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Ontario’s financial regulator has reached a deal to split troubled PACE Savings & Credit Union in two, merging its core business with another undisclosed credit union and hiving off PACE’s more contentious assets and liabilities in an entity to be wound up later.

PACE’s members and their accounts will be transferred to the acquiring credit union, which has agreed to assume key assets and liabilities. The identity of the other credit union has not been disclosed. Some assets and liabilities will remain a part of PACE, which will continue to exist as a separate legal entity for the time being.

In a letter to PACE members sent Thursday, the Financial Services Regulatory Authority of Ontario (FSRA) said the merger “will set a new course for PACE” and give members “a more certain future” after years of scandal, legal battles and failed turnaround plans. PACE, which is based in Vaughan, Ont., has been under the control of FSRA and a previous regulator for more than three years, since regulators seized control and ousted the credit union’s president and CEO in 2018.

Members “will continue to be served by PACE’s employees and branches, which was a critical part of this transaction,” FSRA said in its letter.

Under current chief executive officer David Finnie, PACE had been pursuing a new recovery plan. But FSRA had also been exploring a merger or sale since at least last June. Mr. Finnie will remain as PACE’s CEO until the transaction closes.

The assets staying with PACE after the merger closes include membership shares and other shares purchased by its members as investments, whose value are now in jeopardy after PACE’s financial condition deteriorated in recent years. For now, the owners of member or investment shares are prohibited from redeeming them. PACE will also keep some retail loans and the credit union’s prepaid credit cards business.

The liabilities staying with PACE include those from an investor lawsuit that FSRA settled for $40-million on PACE’s behalf.

In its letter, FSRA said that “in light of the transaction,” PACE will not hold an annual general meeting this year. It also won’t publish its financial statements, or reissue restated financial statements that it withdrew in October, after it discovered more fraud in its lending books, according to FSRA spokesperson Judy Pfeifer.

FSRA is still fighting legal claims on PACE’s behalf to try to recover millions of dollars from former senior executives and directors who were terminated and accused of fraud, misconduct and mismanagement of the credit union. Among the defendants are former president Larry Smith and CEO Phillip Smith, a father-son duo who were fired after Larry Smith led the credit union for more than two decades. Both men have denied the regulator’s accusations.

If FSRA succeeds at recovering significant sums of money on the credit union’s behalf, it could help compensate members for their shares and offset other legal and administrative costs from winding up PACE.

If the regulator fails to recover money through a settlement or trial, however, members could face having some or all of those investments wiped out. The credit union is under considerable financial strain: It lost nearly $23-million in 2020 and breached its minimum capital thresholds last year, needing a special $500-million lifeline from FSRA to bolster its liquidity.

The regulator said it “can’t speculate on the timeline for completion of” the windup of the remaining PACE legal entity, ”nor the ultimate outcome,” in its letter to members.

In January, FSRA sold a PACE subsidiary, Continental Currency Exchange Ltd., to DUCA Financial Services Credit Union Ltd., unloading an asset that was acquired by the Smiths, while they were in charge, in a dubious deal that attracted regulators’ scrutiny. PACE will keep the proceeds from that sale, which were not disclosed.

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