MPs call for regulatory gap closure

The Failure of the Presbyterian Mutual Society

The Committee report states that there was a regulatory gap which was neither publicised nor filled and calls for this to be addressed in restructuring the financial system.

• Report: The Failure of the Presbyterian Mutual Society
• Treasury Committee

It also calls on the United Kingdom Government and Northern Ireland executive to act together to ensure that individual PMS members do not suffer unduly.

John McFall, Chairman of the Committee, said:

"It is possible that in due time the affairs of the Presbyterian Mutual Society will be unravelled. However, many members cannot wait this long for their money. We heard from some who urgently need funds for medical treatment, some who quite rightly want to enjoy their retirement before it’s too late and others who are struggling simply to meet the necessities of daily life in the current economic climate."

"We have long argued for the creation of a system which makes it crystal clear when whether and to what degree deposits are protected. We do not believe that, as a general rule, the taxpayer should stand behind an financial institution.

"However it is clear in the case of the PMS there was a fatal regulatory gap, which no lay person could reasonably have identified. Ministerial Working Group must report swiftly to ensure that MS members do not suffer unduly. We are not prescriptive about what solution is best; it is however clear that a remedy must be found."

What happened and why

The PMS, a Northern Ireland Industrial and Provident Society, was subjected to a run on its deposits in October 2008, which resulted in its entering administration. The estimated realisation value of its assets is significantly less than its liabilities.

There is some prospect of recovering members' money if the administration is allowed to run for a long time, but that would continue to mean that members of the Society, who might have pressing needs, would not have access to their funds.

Moreover, there is legal uncertainty as to whether shareholding members of the society are entitled to the return of any of their funds until those who have made loans to the Society are repaid. The PMS was not regulated by the FSA, nor was it part of the Financial Services Compensation Scheme. Its members have no legal entitlement to reimbursement.

Northern Ireland Registry

In Northern Ireland, industrial and providential societies are registered by the Registry of Credit Unions and Industrial and Provident Societies (the Registry). The function of the Registry is simply to hold a register of the 180 IPSs operating in Northern Ireland, and to make sure their annual returns are filed. The FSA performs a similar function in relation to industrial and provident societies in Great Britain, in addition to its financial regulation responsibilities.

Role of the FSA

The FSA told the Committee that it took steps to mitigate the risks that registered societies were engaging in activities which should be mitigated. The Committee accepts that the Registrar had no regulatory functions in relation to Industrial and Provident societies, and could take no official action. However, it does not believe that Department of Enterprise, Trade and Investment NI (DETINI) was so circumscribed.

The Report notes DETINI’s opinion that it was not their legal responsibility to regulate the PMS or manoeuvre them into regulation. However, the Committee were surprised and concerned 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.

This might well have entailed action in London as well as in Belfast, but as the department closest to the problem, it is reasonable to expect DETINI to have taken a lead in identifying the problem, and in seeking a solution, the Report says.

The future

The Report calls for a system in future where, in cases like the PMS, it would be crystal clear that deposits were made at the depositors’ own risk, and there was no question of government assistance.

It should be clear that it is the directors, not the government, or the regulator, who have ultimate responsibility for such an institution's management, the Report says. The Committee does not believe that, as a general rule, the taxpayer should stand behind financial institutions.

Northern Ireland banking sector

The banking sector in Northern Ireland is regulated by the FSA just as in Great Britain. There were no clear indications that the regulatory system for IPSs differed between Northern Ireland and Great Britain. 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.

If these savers are to be assisted, the United Kingdom Government and Northern Ireland executive must act together to ensure that individual PMS members do not suffer unduly. The Report is not dogmatic about what solution is best. However, it emphasises that a solution must be found, and found quickly.