UK regulatory process itself about the status
of the PMS as to whether it should have been registered with the
FSA. In March 2009 Ian Pearson MP (Treasury Minister) in correspondence
with a local MLA advised that organisations such as the PMS are
exempt from regulation by the FSA under the Financial Services
and Markets Act (FSMA) and that consequently the firm and its
members do not contribute to and are not protected by, the Financial
Services Compensation Scheme (FSCS). Yet less than a month later
as noted above, the FSA concluded quite differently. Right hand,
left hand comes to mind!
As regards DETI, it has repeatedly made clear
that it has no regulatory remit in supervising industrial and
mutual societies such as the PMS, beyond ensuring that they were
registered in accordance with the Industrial and Provident Societies
Acts and complied with their registration and legislative requirements.
In the words of the DETI Minister, it had no "prudential
supervisory role" in relation to the PMS—yet DETI's
published strategy documentation and website specifically refer
to its "business regulation" role which is clearly misleading
and gives a false impression to investors that somehow registration
with DETI provides some sort of "comfort" that their
funds are protected. If this simple administrative process and
legislative role—as opposed to a corporate governance and
financial integrity process—is all that DETI provides then
it is totally inadequate and simply leaves it as acting as little
more than a useless "post box" providing no protection
for investors/savers in local financial institutions. We had hoped
that the recent HM Treasury Review chaired by Ian Pearson would
have produced some urgent recommendations as to DETI's future
role but it has totally failed to address these issues.
So far as the activities of the PMS itself are
concerned it is interesting and indeed most significant in our
view, that its own Rulebook (Rule 29) states that "The Society
shall not receive money on deposit."—so it is quite
evident that the Society (and therefore its directors) believed
that by including this statement in its operating rules it took
it outside the definition of banking and therefore exempted it
from registering with the FSA. It therefore begs the question
as to what is meant by "receiving deposits", what criteria
the PMS directors had applying in arriving at their assessment
and what advice (if any) they had taken in articulating Rule 29.
Since the Society's rules had to comply with the requirements
of the Industrial and Provident Society Acts and had to be lodged
with DETI it seems surreal that while DETI's role may well have
been one of simple process oversight, a so called professional
business organisation such as DETI would not have seen fit to
at least have suggested to the PMS directors (most of whom appear
to have been laypersons with limited commercial expertise) if
they had properly satisfied themselves that the Society did not
need to be registered with the FSA. It is astonishing that the
inclusion of Rule 29 would not have triggered at least some questions
in the mind of a government department charged with business regulatory
responsibilities even if it says it did not have any direct role
in monitoring the affairs of the PMS. We have raised this point
with the DETI Minister but she has declined to comment.
There can of course be no confidence that registration
with the FSA would in itself have necessarily prevented the plight
which ultimately befell the PMS given the "Light touch"
approach which its current Chairman, Lord Turner has implied was
encouraged by the UK Government during the recent boom years when
the banks were acting virtually with impunity and running up huge
and toxic debts for which the taxpayer is now having to foot the
bill. It wasn't that monitoring procedures were not in place within
the FSA, but rather that these were not being applied effectively
for whatever reason. Nonetheless, formal registration and oversight
of the PMS by the FSA would clearly have provided a more effective
basis for monitoring its affairs and ensuring that the Government
could not seek to escape its responsibility for protecting the
Society's savers through extension of the deposit guarantee arrangements
enjoyed by the UK banks.
All of the above questions and a number of other
significant issues relating to the operation of the PMS need to
be answered. These include the conduct of the directors (for example—when
did the Society cease to take deposits from savers in the period
leading up to administration?), the deafening silence in the 2008
accounts and in successive Chairman's/Directors' and auditors'
reports about the weakening liquidity position and the adequacy
or otherwise of internal controls and risk assessment procedures
even before the fatal run on the Society's funds during October
2008. Indeed the PMS Chairman's report in June 2008 on the Society's
2008 accounts commented—with seeming pride—on its
favourable returns and dividend policy compared with competitors
and on the "broad and generous terms" offered by the
Society in terms of savers being "freely able to withdraw
their money at will and without penalty." Famous last words
indeed! So there was nothing whatsoever in the information sent
to PMS members, which we have seen, which would have alerted them
to any signs of trouble ahead. Indeed the impression was clearly
left of the Society continuing to be a safe haven for savers.
The Administrator submitted his report in July
2009 to DETI on the management of the PMS and as yet no response
has been forthcoming. We also understand that the Accountancy
and Actuarial Discipline Board (AADB) has launched an investigation
under its scheme for the accountancy profession into the conduct
of the Institute of Chartered Accountants and Moore Stephens as
auditors to the PMS in connection with events leading up to the
Society being placed into administration. It is imperative that
the auditors' role in this sorry tale is fully investigated.
CONCLUSION
All of the above demonstrates in the Lobby Group's
view, that right from start to finish there were deep rooted flaws
in the whole regulatory regime and that had those organisations
charged with regulatory responsibilities had applied effective
diligence and ensured proper registration and regulation of the
PMS's affairs, then PMS savers would have benefitted from the
FSCS arrangements and thus avoided the run on the Society's funds
which led to it being put into administration in October 2008.
It is clear that the handling of this case by
government officials involved in the regulatory process has fallen
significantly short of the standards expected of those charged
with the very importance task of regulating the financial services
sector and has contributed to the losses currently faced by PMS
savers and severely undermined the confidence of savers generally.
We would therefore request the Working Group
to note these serious issues, which in summary, provide compelling
evidence of significant Government (both UK and NI) responsibility
for the distressful situation in which PMS savers find themselves
in—and therefore recommends that proposals be agreed which
will make available fair and equitable financial compensation
to PMS savers.
3 September 2009
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