On 8th November 2012b the Financial Services Authority (“FSA”) issued two final notices in respect of The Pentecostal Credit Union (the “TPCU”) and Revered Carmel Jones.

Background

TPCU is a credit union with approximately 1,600 members drawn from the congregation of the Pentecostal Church. It was established in 1980 and has been authorised by the FSA since 2002. TPCU was established to operate as an ethical financial co-operative for its members. Revered Jones was the founder of TPCU. He occupied the position of Chairman and director during the relevant period (3 May 2007 to 4th July 2011).

Prior to being authorised by the FSA, TPCU engaged in making loans to the Church Organisation, defined by the FSA as “the corporate entity practising the Pentecostal faith and which was the beneficiary of loans made by TPCU”, via individuals who were members of the Church Organisation. The purpose of the loans was to assist the Church Organisation to buy property and to repair existing properties.

The FSA informed TPCU in 2003 that it must cease this activity immediately as the loans appeared to be made contrary to The Credits Union Act 1979 and they created a financial risk to TPCU’s members. The activity ceased until 2006 when Revered Carmel wrote to the FSA setting out proposals which he believed would enable the loans to be made to members of TPCU, which could then be used for the benefit of the Church Organisation. The FSA informed Revered Carmel and TPCU that such proposals were unlawful and drew attention to CRED 10.2.11 [1] in the FSA Handbook which stated that:

  • “A credit union may only make loans to:
    • Its members who are natural persons; or
    • Other credit unions.
  • A credit union may make a loan to a member for a business purpose. However, this does not mean that a credit union should make a loan to a member who merely intends to transmit that loan to another body that will actually carry out that purpose.”

The FSA informed TPCU that in its view the proposals set out were artificial and had been “designed to circumvent the restrictions……..reflected in CRED”.

Despite the FSA’s position, TPCU started in May 2007 making loans to the Church Organisation in the names of TPCU’s members. In some cases the TPCU members did not sign the loan application form and reported having no knowledge of agreeing to such a loan being taken out in their name. 20 loans were arranged and totalled £1.2m. All monies were paid directly to the Church Organisation and not to the individuals in whose names the loans had been taken.

Repayments were initially made by the Church Organisation. However, relations between the Church Organisation and TPCU broke down in 2009 and repayments ceased. The unpaid repayments stand at an estimated £670,000.

Lack of integrity

The FSA determined that TPCU breached Principle 1 of the Principles for Businesses. The Principles are a general statement of the fundamental obligations of all FSA authorised firms under the regulatory system. Principle 1 states that a firm must act with integrity. TPCU deliberately made loans which they knew to be deemed unacceptable by the FSA. Its actions demonstrated a lack of integrity and exposed its members to the risk of financial loss.

In respect of Revered Carmel the FSA determined that, by allowing TPCU to make the loans when he knew the FSA’s position was such that these loans were deemed unacceptable, he breached Statement of Principle 1 in that he failed to act with integrity in the exercise of his controlled function, as director of TPCU.

Penalties

The FSA took into account a number of factors when determining appropriate penalties for TPCU and Reverend Jones, including:

  • The need for deterrence;
  • Profit gained or loss avoided;
  • Seriousness of the breach;
  • Conduct following the breach; and
  • Impact on the persons concerned.

The FSA determined that, given the level of co-operation by TPCU with the FSA, the fact that TPCU voluntarily varied its permissions, put in place new management at the FSA’s request and completely reviewed its systems and controls, the most appropriate penalty was to issue a public censure pursuant to s. 205 of the Financial Services and Markets Act 2000 (“FSMA”), rather than imposing a financial penalty. Given the role of TPCU in the community and the service it provides to its members, the FSA determined that a financial penalty would only have a negative impact on the members of the union and as such was an inappropriate penalty to impose, despite the seriousness of the breaches.

In respect of Revered Jones the FSA determined that his actions demonstrated a lack of honesty and integrity. As such, the final notice imposes a prohibition order, pursuant to s. 56 of FSMA 2000. This prohibits Revered Jones from performing any function in respect of any regulated activity.

Furthermore, the FSA also determined that a financial penalty of £60,000 was appropriate in respect of Revered Jones. However, taking into account the fact that Reverend Jones is a disabled pensioner with limited income it was determined that such a financial penalty would impose serious financial hardship on him and as a result the most appropriate penalty was to issue a public censure.