Readers from outside Northern Ireland will probably find it impossible to understand just how significant the collapse of the Presbyterian Mutual Society is. But, and I hope you will accept my word on this, it is.
Part of the explanation is that religion and politics are pretty well indivisible in Northern Ireland. And, according to churchgoers, Presbyterian ministers were fulsome in their assurances that investing in PMS was a good thing to do and in keeping with the church’s principles. (In fact, so closely linked was PMS to the Presbyterian church that they shared a website.)
As a result, about £300m was held in PMS on behalf of people closely identified with unionism. So important subsequently did the PMS crisis become that it was widely believed that its resolution was central to the political deal that was ostensibly about the devolution of policing and justice. One of the side deals was rumoured to be a settlement on PMS.
However, Co-operative News has been told that the rumours are false. Gregory Campbell MP, MLA – a former Democratic Unionist minister for regional development and one of the DUP’s negotiators – told the News: “I would not expect any announcement [on PMS] in the next few days. It’s totally and utterly disconnected from discussions about policing and justice.”
In fact, any solution to the PMS crisis is in the hands of a ministerial working group, convened by the Treasury and with representation from Northern Ireland. That group was to have reported last autumn, but did not. The focus of the working group now is trying to convince a bank or other financial institution to take over PMS. Ministers remain hopeful they can achieve this.
The task is not easy because of the severity of the PMS crisis. The underlying issue is that it over-invested that in fixed assets, leaving it short of liquidity. When savers became spooked by the collapse of Northern Rock, an increasing number wanted to withdraw their money – but there was insufficient in liquid funds to enable this to happen, so the society became insolvent. Meanwhile, the capital assets that PMS invested in were dropping in value, so the society was hit by a secondary crisis.
To make matters worse, an investigation by the Financial Services Authority revealed that the PMS directors engaged in activities that as an unregulated body they were not permitted.
Last April the FSA explained: “The FSA can confirm that it has investigated the activities of Presbyterian Mutual Society (PMS), now in administration, to consider if it was conducting regulated activities without the necessary authorisation or exemption. We have concluded our investigation and have decided that it was conducting regulated activities without the necessary authorisation or exemption.
“However, on the basis of the information currently available to us, and applying the criteria in the Code for Crown Prosecutors, we have decided that it would not be right for us to take a case against any of those involved in running the PMS. However, we remain in touch with the administrator and, if further information comes to light relating to the issues we have investigated, we will look into it.”
In recent weeks, the cause of the PMS crisis have become clearer – mostly thanks to John McFall, the soon to retire Labour and Co-operative MP who chairs the Treasury Select Committee. John responded sympathetically to the many PMS savers who contacted him hoping for some form of compensation. Consequently the Treasury committee recently heard evidence on PMS in a hearing in Belfast. The evidence that was presented – which it should be stressed is at present uncorrected – was enlightening
Finance minister Sammy Wilson explained how the crisis dramatically unfolded. He said that anecdotal evidence suggested that some banks spread rumours about PMS, leading to a loss of confidence in it and fears because it was not covered by the Financial Services Compensation Scheme. “Within three weeks £21 million was poached, I suppose is the word I would use, from the PMS to local banks,” said Wilson.
McFall did stress, however, that local banks denied having been involved in rumour spreading. Astutely, John focused on regulation and the history of PMS. How, he wanted to know, was it possible for an institution with assets of £30,000 in 1982 to end up with £300m by 2008. In a sense that is an unanswerable question and led, instead, to another question from enterprise minister Arlene Foster. “One of the issues is whether the management evolved at the same rate as the growth which happened to the Presbyterian Mutual Society,” she wondered.
Another interesting question is how to reconcile that £300m figure with current asset values. At March 2008, it emerged, the property portfolio was worth a mere £129.5m. It has since fallen further. The PMS administrator is looking after some non-property assets, but even so there remains a deficit of around £100m in the society’s finances.
About 10,000 people were classified as PMS shareholders and have potentially lost money – many lost tens of thousands of pounds. Unfortunately, many seemed to believe that PMS was a bank and failed to understand the implications of holding money in an industrial and provident society as shares.
Observers will find it equally difficult to understand how a society can generate a deficit of £100m – a third of the value of the deposits they were holding – without any regulator noticing. It was a challenge that the members of the Treasury Select Committee had similar problems with. Enterprise minister Foster explained in terms that might be compared to Catch 22. (In Catch 22, an airman could be exempted from combat flights merely by requesting an exemption on grounds of being mentally unfit. But the catch, Catch 22, is that any request for exemption is the act of a sane person, so the request must obviously fail.)
Any request for regulation, said Ms Foster, was up to the society to seek. “Essentially, it is up to those IPSs. If they are carrying out activities that need to be regulated by the FSA, they need to alert the FSA to that and then become regulated by the FSA.” So, any society that did not see the need to be regulated was not regulated. And that was the catch.
“Why do you think this gap – which is a gap – was not acted on?,” asked McFall. “There is no gap in so far as the PMS should have opted in,” explained Foster. Understandably, McFall disagreed. “I do not think we are totally convinced, Arlene, but do not worry. We are not totally convinced of that. We think there is a gap.”
And that, almost certainly, is what the Treasury Select Committee will conclude. When I phoned John McFall he was too busy writing the report to discuss it. But it would be surprising if the view of McFall and his colleagues differs from that of leading SDLP MLA Alban Macginnis, who is chair of the Northern Ireland Assembly’s enterprise committee.
“I think there was a gap in terms of the regulation; I think that is clear,” Macginnis told the select committee. “On reflection, and hindsight is a great thing, I think there should have been some sort of regulation put in place…… It is evident that there should have been regulation, and that regulation possibly could have been under the FSA. It is not sufficient for societies such as these to be self-policing and to expect them to say to the FSA, “Oh, by the way, we are doing this or that”, and then the FSA comes in and has a look at what they are doing, so I do think there was a gap.”
And despite efforts by today’s Northern Ireland ministers – who merely inherited a flawed system – to argue the contrary, any reasonable person has to conclude the gap existed, was very large and very expensive.