I fear this may be a continual theme in 2010. Another column, another inquest.
The year is already shaping up painfully for the mutual sector. In the last column we considered the sad fate of Equity Shoes. This time it is the turn of the Presbyterian Mutual Society, based in Belfast. I have referred to its collapse in a previous article, but a provisional report by the administrator has now been published, allowing us to understand better why the society collapsed and what the lessons are for the wider mutual movement.
In simple terms, the Presbyterian was a victim of a traditional ‘run’ on its deposits. Savers saw the queues outside branches of Northern Rock, worried about which banks might go bust and then realised that the Presbyterian was not covered by any form of guarantee or compensation. Many members removed their deposits.
In total, investors withdrew £21m in October, leaving a mere £4m in cash before the society called it a day. The society argued, with some justification, that investors’ money was covered by its assets, but many of these were of long-term character and therefore not liquid.
This interpretation of events explains the demand of Northern Ireland’s minister for enterprise, Sir Reg Empey. Empey says that because the collapse of the society was brought about by a lack of confidence in the banking system and because the UK government stepped-in to save other depositors’ funds – even where this went beyond their legal obligations, as with investors in Icelandic banks – so the Treasury should cover the Presbyterian’s members’ losses.
The Treasury rejects this view, on the grounds that the registration of industrial and provident societies such as the Presbyterian, or PMS, is a devolved responsibility of Sir Reg’s department. Empey responds: “If the Treasury really believes that the PMS is a devolved responsibility then I would pose them this question. Did they consult with the Department of Enterprise before they emphasised these guarantees, or did they dream-up this argument after their effect on the PMS became apparent?
“In my view it is simply a matter of cause and effect and they have a moral responsibility to guarantee the PMS funds. There are some elderly people who are completely dependent on this for their income in retirement.”
But while there is obvious sense in Sir Reg’s argument, further disturbing facts have emerged from the provisional report of the society’s administrator. He is the man responsible for running the society after it became clear it was insolvent and who must help members decide whether to quickly liquidate the society, or to gradually run it down in an orderly fashion.
The society, it emerges, made considerable investments in the property sector – which boomed more in Northern Ireland than anywhere else in the UK and which has subsequently collapsed most heavily in the province. Presbyterian loaned £85m to developers to purchase building land, which has now collapsed in value from peak market prices. And a further £26m was provided for buy-to-let investments. Across the UK, much of the buy-to-let sector is hanging off a cliff, with some apartments constructed for buy-to-let speculative investments falling in market value by more than half. It is reasonable to guess that this will have happened to some of the investments financed by Presbyterian loans.
According to the administrator’s report, the society had commercial property holdings at the time of its annual report in March last year of £129.5m, but this has a value in today’s market of only £92m or so. Total outstanding loans stood at £184m at the time the administrator took over.
Presbyterian is an industrial and provident society and, as such, investments are made in the form of shares, not savings accounts. Consequently, Presbyterian is not covered by the Financial Services Compensation Scheme. Many people stand to lose substantially as a result. Northern Ireland politicians from all the major parties are currently lobbying the Prime Minister to extend compensation from either the Treasury or the FSCS, backed by an online petition with 5,731 signatures on it at the time of writing.
While there is apparent unanimity in Northern Ireland about the need for a state-backed guarantee for credit union savings, the same does not apply to the fate of the Presbyterian. Erskine Holmes is a Co-operative Press director and attentive observer of the mutual scene in Northern Ireland. He is not persuaded the Treasury or FSCS should compensate members of the failed Presbyterian.
“Why should they?,” asks Holmes. “The Presbyterian should sort this out themselves. They were speculating. They were running an unregulated deposit and loan operation. Buy-to-let, commercial lending, building sites. The investment figures, the money they brought in, doubled in three years – from £160m to £300m. They had 9,000 investors.”
But the problems at the Presbyterian highlight a much wider weakness. In particular, it has emerged that the UK’s FSCS does not cover credit unions in Northern Ireland, because of a vagary in the law. My apologies for having wrongly said in a previous column that credit unions were covered – they are in Britain, but are not in Northern Ireland. Here I am not alone in getting in wrong – the UK’s financial regulator, the Financial Services Authority, gave me a detailed, 30 minutes, briefing on the structure on financial compensation for institutions in Northern Ireland and the Irish Republic and gave me incorrect information on compensation arrangements for credit unions in Northern Ireland.
Credit unions in Northern Ireland are in fact registered with the devolved government’s Department of Enterprise, Trade and Industry, as are other industrial and provident societies. Consequently, the province’s credit unions are not registered with the UK’s Financial Services Authority. Nor are they authorised by the FSA, because credit union savings are treated as shares not deposits and so the unions do not need to be licensed deposit-takers.
The FSCS confirms that its compensation arrangements do not extend to Northern Ireland’s credit unions, even though they have bailed-out several failed credit unions in Britain. The Irish League of Credit Unions stresses that there have, in fact, been no failures of Northern Ireland credit unions and they intervene at an early stage to support unions that enter difficult. To help with this, the Irish League has a reserve fund of £88m to provide a savings guarantee scheme that would pay up to £10,000 per investor – which covers the vast majority of savers. In addition, the unions themselves hold back 10% of savers’ funds as their own reserves.
But the fact that the FSCS does not cover Northern Ireland is a matter of concern to the Irish League – and to those credit unions that belong to the Ulster Federation of Credit Unions (which also runs a compensation scheme for its members) and other unions that belong to neither association. The Irish League has been lobbying for an extension of the compensation scheme to cover Northern Ireland credit unions.
And it looks as if its political pressure is beginning to pay. Firstly, a report from the Northern Ireland Assembly’s Committee for Enterprise, Trade & Investment has backed its argument, not only in extending the protection available to Northern Ireland’s credit unions and their members, but also to enable them to increase the services they offer in line with what is permitted in Britain.
The chair of the committee is Mark Durkan MP, MLA, a good friend of the co-operative movement. He said: “It is essential, if we are to tackle financial exclusion that credit unions are allowed to offer all the services that their members need. We have an exceptionally strong credit union movement here—over 400,000 people in Northern Ireland are currently members.
“This is a much stronger base than in Great Britain but, perversely, credit unions here are much more restricted in the services they can offer. The credit union movement has the potential, if permitted, to bring the full range of financial services to those who are now financially excluded. The Committee’s recommendation is for regulation to move to the FSA to enable credit unions here to offer the full range of services that their counterparts in Great Britain can offer.
“Some people resort to high cost doorstep lenders because they can’t access affordable credit from banks. If people could have their wages and benefits paid directly into their credit union this would encourage saving and help people to borrow responsibly. As well, the uptake of Child Trust Fund vouchers is much lower here than any other region. The Committee believes that, if credit unions are allowed to accept Child Trust Fund vouchers, our uptake would be much increased.”
The committee has also proposed the credit unions be allow to invest some of their assets into community development and social enterprises.
Within two days, very promising noises emerged from HM Treasury. It has accepted both the argument of the Assembly’s committee and the need for urgency. It has accepted that it nees to review the legal and regulatory structure governing credit unions, particularly related to depositor protection, the range of services offered and consumer information and education.
Both the Treasury and Mark Durkan’s committee deserve praise for acting with such alacrity. Given the range of pressures on the Treasury – it is trying simultaneously to bail-out the banks, insurers, small firms, the Private Finance Initiative and the car industry – it is reassuring that it is also keeping its eye on the ball marked ‘credit unions and industrial and provident societies’. Considerable good may yet come out of the Presbyterian disaster.
As much as I sympathise with the plight of people adversly affected, I’m afraid Mr Holmes has a point. The FSCS levy has adversely affected UK Building Societies (who have been prudent and avoided risky investments) and UK credit unions are also not happy with the levy they have to pay. The levy in question is the ‘interest only’ costs relating to the funds that the FSCS was required to borrow from the Treasury to address the defaults that have resulted from the financially irresponsible activities of the UK’s mainstream banking sector. The interest costs for the levy this year will be some 450 million. The UK credit unions share of this is 0.05%. If you do the arithmetic that’s over 200,000 that has to be paid. And it will go up each year – and if there are more problems in the financial services sector (which there will be!) well what can I say? In fairness, the UK govt wants to review the current levies being charged to building societies and credit unions.
There are some positive reasons for seeking FSA regulation of credit unions in Northern Ireland – but if Northern Ireland politicians want to lobby for this they should also ask questions about the fairness of the current FSCS levy on Building Societies and Credit Unions.