The failure of the Presbyterian Mutual Society - Treasury Contents

Letter from Derek Lynn on behalf of members of the PMS Savers Lobby Group Northern Ireland to the Chairman, PMS Officials Working Group


  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.


  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.


  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.


  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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