The disaster of the Presbyterian Mutual Society is still causing ripples across financial services regulation in Northern Ireland. A gap in regulation between the Financial Services Authority and Northern Ireland’s Department of Enterprise, Trade and Investment meant there was no proper oversight of the Presbyterian – an industrial and provident society.
Members of the Presbyterian found to their surprise that their society had speculated in ways that were outside its powers as a financial institution not regulated by the FSA. As they were not regulated by the FSA, and as the members were legally ‘shareholders’ rather than ‘savers’, they were not entitled to any compensation from the Financial Services Compensation Scheme.
Eventually – but only after a political lobby reached Prime Ministerial level – a negotiated settlement was reached. Under this, savers with shares and loans with the society recovered all the value of their shares and 85% of the value of their loans, while savers whose holdings were over £20,000 recovered between 77% and 85% of their holdings – subject to deductions where this was individually and voluntarily agreed.
The settlement was funded by the UK Government and the Northern Ireland Executive, at a total cost of £225m. This was provided through a £175m loan from the UK Government to the society, plus £25m each from the UK and Northern Ireland governments towards a mutual access fund. Another £1m is to be provided by the Presbyterian Church – which was closely attached to the society, to the extent that they had a shared website.
Much of the society’s crisis was caused by difficulties accessing value from illiquid investments at a time when the global financial crisis caused a run on deposits with the society. Consequently, it is hoped that the run-down of the society – which is now in administration – will eventually lead to the repayment of the £175m. A court order prevents detailed consideration taking place in the media of the reasons for the society’s collapse. We can, though, report that a House of Commons inquiry concluded that the society had exceeded its powers.
More positively, though, the Presbyterian crisis has led to the modernisation of the regulation of the credit union sector in Northern Ireland, which has been vulnerable because it shared the same weak and confused regulatory structure that had failed the Presbyterian’s members.
From next year, the FSA will have clear regulatory responsibility for credit unions in Northern Ireland, as it does in Great Britain. Martin Stewart, its head of building societies and credit unions, explained that there will be consultation before the new regulatory framework is finalised. “Over the next few months we will be engaging with NI credit unions and other stakeholders to encourage them to provide us and HMT [the Treasury] with their views and suggestions so we can ensure the transfer process is as smooth as possible.”
Under the new arrangements, NI credit union members will have recourse to the Financial Services Compensation Scheme, should any fail. At present, members are covered by voluntary compensation systems provided by the two membership bodies of Irish credit unions operating in the North. These are the Ulster Federation of Credit Unions (for unions associated with unionist traditions) and the Irish League of Credit Unions (for nationalist and republican credit unions, which operates on both sides of the Irish border).
DETI will continue to register NI credit unions until a later date – probably not before the new financial regulation system for the UK is clarified and operational. The same prudential standards will apply to credit unions in NI and GB from next year, including on matters related to capital, liquidity and financial reporting. Members of NI credit unions will also for the first time have redress in the case of disputes to the Financial Ombudsman Scheme.
Tommy Jeffers, development worker at the Ulster Federation of Credit Unions, said: “The Federation is in favour of this. We have been trying to get a policy of esteem with GB for a number of years.” He played down fears that NI credit unions will be unable to comply with the stricter regulatory requirements.
“We hope we won’t have much problem,” said Jeffers. “Some smaller credit unions may have problems.” But he doubted whether this would lead to many credit union mergers. “The FSA is saying this happened in England, but the small unions there have as few as 50 members. Our smallest credit union here has 200, which is a fair size. Some credit unions where the members are elderly might say they won’t do it any more.”
The Irish League of Credit Unions took a more cautious view. A spokesman for ILCU said merely: “The Irish League of Credit Union has noted the publication of a joint consultation paper by the Financial Services Authority and HM Treasury setting out proposals on the transfer of regulatory responsibility for credit unions in Northern Ireland. The ILCU is reviewing the paper in detail and will engage directly with our member credit unions with respect to this.”
But the Northern Ireland Consumer Council expressed its satisfaction with the proposals. Joleen Cunningham, its senior consumer affairs officer, said: “The Consumer Council has been lobbying on this issue since 2007. The proposals will mean stronger protection for the 177 credit unions in Northern Ireland and greater protection for members’ savings. [The] announcement acknowledges the invaluable role that credit unions have been playing in Northern Ireland for decades in supporting and providing affordable credit and savings for consumers.”
Mark Durkan, MP for the Foyle constituency, has been leading a Parliamentary campaign for equal treatment of NI credit unions and spoke in favour of this during House of Commons Treasury questions in June. He also chaired a NI Assembly committee investigation into credit union regulation, which recommended a single system across the UK. “This is welcome and overdue and it reflects credit on credit unions here, which will enable them to provide more and better services,” he says. “Northern Ireland credit unions have a very strong membership base. Their counterparts in GB have a much lower membership base.”
But Durkan warned: “There will be a new anomaly. Credit unions in GB have been campaigning for more powers for years.” As a result of the strong lobbying by ABCUL – the Association of British Credit Unions Ltd – British credit unions will soon be able to offer defined and guaranteed rates of return for savers, which will make their savings accounts much more attractive. In the past, credit unions were only empowered to pay dividends, which could not be calculated in advance and were therefore not guaranteed.
Under a Legislative Reform Order laid in July, British credit unions will also be able to attract investment from local businesses and offer services to the local voluntary sector. It is hoped that the new powers will be in place for the beginning of next year – in Great Britain. “The scope of this is deemed to be actually in the realm of [NI] Assembly competence,” explained Durkan. “So the Assembly here will have to consider this themselves. So people here will say you have told us we are equal, but actually we won’t be!”