“There was a Chinese wall and people were quite happy with it.”

When the UK Treasury Committee met in the Senate Chamber at Stormont on 18th January to hear evidence on the illegally-operating Presbyterian Mutual Society, I mentioned that there had been some sharp questioning of the witnesses. The uncorrected transcript of that evidence is now online. Note that the transcript is not yet an approved formal record of these proceedings. Extract below the fold.Here’s the exchange I had in mind. From the uncorrected transcript

Q40 Mr Fallon: My apologies to everybody for my late arrival; I was on a different flight. This point may have been covered before, but could I just ask Arlene Foster, was your department aware of the scale of the society’s commercial property portfolio?

Ms Foster: As I explained before you arrived, Michael, our primary objective was as a registrar and not as a regulator.

Q41 Mr Fallon: I understand that, but was your department aware of the scale of it?

Ms Foster: Yes, we were because the auditor signed off on it every year to say that there were no difficulties arising.

Q42 Mr Fallon: And who did you think was regulating it at that point?

Ms Foster: It is not our function.

Q43 Mr Fallon: I know that, but who did you think was regulating them?

Ms Foster: Yes, but it is not our function to ask if it is being regulated, as it were. It is a function of the people who are carrying out the activities to register with the Regulator, which is the FSA. The Chairman mentioned that he was not convinced that there was not a gap, but it is actually the same in the rest of GB as it is in Northern Ireland: registration and regulation are two separate functions and if you are carrying out activities, you register with the FSA.

Q44 Mr Fallon: You and all your officials assumed that somebody else was regulating the commercial investment side?

Ms Foster: It was not our function to assume or not to assume.

Chairman: In the annual report there is £120 million of commercial property.

Q45 Mr Fallon: That is just what I want to be clear about. Did it not occur to anybody to ask who was regulating that kind of commercial activity?

Ms Foster: We do not have a prudential supervisory role in the department.

Q46 Mr Fallon: I know it was not you; I understand you did not have the responsibility. What I am asking is, is it really conceivable that, given the scale of this, none of you, no official in your department, ever asked who was regulating it?

Mr Bohill: The PMS was required to submit an annual report and annual accounts, and clearly the annual accounts showed the scale of the business in terms of turnover, for example, that the PMS was doing. What it did not show or provide any evidence about was the nature of that business, just in the same way as annual accounts for any company do not indicate the type of business that is being undertaken. As well as the accounts being signed off every year by accountants, the annual report included a statement by the directors of the company then that the society was not, I think the term is, “accepting deposits”, and finally the annual accounts were also not showing that high activity. There was no indication from the auditors of any matters of concern about the accounts. I think it is also on the record that the FSA’s investigation concluded that it was incumbent upon the officers of the society to apply to the FSA seeking authority to be regulated by them in terms of the activities that they were undertaking.

Q47 Mr Fallon: Did you know how much of the portfolio was actually commercial rather than domestic?

Mr Bohill: That information will not have been available from the accounts.

Sammy Wilson: I do not know if it is helpful, but the person who —

Q48 Chairman: If you do not mind, Sammy, maybe we could articulate the gap that we are seeing here. The FSA in Great Britain is also the Registrar but in Northern Ireland you have a Registrar and a Regulator, and to us it seems that there was a wall of silence between them, saying, “We did not need to ask questions”, and that is where the gap has occurred here.

Ms Foster: Perhaps I can say, Chairman, in respect of that, yes, the FSA in GB carries out both of those functions but they do not interlink; they are separate functions, so the Registrar and the FSA will not say, “Hold on a wee second; that should be regulated”. That is not the way it works.

Q49 Chairman: I have been involved with credit unions for years and I have got the Registrar coming up and talking to them and the Regulator, and I know that there is noise between the Registrar and the Regulator, so I do not think that is the case, Arlene. It just seems to us that there was a gap here and nobody seemed to pick it up, and that is what Michael is probing.

Sammy Wilson: As I understand it, the gap is filled by the auditor who clearly would have known when signing off the accounts the amount of commercial property, et cetera. If the auditor was not happy that, given the amount of commercial property and what-not there, there was no regulation, then he could have qualified the accounts and I do not think that happened.

Q50 Mr Fallon: Sure, but the accounts were filed with you for a purpose, not just to be put into a box. You were running the business department here. It must have occurred to you, looking at these accounts, that the society was involved in an awful lot of investment activity.

Ms Foster: They were filed with us for a purpose and that purpose is that we have to keep a register. That is the purpose of the file, which is open then to the public and which people can come in and see. We have already covered the fact that if someone from the public had made a complaint about the workings of the PMS, then we would have alerted the FSA to that. Nobody did that. We were not alerted by the solicitor, we were not alerted by the accounts, we were not alerted by the auditor, and therefore there were no alarm bells ringing. I have to say that very clearly to you. I do want to put on record, however, that the Treasury have conducted a review of the legislative framework for credit unions —

Q51 Chairman: We are going to come on to that.

Ms Foster: — but also for IPSs, and they have very clearly said that the IPS legislation in Northern Ireland is very similar to GB’s and, therefore, if we are saying there is a gap here in Northern Ireland, then perhaps there is a gap throughout the UK.

Q52 Mr Fallon: But the accounts show that for the year ended 31 March there was investment property to the extent of £130 million. That was commercial property, not domestic property. You had those accounts and not one of you asked who was regulating all this.

Ms Foster: Because we did not have a prudential supervisory role.

Q53 Mr Fallon: But you did not ask who did.

Ms Foster: But that is not our role to ask who did.

Q54 Mr Fallon: But you are running the business department here. This is a huge business.

Ms Foster: Which is why the FSA regulates businesses that are carrying out those sorts of activities.

Chairman: There was a Chinese wall and people were quite happy with it.

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  • joeCanuck

    I hope this isn’t an attempt to shift the blame to Stormont rather than where it properly lies; with the people who were breaking the law.

  • Drumlins Rock

    for once Pete I actually waded through through your links, to links, to links, to link and finally got back to where your illegal accusation stems from, the FSA report states-
    “We have concluded our investigation and have decided that the PMS 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.”
    Now the committee are investigating how this came about, those who ran the PMS say they complied with everything they were asked to by the DED, and believed everything was above board, by taking no further action it seems the FSA have accepted this explanation, the FSA say they knew nothing about the PMS, so it has come back to the DED to ask why they didn’t either inform the FSA or instruct the PMS to contact the FSA.
    It appears thats things just got missed by all concerned, it has happened all over in this crisis, the big difference here is Gordon gets no votes in NI, so he dosnt give a stuff.

  • joeCanuck

    Ignorance of the law is not a valid defence.

  • Drumlins Rock

    but does result in strong mitigating circumstances. Joe the FSA would have thrown the book at the PMS if they found anything untoward, it was a cock-up from all involved, a failing to tick the right box type one, probably it wouldnt have been a major one in normal times but this time it has resulted in the PMS falling out side the Governments safety net, they wern’t the only ones.
    Northern Rock, Drumferline, HBOS, RBS, probably the whole lot were way beyond the safety net and all being fair should be in the same situation as the PMS, but Gordon changed the rules for each one of these, he could easily have included the PMS too, but as i said before its small fry and none of its savers vote Labour.

  • joeCanuck

    I don’t agree, DR. I lost a fair chunk of my retirement savings without breaking any law and the Government isn’t coming to my help.

  • Drumlins Rock

    Have no idea where your saving were invested, but my father put his pension in the PMS when it matured as it was giving a marginally better return and I guess out of a scense of supporting his denomination, just the same way as you would put it in a bank, building society, credit union, etc. it was savings, not an investment, the membership booklet made it clear that although they called each pound a “share” they remained savings, (we have the booklet at home still I checked it), this is exactly the same terminology as used by Credit Unions, and my father set up one so was more than familar with all the terminology.
    I dont know when the PMS crossed from a “Super Credit Union” to something more, not sure anyone does, but currently he has no pension, its been frozen for a yr and a half now, remember the PMS fell when Gordon guarnteed bank deposits and some bank mangers and other created a panic, ironically without that the PMS has strong enough assets to ride out the storm, if it had of got the chance.

  • joeCanuck

    I hear what you’re saying DR.
    I have to admit that I clearly knew that I was investing, even though I thought it was low risk since I am approaching retirement and wasn’t using high growth/potential high loss instruments.
    I know younger people who took a much bigger hit than I did.

  • Drumlins Rock

    Dont worry Joe mines safe, I investing in bricks and mortar, can’t go wrong there can you? lol
    I invested at the peak but should till come out of it ok, could be alot worse, but that guarnteed fortune was looking so tempting at times…
    guess will have to wait another yr or two, least I should know for the next time.