JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate -
Tuesday, 23 Mar 2010

Financial Regulation of Credit Unions: Discussion with Credit Union Managers Association.

Chairman

I apologise for the late start.

On behalf of the committee I welcome Ms Selina Gilleece, chairperson of the Credit Union Managers Association, CUMA, and Mr. Tim Molan, national secretary.

Before we begin, I draw witnesses' attention to the fact that members of this committee have absolute privilege but this same privilege does not apply to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I invite Ms Gilleece to proceed to her presentation.

Ms Selina Gilleece

I thank the Chairman and the distinguished committee for affording the Credit Union Managers Association, CUMA, the opportunity to appear before it today.

CUMA is the representative organisation for credit union managers in Ireland. We comprise more than 230 professional credit union managers who work on a daily basis at the coalface dealing with credit union members.

With me is my colleague, Mr. Tim Molan, national secretary of CUMA and manager of Cashel Credit Union Limited and I am chairman of CUMA and manager of ASTI Credit Union Limited.

As professional managers we witness at first hand the impact of the economic recession on our members. Credit unions have worked with their members throughout the turmoil of the past two years, and we have made every effort to facilitate those who have lost their jobs or have had their incomes reduced. We have been rewarded as always by huge member loyalty and by the knowledge that we are serving our communities by delivering quality financial services on a co-operative, not for profit basis.

Our job is to ensure that the credit unions we manage adequately, effectively and appropriately respond to the financial needs of our members. The economic environment in which we operate has dramatically changed as have the needs of our credit union members.

We wish to highlight some of those key challenges specifically where we believe regulatory and legislative change is required. I refer to section 35 of the Credit Union Act 1997 as amended. This section deals with how credit unions may conduct the business of lending. Section 35 restricts credit unions to lending no more than 20% of their loan books for periods in excess of five years. This level of restriction had been a matter of discussion; however the debate has become much more focused in the past two years. Unemployment has forced all financial institutions, including credit unions to take appropriate and necessary action to deal with increasing levels of arrears, but section 35 restricts our capacity to renegotiate or reschedule loans to our members.

In practical terms if my credit union currently has 20% of its loan book out over five years I cannot sit down with a member who has lost his or her job, or has experienced a reduction in pay, and work out a new repayment schedule with a reduced payment over a longer period of time. Effectively section 35 ties my hands. Credit Unions encourage members to be proactive in managing their financial circumstances. In most cases members apply to reschedule before missing any payment, before any impairment on the loan takes place.

As a result of the concerns raised by all the credit union representative organisations, including CUMA, the Minister for Finance reactivated a committee to examine the problems caused by section 35. CUMA was not invited to participate in this committee, despite requests to the Minister and we are therefore not directly aware of the proposed ministerial changes to this section. CUMA believes the Financial Regulator proposals view the issue of extending loan duration as an opportunity to further bolster reserves, in an already reserve-rich industry. The impact of the proposals being put forward by the Minister for Finance will be to render it unaffordable for many credit unions to respond to reasonable member requests for extension to their loan terms. Members will suffer, as will their credit ratings, as a result of over-stringent rescheduling rules. This flies directly in the face of Government advice to banks and how they treat their customers.

We understand that credit unions will be required to make a 20% provision for every rescheduled loan regardless of whether it is impaired at the time of rescheduling. We further understand that if there is a missed payment on a rescheduled loan the credit union will be required to make an immediate provision of 100% of the total loan. CUMA believes a number of amendments need to be made to the proposal before it is incorporated into legislation and requests that CUMA be afforded membership of the section 35 working group.

The Financial Regulator regulates financial service providers including credit unions through supervision and the authorisation process. The purpose of the financial services industry is to provide a range of services that are essential for people and for the functioning of a modern economy. The financial services sector should not exist by, or simply for itself. It is merely a service. There is a significant difference in the way credit unions provide that service compared to the banking sector. The imperative in credit unions is to act ethically in dealing with our members. This is our core value. Our member is at the centre; our credit unions exist not for their own wellbeing but to serve the financial needs of the member. As credit union managers, duty of care to our members is our central focus.

In an era where we are witnessing at first hand the catastrophic failure of the global financial services industry it is a commendable achievement that credit unions have managed to withstand the worst of the current economic storm and are continuing to deliver much needed credit and other financial services to our members. It is a tribute not only to our voluntary boards of directors but to the prudent regulation of credit unions by the Registrar of Credit Unions. While we cannot share the views of our ILCU colleagues that the regulation of credit unions should be transferred to the Department of Enterprise, Trade and Employment we strongly contend that credit union regulation must continue to be recognised as being separate and different from banking regulation.

CUMA believes that the regulation of credit unions should remain within the Financial Regulator structure. We contend however that the registrar's position and function is significantly separate and independent from the regulation of commercial, profit-driven financial institutions. We believe that in order to recognise the importance of the function of the registrar in the regulation of credit unions, the registrar should report directly to the head of financial regulation.

We believe that the importance of the registrar within the Financial Regulator framework should not be diminished in any way. We contend that the proposed structure announced by the Financial Regulator on 12 January 2010 may lead to a "one-size-fits-all" approach, that will encompass banks, insurance companies and credit unions, and that the unique, not-for-profit nature of credit unions cannot be accounted for in such a scenario.

The European Commission has already responded to the financial crises and speculation grows about the development of a single European regulator model. The capacity for Irish credit unions to be recognised as being separate and different within emerging systems will be a challenge going forward as regulatory arbitrage becomes a thing of the past. CUMA urges our public representatives to champion the achievements of Irish credit unions at European level and to ensure that we are given sufficient recognition and support as alternative not-for-profit financial services providers to the Irish consumer.

We contend that the first step in doing this is by establishing a strong role for the Registrar of Credit Unions within the Central Bank. We are aware that the Registrar of Credit Unions will be conducting a strategic review of the credit union industry in the months ahead. CUMA believes that for this process to be successful and effective it should be collaborative. CUMA believes that the appointment of consultants is already under way in relation to this process. We recommend that a direct stakeholder forum comprising representatives of the Department of Finance, credit union representative organisations, the Financial Regulator and members of this committee should review all stages of this process and ensure that the final report is delivered on time and that its recommendations can be implemented as expeditiously as possible.

CUMA will engage with the strategic review. We will be particularly focused on the development of appropriate risk assessment models for credit unions and will reflect the views of our managers, our credit unions and credit union members we meet every day.

Access to credit is becoming more and more difficult for the Irish consumer. Our experience is that credit is simply not being made available by banking institutions that are currently struggling to build capital reserves. On the other hand, moneylenders regulated by the Financial Regulator are charging APR interest rates of 160% to 180% per annum. Fortunately credit unions are open for business and we are certainly providing much needed access to credit for our members. CUMA believes however that lessons must be learned from the mistakes made in recent years. All lenders, including credit unions, have a duty of care to ensure that we lend responsibly and that those who borrow from us have the capacity to repay their loans and that in so doing they are not put under undue financial pressure.

Prudent lending can only take place where institutions have full access to an applicant's credit history. Currently there is no such database in Ireland. There are a number of credit referencing agencies but there is no single complete database that provides a comprehensive credit report that includes, for example, data on all banks, credit unions, credit cards, catalogue debt, moneylenders and other providers of credit. CUMA promotes the establishment of a national central register which all providers of credit and finance would be obliged to consult before granting credit.

CUMA welcomes the recent establishment by the Minister for Finance of a committee made up of a group of experts to work with Government on the issue of indebtedness. We note, regrettably, that there is no credit union representation on this committee although we further note that the Irish Bankers Federation is represented. We would respectfully request that a credit union representative be appointed to the committee as we would contend that credit unions have considerable expertise in the area of credit and helping members in debt. The committee is charged with bringing forward innovative recommendations on debt management. We believe a credit union representative would have much to offer in this regard.

Unique among financial institutions, credit unions have the capacity to provide an additional layer of safety for their member savers by having a self-funded, savings protection scheme, in addition to the deposit guarantee scheme announced by the Government on 20 September 2008. Section 46(1) of the Credit Union Act 1997, as amended, states that a credit union may incur expenditure in participating in a savings protection scheme which is approved by the Central Bank. Section 90 allows the Financial Regulator to inspect the books and documents of a credit union, and of an approved savings protection scheme, effectively to regulate it. No savings protection scheme has been approved by the Financial Regulator under section 46 since the inception of the Act 13 years ago. A savings protection scheme is operated by the Irish League of Credit Unions, ILCU, which acts as a stabilisation fund, but this is not approved by the regulator, and is therefore not subject to regulation by the Financial Regulator. This fund currently contains approximately €120 million, contributed by affiliated credit unions in the Republic of Ireland and Northern Ireland. Credit unions that are not affiliated to the ILCU are not eligible for cover by the ILCU savings protection scheme.

On 20 September 2008, the Minister for Finance announced the increase in the limit of the deposit guarantee scheme to €100,000 and its extension to include credit union savings. This was a most welcome development. No arrangements, to our knowledge, have been finalised in relation to the institutional contributions to the funding of this scheme. Clarification is required in the area of the funding of the deposit guarantee scheme as a matter of urgency.

The Minister's statement went on to deal in considerable detail with the subject of the ILCU savings protection scheme, indicating that it is intended that the guarantee that was announced for credit institution savers would act as a backstop to an approved savings protection scheme for credit unions. No mention was made by the Minister of the credit unions that are not members of a savings protection scheme. No progress is apparent on the recognition or regulation of the scheme referred to by the Minister. It is the view of CUMA that a single, independent savings protection scheme regulated by the Financial Regulator should be compulsory for all credit unions in the Republic of Ireland, and that progress in this area is long overdue. CUMA recommends that this be treated as a priority issue in the forthcoming strategic review of credit unions.

I would like to thank the Chairman and members once again for giving CUMA this opportunity to appear before the committee. The current economic situation presents very significant challenges for all financial institutions, including credit unions. The exit of a number of banking institutions from the Irish market will reduce consumer choice and access to competitive financial services. The lack of access to credit for consumers and small businesses is ongoing and is a cause for serious concern. Of further concern is the understandable erosion of trust by the Irish consumer in the financial services industry. Credit unions in Ireland are well placed to step up the mark in offering a range of financial services to the Irish consumer. Credit union members are able to depend on their credit unions to provide them with much needed access to credit.

There are many opportunities for credit unions to further develop the services that we provide to our members. The challenge will be to develop the appropriate enabling legislative framework that will allow for growth while ensuring there is appropriate risk-based regulation that reflects the nature and size of our business.

Deputy Seán Sherlock

I welcome Ms Gilleece and Mr. Molan to the committee. It is unfortunate that the Cabinet reshuffle is taking precedence today.

I welcome the presentation which is direct and unequivocal. The language is not coded in any way and clearly sets out the intentions and aspirations of CUMA. That is what we need to hear in the committee. A number of disparate views have been expressed on the application of section 35 and on the regulatory regime. There is a clear divide between the Credit Union Managers Association, CUMA, and the ILCU with regard to the regulatory framework. Has CUMA a criticism to make with regard to the ILCU proposals to have the regulatory framework housed under a Department? If I remember correctly, the ILCU attested that the regulatory framework for credit unions should be outside of the Central Bank commission. The only route to take is under the umbrella of the Central Bank commission, but how that is finessed is a matter for discussion. I take the same view as CUMA with regard to a direct reporting system to the head of financial regulation rather than to a sub-head or assistant director. If we are to recognise the importance of the credit union and the primacy of its role within society, it must be given due recognition with regard to the reporting role. That is common sense. What is the CUMA position with regard to the ILCU position?

I am amazed that CUMA is not part of the working group on section 35, as I was given to understand that all of the stakeholders would be actively involved in the process. Bearing that in mind and based on what CUMA has said about the section 35 working group and the indebtedness working group, the committee should take a strong stance with regard to CUMA membership of both of those working groups. If we are to achieve anything from this meeting, the committee should request the Minister, or demand of him if that is within our remit, to involve CUMA in those two working groups. This makes sense. CUMA is made up of credit union managers and it would be remiss not to involve it as part of the working group.

Section 35 is the big issue. CUMA has set out clearly the permutations for the ordinary credit union member. While CUMA is not part of the section 35 working group, it appears from its submission that it has an insight into the proposals. What is the optimum solution with regard to section 35? CUMA has outlined its critique of the section, in terms of the 20% of the loan book over five years provision and whether this is effective in terms of the liquidity scenario for a given credit union. What direction should the Minister take on section 35? If CUMA was to write or amend the legislation or the particular section, how would it do that? CUMA's submission makes sense. We need common sense in terms of the approach the regulatory framework should take and in terms of section 35. CUMA is speaking my language on this matter. However, if I am to push a position along the lines of an unequivocal analysis of section 35 with regard to what CUMA would like to see occur, it would be very helpful to me and members of the committee to have CUMA's views on what should be done.

Ms Selina Gilleece

I will deal with the issue Deputy Sherlock raised with regard to the ILCU's position regarding the Department of Enterprise, Trade and Employment. Then I will revert to my colleague, Mr. Molan, with regard to the queries raised on section 35.

The Deputy referred to the ILCU's preference that regulation of credit unions would be moved back to the Department of Enterprise, Trade and Employment. CUMA would see that as a step backwards. We recognise that credit unions have grown and developed considerably in recent years. We all remember when credit unions fell under the ambit of the Department of Enterprise, Trade and Employment. Perhaps that suited credit unions at the time. However, CUMA's position now is that credit unions are financial institutions and have a duty of care to safeguard members' money. We take that duty very seriously. Since the set-up of the Office of the Financial Regulator in 2003, we have worked extremely well with the structures that have been put in place and with the Registrar of Credit Unions. CUMA and credit unions in general have a very strong relationship with the regulator that has worked well. That is not to say that we would agree with the regulator on everything. We certainly would not.

It is important that there is strong regulation of credit unions and this is best served within the Office of the Financial Regulator. Credit unions hope to develop and provide a number and range of different services in the future, particularly, as mentioned in our submission, following the withdrawal of banking services from the Irish consumer. The only way we can do that is to ensure we are regulated properly and that we meet best industry practice standards. That is the reason we feel so strongly about being regulated within the financial regulatory structure.

Deputy Seán Sherlock

Ms Gilleece mentioned the withdrawal of banking services. Does CUMA aspire to filling a gap and expanding its services even further? The ordinary layman is concerned that credit unions will become de facto banks and, therefore, lose some of their ethos. I do not have particular concerns about that, but it is something that may be said. If that is its aspiration, how far does CUMA want to take it? At what point might it stop being an organisation with a duty of care? It was stated that every financial institution has a duty of care to its stakeholders, depositors or whatever, but that is not always the case in reality. I would like to understand the aspiration and whether we are talking about a potential reshaping of the credit union movement or whether the original ethos will be protected. Is there a danger the ethos could falter? I would like to understand and get some sense of CUMA's aspiration.

Ms Selina Gilleece

The Deputy has raised several valid points. I assure him that CUMA's agenda is that credit unions will remain as credit unions and cater to the needs of members in the way they do currently. We strongly believe in the voluntary aspect of credit unions and CUMA has an excellent relationship with the Irish League of Credit Unions and the Credit Union Development Association. We see our role as providing professional advice and more to boards of directors, but that does not undermine the credit unions. When many credit union managers go home in the evening, they are volunteers of credit unions in other capacities. We strongly believe in the ethos of the movement.

We must recognise that we need credit unions to provide a range of services to members, for example, the delivery of products through IT. However, we would like to see this done properly and professionally. By doing this under the umbrella of the Financial Regulator, we will do it most effectively, rather than through a Department that is not responsible for finance. That is the position we take in this regard.

Mr. Tim Molan

To answer Deputy Sherlock's question on section 35, one of the practical ways we would see of addressing the problem concerns where an existing provision exists. If, for example, a loan is impaired and we have a provision on it, we would retain the existing provision for a defined proving period of 26 weeks or 26 consecutive payments. If the new arrangement was working we would be able to drop it as it is unreasonable to retain a provision for the entirety of the life of a loan.

Deputy Seán Sherlock

I presume the period of 26 weeks is not arbitrary but is based on calculations of a person's ability to meet his or her obligations.

Mr. Tim Molan

Within a 26-week timeframe one will find out whether a person is able to meet his or her debt servicing requirement. A person may have been made unemployed but his or her circumstances may change in the future. However, if somebody has not allowed an account to get into arrears and has acted prudently but asks for a loan to be extended from three to five years, we should not have to write a provision for that straight away.

We are not against good and robust provisions or having good reserves. The credit union movement is much more reserve-rich than the banking movement and we have responded positively and swiftly to the regulator's requirements. In 2009 the regulator brought in a regulatory reserve requirement of 10% and all credit unions that were able to do so responded immediately, while those which needed additional time negotiated that with the regulator.

Deputy Seán Ardagh

I thank the Credit Union Managers Association for coming before the committee. We have heard presentations from a number of interested bodies and very much appreciate today's presentation.

What is the raison d’être of the Credit Union Managers Association and what are its main objectives? It appears that its objectives are different from those of the Irish League of Credit Unions, particularly in terms of the regulatory system which is proposed. We also heard from an association of very large credit unions which agreed with CUMA’s thesis on regulating the industry. I forgot the name of the body.

Chairman

It was CUDA, the Credit Union Development Association.

Deputy Seán Ardagh

Yes. How many other bodies are there in the top echelons of the credit union movement and why can they not come together with a unified approach? CUMA has 250 members but I think there are some 520 credit unions in total so it represents less than 50%. Is it to the benefit of the movement that there are various leagues and associations which are not ad idem on important aspects of the industry, particularly in the area of regulation?

Section 35 is becoming a very important matter and Mr. Molan told us that prudent borrowers who feel they are getting into trouble will look for a rescheduling of their loans before their situation becomes more serious. There must be some way of dealing with this and Deputy Sherlock asked what CUMA would specifically recommend. Can the witnesses answer that question in greater detail?

I agree wholeheartedly that there should be a national credit bureau in some form which integrates all the banks, credit card services and credit unions. Could CUMA not take the initiative in this regard? Could it call a meeting of the people who would benefit from it, leaving the State out of it altogether? The credit unions, the banks and the credit card companies could then put together a credit bureau, which would be primarily in the interests of the movement.

Ms Gilleece said that clarification was urgently required on the funding of the deposit guarantee scheme. I thought the strength of the guarantee derived from the fact that the resources of the Government were behind deposits but that there was no specific fund. The savings protection scheme was catastrophic but I am aware that the union has €120 million as a stabilisation fund. Would that be used in the first instance as a savings protection scheme?

I again thank the witnesses for attending. It is unfortunate that they were invited today but nobody knew what would happen.

Chairman

I ask Ms Gilleece to address Deputy Ardagh's questions.

Ms Selina Gilleece

I will deal with two issues and my colleague will deal with the other two. The Deputy's first question was on the number of different representative organisations covering credit unions. I agree that there is a range of representative organisations, in particular the Irish League of Credit Unions, the Credit Union Development Association and the Credit Union Managers Association.

The Credit Union Managers Association is approximately seven years old and comprises credit union managers only. We are a professional organisation and have clear objectives to promote professionalism within credit unions. Specifically, we try to ensure that certain standards are met in regard to managing credit unions. We provide a range of quality training courses to our managers and meet regularly with them to discuss all the issues facing credit unions. We work very closely with the Irish League of Credit Unions and the Credit Union Development Association. However, we consistently meet with the Financial Regulator in regard to operational issues in credit unions. That is what makes us different from the two other representative organisations which cater to the volunteer board side. We deal face to face with members on a daily basis and have a different insight on how credit unions operate and the implications of decisions made by the Financial Regulator or Government on credit unions.

With respect, I would probably disagree with the assertion that, perhaps, all the representative organisations should get together and become an all-encompassing organisation. There is much to be gained from diversity. We have excellent relationships with the other organisations but we disagree on certain issues. The example we gave earlier in regard to the Department of Enterprise, Trade and Employment is one of those differences. It is healthy state of affairs that there is discussion and debate and we do not all necessarily have to agree with each other on every issue. I will invite my colleague to deal with section 35 and the development of a national credit bureau.

I would like to touch on the issue of the deposit guarantee scheme raised by Deputy Ardagh. In our presentation to the committee we were seeking clarification in respect of the deposit guarantee scheme. We would like to know if the Government is providing that guarantee and if it is the intention that at no point in the future a scheme will be developed where individual financial institutions actually subscribe to it. It was our understanding that was the direction in which the scheme would go in the future and that individual financial institutions would be required to make some level of contribution towards a deposit guarantee scheme that would be called upon in a catastrophic situation. It may be that we have misunderstood what the development of that scheme would involve.

Deputy Seán Ardagh

I understand it is not expected that the scheme would be called upon. However, if it was called upon and an amount of money was paid out, a levy would be imposed on financial institutions so that the Government would not be out of pocket.

Ms Selina Gilleece

That is fine. That clarifies the issue for us. We raised it as a point of information because we were unclear as to how that scheme would be funded. I thank the Deputy for that information. I hand over to my colleague, Mr. Tim Molan.

Mr. Tim Molan

In regard to section 35, we believe the current proposals are too expensive whereby we automatically have to write a 20% provision even if a loan is not impaired. We are saying very clearly, perhaps it is a subtle difference, that one should retain whatever provision one has at present on a loan. If it is an unimpaired loan we have to write no provision on it but if it is impaired to the extent that we must have a 10% provision on it, let us retain that 10%, 20% or 30% for a proving period. We suggest a proving period of 26 weeks but that could be 39 weeks or 52 weeks. If, on the basis of prudence, one has to make a loan affordable to a person whose circumstances have changed, over a seven or eight year period, it is burdensome to retain a provision for that period. There are practical ways of addressing fees for particular issues.

Deputy Ardagh raised the issue of the national credit bureau. We see it as a legitimate State intervention whereby one would have to compel membership of such an institution. There are models for such institutions. For example, in Belgium there is a national credit bureau with which all bodies that furnish credit are registered. There is an à la carte menu available in terms of the provision of credit within the State. Whereas my colleague has said we enjoy a respectful and professional relationship with the Financial Regulator, we seriously disagree with the Financial Regulator in its treatment of licensed moneylenders. I have a photocopy of a document showing an annual percentage rate of 187.2% from a licensed moneylender regulated by the Financial Regulator. We need a consistent approach to the provision of credit and to the regulation of credit. We see the national credit bureau as very beneficial in ensuring against over-indebtedness within the State.

Chairman

I thank the witnesses. We hope to issue a report from the various interested bodies and by the first week in May we should have a draft report. In yesterday's edition of the Irish Examiner there was an article to the effect that bad lending continues to haunt credit unions. Despite what is contained in the witnesses’ opening statement in regard to ensuring its practices were far superior to those of other financial institutions, some people have been claiming that despite the fact that the credit unions are open for business, their loan approvals have shown a dramatic decrease. The witnesses may wish to comment on the article before we compile a report. If so, perhaps they would respond to the committee in writing.

Ms Selina Gilleece

I thank the Chairman.

Chairman

I thank the witnesses for appearing before the committee. We look forward to further discussing the issue of credit unions.

The joint committee adjourned at 4.40 p.m. until 3.30 p.m. on Tuesday, 30 March 2010.