Why the savers with the Presbyterian Mutual Society should be compensated.

The demise of the Presbyterian Mutual Society is a sorry tale for anybody who follows Northern Ireland affairs and a disaster for those with savings in that Institution.  Some good work has been done by Northern Ireland politicians, including the passing of legislation to prevent litigation and allow an orderly administration.  However, whichever way the administration pans out, investors are unlikely to recover their money.  The Government is now being looked upon to underwrite the losses of the investors.  

If the Government refuses to support a bailout, the Conservative Party will be pressurized to make good those losses if it is returned to power.  I personally believe it would be wrong to make a manifesto promise which amounts to nothing more than election bribery.  There has to be a reason for compensating the investors which is based upon sound political criteria.  What should the criteria be?   

One of the features of capitalism is that there are many ways in which to take a risk with money and the higher your return, the greater the risk tends to be.  At the beginning of the spectrum are the savers who want some interest or return on their money so long as there is no risk of losing it.  The Financial Services Act 1986 was introduced to protect this group of savers and other groups of consumers using financial services.  Most savers are protected by the Financial Services Compensation Scheme (“FSCS”).  

Savers with the PMS can not benefit from the FSCS.  The FSCS automatically protects deposits up to £50,000.  A deposit is defined as

“Money placed in a bank or similar institution to earn interest or for safe-keeping”.   Note the word “safe-keeping”.  One of the policies behind the Financial Services Act is to protect people who want a safe place to put their money. 

Money placed in a PMS account does not fall within this definition.  When a saver puts money into the PMS, s/he buys shares.  Income is received by the account holder in the form of dividends, not interest.  The PMS could still have been registered with the scheme.  It was not.  Is the failure by PMS Managers to protect the fund a reason why the savers should be left “twisting in the wind”?

If it were, there would be no point in the Government reviewing it.  

There an argument for grouping the PMS members being in a similar category to investors holding equities on the stock market or property speculators who have seen the value of their shares fall spectacularly.  After all, the PMS chose to put surplus funds into property to earn rental income.  On the other hand, looking at the PMS more closely, it is evident that people were treating it as a safe place to put money like a bank.  It even operated similarly to a bank.  Money could be withdrawn quickly and freely. 

There is no doubt that the set up was flawed and vulnerable to a collapse in the property market.  There is no doubt either that the managers of the fund were negligent and that some people, such as an 85 year old from Ballymena, who is reported to have deposited £20,000 on the advice of her minister (source: Newsletter 14^th November 2008) were vulnerable in a situation where a fiduciary relationship existed.  

When the economy finally recovers, our country will need savers to place their money in our financial institutions so that they can lend.  Savers will not do this unless they are confident that their money is safe.  A failure by the Government to compensate the PMS investors would send the wrong message.  Of course, the Government should not be put in this position again.  Tighter regulation should be brought in to ensure that a similar case does not recur.  Meanwhile, I believe that on balance, the PMS account holders should be compensated.