Ontario’s financial regulator gave PACE Savings and Credit Union an extraordinary life after the troubled financial institution’s capital levels fell below minimum requirements, threatening to put its financial stability in doubt.
The Ontario Financial Services Regulatory Authority, or FSRA, revealed on Monday that PACE’s regulatory capital – which acts as a cushion to absorb unexpected losses or shocks – will be insufficient when its 2020 financial statements are released this week. In response, the FSRA has temporarily reduced the minimum capital limits for the credit union and will provide a $ 500 million credit line to ensure that PACE has enough money to meet the withdrawal demand.
It is the first time that the regulator has granted this type of loan to a credit union. FSRA also prohibited PACE from paying dividends, redeeming investment shares owned by members, except in special circumstances, or paying bonuses to managers and employees.
The rare and significant steps the regulator is taking are to help PACE “continue to operate as a credit union” and to protect its members, according to FSRA. They should also increase confidence that PACE remains viable and calm nervous members, providing extra financial capacity in the event that members decide to withdraw their deposits. The credit union has been under various levels of administrative control and supervision by FSRA and a previous regulator since fall 2018, and has suffered repeated false starts while trying to recover from allegations that former senior executives were involved in fraud and self-negotiation over a period of years.
In a letter to members on Monday, FSRA Executive Director Mark White said the $ 500 million credit line, which will be secured by PACE’s assets, is to help ensure that the credit union can “pay your deposits without interruption or delay”. At the end of 2019, PACE deposits totaled more than $ 1 billion.
A condition for granting capital flexibility to PACE is that, by May 6, the credit union must contact all members with uninsured deposits – money in accounts that exceeds the $ 250,000 limit for provincial deposit insurance, or does not qualify for coverage – and reorganize deposits so that they are insured or offer to return them immediately to members.
In an e-mail response to questions from The Globe and Mail, Mr. White said that uninsured deposits are equal to less than a third of PACE’s net financial resources, and that the facility “is indicative of the commitment of FSRA to maintain stability and confidence in PACE Credit Union and the industry. ”
Normally, PACE is expected to maintain capital equal to at least 4 percent of its total assets and 8 percent of risk-weighted assets, but those ratios dropped to 2.82 percent and 6.51 percent on December 31. Mr. White attributed the capital deficit to “events of the past year”, including the COVID-19 pandemic and the bankruptcy of companies linked to the credit union that generated losses for PACE.
Ontario credit unions have a legal right to apply for FSRA to reduce capital requirements, but the regulator only considers these requests in exceptional circumstances.
At the end of last month, the FSRA also issued a revised order adjusting the terms of its management of PACE, giving the credit union’s management more control over day-to-day issues. Since December, PACE has been chaired by CEO David Finnie, who was appointed after the previous board of directors, CEO and risk director abruptly resigns last november. Mr. White said that the FSRA has “complete confidence in David and the current PACE management team”.
The order still gives FSRA significant power over PACE, allowing the regulator to act in place of a board of directors. FSRA also has full control over PACE’s role in two separate processes that can shape the credit union’s fate.
The first was launched against former PACE President Larry Smith, former CEO Phillip Smith and former directors, alleging a series of misconduct and negligence that the Smiths have denied. The second is on behalf of hundreds of investors who collectively lost about $ 49 million after investing in products linked to Pace Securities Corp., a now defunct concessionaire owned by PACE. These investors are seeking up to $ 60 million in compensation, and the dispute has raised questions about who has the responsibility for the harm done to them.
In its request for capital relief for PACE, the FSRA says it hopes that the funds recovered through the Smiths lawsuit will help resolve the credit union’s capital deficiency, although there is no certainty that it will recover that money. Any amount recovered from this legal action could be overshadowed by a possible agreement to end the process with investors, which is in the process of mediation.
On January 29, FSRA placed PACE under a “comprehensive stabilization plan” that requires management to cut costs, reduce leverage, make its commercial loans less risky and improve governance and controls.
In his letter to members, Mr. White acknowledges that PACE members and employees “have faced many adversities since 2018”. In the email to The Globe, he said, “the current environment and its duration will play an important role in how quickly PACE can recover and return to profitability”, but insisted that the credit union is “solvent and viable ”.
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