'Oversight failure': Over 14,000 get £10m compensation over collapse of SIX Scots community banks

That is above the millions that has already been written off as bad debt before the insolvency experts were brought in.

A Herald investigation shows that in all cases there was a failure to publish annual audited accounts - which give a clear indication of the financial strength of a company. In two cases there was no publication in ten years.

One whistleblowing Scottish credit union director has hit out at the lack of oversight from regulators the Financial Conduct Authority and a lack of transparency in the sector which provides lifeline financial services for people who might not be able to get credit elsewhere. He fears that the regulators will now pull the plug on other community banks rather than support them to thrive.

Gordon Keenan, a board director with the Glasgow Credit Union, and a background of senior management roles across the local authority, housing & social enterprise sectors, has raised concerns that credit unions are not attracting enough borrowers with good credit ratings were borrowing from it.

He alerted the regulators to the issues with the latest credit union to collapse the Barrhead-based Pioneer Mutual Credit union.

An investigation was launched by administrators as £3.3m was refunded to thousands of savers two years. Two years previously auditors cast doubt over its future as a going concern.

It has emerged that the credit union received £45,000 support from a Scottish Government support fund during the summer along with other community banks during the Covid crisis.

Mr Keenan, who was a member of Pioneer Mutual for six years alerted the FCA to "serious concerns" including the fact that in 2019 the latest set of audited accounts available were eight years old and raised other governance and transparency issues. He said they "dismissed" his concerns.

Pioneer Mutual's promotional video plugging its "ethical and fair finance".

The FCA investigated and in a response told him that no other annual accounts documents could be provided.

According to FCA rules, those that do not submit annual accounts can be prosecuted. The last prosecution for not submitting their annual returns and accounts was in 2017, according to FCA records.

Details of the raft of credit unions that have gone to the wall show an array of lawyers and debt collectors have had to be called in to force repayment of loans after they have gone bust and in some cases insolvency experts admit they will only recover a fraction of what is owed.

Currently, around 400,000 people are members of nearly 100 credit unions in Scotland – roughly about seven per cent of the population. They hold assets of around £650 million and lend £362 million per annum, which is nearly a quarter of the total for the UK.

Credit unions offer many of the same services as banks and follow the same rules and regulations.

Unlike banks, credit unions are owned and controlled by the people that use their services and are sold as a way you can save your money and get loans at competitive rates.

What makes credit unions different is that they’re not-for-profit, so any money they make goes back to the people who use them via their rates and dividends.

The money credit unions hold in savings accounts or current accounts is loaned out to other customers who need to borrow money at an affordable rate.

Michael Sheen, actor and social activist, has worked on the Scottish Government-backed People, Not Profit campaign, featuring in a video, to grow and raise awareness of the credit union sector.

Credit unions have fallen into administration in many cases because they have been unable to pay savers back their money when they want to transfer their accounts.

Mr Keenan said there needed to be urgent action taken to ensure credit unions are properly scrutinised, but also supported to allow them to stay afloat.

He believes the credit unions have suffered as an extended period of low interest lending rates over 15 years has effectively prised a significant portion of regular middle income borrowers from credit unions towards mainstream banks who can offer cheaper deals.

The same low interest rates has resulted in less income from the cash it holds.

Mr Keenan said credit union rules should allow them to invest its money to make money like banks - so that that when it gets into trouble it does not default.

He also said it has become easier for those who are in financial trouble to declare themselves insolvent, meaning credit unions had become saddled with bad debt.

He said: "The credit union sector in Scotland stands as a largely ignored and certainly under-acknowledged source of extensive co-operative community wealth.

"Across Scotland, and specifically across the central belt we have more than 85 community and workplace credit unions holding in excess of half a billion pounds in Scottish member deposits. This is not an insubstantial sum and it is owned mutually at community level by members, loaned to members and with profits redistributed among members.

"In simple terms, Scotland’s credit unions are finding themselves unable to disperse sufficient loans among members and prospective customers and are struggling to match growing business costs with sufficient income either from loans to members or through interest on excess cash sitting in UK bank deposits.

"As a sector there is literally £10s of millions of unused funding sitting on deposit which is earning nothing and which with just a little coordination and shared strategic investment at local and Scottish government level you could quickly treble or quadruple the funds available to those low-middle income households in need.

"It does however urgently require the bringing together of the key parties around the table, to come up with a genuinely coordinated delivery model - one which not only responds to immediate hardship but which explicitly looks ahead to build long term financial resilience at individual, household and community level."

Apart from Pioneer Mutual, also biting the dust in the past three years was the North East Scotland Credit Union, Parkhead Credit Union, the Greater Milton and Possilpark Credit Union, the Mercat Cross and The Bruce Credit Union and the North Airdrie Credit Union.

Some £100,000 had to be repaid to customers of the Stirling-based Mercat Cross and The Bruce Credit Union in December, 2019 when it went into administration having had no published audited accounts for ten years.

Administrators PKF Geoffrey Martin & Co said that an alarm was raised two months earlier by Stirling Council which was contacted by various members of the Credit Union who had expressed concern about its governance.

According to a report, it quickly became apparent that there were a series of posting errors and anomalies in the credit union's financial records and that as a result the system and figures could not be relied upon.

Of six Directors listed on the FCA’s Public Mutuals Register, one was dead, having passed away "some time ago", two had resigned and two had long term health conditions.

Only one was left, and according to administrators had become "overwhelmed in trying to keep the records and systems of up to date".

By November the sole director outlined the credit union's "practicable inability to continue trading and that steps would likely be necessary to close as soon as possible".

The Greater Milton and Possilpark Credit Union which went into administration in March, 2019, leaving the FSCS to pay back £3.4m to all 4000 customers. Its last published accounts was in 2014.

According to administrators, it had loans outstanding of £1.632m but bad debts amounting to £511,285. It was estimated that they would only be able to recover 48% of what it had lent.

Some £1.68m in FSCS compensation had to be passed to over 2500 customers of The Parkhead Credit Union, which went went bust the following month. Its last published annual audited accounts were in 2014.

Administrators PKF Geoffrey Martin & Co said the community bank had lent £994,153 to 503 customers.

The administrators said they were aware that many of the outstanding loans are due from debtors and it was estimated some £500,000 may not be able to recovered.

North Airdrie Credit Union went under in December, 2019 with £447,370 in FSCS compensation paid to 1,657 members. Its last published accounts were in 2009.

An administrators report revealed that of the £397,300 borrowed by 495 customers, they were expected to find £126,336 would not be recovered.

It noted in June, last year that to assist with the debt collection process, specifically in relation to those non-responsive loan customers who have not responded "we are in the process of instructing a firm of messengers-at-arms and sheriff officers debt collection services to pursue those debts as appropriate".

The collapse of North East Scotland Credit Union in February, 2018, became a discussion point in the Scottish Parliament, as £1m in compensation was given to 2500 savers. It's last published accounts were in 2011.

The plight of the credit union was highlighted to MSPs by Aberdeen South and North Kincardine MSP and former mental health minister Maureen Watt in September 2019, as the Scottish Government announced a £10m investment in credit unions.

Administrators said the credit union was lent out £790,549 to 715 customers - but did not expect to get back £370,549 of that.

In the same debate Pioneer Mutual was commended by Renfrewshire South MSP Tom Arthur having been recognised at the Scottish Parliament for its "responsible approach to borrowing" following a motion lodged by him in July, 2018 . It was supported by 11 other SNP MSPs, including the then party chief whip in the Scottish Parliament Bill Kidd and Ms Watt.

The FCA, which posted the 2018 accounts of Pioneer Mutual after the Herald asked questions about the level of scrutiny there was over the bank and its filings, said only that it was "closely engaged" with the Prudential Regulatory Authority (PRA), insolvency practitioner and FSCS "as the situation has progressed".

The banking watchdog has come under increasing fire over its ability to regulate with MPs having called for a parliamentary debate on to ensure it is fit for purpose. The FCA has said in the past week that the cost of the FSCS is not sustainable.

Peter Gibson, chairman of the All-Party Parliamentary Group on Personal Banking and Fairer Financial Services, said in December that two reports about the FCA's handling of the London Capital & Finance (LCF) and Connaught failures provided “irrefutable evidence” that the FCA is failing to regulate effectively and that an inquiry is needed.

The first of the two highly scathing independent reports, by Dame Elizabeth Gloster into the collapse of LCF, concluded the City watchdog had failed to properly regulate the company and warned its handling of information from third parties regarding the business was "wholly deficient".

The report claimed the root causes of the City watchdog's failure to regulate the mini-bond provider properly were "significant gaps and weaknesses" in the policies and practices it implemented to analyse the business activities of regulated firms.

The second report, by Raj Parker into Connaught, warned the Financial Conduct Authority's regulation of entities and individuals connected to the fund was "not appropriate or effective" and it could have done more to protect investors.

Debbie Gupta, director of life insurance and financial advice at the FCA, told delegates in a recent keynote address at a Personal Investment Management & Financial Advice Association event that the regulator acknowledged it needed to change, adding the independent reviews of the regulator’s handling of LCF and Connaught made for “sobering reading for all of us”.

Ms Gupta said the regulator shared the frustration of wealth managers and advisers over the cost of the FSCS.

She said the FSCS estimate that its compensation levy for this year would be 48% higher than in 2020 when it was over £1bn, showed the current situation was “unsustainable” and she said the FCA wanted “to see this come down”.

While saying the FCA recognised “the painful consequences of where we are today” and the need to consider ways to address it, she said the challenge was how to bring down the cost of the levy, noting that suggestions from across the industry had been “inherently contradictory”.

A Scottish Government spokesman said: “We are committed to the credit union sector and to see it continue to grow and thrive. We recognise and value the role of ethical lenders and financial services providers in our communities, including for those facing financial exclusion.

“We would expect any reports of mismanagement to be taken seriously and investigated by the appropriate authorities.”