I served as Registrar of Credit Unions from September 2003 until I retired from the position in December 2009. The Registrar of Credit of Unions acts as the delegate of the Central Bank and Financial Services Authority of Ireland, and is responsible for the regulation of credit unions in the State in accordance with the provisions of the Credit Union Act 1997, as amended.
I am working on the assumption that the committee is interested in the way credit union regulation works, what problems are associated with the function and how regulation of the movement might be improved. The views I am expressing are my own and should not necessarily be taken as representing those of the Central Bank and Financial Services Authority of Ireland.
The credit union movement has, up to now, survived the financial crisis in better condition than most other providers of credit. I attribute this to the following factors: the business model enshrined in the Credit Union Act; the inherent common sense of most credit union directors; and strict regulation before and during the financial crisis.
Taken in consolidated form, the movement appears to be in reasonably good financial shape but certain individual credit unions are suffering financial stress in the liquidity and solvency sense. Such stresses are increasing steadily due to the deteriorating economic conditions, and changes in policy within the movement and determined regulatory action will be needed to prevent future financial difficulties in the movement. The quality of the loan books would be a matter requiring particular regulatory attention and the degree to which loan rescheduling takes place will require an enhanced focus.
As members are aware, the Minister has requested the regulatory authority to carry out a strategic review of the movement and this is in the course of preparation. While the Credit Union Act has many admirable features that have served credit unions well, I nevertheless believe that short-term protective legislative measures should be introduced in advance of any structural recommendations that might arise later out of the review. I will mention some of these later.
Regardless of its apparently reasonable financial state, it cannot be ignored that the movement has suffered financial damage as a result of the crisis. Serious losses were sustained on certain inappropriate investments and on certain non-personal business and property-type loans during the past two years. Such losses arose from historic errors of policy within the movement and partially from the inability of the regulatory system to change such policies arising from the structure of the Credit Union Act.
In general, the Registrar of Credit Unions does not have powers to make regulations for the movement as a whole that have the force of law. Such powers as do exist in this regard are narrowly defined and difficult to structure for general regulatory use. While regulatory directions can be issued by the Registrar of Credit Unions these can be applied, in most cases, only to individual credit unions on a case-by-case basis. Consequently, such directions usually operate as corrective rather than preventive measures. Most powers to make regulations are reserved to the Minister under the provisions of the Credit Union Act. Change to section 35 is a current case in point where the Minister's power to alter its provisions is enshrined in subsection (6). Many of the other regulatory powers of the Minister are to be found in section 182 of the Act.
Arising from these statutory provisions, the process by which the Registrar of Credit Unions seeks to make changes in regulations in response to economic conditions usually becomes politicised. This is because a ministerial statutory instrument is required to effect most changes in regulation. This can result in serious delays in the implementation of changes and in dilution of the needed changes arising from conflicting stakeholder positions. This represents a serious defect in the regulatory structure and process. An example of this was the inability of the Registrar of Credit Unions to introduce regulations in 2004 limiting investments by credit unions of their surplus funds to specified safe investment instruments. Existing provisions in the Credit Union Act that might have been used to address this problem were found to be unsuitable and difficult to apply. As a result of this problem it was not until late 2006 that diluted limits could be published and then only in the form of a guidance note. The use of guidance notes as a default from the issuance of regulations by the Registrar of Credit Unions is not satisfactory from a regulatory point of view.
The movement is host to a number of representative bodies. These are not always in agreement with each other on matters of movement policy. This can give rise to conflicting pressures on policy makers. In this environment the process of policy development for the sector based on a consensus approach poses a significant challenge.
While the governance of the movement is, in theory, quite democratic, in its actual operation it is generally not so. This often gives rise to governance problems. Typically, very few members attend their credit union AGMs and consequently take no part in the election of directors and supervisors. Notification to members of vacancies on boards and supervisory committees is inadequate in most credit unions and, typically, a proper canvassing of the membership seeking nominations for vacancies does not take place. Personal details of nominees standing for election are rarely supplied to members making it difficult for members to decide on the suitability of the candidates seeking office. This gives rise to the risk that some credit unions can fall under the control of a limited circle of people who generally do not welcome newcomers to their boards.
There are no statutory limits to the term of service of directors and supervisors nor are there provisions for the rotation of the holders of such positions. Equally, there are no provisions for minimum standards of fitness and probity to qualify persons for election or appointment to officer positions in credit unions. Many of the losses that have been sustained in investments and business loans by credit unions can be attributed, in part, to the inadequacy of the personal skill sets of some directors and managers. Consequently, I believe that changes to the way credit union directors and supervisors are elected, and the means by which they can qualify for officer positions need to be introduced without delay. Such qualifications also need to be applied in the case of management appointments.
In a period when credit unions are sustaining increased stress due to the economic conditions there has been no progress on the introduction of an agreed centralised liquidity support mechanism for credit unions, as already proposed by the Registrar of Credit Unions. Nor is there an agreed centralised solvency support mechanism for credit unions which sustain losses that threaten their stability. While the savings protection scheme of the Irish League of Credit Unions has performed a useful, if limited, function in this regard, the existence and the operation of the SPS are matters of some conflict between the main representative associations. Consequently, proposals for the introduction of statutory provisions for the liquidity and solvency support of credit unions appear to have become paralysed.
It may be desirable, where financial events dictate, to enforce the consolidation of smaller dysfunctional credit unions into more viable units. No provisions currently exist in law for the Registrar of Credit Unions to do this. The alternative of the liquidation of a credit union in the absence of any workable alternative could have damaging effects on confidence in the movement as a whole.
While the strategic review of the movement is to be welcomed as a means of reshaping the movement for the future, short-term legislative changes to address the issues I mentioned are also now needed. As the old saying goes, "A stitch in time saves nine."
