Northern Ireland’s Neglected Savers
Posted by robin in Financial Articles Wednesday December 2, 2009 3:09 pm
A call out of the blue from Northern Ireland…
“Have you heard of the Presbytarian Mutual Society?”
Um, not a lot.
A year’s worth of distress follows in quick time: an account of another financial institution that got dashed on the rocks of the credit crunch.
The difference here is this one actually went bust and missed the bail out. It merits scant national media attention but resonates loudly in Belfast among the 9,500 who are out of pocket, some of their life savings. Approximately two-thirds of their number is over 60 years old and, after a year of waiting, some have “started to die”.
PMS Ltd was set up as an Industrial and Provident society in 1982. There are around 160 such societies registered as limited liability companies in Northern Ireland and more than 8,000 registered with the FSA.
Such organisations typically serve communities with a “common bond” to one another. They are set up as limited liability companies either as co-operatives or with a view that the business conducted will be to the benefit of the community. In Northern Ireland these include a variety of housing associations and agricultural societies amongst other trades.
FSA guidelines define an Industrial and Provident society as:
“…an organisation conducting an industry, business or trade, either as a co-operative or for the benefit of the community…”
“Co-operative societies are run for the mutual benefit of their members, with any surplus usually being ploughed back into the organisation to provide better services and facilities.”
The FSA is the UK regulating authority for such organisations. Only in the case of PMS it wasn’t. PMS was registered but not regulated by the Northern Ireland’s Department for Enterprise, Trade and Investment (DETI).
A condition of set up is defining the “objects” of the society. In the case of PMS these were:
· To promote thrift among its members by the accumulation of their savings
· To use and manage such savings for the mutual benefit of members
· to create a source of credit for the benefit of its members at a fair and reasonable rate of interest
PMS’s growth over time had accelerated rapidly in recent years. Assets had increased from £50m to £300m in the six years prior to its swift and brutal end. An “unprecedented run on the Society’s cash” led to administrator, Arthur Boyd & Company, being appointed on 17 November 2008. Its stated aim was first, to see if PMS could be rescued or if that was not possible, then organising a wind up of assets in an orderly manner.
The administrator’s last report on 15 June 2009 updated its assessment of the PMS loan book and identified where the holes lie.
Nature of Advance Amount Estimated Recovery
(£m) (£m)
Advances to Congregation 11 11
Advances secured on:
Own homes 9 8
Houses for sale 3 2
Agricultural land 26 22
Other forms of security 4 3
Buy to let properties 24 17
Commercial property 17 10
Building sites & development land 85 34
Total 179 107
The report notes half the advances made between 2005 and 2007 were “to fund commercial property, building sites and development land”. The Northern Ireland property boom saw values double in the three years to June 2007. By June 2009 they were pretty much back where they started having fallen an estimated 40-60%, though the market has been recovering since.
This small credit institution boasted 21 directors, including six addressed as Reverend. Barclays, in contrast, with around £1.5trn in assets gets by with a board of 13. But it appears societies originally required a minimum of 21 members to form in the first place, so perhaps this was the legacy from inception.
My caller maintains savers didn’t know what was going on. The administrator too noted in its June report approaches from “a number of members” who believed themselves depositors rather than investors. Returns received by savers were those akin to a deposit account with interest credited annually. One disappointed saver says:
“We were never told our savings were at risk, in fact we were told the exact opposite; the directors assured us that they would not speculate with our savings.”
Though this was an unregulated entity with the FSA, the UK regulator has since made enquiries and on 9 April broke with protocol for ongoing investigations when it announced on that PMS “was conducting regulated activities without the necessary authorisation or exemption”.
Meanwhile some savers, with all their money tied up, continue to suffer. Calls on the administrator to set up a “hardship fund” could not be realised for legal reasons.
In mid-January 2009, Northern Ireland’s Enterprise Minister Arlene Foster stated it was a UK government problem:
“The Executive has done everything it can within its powers to assist the Presbyterian Mutual Society. It does not have the same options open to it as the UK Government in terms of depositor protection.
“The UK Government must act now to assist the members.”
The UK government didn’t see it that way and lobbed the problem back at Northern Ireland. Northern Ireland secretary Shaun Woodward explained their position in parliamentary questions on 3 June:
“We appreciate the gravity of the situation, but we equally have to recognise that, under the law, those people who put money into the PMS did so not as savers, but as investors, and that the regulation of this body in Northern Ireland is the responsibility of devolved government in Northern Ireland, not of Whitehall.”
Mark Durkan MP pointed out to the Minister the assertion that most with money entrusted to PMS believed themselves savers NOT investors. Tory MPs Ann Winterton and shadow Northern Ireland secretary, Owen Paterson, said the government was to blame for PMS’s downfall. The blanket deposit guarantee scheme issued on 8 October 2008, excluded the unregulated PMS from its protection. Their savers subsequently rushed to withdraw funds and switch to government guaranteed deposits.
Between 27 October and 17 November 2008, when it went into administration, the Society had withdrawal requests of £50m and only £4m in the bank. The government had bailed out Dunfermline why not this Society the MPs wanted to know?
That was a building society regulated by the FSA and its depositors were savers reiterated Woodward, explaining further that:
“…they made an investment in the form of risk capital in the form of withdrawable shares and loans”.
We might also note that Dunfermline was 10 times the problem, with assets of more than £3bn and that Scotland is not wanting for political influence in Westminster.
Mr Woodward cited the FSA’s judgement on the matter that PMS had been “conducting regulated activities without the necessary authorisation or exemption”. The Minister also alluded to “issues about the regulation of bodies such as the PMS and they will need to be addressed,” perhaps this starts with the question: how did DETI and the FSA miss this unregulated bank?
The findings of the UK Accountancy and Actuarial Discipline Board might make revealing reading when published. They launched an investigation in August to look at the actions of directors and the society’s auditor, Moore Stephens.
Further parliamentary questions to Sinn Fein Deputy Leader Martin McGuiness MP on 9 November suggested an increased likelihood of government assistance. This is envisaged along the lines of solutions provided for Dunfermline and Bradford & Bingley, though care is needed not to fall foul of EU state aid rules.
Some form of white knight bank has been mentioned. An FT report in February suggested RBS subsidiary Ulster Bank as a possible buyer. The Belfast Telegraph reported “three financial institutions have shown an interest” in November with Ulster Bank again in the frame.
Meantime the anniversary of this collapse has recently passed and some savers, who put life savings with PMS, are facing a second Christmas of financial hardship. A “delayed” report on PMS from a Ministerial Working Group set up back on 17 June is due to be presented to Gordon Brown by NI Minister Shaun Woodward “within weeks”.
“They were originally due in September but were then pushed back to October…”
It’s now December and still no report.
Administrator Arthur Boyd, meanwhile, is sitting on its hands awaiting possible government assistance before proceeding to wind up PMS’s assets.
My caller fears political heat cools with distance and their plight needs to resonate more loudly in Westminster. Given an urgent call for action was made six months ago and an overdue report is yet to materialise, it seems a fair point.
Government machinery turns slowly on this one, in contrast to similar such problems of late. Presbytarians reportedly place great importance on education and life-long learning. This unfortunate experience provides plenty of both.
Ireland: Only ever a Celtic Tigger?
Posted by robin in Financial Articles Friday November 6, 2009 3:27 pm
Where to now for Ireland?
Yesterday’s pin up for success, today’s case study of excess.
Branded the “Celtic Tiger” following an analyst’s research note 1994, last year’s bust exposed more Tigger than Tiger.
An optimistic and exuberant Tigger that was hyperactive in the construction business – a sector accounting for 12% of its workforce and almost 10% of its economy – redeveloping, renewing and building aplenty: houses… apartments… gleaming glass offices…roads to nowhere.
Of course, Tigger bounced around the banking sector too, lending huge sums at cheap rates to finance the national rebuild while the easy money flowed.
An IMF report in 2000 concluded the Irish property market had peaked. The market wasn’t listening and duly tripled over the next six years.
Since 2000, Ireland was building around 75,000 homes a year for its 4m odd residents. The UK, with fifteen times the population and more than three times the size, appears to have managed a little over twice that build rate.
Today many homes stand empty. A September estimate put the vacancy rate at 350,000 though this includes a fair few holiday homes. Still for a country that counted less than 1.3m households in 2002, that’s an overhang that will take some draining.
There was other fuel fanning the flames of the property market too. Mortgage interest relief, long ago scrapped in the UK, is still available today though crimped in the April 2009 emergency budget and likely to go altogether perhaps in the next one on December 9. In the boom, affluent types were sometimes desperate for a trust-based pension plan that permitted residential and commercial property purchase with gearing…up to 75% says one. It all went into the mix on the journey to becoming the most indebted nation on earth by CNBC’s reckoning, with more than $500,000 in foreign debt per head.
Sated with Irish conquests, overseas buying became fashionable. Cape Verde was briefly a hotspot for the property speculator, even though there was apparently no direct flight from Ireland. And if you’re wondering where Cape Verde is (I did), look for an island archipelago off West Africa.
A fully paid up member of the EU, Ireland received transfer payments up to 4% of national income. When the time came, there was no hesitation signing up to the euro. It was among the first through the door, ditching the punt. Since then, it has enjoyed and now endures the too low ECB interest rates that came with the ticket. Now it finds itself with a high priced currency in a low valued economy. One problem not shared by their euro-wary neighbours across the Irish Sea, where a devalued sterling reflects the devalued economy that prints it.
Credit is due as Ireland has come a long way, of course. One of the poorest nations in the EU in 1986, it became one of the richest. It opened its doors, threw off the regulatory shackles and pitched for high-end foreign direct investment (FDI), successfully making the leap from agrarian backwater to self-styled ‘Smart Economy’ serving the single market.
The EU is the cornerstone of their success and ploughed in transfer payments to help them along. But Ireland made good use of its inclusion in the club in other ways. Together with a corporation tax rate of 12.5%, the country developed into a tax-privileged landing strip for multinationals launching trading sorties into the single market.
At the end of 2008, this ‘Smart Economy’ had 980 companies established, almost half from the US. The names installed reads like a who’s who of the glittering uplands of the tech revolution…with Dell, Fujitsu, Google, Hewlett Packard, Honeywell, IBM, Intel, Lucent, McAfee, Microsoft, Oracle and Yahoo amongst them. Pharma and medical instruments is another big sector and includes Abbott Laboratories, Braun, GlaxoSmithKline, Merck, Pfizer, Phillips, Ranbaxy, Reckitt Benckiser, Roche, and Wyeth.
The establishment of the International Financial Services Centre in 1987 established Ireland’s FDI appeal to the financial services sector too. It created good jobs and with a 10% corporation tax rate lured the likes of JP Morgan, Citibank, BNP Paribas and a host of other banks and insurance companies. The initial tax rate has now gone, harmonised in 2006 with the national 12.5% corporation tax rate.
All told the FDI imports have been a great success. They bring modern high-paying skilled employment together with the service companies that feed them. At the end of 2008, FDI companies employed 136,000 staff from a national workforce total of a little over 2m.
And what of home grown industry? The EIU record that Irish exports totalled $118bn in 2008. The Irish Development Agency record FDI company exports totalled $92bn. Take away FDI exports from the total and net Irish exports are €26bn. This line of thinking suggests domestic industry’s export prowess is a pygmy in comparison. The Irish Development Agency, which spearheads FDI in Ireland, adds to this conviction when it voiced its opinion in a press statement in September:
“One of the most serious, if rarely discussed weaknesses of the Irish economy, was and is the poor performance of home-grown businesses. Although there have been some real successes which give reason for optimism over the medium to long term, indigenous industry is not only weak, it is falling further behind its competitors as measured by the most broad-ranging and important indicator - exports.”
Look around the local Irish businesses and it’s more a legacy economy than a smart one that resonates. Ireland’s stock market in equities boasts a modest 83 main market listings, strip out the exchange traded funds and there are 50-plus companies. Cast your eye down the names and it’s the less cutting edge activities of natural resources, banks, insurers, Fyffes banana business and Waterford Wedgwood’s bone china, that catch the eye.
Ireland has some entrepreneurial buccaneers. Gobby airline boss Michael O’Leary for one, who has successfully built up Ryanair, but all in, unlike Irish culture, business treads a light footprint internationally. The government recognises the issue and is encouraging home grown prosperity. Money is pumped into higher education and Enterprise Ireland promotes Irish exports in the EU. There’s plenty of work to do. This is where Ireland really needs a tiger for its economy.
Nobel economist and New York Times columnist, Paul Krugman said of Ireland in April 2009:
“As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.”
With the economic clouds lifting, the chances are that is already probably happening. But Ireland’s interest in it rests predominantly with the 75% plus of exports generated by their FDI imports.
The Irish government now treads a fine line. Desperate for tax revenue it knows that if it upsets the FDI, it walks. Dell’s announcement to close its manufacturing operation in Limerick in January in favour of EU newer boy Poland was a reminder that the roots of some FDI are only as deep as the commercial advantages that justify residence. It took 1,900 jobs with it leaving a significant hole in a small economy. Globalised commercial decisions with brutal local impact can be signed off in boardrooms a continent away.
So not without good cause is the government resolutely clinging to the 12.5% corporation tax rate, while seeking to tax the pants off everything else and trying to expand a relatively narrow tax base.
In normal times, Ireland has a budget each December and runs a calendar tax year. As we know too well, 2008 was abnormal. The banks had to be bailed out and Anglo-Irish Bank was nationalised. By the end of the year the government knew (and the IMF made clear) they were in the deepest doo and in April 2009 enacted an emergency budget…up went taxes again, down came spending.
Minister of Finance Brian Lenihan commented at the time that tax revenues had effectively fallen off a cliff: from €47bn in 2007, to an estimated €34bn in 2009. The government’s own forecast for net spending in 2009 weighed in at €57bn. With a few adjustments here and there they reckoned they would be €18bn short for the year…and another €18bn short next year…a further €15bn in 2011 and another €10bn in 2012. Oh, and another €5bn in 2013. Mr Micawber would be apoplectic.
In passing it’s worth noting that once meagre welfare benefits have more than doubled in the past decade. The state pension for one is up from €113 to €230pw. Welfare was spared that time though an axe fell on other public spending, namely salaries and pensions in the public sector. Amongst the measures a new income tax, introduced in January, was doubled in May.
So how is the fiscal medicine working?
The early signs aren’t encouraging. A recent update reckons tax revenues will be nearer €32bn than €34bn. The shortfall was blamed on the halving of those paying top rate income tax (41%) and wage cuts removing some of the lower paid from tax altogether. Cue the deficit for the year to October is now estimated at €22.7bn as of 3 November. With a couple of months still to go in the current financial year, this is one to watch…a ballooning deficit count in real time.
A factor that wasn’t mentioned but casts something of a dark shadow in the Irish psyche, not to mention a huge headache for its policymakers, is emigration. Between 1995 and 2007, Ireland received net migration into the country. The tide turned in 2008 when a small net outflow was recorded, a little under 8,000 souls; amongst them East Europeans returning home now the party’s over.
The question is: will Ireland’s own, more ambitious youth stick around to help pay the debts of their elders? Debts that include a mountainous €54bn “bad bank” scheme to foist bum property deals on the taxpayer. (This is the game we heard about: privatised profits and socialised losses.)
As the economy goes backwards (forecast to shrink around 14% by 2010) and unemployment soars – up from 5% at the turn of the year to around 12.5% in October - a recent report suggests they are increasingly voting with their feet. Attracting rather than losing young talent is a priority in many ways not least demographically, where Ireland shares the concerns of most of the developed world. 34% of the population may be under 25 today but tomorrow anticpates challenges from an ageing population and extended life expectancies. For every resident of pensionable age there were six of working age to support them in 2006, that ratio is forecast to drop to less than two by 2050.
When state coffers run down, the borrowing goes up. For many years Ireland had successfully reduced their debt as a proportion of national income. Suffice to say that trend came to an abrupt end in 2008 as the credit crunch wrecking ball smashed into the house of Ireland.
National debt jumped from €38bn in 2007 to €50bn in 2008. Already this year a busy National Treasury Management Agency, had by October added another €34bn. This is well ahead of the €25bn government target as it happens, so confounding doubters who questioned whether there would be sufficient takers. To date, borrowing to plug the gap has been the easy part. Tapping and holding on to the tax base is proving more tricky. And as I publish today, the Irish Times reports a union-backed rally in Dublin today where “tens of thousands” are expected to protest government budget measures.
Ireland doubtless makes a remarkable study for economic transition. It has played its EU club card well. The supranational body has given it a pass into the single market, fed it with cash, tolerated its tax competition and provided credibility for an otherwise incredible bank bailout. Not without reason did they vote yes to Lisbon, even if it was at the second time of asking. But take away the construction and the FDI and what have you got?
I sign off with a completely disconnected thought. A few melancholy few lines from occultist, hermetic and Nobel prize- winning Irish poet, W B Yeats, which I chanced on during a recent visit to Dublin. I love it:
Come away, O human child!
To the waters and the wild
With a faery hand in hand
For the world is more full of weeping than you can understand
The Stolen Child
Latest Comments