“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.