JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS debate -
Thursday, 27 May 2010

Credit Union Regulation: Discussion with Registrar of Credit Unions

Chairman

On behalf of the joint committee I welcome Mr. James O'Brien, Ms Elaine Byrne and Ms Aoife Langford of the Registry of Credit Unions and Mr. Jonathan McMahon of the Financial Regulator.

By virtue of section 17(2)(l) of the Defamation Act 2009, you are protected by absolute privilege in respect of the evidence you are to give this committee. If you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise or make charges against any person(s) or entity by name or in such a way as to make him, her or it identifiable. 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 House or an official by name or in such a way as to make him or her identifiable.

I ask Mr. O'Brien to proceed with his presentation.

Mr. James O’Brien

I thank the Chairman and members for their invitation to me in my new role as Registrar of Credit Unions. I am accompanied by Mr. Jonathan McMahon, assistant director general for the financial institutions, Ms Elaine Byrne, deputy registrar of credit unions and Ms Aoife Langford, senior manager in the Registry of Credit Unions.

I take this opportunity to comment on three main areas. First, I would like to talk briefly about the health of the credit union sector. Second, I will talk about the regulation of credit unions. Then I will outline the process for the strategic review of the credit union sector which will be under way shortly.

I will turn first to the health of the credit union sector. The sector as a whole has, so far, withstood the financial and economic crisis better than most other financial institutions in Ireland. In consolidated form, the sector could be regarded as being in reasonably good financial shape. However, looking at the numbers this way does not capture the full picture. There are currently 414 credit unions registered in the State. Each one is autonomous in its own right, with its own board, its own governance structures and policies and, in this sense, the risk profile of the sum of the parts does not reflect the level of risk in each of the individual credit unions.

It must be recognised that credit unions cannot expect to escape the adverse impact of high levels of unemployment, public sector pay cuts, mortgage interest rate rises and the high level of individual debt we are now seeing. The full impact of these events on credit unions will only become apparent over time. We are already seeing a sharp rise in arrears levels in the sector overall and we are also seeing a significant increase in the levels of loans being rescheduled as more and more members come under financial stress. This is a concern.

In recognition that these stresses are increasing steadily due to the current economic environment, our main regulatory focus at this time is on the quality of credit union loan books and the levels of provisions and reserves held by credit unions. With regard to the proposed amendment to section 35 of the Credit Union Act 1997, we are fully conscious of the need for credit unions to help members in financial difficulties. However, the big challenge for directors and managers in credit unions over the next while will be how to ensure that a proper balance is struck between the need to help member borrowers and the overriding requirement to protect the savings of their members, their individual credit unions and the sector overall.

It has never been more important that the decision-making process within credit unions is objective. Directors in credit unions must face up to the challenges and ensure that appropriate provisions for bad and doubtful debts are made that truly reflect the quality of their loan books, including those loans that have been rescheduled. The section 35 proposal, as framed, is sensible and prudent. The conditions outlined in the proposal are preventative measures that allow credit unions to help their member borrowers by rescheduling their loans, while at the same time protecting members' funds. Providing for loans that have been rescheduled because the borrower is financially distressed is prudent. It is a form of insurance in the event that the loan cannot be repaid despite the best intentions of the borrower. As the loan is repaid the provision reduces and can be released back into the income and expenditure account and could then be available for distribution as a dividend.

In our consultation with the sector's representative bodies we have provided details on how we will implement this initiative. We will adopt a balanced approach in implementing the new requirements. Transitional arrangements have been provided for in respect of the minimum percentage provision required, which will not have to be met in full until after September 2011. Clarification also has been agreed as to the circumstances in which a full provision may not be required on a rescheduled loan that falls into arrears. Ultimately it is the responsibility of the board of directors to ensure the adequacy of the provision for bad and doubtful debts. Where it can be demonstrated, along with supporting documentation, that a full provision is not appropriate, we will take this into consideration. There also is a mechanism built into the process whereby the level of provisions held on rescheduled loans can be reviewed and reduced once the loan has performed for a period.

These clarifications are designed to ensure that the measures proposed are proportionate and we intend that these measures will be fully reviewed as part of the strategic review of the credit union sector which, as members are aware, is due to commence in the second half of this year. In these uncertain times strong and responsible leadership has never been more important for the credit union sector. The willingness of the Irish League of Credit Unions to support the regulatory requirements in this initiative was encouraging for the future well-being of the sector. It is surprising and disappointing that the league has now backtracked on this earlier agreement.

On the regulation of credit unions, members will be aware of the global reform effort under way to address the flaws and weaknesses exposed so clearly in the financial regulatory system. At a high level, what is envisaged is a financial system that is underpinned by better quality prudential regulation, increased supervisory engagement and challenge, as well as one that has stronger levels of capital and liquidity. We concur with this approach for the credit union sector here and credit unions can expect that as they grow and their business model becomes more complex regulatory oversight and prudential requirements will increase commensurate with their risk profile. The primary focus of our work continues to be the protection of members' savings and the maintenance of the financial stability of the sector overall. In these increasingly challenging times, some changes to our regulatory tool kit are required as a matter of priority.

One of the main building blocks for any sustainable credit union model is a strong governance culture. Long-term sustainability can only be achieved if the governance framework is robust. Too often, in our experience, the problems arising in credit unions stem from poor governance. If proper governance is to be achieved in credit unions, the general quality of boards, supervisors and managers within the sector must be improved in terms of skills, expertise and competence. To bring this about, we are of the view that statutory fit and proper competency-based requirements for directors and managers of credit unions are required.

In a period in which credit unions are experiencing increased stress due to economic conditions, the need for a statutory central liquidity fund for the sector has never been more important. This fund could be accessed by credit unions experiencing unusual liquidity demand at short notice. We wish to see creation of a statutory central liquidity mechanism for the credit union sector established as soon as possible. In general, the current regulatory powers available to the Registry of Credit Unions are reactive in nature and in most cases can only be applied to credit unions individually on a case by case basis. We cannot issue general regulations for the sector that are preventative rather than corrective in nature that have the force of law. Where we seek to effect changes in policy or practices in credit unions, we are reduced to issuing guidance notes that are not legally enforceable. While we have regulatory powers to take corrective action in the event of non-compliance, this is not appropriate for a modern regulatory system, having identified emerging risks, that must have the ability to act in a proactive manner in the interest of the savers in credit unions.

There must continue to be a place for all credit unions regardless of their size and any new legislative and regulatory framework must allow for this. However, in the future it must be recognised that some credit unions may not be viable on a stand-alone basis. Currently there are no provisions in law for the regulator to direct and fund the transfer of such credit unions into more viable entities. Winding up a non-viable credit union, following a petition to the High Court, could have unnecessary damaging effects on confidence in the sector, especially in the current financial environment. However this is the only option available to us in the absence of an alternative. Ireland is not alone in having a large number of small institutions offering banking type services. Spain, for example, has a large number of small savings banks. Last year the regulatory authority in Spain was given greater powers to deal with non-viable institutions in an orderly fashion so that financial stability issues do not arise. While consolidation within the credit union sector is an emotional issue, emotion needs to be set aside when financial stability issues and the health of the sector come into play.

I now will turn to the strategic review of the credit union sector. The current business model and governance arrangements in the credit union sector have, up to now, produced certain advantages for credit unions. However, it has become increasingly clear that changes are required in how credit unions operate, which will enable the sector to progress to the next stage of its development. The current regulatory framework for credit unions is outdated and requires significant change. Credit unions have also been seeking change in the legislative framework for some time now. As members will be aware, the Minister for Finance has requested the Financial Regulator to arrange for a strategic review of the credit union sector to be carried out. A key focus of the review will be on how to protect the strengths of the sector while having an enabling legislative and regulatory system that allows credit unions to develop in a prudent manner. It is intended that there will be wide consultation with all stakeholders in the sector during the review to ensure that all views are considered in the work.

We have structured the work in two phases. It is intended that the first phase of the work will be completed by end-December 2010 and the second phase by end-March 2011. The first phase is structured to take stock and look at the present position to make an assessment of the current risk profile of the sector. This first phase of the review will involve an examination of the structure, operation, regulation and legislation of the sector. The scope of this phase of the work has been agreed with the Department of Finance and discussed with the main representative bodies. The second phase of the review will concentrate on the strategic direction of the credit union sector. The second phase will advise and inform an assessment of the future strategic direction of the credit union sector. Based on the work carried out in the first phase and in full consultation with all stakeholders, recommendations will be made as to the operational model, legislative framework and regulatory controls necessary to develop, protect and sustain the sector into the future. The scope of this part of the review will be agreed with all stakeholders before a decision is taken to proceed. This is a valuable opportunity to design a sustainable credit union business model and regulatory structure that will support the strategic development of the sector into the future.

These are challenging times for credit unions. While there is no reason the sector cannot come through in good shape, this will depend on how boards and managers respond to the challenges. The future shape of the credit union sector depends on that response. I thank members for inviting me to appear before the joint committee and will be happy to answer any questions they have.

Senator Paul Coghlan

I welcome Mr. O'Brien and his team and thank him for his opening remarks. All members of this joint committee are highly conscious of the importance of credit unions and of the difference between credit unions and banks. Mr. O'Brien should outline whether there are specific ways in which his office takes or will take a different regulatory approach to credit unions. While I am open to correction, I understand there has been no injection of taxpayers' funds or transfer of impaired assets arising from anything that happened within credit unions. I invite Mr. O'Brien to discuss this point. My impression is that there may be a lack of understanding at the top about the role, function and culture underpinning the credit union movement in Ireland. On that basis, I am worried that there may be regulatory overkill in this regard. Will credit unions be treated in exactly the same way as banks? I suggest they are different cases.

Following on from this, Mr. O'Brien must perceive the completely adverse impact that excessive regulation would have on volunteers involved in credit unions. Do our guests agree this must be a material consideration for them? Have they carried out any regulatory impact assessment of the measures being proposed in respect of the credit union sector? I am grateful to the Chairman for allowing me to ask these questions.

Mr. James O’Brien

I thank the Senator for those. I will deal with them from the top down. The regulation of credit unions as set up within the Central Bank sees me, as Registrar of Credit Unions, having responsibility for the sector, which has its own legislation, namely, the Credit Union Act 1997. We fully understand the issues relating to credit unions and, since 2003, have built an understanding of the unions' role, which is increasingly valuable in light of the banking sector's position.

The level of understanding within the Central Bank is appropriate, as we understand what we need to do and where we are going. Our proposals in terms of examining the risks in the credit union sector should not impact on the volunteer element. We are seeking prudence and controls around the lending and investment functions. For 50 years, credit unions have managed their business prudently. Much common sense has prevailed, a large element of which needs to continue to prevail in the current environment. If credit unions can recognise there are difficulties and take the common sense approach to dealing with them, there is no reason the sector cannot survive the current environment.

The Senator rightly stated that no credit union has needed to access taxpayers' money, a fact of which we, as regulators, are proud. We have built up strong reserves. In 2009, we established the regulatory reserve ratio for credit unions, which statutorily required them to put 10% away as a reserve. In recent years, we have also worked with credit unions to build up their provisions for bad and doubtful debts. We have worked extensively with individual unions in this vein, carried out many inspections and made them increase their provisions. From the regulatory side, these two elements have helped credit unions withstand the difficult environment in which they find themselves. They are well reserved.

We have conducted an analysis of the impact of the current section 35 initiative. At the current level of rescheduling within the sector, the majority of credit unions can absorb the impact without difficulty. The more a credit union reschedules, the greater the impact on its business and its ability to make distributions, but this is only right. If a union is rescheduling more of its loan book, more of its loan book is in distress and it should make provisions.

Senator Paul Coghlan

Are credit unions engaging in much rescheduling?

Mr. James O’Brien

In recent years, the amount of rescheduling has increased significantly. Some unions are not rescheduling much whereas others are. Our proposed initiative in respect of section 35 is a preventative measure. Members must be helped in the current environment, as must those who are financially distressed, which is the ethos of the credit union, but——

Senator Paul Coghlan

Is Mr. O'Brien stating there is no even-handed approach, only an inequality of treatment by credit unions?

Mr. James O’Brien

No. We are telling unions the requirements if they are rescheduling. The less they reschedule, the lesser the impact of the requirements on them will be. The more they reschedule, the greater the impact. This is appropriate. If a union is rescheduling loans, it must make certain provisions.

How credit unions make bad debt provisions is very much based on the number of weeks in arrears. If credit unions do not reschedule loans, those loans will fall into arrears and the unions will need to make provisions for them anyway. Unions must help their members and we are giving them an option to reschedule even though we do not like rescheduling, which should not occur in the normal course of events. According to the guidelines of the World Council of Credit Unions, loans should only be rescheduled once. Given the current environment, however, we are allowing credit unions to reschedule, but they must protect themselves and the savings of their members — in many cases, these are life savings — in doing so. When those loans are repaid, the credit unions can distribute. If they are not repaid, unions will have a pot of money to set against them without bringing themselves into difficulty.

Deputy Kieran O’Donnell

I welcome Mr. O'Brien and his colleagues. He mentioned the capital reserve and the 10% ratio required of credit unions. How many credit unions are meeting that reserve ratio? According to what we have heard, the top 100 credit unions comprise approximately 100% of the credit union movement's overall assets. How many of the top 100 are meeting the 10% ratio and at what levels? The equivalent in the banking system would be approximately 8%.

Does Mr. O'Brien agree that credit unions are different from banks in terms of their structure? He mentioned that the majority of unions are in sound financial shape. How many are not? The retail banks were driven by property and development, which do not appear to be factors for the credit union movement. The only issue that arose was that of investments and the union's losses in that respect. Is Mr. O'Brien satisfied that credit unions have been able to absorb those losses and that there is no issue?

The amendments to the Central Bank Reform Bill 2010 pose an issue. Am I correct in saying that, under existing legislation, the registrar has the power to enact the provisions of the proposed section 35(2)? Under section 35A, which is a general amendment, will the registrar have specific powers to address individual credit unions? Section 35A effectively allows the registrar to apply blanket rules to all credit unions. Is this reasonable, given that the credit union movement is generally in a good state? In this light, would a strategic review not be more appropriate? He stated: "In full consultation with all stakeholders, recommendations will be made as to the operational model, legislative framework and regulatory controls necessary to develop, protect and sustain the sector into the future." Currently, the registrar has the power to deal with individual credit unions experiencing difficulties. Would proper consultation not be more appropriate? The general view is that there could have been more consultation with the movement in respect of section 35A. The purpose is for the credit union movement, working with the regulator and the Minister for Finance, to find a framework that works. Credit unions are not in the same situation as retail banking. Many of them were prudent and did not get into property. Would it not be more appropriate to allow for proper consultation, with a proper strategic review? The registrar has the powers to deal with credit unions that are in difficulty but it does not appear that this is a problem across the system. The review should take place and we should then put legislation in place for the credit union movement to provide the elements we all want to see in terms of safety of deposits.

The purpose is for the credit union movement, working with the regulator and the Minister for Finance, to find a framework that works. Credit unions are not in the same situation as retail banking. Many of them were prudent and did not get into property. Would it not be more appropriate to allow for proper consultation, with a proper strategic review? The registrar has the powers to deal with credit unions that are in difficulty but it does not appear that this is a problem across the system. The review should take place and we should then put legislation in place for the credit union movement to provide the elements we all want to see in terms of safety of deposits.

Mr. James O’Brien

The intention is that the section 35 initiative will be fully reviewed as part of the strategic review process.

Deputy Kieran O’Donnell

Section 35A is extremely broad. The system is functioning reasonably well, although certainly there are specific credit unions where there are difficulties. It is a movement many people could not have survived without and it managed its finances in a prudent way, without lashing out money. There should be a systematic approach. It happened with the banks; PWC was brought in to look at them and the report evolved over many months.

Mr. James O’Brien

Credit unions are important and we believe the credit union movement will become even more important in the near future because of the shape of the financial sector. However, we should not be complacent. The credit union sector has done reasonably well but we need to be able to look forward and to take preventative measures where we see a risk. This is a preventative measure. We are not saying there are significant problems at present; we are looking a year to 18 months ahead.

Deputy Kieran O’Donnell

The strategic review could be completed within that timeframe.

Mr. James O’Brien

If the strategic review is completed in 18 months, it might be too late. We are now looking at a period where the stresses are increasing dramatically. We want to put a preventative measure in place where we help members while protecting the credit unions and the savers.

Deputy Kieran O’Donnell

How many credit unions are meeting the 10% capital ratio?

Mr. James O’Brien

We set a benchmark of 10% but we have also provided transitional arrangements for credit unions of 7.5%. The majority of credit unions are now meeting that 7.5%. A significant number of credit unions is also meeting the 10%.

Deputy Kieran O’Donnell

What would that figure be?

Mr. James O’Brien

About 84% of those meeting the 7.5%.

Deputy Kieran O’Donnell

That is 84% numerically speaking?

Mr. James O’Brien

Yes. They have total reserves of more than 10% of their assets.

Deputy Kieran O’Donnell

The assets are around €14 billion. What percentage of the top 100 credit unions are making 10%?

Mr. James O’Brien

We do not have figures for the top 100 credit unions.

Deputy Kieran O’Donnell

It would be reasonable to say that the credit union movement is unlike the banking sector. It is in a reasonably sound financial state.

Mr. James O’Brien

I said at the outset that if one looks at the sector overall, it is in shape but we do not want to be complacent.

Deputy Kieran O’Donnell

I accept that.

Mr. James O’Brien

Our fear is that it might appear that reserves are healthy on the face of it, but if credit unions start to reschedule loans, and do not make provisions for those loans, and those loans eventually go bad, those reserves could be wiped out quite quickly. We have carried out a significant number of loan book reviews and in those reviews we have seen some serious under-provisioning for those loans, to the tune of around 85% to 90%. That means credit unions are not making the right provisions on their loans and must bump them up by almost double.

Deputy Kieran O’Donnell

That would be individual credit unions, the great majority of credit unions are not doing that.

Mr. James O’Brien

That view arises from 100 loan book reviews, which is a significant number within the sector. If it is extrapolated across the sector, it is very significant. The measure we are putting in place is preventative. If more loans are rescheduled, there should be greater provision.

Deputy Kieran O’Donnell

There are two elements to this. There is section 35 but there is also the broad power. I do not see why a strategic review should take 18 months. I would have thought it could be done much quicker.

Mr. James O’Brien

I did not say it would take 18 months, the plan is to finish it by the end of March 2011.

Deputy Kieran O’Donnell

That is about nine months but there is an expectation of difficulties within an 18 month period. My point is that to get to a situation where everyone is moving the same way, the strategic review mechanism would provide an enabling measure with proper consultation whereby when legislation is introduced, it is geared to the specific requirements of the credit union.

What about investment losses on products? Has the credit union movement provided adequately for that area?

Mr. James O’Brien

With regard to investments, credit unions have had a particularly hard time. In the majority of cases, those investments have been written down so they have gone through the income and expenditure accounts. There is still, however, a large number of investments that could have difficulties in terms of amounts. Credit unions, however, have taken the majority of the losses they are expecting.

Deputy Kieran O’Donnell

So they are meeting their reserve ratio after having taken these loss hits.

Mr. James O’Brien

Yes.

Deputy Kieran O’Donnell

From what you have said, it strikes me that the credit union movement is on a sound financial footing. Individual credit unions——

Mr. James O’Brien

I did not say that, I said the credit union has withstood the financial meltdown better than most. We should not be complacent and there are trends in the sector that are causing us concern. We are looking to put preventative measures in place to ensure they do not go the same way as the banks.

Deputy Kieran O’Donnell

Absolutely, and no one doubts that. From the figures generally, 85% of credit unions have the 7.5% or more reserve and the greater majority have the 10%. They have provided for the investment losses so as things stand they are in reasonable financial shape.

Mr. James O’Brien

They have provided for the investment losses but we do not see the risk as being on that side at the moment, we see the risk as relating to loans. We are concerned about the lending of credit unions.

Deputy Kieran O’Donnell

The registrar can see the merit in a strategic review being carried out in a timely fashion so it can be used as a basis for a legislative framework. At present there are concerns that section 35A is being introduced without informed consultation with the stakeholders. Perhaps the strategic framework would provide that consultation. Will Mr. O'Brien take this on board?

Mr. James O’Brien

We do not agree. We consulted on it and stated that we would like to put conditions on the expansion of lending. We do not have the powers to do so broadly across all credit unions and section 35A gives us that power.

Deputy Kieran O’Donnell

That is in section 35A, but it could be done for individual credit unions.

Mr. James O’Brien

We could do it for individual credit unions but we cannot do it across all credit unions and we cannot set a provisioning requirement for individual credit unions.

Deputy Kieran O’Donnell

How many times has the Registrar of Credit Unions met the credit union stakeholders to discuss the specific provisions of section 35A?

Mr. James O’Brien

The legislation is a matter for the Department of Finance. We specifically asked for the power to be able to impose those conditions.

Deputy Kieran O’Donnell

There were no discussions with the stakeholders.

Mr. James O’Brien

There was discussion with the stakeholders on the conditions we wanted to——

Deputy Kieran O’Donnell

Were there discussions specifically on section 35A with the credit union movement?

Mr. James O’Brien

There was discussion with the Department of Finance but not with us on the legislation.

Deputy Kieran O’Donnell

The regulator did not discuss section 35A specifically with the credit union movement.

Mr. James O’Brien

We discussed that we needed the powers to be able to——

Deputy Kieran O’Donnell

With the Department.

Mr. James O’Brien

Also with the representative bodies. They were aware we were attaching conditions to the requirement.

Deputy Kieran O’Donnell

Were they aware of the generality of section 35A and how broad ranging that provision is?

Mr. James O’Brien

Section 35A is there only to allow us attach the conditions.

Deputy Kieran O’Donnell

If a strategic review could be got up and running it would provide a more positive framework for progress in regulating credit unions.

Mr. James O’Brien

We agree that it should be in the strategic review. However, we need to take this interim measure to ensure the sector stays safe in the coming 12 to 18 months.

Deputy Seán Sherlock

The credit union movement is a little perturbed by the fact that the legislation will be implemented in advance of a strategic review and to its mind the consultation process will be a waste of time after the fact. Credit unions hope for proper consultation in advance of the legislation being passed or perhaps a parking of the legislation until such time as they can get down to the nitty gritty of the details of how it will impact on them in the long term. A strategic review after the legislation is passed seems to the credit unions to be quite a waste of time and their perception is that the Registrar of Credit Unions is driving a coach and four through any initiatives or views they have on how the new sections 35A and 35B will affect them. They also have a perception that they have already made adequate provisioning arrangements. They believe there is a relatively decent reserve in position and they are well placed to withstand any economic downturn or anything that may change within the 12 to 18 month period. What is Mr. O'Brien's view on this? If he were to communicate a message to the credit unions through this forum what would he state on this?

Mr. James O’Brien

The strategic review is on a much wider area than just this. This is part of that entire process. The strategic review will take account of all of the concerns of all of the stakeholders and that is right. The future direction of the credit union sector is a matter for the stakeholders and not the regulator. I am concerned about the idea that there are adequate provisions. They are adequate at this point in time. However, the numbers are ramping up and we want to safeguard all the good work we have done in recent years. We recognise the input of the representative bodies into putting together the regulatory reserve ratio and that was a seminal moment in building a strong base for the credit union sector. I am concerned that we are hanging everything on that and not looking at the risks emanating and taking account of them. We should not state that what we have is enough; we should ask whether we need a little more or whether we should pull back a little on our lending.

We understand the ethos of credit unions and the need to help members but we are asking credit unions to be a little more cautious and prudent at this point in the economic cycle and to put a little away to ensure the credit union will be there for future generations. It is a very important sector. Up to now it has done quite well but it should not be complacent. Credit unions may have to take difficult decisions and we understand there may be difficulties with their members and people in financially distressed states. That is not easy and it is very difficult for credit unions to underwrite loans because it is very personal and emotional. However, difficult decisions will have to be made for the future of the sector and that is what we advocate.

Deputy Seán Sherlock

Does Mr. O'Brien have regard for the fact that because of the new provisioning arrangements and the reserve requirements many credit unions will find it more difficult to pay dividends and surpluses? This could in the long term undermine the credit union movement. If one does not get a return why should one invest in an individual credit union? Credit unions take a view that they have voluntarily introduced new parameters on provisioning requirements. Some will argue that there have been increases of anything up to 40% in the reserves of individual credit unions to meet any onslaught or potential problems that might arise.

At present, credit unions have a sense that Mr. O'Brien is not in a position to bargain, negotiate or even consult. Their perception is that Mr. O'Brien will drive on and adopt a "one size fits all" approach. He may extrapolate from the results he elucidated to Deputy O'Donnell on reserves and the increasing pressure that exists for 100 loan books.

Mr. James O’Brien

Yes.

Deputy Seán Sherlock

Are they representative of the overall credit union sector? Do we need to look more closely at those 100 loan books? What was the product mix and what was the mix of credit unions examined? If Mr. O'Brien takes a unilateral approach he will potentially impact on the ability of credit unions to draw in new customers if the reserve and provisioning requirements are so stringent that they will not be able to pay out dividends even though their loan books might be performing quite well.

What I am trying to get across is the idea that there may be a sense in which the Minister has bought into a view on sections 35A and 35B. In his Second Stage speech, he stated:

The Registrar of Credit Unions will adopt a balanced and proportionate approach in the application of the loan provisioning requirements which are proposed to be introduced. Depending on the circumstances, a missed repayment on a rescheduled loan may not always trigger a full provision against the loan provided that the credit union is satisfied that the loan continues to perform in accordance with its new terms.

It could be argued that it is giving them a carte blanche, but that the ability of the individual credit union to know its customer and have a personal relationship with him or her is being overridden by the new provisions which it will impose. That is something which needs to be teased out because in the future one does not want tension to exist between the registrar and individual credit unions, thereby having a negative impact on their ability to pay dividends.

Mr. James O’Brien

Absolutely. I agree that the tension between the sector and us is one which we are surprised at because we felt we consulted widely on this with the representative bodies.

Deputy Seán Sherlock

What were the representative bodies?

Mr. James O’Brien

They were the Irish League of Credit Unions and the Credit Union Development Association.

Deputy Kieran O’Donnell

Were they the only two?

Mr. James O’Brien

They are the two representative bodies for the movement. Traditionally, that is how we have——

Deputy Damien English

Mr. O'Brien said there was agreement. Did both bodies agree?

Mr. James O’Brien

The Irish League of Credit Unions agreed but the Credit Union Development Association never agreed with the process because it felt there was a wider remit, in terms of section 35, and it was not happy that section 35 should be examined in isolation.

Deputy Seán Sherlock

What was its position regarding section 35(a) when it was sitting in the room with the delegation?

Deputy Damien English

It had a position when it appeared before this committee.

Deputy Seán Sherlock

A position was articulated to us in the committee and I am sure the delegates have read the transcripts. The Minister has a very clear position on section 35(a), as does Mr. O’Brien. Where is the breakdown, if this was a consultative process?

Mr. James O’Brien

I do not understand where the confusion is because throughout the consultation process we have always said that the provisions contained in section 35(a) are purely to give us the power to be able to impose the conditions attaching to this proposal.

I will return to the earlier questions. In terms of the consultation, we believe it is right that we consult. We do not believe that what we are doing is overly draconian. It is preventative. We see it as a way of allowing credit unions to manage their own affairs, within guidelines. I have said that where credit unions can demonstrate to us that the 100% provision does not apply because the underlying loan is performing in accordance with the terms, we will of course take that into account. We will take a balanced and proportionate approach to all of this.

We are considering putting some parameters around this area. In all our dealings with the credit union sector we are pragmatic and take the view that ultimately boards of directors are responsible for the provisioning. Where we see a lack of provisioning or under-provisioning we have to step in for the sake of the member.

Deputy Seán Sherlock

I appreciate that. I have one final question regarding the appropriate processes, procedures and systems that will have to be put in place to meet the requirements of section 35(b). What does the delegation envisage in that provision? It could arguably place a massive cost burden on individual credit unions as a result of updating information technology systems and other such processes. I want to get a sense of the current position of the delegation.

Mr. James O’Brien

In terms of the reporting process, we are always conscious of costs in the credit union sector and imposing administrative requirements which are a burden in terms of cost. We are considering implementing the reporting system over time and giving them time to put it in play. The key things we need to know are what loans are being rescheduled, what the levels are and what provisions are held against those loans. It is quite simple, in legal terms.

Deputy Peter Kelly

I welcome the delegates. I wish to ask some questions. I am a member of the Longford Credit Union to which I would give ten out of ten for its service to its members. Everybody connected with it, including the board, management and staff, is a role model on how to run a successful operation. The Registrar of Credit Unions has already restricted the lending of some credit unions. It has restricted the investment income of credit unions by allowing some to place money for a maximum of three months with six State guaranteed banks. This allows the banks to offer lower rates to credit unions in the knowledge that they have to have money with them. Credit unions cannot have more than 25% with any one institution. This is distorting competition. One financial institution is offering personal customers 3.5% for three months and offering credit unions 2.5% for the same period. Is the Registrar of Credit Unions changing the investment guidelines for credit unions?

Why should section 35 apply to all credit unions, even those who do not want an extension of the section 35 arrangement? Some credit unions have liquidity of more than 50% as a result of directions from the Registrar of Credit Unions. Is this helping or hindering credit unions? Can the strategic review of the credit union movement not wait to publish its recommendations until the current legislation is completed?

The Registrar of Credit Unions already has power under section 84(2) of the Credit Union Act 1997, which states that: "The Registrar shall have power to do anything which, in his opinion, is necessary to facilitate the exercise of his functions or is incidental to or consequential on their exercise." Does the Registrar of Credit Unions feel this is sufficient?

Excellent loan members who are not in arrears should be able to have a reduced payment plan in place without the need to charge a book loss provision against the credit union's profit and loss account. Under current proposals, a borrower with, for example, a loan of €25,000 whose payments were reduced from €100 to €90 per week will cost the credit union 15% of the loan, that is, €3,750. It is easy to clock up 100 such loans in a year, which amounts to €375,000 that is unavailable for distribution to members.

Mr. James O’Brien

I will deal with the last point first. In terms of putting provision away, it is not a cost to the credit union, rather, it is an accounting provision. At a later date it will be able to distribute it, provided that all of those loans are repaid. We think it is prudent that is done. As I said earlier, credit unions could rack up significant sums under provisioning. As in the Deputy's example, they could rack up €375,000. If those loans are not repaid they will have to find that €375,000 from somewhere. If they distributed that money to their members and do not have it in reserves, then they are in difficulty. We are asking them to hold back their reserves and distribution, and distribute when things get better and those provisions are not required.

We have had to restrict lending in some credit unions where we have found difficulties. We do not do it lightly, but we feel it is necessary to do it in some cases. We have also restricted investments, as the Deputy quite rightly said, which was a preventative measure in the past 12 to 18 months when we felt liquidity was all-important in terms of credit union stability. We wanted to make sure that credit unions had significant funds available at reasonably short notice and that they were not putting funds away in complex products, as they have done in the past. It is an area which we need to examine again, and we will do so towards the second half of this year, in terms of offering guidance on that area.

On section 35, we are saying that all credit unions should abide by its conditions. That is a reflection of our oversight and looking at the trends arising in credit unions. We believe it is appropriate that these conditions apply to all credit unions. We do not believe it can wait for the strategic review. We believe it is necessary now and that it will stand the credit union in good stead. While I accept it will perhaps restrict payments or dividends in some credit unions, we believe the stability of the credit union individually and the sector overall is more important than the payment of a dividend at this point.

Deputy Damien English

Some of the questions I will ask have probably been asked already, so I will try to keep them short. In regard to the strategic review, does Mr. O'Brien have a vision for the credit union and to where does he believe it will go? Does he have an open mind in that regard? I am glad he said the review should allow the sector to progress to the next stage of its development because there is a belief among some credit unions that they are being held back, that they could do much more and that they provide many more services. I take it Mr. O'Brien has a progressive view on where the credit union can go, and that is not to stay where it is. Mr. O'Brien also said the credit union should be allowed to develop in a prudent manner. I presume he is happy to see different levels of expansion for different credit unions. I would be glad if that was the case.

The concern I have, which I believe is shared, is that there seems to be a doubt over the quality of consultation, whether with Mr. O'Brien or the Department of Finance. There is a question mark over that and we are getting different versions from different people and groups. I hope that will end. Will guaranteed consultation be built into this? Will it become a rule that there is a clear mechanism there for proper consultation and that everyone will be involved in it? There are different groups and different emerging groups and sometimes they have different views and it is important they all get a fair say. I want a guarantee a checks and balances approach will be taken. I presume Mr. O'Brien will be in charge of that, more so than the Department of Finance.

Will Mr. O'Brien clarify exactly what consultation took place on this part? I understand this began a year ago. At an annual general meeting of the Irish League of Credit Unions, the Minister for Finance gave great hope to people that this area would be looked at. Nothing has happened since then, and that was more than 12 months ago. All of sudden we have this very complicated process and by the looks of things, nobody is happy. We have gone from trying to do something simple 12 months ago to help people and help credit unions to help people. All of a sudden that has been blocked. Something went wrong in the meantime and I would like to know what. As far as I am aware, the situation of credit unions has not changed that much in the past year.

Mr. O'Brien told a colleague that an impact assessment was done. I was not aware of that. If it was done, could we see it? I am well tuned into credit unions and the logic of some of what Mr. O'Brien is doing and some of the conditions. Perhaps Mr. O'Brien could tease out some of the conditions now, or in writing at a later stage. Even the conditions being attached are getting complicated. If an impact assessment was done on the conditions, what did it show? Did it show clearly this would not affect the running of credit unions in terms of their dividends, their reserves and their ability to attract cash in? If no cash is coming in or being left in savings, they cannot perform.

The original conditions changed to other conditions. Why did that happen? What was the advice on that? We need to understand the process. The committee wants to do a good job and the right thing for all involved. We do not want to give credit unions the freedom to do what they want and we understand there must be proper regulation but we need to understand the reason for it and from where it is coming. I have a difficulty with that at present.

Mr. O'Brien made it clear that the duty is to protect the investors in credit unions. The sole job of credit unions is to protect savings but a feature of credit unions from day one has been that they have been very flexible and approachable in dealing with finance and credit. That has been a very important part of the credit union sector and is generally for what they are known and why people are involved in them. If we lose that or if it is stopped, credit unions will probably fail in the future in that they will not be wanted as much as they are now. They do a very good job.

If one goes to a credit union, a bit of flexibility is shown. One can talk to somebody at the other side of a desk and get a result not to be let off paying what one owes but to be able to handle one's affairs in a proper and prudent manner. We are concerned staff flexibility could be dealt a blow if some of these conditions and regulations come in.

We need to see preventative measures in terms of dealing with people's debts. If a person who is not yet in a terrible financial situation is unable to reschedule his or her credit union loan in order to prevent him or her getting into difficulty, we will cause more problems. A real fear of mine is that credit unions will stop being flexible or rescheduling loans because it will hinder other parts of their business. I would like to hear Mr. O'Brien's comments on that because it is the nub of the issue. Some people might want to spread a loan over eight years rather than four years because that option suits them better and will enable them to pay off other debts. All of us are involved in trying to convince the banks to do likewise. They are not as open to it as credit unions and that has always been the benefit of the credit unions. There is nothing wrong with that and I do not believe Mr. O'Brien believes there is either. There is common ground here.

The current legislation gives scope to certain credit unions to adjust their loan schedules. The power lies with the Minister, who does not seem to want to use it for whatever reason. The idea is to give the Registrar of Credit Unions more power. Mr. O'Brien said he wanted the power not only to give guidance but to make regulations. I do not have a problem with that, nor does any of the groups I met. Their fear is the list of conditions being made law. If Mr. O'Brien wants the power, is it not enough to give him that in the Bill and then implement things on a credit union by credit union basis rather than across the board because if the conditions become law, that is what will probably happen? Regardless of what the intention is, those conditions will be implemented across the board.

Mr. O'Brien said that where it can be demonstrated, along with supporting documentation, that a full provision is not appropriate, he will take this into consideration. I would question whether he will be able to take it into consideration. Do the proposed conditions not prevent that? Will Mr. O'Brien clarify that because if he is allowed and prepared to do that, that might be a solution? The belief is there will be conditions and that will be it. If Mr. O'Brien could tease it out a little, that would be no harm. Some of these measures could be slightly draconian.

I refer to the transitional arrangements which have been provided for in respect of the minimum percentage provision required — 10% to 15% to 20% — which will not have to be met in full until after September 2011. If Mr. O'Brien decides in January 2011, mid-way through the review, that we do not need to go to 20%, is he in a position to say that? Will he be unable to do that because it is a condition laid down in law? A lot can change and this time next year Mr. O'Brien may be of the view that we do not need to go to 20% and we could avoid all the problems. Is he able to do that?

Mr. James O’Brien

The legislation change gives us the power. It does not put the conditions in the legislation.

Deputy Damien English

That is where the doubt is.

Mr. James O’Brien

We have the flexibility to change those conditions.

Deputy Damien English

To clarify, Mr. O'Brien wants the power to be able to use these conditions if he wants. The belief is that these conditions will be laid down in law.

Mr. James O’Brien

No.

Deputy Damien English

That is a belief many of us share.

Deputy Kieran O’Donnell

The first section is in law anyway. There is nothing new in section 35.

Mr. James O’Brien

The second part of the section gives us the power to be able to impose the conditions which are part of the proposal.

Deputy Kieran O'Donnell

It is putting the cart before the horse.

Deputy Seán Sherlock

It is how one determines the power. Is it a soft power or a hard power? Will Mr. O'Brien beat them with a stick or coax them along gently in a consultative fashion?

Mr. James O’Brien

The power is to impose the conditions as has been described and as per the clarifications we have given the representative bodies. To go back to the point on these conditions changing, they are changed through the consultation process we went through, so we clarified how we would implement the requirement which was a pragmatic approach. It will be proportionate and we will certainly take account of issues where there are perhaps technical arrears and so on and a couple of missed payments because somebody has gone on holidays. We have clarified all of that. Of course, we will take all of that into account.

Deputy Damien English

Despite the clarification, it remains a grey area. When conditions provided for under law are not backed by sufficient logic, confusion ensues.

Mr. James O’Brien

These conditions will form part of the proposal. When we implement them, we will send them to all credit unions, with the clarifications and transitional arrangements.

Deputy Damien English

Do the conditions need to be written into law?

Mr. James O’Brien

We do not believe that is necessary because we would prefer to have flexibility to deal with the circumstances outlined by the Deputy. We will have the power to react in a flexible manner.

Deputy Damien English

My understanding of the legislation is that it will not be flexible.

Ms Aoife Langford

The conditions are not included in section 35A. The legislation provides for the power to introduce conditions.

Deputy Kieran O’Donnell

The Credit Union Act 1997 is wide-ranging and has worked well. Is the cart being put before the horse in amending it without allowing for a strategic review? There is a general view within the credit union movement that the consultation procedure provided for in section 35A is not sufficiently wide-ranging. Deputy English got to the kernel of the matter. A strategic review could be completed in less than nine months because it could be tailored to deal specifically with legislative requirements. We could amend the 1997 Act as appropriate, but one section is already in effect, while a second is broad. As in the case of other legislation, we could simply insert a section to give the regulator the power to do whatever was necessary.

Deputy Seán Sherlock

If I was a member of a credit union representative body, I would be distrustful of the process outlined by the delegates. The legislation is being amended to provide certain powers. Mr. O'Brien may say he intends to consult widely on individual scenarios, but that is an easy commitment to give. A credit union representative would ask why the legislation was being changed before the strategic review was completed. Surely it would be preferable to park the legislation until the review and consultations have been carried out. It could be wrapped up by the autumn or winter and there would be a clearly defined set of goals for each of the legislative, regulatory and representative sides. What is Mr. O'Brien's view of this proposal?

Mr. James O’Brien

These requirements need to be introduced now.

Deputy Seán Sherlock

Does that not make a mockery of a subsequent strategic review?

Mr. James O’Brien

No, because a strategic review involves a wider investigation of legislation and practice. This is a limited aspect.

Deputy Seán Sherlock

We are looking at the legislation, yet Mr. O'Brien is calling for another review later. Why not include this aspect in the strategic review?

Mr. James O’Brien

The legislative changes we seek are purely intended to give us the power to impose the conditions agreed in the proposal. We are not looking for wide-ranging powers in any way, shape or form. We simply want to be able to impose the conditions on rescheduled loans.

Deputy Damien English

The Minister stated 12 months ago that a problem had arisen but that it would be addressed. That sounded like a simple matter and when we discussed it two months ago, we agreed it required separate consideration. All of a sudden, the waters have been muddied and the matter has grown considerably beyond the original proposal. It may create more problems than it will solve. I am trying to understand what has changed in the past 12 months. The registrar's conditions have changed twice and nobody has fully teased out the issue.

Mr. James O’Brien

Our conditions never changed.

Deputy Damien English

We discussed a set of conditions which were changed one week later.

Mr. James O’Brien

The conditions were never changed.

Deputy Arthur Morgan

The interpretation changed.

Mr. James O’Brien

We offered clarification and transitional arrangements, but the conditions were never changed and remain as agreed with the League of Credit Unions.

Deputy Damien English

Mr. O'Brien referred to the League of Credit Unions which is one body.

Mr. James O’Brien

It represents 98% of the movement.

Deputy Damien English

I do not represent any individual group, but we are getting differing views. The League of Credit Unions has also expressed concerns, although I accept Mr. O'Brien said it was finding it complicated and had changed its mind.

Mr. Jonathan McMahon

We are doing this purely to prevent further problems from crystalising in the credit union sector in 12 or 18 months' time. As Mr. O'Brien noted, it is in our interests to see a strong credit union sector emerging at the end of this process. We consider this to be a proportionate measure which will help us to achieve our goal. We do not think it would be prudent to wait for the strategic review to be completed and, although the Deputy makes a reasonable point, it is preferable to act now to head off risk. The strategic review will include taking a closer look at a number of credit union balance sheets. Given that we currently employ 28 staff to scrutinise 414 credit unions, we do not have the resources to investigate potential problem areas.

It is slightly disappointing that the representative bodies have changed their positions and are not engaging on the substance of the issue. We all agree it is in everyone's interests to maintain a strong and prudential system of credit union regulation. There have been numerous complaints about the process and letters were fired off to Ministers, but I have yet to see real engagement by credit unions with the substantive issue of strong and prudential regulation. If we had come up with a similar set of proposals during the period prior to the banking crisis, I do not doubt we would have experienced a similar push-back by the banks' representative bodies.

Deputy Kieran O’Donnell

With due respect, the credit union movement is different.

Deputy Seán Sherlock

Mr. McMahon is describing apples and oranges.

Deputy Arthur Morgan

Apples and footballs.

Deputy Kieran O’Donnell

If the banks had acted like the credit unions, we would not be faced by the current difficulties.

Mr. Jonathan McMahon

The point I am making is that we are keen to engage on the issue of substance. We are conscious that there are important differences between the banking and credit union sectors. We would welcome further dialogue with the credit union representative bodies on the substantive issue.

Deputy Damien English

A big part of this is the perception that every rescheduled loan is impaired or in trouble. Many in the credit union movement believe that is not the case, but we will have a problem if it becomes the case because it will unnecessarily tie up too much money. Availing of the opportunity to reschedule loans can keep people out of trouble. That is where the credit union sector has been at its best in good and bad times. I fear these measures will remove that ability and nobody has fully convinced me otherwise.

Mr. Jonathan McMahon

To reiterate the point Mr. O'Brien made, the provision involves money that may be released at a later date. The money is not gone. It is a prudent step similar to painting a house in the summer to be ready for the winter.

Deputy Damien English

I understand the money is not gone, but the opportunity is being removed. Even though a customer could end up in serious financial trouble if he or she cannot reschedule a loan, these measures might result in a credit union deciding it is not in its interest to facilitate him or her.

Mr. James O’Brien

In that case, if a credit union does not reschedule the loan, under the current arrears model credit unions use for provisioning, the loan effectively goes into arrears and the credit union would have to make a provision for it. By giving the credit unions the flexibility to reschedule the loan, the loan is removed from the arrears calculation under which the credit union would have to make a provision. If it is a member of the Irish Credit Bureau, it would also have to place a flag against the person who took out the loan. The flexible approach we have taken allows credit unions to protect their members while requiring them to protect the credit union.

While I accept that some loans in arrears will not go bad, others will go bad. We ask only that the credit unions hold some money in case loans go bad. Everyone intends to repay their loan but circumstances may dictate that borrowers will not be able to do so. If we allow credit unions to distribute all of the reserves, they will not have the reserves to be able to absorb——

Deputy Damien English

That is not the issue. Credit unions do not distribute all their reserves. Mr. O'Brien is being slightly unfair to credit unions as they have been responsible in most cases.

Mr. James O’Brien

Provisions are reserves. If the credit unions do not make provisions and instead distribute reserves, they are not making the reserves they should make.

Deputy Damien English

The discrepancy is between the level of reserves Mr. O'Brien wants the credit unions to make and what level the credit unions believe to be necessary.

Mr. James O’Brien

What we are saying is that if the credit unions do not reschedule these loans, they will go into arrears and they will have to make the provisions in any case.

Deputy Damien English

Mr. O'Brien is speaking about the individual who goes into arrears, whereas I am speaking about the individual who would like to reschedule a loan. The thinking behind credit unions is that members should be able to rearrange their affairs. I am afraid that the approach taken by the registrar could completely undermine this logic.

Mr. James O’Brien

No, that is not true.

Deputy Damien English

That view is held by many people and it is one I share.

Mr. James O’Brien

Our approach allows credit unions to be very flexible and to reschedule loans as required. All we require is that they also protect the credit union when doing so.

Deputy Damien English

It is a high price to pay. Was an impact analysis done and, if so, may we have a copy of it?

Mr. James O’Brien

While a formal regulatory impact analysis was not done in the credit unions, we did our own impact analysis which examined the level of provisions that are held against the rescheduled loans.

Deputy Arthur Morgan

May we have a copy?

Mr. James O’Brien

Yes, we can provide the analysis.

Deputy Damien English

The impression given to my colleague, Senator Paul Coghlan, was that a formal analysis was done. Why was such an analysis not done?

Mr. James O’Brien

We did our own internal analysis. A formal regulatory impact analysis under better regulation standards was not done.

Chairman

There is a division in the Dáil.

Deputy Damien English

If Mr. O'Brien is unable to answer some of my questions now, I will be happy to have the answers in writing. The gap between the Minister's original intentions and the current position has not been closed.

Deputy Arthur Morgan

Will the meeting resume following the vote?

Chairman

Yes, we will suspend for the division.

Sitting suspended at 12.35 p.m. and resumed at 12.50 p.m.

Deputy Arthur Morgan

I thank Mr. O'Brien and his team for their presentation and the earlier exchange. It is important that Mr. O'Brien and his team know that some of us on this side have had the unpleasant experience in the not too distant past of having to criticise a former regulator fairly severely. It is important that we are constructive in a timely fashion, which is a point being made consistently by Mr. O'Brien in his replies today.

There is a political consensus in the Oireachtas that we want something reasonable and fair. We accept the need for regulation, but we do not want to distort the culture of the credit union. That cultural thing is important, because it is very much like the GAA. The credit union staff know almost all of their members, just like in a GAA club. Notwithstanding that we can all be caught short on occasions, there is a great willingness to repay. This culture in the credit unions is completely different from that of the banks, where the banker does not know the person coming through the door. Credit unions have great relationships with their members in urban and rural areas, and that is very important.

Mr. O'Brien said the sector was in good shape and he gave us some figures, which I appreciate. How many of the 100 credit unions in difficulty are below the 7.5% threshold? Are there many of them substantially below it? That is an important figure to deal with to get some handle on the scale of difficulties.

Do the delegates accept that they are requiring the credit unions to disadvantage themselves vis-à-vis the banks? The banks are on an 8% reserve, while the credit unions are on 10%, so they are already at a significant disadvantage. Deputy English made a point about rescheduling loans. There is an excellent track record in that respect. Do the delegates accept that there is an excellent track record even in cases that have to be rescheduled and that rescheduling is the prudent, sensible approach for the credit unions to take? Unfortunately, in this instance they seem to be being penalised for that prudence. In his presentation, where Mr. O’Brien talked about clarification it says: “has also has been agreed as to the circumstances where a full provision may not be required on a rescheduled loan that falls into arrears.” I can understand that Mr. O’Brien must be almost in despair because this thing is sorted and he must be wondering what we are on about. The problem we have is that the clarification given by Mr. O’Brien is not in writing and it is certainly not in legislation and it could be reinterpreted the day after section 35A is enacted. That is our concern and it is the concern of the credit union movement even if we accept Mr. O’Brien as a great guy, although I cannot say that just yet; I am holding that in reserve for the moment. I do not mean it offensively, but that is the politics of it.

Deputy Kieran O’Donnell

Deputy Morgan is leaving Mr. O'Brien's colleagues out of it.

Deputy Arthur Morgan

Yes. Mr. O'Brien could be gone some day and the worry is how the next person interprets the legislation. Does he accept that this is a valid reason for wishing to see this tied down in a better way in legislation? I do not think there is any difference on this between the political parties. We want to get something fair here.

Later on in his presentation, Mr. O'Brien states: "While we do not have regulatory powers to take corrective action in the event of non-compliance...". Surely the regulator has such powers. Surely that is what the first part of section 35 is about. It gives the regulator powers, so perhaps that was just an error. Can he clarify that for me?

Mr. O'Brien makes a big point about the competence of managers and directors, but there is no evidence of them being as wayward as those in the banking sector. I suppose Mr. O'Brien accepts that, because if he does not, I should remind him of Anglo Irish Bank and the directors who signed off on the bank's 2008 accounts that showed a profit of €784 million, even though a few months later it was a €12.7 billion loss. There is a firmer auditing process put in place for credit unions and perhaps that is where one of the gaps exists. There is no record of anything remotely comparable in the credit union sector that demonstrates the level of incompetence or dishonesty that emerged from Anglo Irish Bank and other banks.

There are 28 people looking after 414 credit unions. How many would it take in Mr. O'Brien's office to meet that demand?

Mr. James O’Brien

I thank Deputy Morgan. I did not say that the sector is in good shape, but rather that it has not turned out as badly as the banking sector. There are problems in the sector and we are seeing trends in arrears that are causing us concern. Some of the underlying problems in the sector are starting to come to the fore. Some credit unions are now experiencing solvency issues and we want to make sure that this does not happen across the sector. There are some signs that would concern us about the lending in credit unions, as there is much stress in the sector. Some of the initiatives we are trying to put in place on section 35 represent an attempt to address that.

Deputy Arthur Morgan

Can Mr. O'Brien quantify that level of stress?

Mr. James O’Brien

A small number of credit unions are experiencing solvency issues. The stress is quite high on the arrears figures, as they have doubled in recent years. Part of the problem with rescheduling is that in some cases, credit unions reschedule loans to take the loan out of the arrears position and not to make the provision, which is why we are trying to tighten up in that area.

Deputy Kieran O’Donnell

What percentage of the loan book would be involved? Is Mr. O'Brien talking about loans in arrears for longer than ten weeks?

Mr. James O’Brien

Yes, I am. It is currently about 13.5%, having been at 6% two years ago. That is a significant increase in arrears and we are very concerned about that.

Only 2% of credit unions are below the 7.5% reserve requirement, and we find that encouraging. In the past, there have been excellent track records at some credit unions, but we are in a different environment now, and everybody must accept that. I accept that local credit unions know their members and members feel an obligation to repay at the credit union, but it may come to a stage where they simply will not be able to pay the loan. That may happen and we need to take account of the fact that despite the best intention of the borrower, he or she might not be able to pay back the loan. In those circumstances, if a credit union has not made provisions, it is in deep trouble because it will not have the reserves to absorb the losses.

I said in my statement that we have the powers to take corrective action. We are looking to take proactive action, however, in terms of being able to prescribe regulations for the credit union sector overall. I shall give an example that may deal with competency of directors and managers. Some credit unions have given large loans to a small number of people in the credit union. It seems to be a trend that the loans are getting bigger and the number of people getting the loans is smaller in terms of the overall loan book. We believe that comes down to governance.

Deputy Arthur Morgan

Is that a recent phenomenon?

Mr. James O’Brien

It is a trend we have seen in recent years. We do not have the power to set concentration limits. We would like to be able to set concentration limits for, perhaps, business lending or something of that type of risk. We would like to be able to define that credit unions can only put so much of their money into that area because we believe it is risky. They should not be piling everything into those areas. We are looking for proactive regulatory powers to be able to correct that.

Deputy Arthur Morgan

That was of its time. Banks were hawking loans and were giving them away without the need to complete an application form. Was that not of its time? Does Mr. O'Brien not think the credit unions themselves recognise the level of prudence that is required? I would have thought that, in the past year in particular, that would have come back into shape.

Mr. James O’Brien

Regardless of whether it is of its time, the problem exists and needs to be addressed. It needs to feed through the system.

Deputy Arthur Morgan

It exists but, if it is going anyway of its own right through prudence——

Mr. James O’Brien

If those decisions were made at that time, those decisions now need to be paid for in the sense that they will need to feed through the results of the credit union sector. Those are the types of things we are seeing at the moment. These types of practices will need to feed through. We are looking at governance structures wider than fitness and probity. We need proper governance structures in the credit unions, proper exposure limits on the sectors into which they are lending, etc. Credit unions have moved away from the traditional small loans and small deposits and have moved into quite significant loans in terms of business and SME lending, etc. We believe if that type of lending is to be carried out by credit unions, it must be controlled and they must have the relevant skills and expertise to manage it.

Mr. Jonathan McMahon

We are in the early stage of understanding the depth of the problems in the credit union sector. We are aware of 20 credit unions with serious solvency issues. Until we have carried out a more in-depth and broader analysis, including a stress testing exercise that we will carry out later in the year, we cannot say there are not significant problems in this sector. It is likely there are problems in this sector.

Deputy Arthur Morgan

That is an assumption.

Mr. Jonathan McMahon

It is not an assumption. It is a cautious and prudent assessment of the likely impact of very severe macroeconomic conditions on all sectors of the financial system. The credit union sector is not immune from those problems.

Deputy Seán Sherlock

What is the mix of those credit unions if they form a representative sample? Are they large-scale credit unions, small credit unions or a mix?

Mr. James O’Brien

It goes right across the board.

Deputy Damien English

Some of my questions were not answered.

Deputy Arthur Morgan

Before Deputy English comes in, I believe Mr. O'Brien was not finished.

Mr. James O’Brien

The Deputy was going to ask about the staffing levels.

Deputy Arthur Morgan

Staffing is one matter. I would like Mr. O'Brien to come back to another matter. A person who works voluntarily in the credit union recently told me that if a person now misses a payment at Christmas, that loan is written down as stressed and we are all in bother. Mr. O'Brien stated in his presentation that if a loan was rescheduled and payments were being made, in a very short time it would be back in the system as a performing loan. How long is that period?

Mr. James O’Brien

We have clarified that those types of missed payments would not fall to have 100% provision made against them. On a point the Deputy raised earlier, these clarifications are in writing and were provided to both representative bodies. This week we have sent them to all credit unions.

Deputy Damien English

I have a copy of the letter Mr. O'Brien sent out and it does not clarify all the matters.

Mr. James O’Brien

It does. The clarifications are at the back with the——

Deputy Damien English

I have read it and it states that Mr. O'Brien has clarified to the associations but not necessarily to the credit unions.

Mr. James O’Brien

We provided the proposal plus all the clarifications to every credit union. It was attached to that letter.

Deputy Arthur Morgan

I asked about staffing.

Mr. James O’Brien

We are hoping to increase our complement to approximately 28 by the end of the year, going to 38 over the next 12 months or so. We believe the right level is approximately 40 people.

Deputy Arthur Morgan

In the past people did not want to say or do anything in public that would cause a run on the banks. I am conscious of what we are saying at this meeting and that Mr. O'Brien does not want to see a run on the credit unions. Some of the results of what he seeks could lead to a run on credit unions because they are being disadvantaged, for example, by virtue of the requirement for stronger reserves, which means they are not in a position to make their loans. They certainly will not be in a position to pay dividends. If interest rates rise next year, as we expect, everything is beginning to stack up against the credit unions because people will shift their money. Why would they leave their money if it is not making them anything? If interest rates in the banks are rising, why would they not go there? People are concerned there is a fundamental threat to the credit union movement which is an ingrained part of society across the island in every community.

Mr. James O’Brien

I do not believe that is a major threat. In the majority of cases people are not members of credit unions for large dividends. I accept there are significant large deposits in credit unions which are rate chasing and looking for high levels of return. I would expect those types of deposits to go. I believe that people are in credit unions for vastly different reasons other than dividends. It is a safe place to put money, which is our real priority. It is a place from which people can borrow in the knowledge that they will get a flexible approach. More importantly, the credit union is there in times of need and people trust their credit unions. I do not accept it will cause runs on credit unions. There may be some withdrawal of deposits, but I would much rather see a healthy, strong and safe credit union sector built on good foundations than purely chasing its tail trying to keep funds in credit unions on some misapprehension that if they do not make provisions, they will get paid big dividends.

Deputy Damien English

Regarding Mr. O'Brien's vision for the future, does he believe we can have different levels of credit unions?

Mr. James O’Brien

Absolutely. My vision for the future is for a strong, safe and healthy credit union sector run by people with competency-based qualities. I am not talking about PhDs or other formal qualifications but the commonsense approach we have seen traditionally in the past.

There is probably more than a one-size-fits-all approach. We will need to look at those credit unions that want to develop to include things like electronic banking and provide different services. Credit unions should be allowed to develop in that space but will need to abide by stricter or stronger regulation and controls on that type of business. There should also be a place for traditional credit unions that want to have small loans and savings. We need to find a place for everyone in that new structure.

Deputy Damien English

Mr. O'Brien said he had further clarification. Can the committee have access to that?

Mr. James O’Brien

We will send the committee the documentation we sent out to all credit unions.

Deputy Damien English

That is perfect. Will Mr. O'Brien send anything else he might have? We have not seen any impact analysis. I have carried out my own interpretation of credit union accounts but I would like to see the credit unions' analysis.

Mr. James O’Brien

As the Deputy will appreciate, we can just give the overall view. We cannot give information on each credit union.

Deputy Damien English

No, but Mr. O'Brien said he carried out an impact analysis. I ask him to send the committee as much information as he can. I am concerned that a formal impact analysis was not carried out but whatever is available will have to do.

Mr. James O’Brien

Yes.

Deputy Damien English

Mr. O'Brien said in his clarification to the various groups that they can approach him to negotiate the conditions. Could he outline the scenario? Does a credit union have to be at the 20% level, or when they arrive at his office can they negotiate with his staff to be allowed to go back again, or is the issue tackled prior to that? Is it necessary for them to close the gate first and then come and talk to Mr. O'Brien to get back to where they want to be or can they talk to him prior to that?

Mr. James O’Brien

Does Deputy English mean in terms of this proposal?

Deputy Damien English

Yes. Mr. O'Brien said the provisions might be flexible in some cases, that they might not necessarily have to get 20%.

Mr. James O’Brien

No, we will set the standards we expect. If we inspect credit unions and find those standards have not been met and the reasons they have not been met are valid, we will take that into account.

Deputy Damien English

That is my point. It is a blanket condition that everyone must meet. If Mr. O'Brien subsequently discovers the standards are not being met, they have to make their case.

Mr. James O’Brien

Yes.

Deputy Damien English

It is not possible that well in advance of that happening a credit union could arrive at the registrar's door and explain its situation.

Mr. James O’Brien

No.

Deputy Damien English

It is a blanket condition.

Mr. James O’Brien

It is in the sense that there is a standard. We are setting a standard.

Deputy Damien English

I wanted to confirm it is a blanket condition that everyone must meet. My concern is that it is not the other way around and that Mr. O'Brien would impose that standard where it is needed.

Mr. James O’Brien

As the Deputy will appreciate, if we were to go down that route, we would only find problems when we inspected, which could be too late for some credit unions.

Deputy Damien English

Mr. O'Brien will not see that in the first credit unions, but that is another thing.

Deputy Seán Sherlock

Does Mr. O'Brien envisage a time when every credit union, before paying out a dividend, nominal or otherwise, would have to notify the registrar regardless of whether they are in deficit or otherwise?

Mr. James O’Brien

No, we believe that is a responsibility of the board. When we believed there were issues around the level of reserve, we requested those credit unions to come to us to ensure they were not paying out high levels of dividends.

Deputy Kieran O’Donnell

What is Mr. O'Brien's view of dividend payments by credit unions for the coming year? Mr. McMahon referred to an in-depth review being carried out. Who will carry out the review? Will it be the Registrar of Credit Unions or an external body? What form will it take? There was reference to section 35A being introduced to enable credit unions to implement what is being introduced by section 35. I would have thought a slight amendment to section 35 would have enabled credit unions to implement the section. I am sure Mr. O'Brien would admit that section 35A is very broad.

Mr. James O’Brien

It is not broad. It is specific to give us the power to be able to implement those conditions.

Deputy Kieran O’Donnell

It refers to lending, reporting loans, provisions, liquid assets, any other matters or specified class and types of loans, systems controls and reporting arrangements as the bank considers appropriate.

Mr. James O’Brien

They are all to do with lending practices. They are very specific.

Deputy Kieran O’Donnell

That is very much one side of the balance sheet for the credit union movement. Obviously the other aspect relates to investments. The credit union movement needs certainty. If the strategic review process into which Mr. McMahon went in more depth was carried out over a reasonable period, it would facilitate coming up with a legislative structure. An issue arises in terms of the credit unions' belief that there is a need for further consultation on section 35A. We want a credit union structure that is financially prudent and works in the interests of members. I note that the loan arrears were 13.71% of the loan book. The bad debts that were written off in the year to date were approximately 0.53% and the level of bad debts recovered was 0.15%. As a movement, the credit unions have been prudent in the way they have made provision. In terms of rescheduling they are looking for further provisions.

Mr. James O’Brien

To some extent, it is a case of looking for further provisions but it is also to prevent those provisions from being eroded because, in effect, if one reschedules a loan, one takes them out of the provision pot.

Deputy Kieran O’Donnell

The point I am making is that, as a group, the credit unions have increased their capital reserve ratio, as the registrar required. Unlike the banks, they have been able to write off losses in terms of the investments. They are making every effort, although there is an issue in terms of specific credit unions. It is fair comment to say that the registrar will carry out a significant review process in terms of credit unions, which is necessary. That should be the basis in terms of introducing a legislative framework. This section is amending the Credit Union Act 1997. It will be tabled as an amendment. With proper consultation the review could be carried out within a short period. In the main, the credit union movement has shown itself to be honest and prudent. What is being proposed in terms of the review process would give a position. What does Mr. O'Brien consider will be the financial position of the credit union movement in the next three to six months? A strategic review process could be carried out within the timeframe. This is about financial prudence and sustainability while working with stakeholders at the same time. A nine-month timeframe would strike me as being too lengthy.

Deputy Damien English

I wish to get clarification on another point on the conditions that exist, if not in law. If the registrar decides next January, mid-way through the review, that 20% is excessive, will it be possible to reduce the amount?

The 1997 Act was amended at a later stage to give powers to the Minister to make changes to section 35. Where stands those amendments and those powers? Is it fair to say the powers the Minister was given will be given to the registrar following the enactment of the Bill?

Mr. James O’Brien

In terms of where I see the credit union movement financially in the next six months, the year end, which is the end of September, will crystallise a lot of credit union problems in the sense that I expect they will be reporting significant arrears which will continue to rise. There will be some difficulties in the credit union sector.

Deputy Kieran O’Donnell

That would be fair to say, along with all other sectors.

Mr. James O’Brien

I can only speak about the credit unions. That is where my concerns lie. We do not have time to wait for prudent measures to be put in place and we need to act now. We need to recognise that there are problems and that we can deal with them. To wait for a strategic review to give us power to take preventive action would not be prudent. We would not like to see that happen.

Mr. McMahon was talking about a separate exercise. The strategic review will run over the next while but Mr. McMahon was saying we will undertake our own stress tests on the sector to determine the true position.

Deputy Kieran O’Donnell

I would have believed the stress test should be done concurrently with the strategic review.

Mr. James O’Brien

Part of that process will be to look at those stresses, but we need to carry out our own stress testing also.

Deputy Kieran O’Donnell

Would it not be fair to say that if one is embarking on the imposition of requirements, by notice, one should have all the in-depth facts? Mr. O'Brien is saying we know from the ratios that the credit unions are in reasonable shape.

Mr. James O’Brien

No, I have not said that. In my statement, I said we should not regard the sector overall as being a barometer of the state of individual credit unions. They are all autonomous entities and all have different boards. To consider them in the vein suggested by the Deputy is not appropriate.

Deputy Kieran O’Donnell

That gets to the heart of the matter. What is being proposed in section 35A is a general measure for all credit unions. The great majority of credit unions, if not all, have gone about their business in a very prudent fashion. If the banks had operated in the same fashion, we would not be throwing €22 billion into Anglo Irish Bank or the other banks. Not one euro of taxpayers' money has gone into the credit union movement to date. This needs to be acknowledged.

We are not envisaging a very long period but a relatively short one. We envisage a proper consultation period and proper strategic review that allows the registrar to carry out an in-depth study, as it is entitled to do. Having done this, it should determine the way forward.

The problem is that section 35A will lead to considerable uncertainty nationally within the credit union movement, which is providing a very worthwhile service for the benefit of its members. Does Mr. O'Brien understand where I am coming from?

Mr. James O’Brien

I do but we believe this is a critical period for credit unions. They need to take steps to address what is happening in the sector. It is not a time to ignore the realities of what is happening in the sector.

Deputy Kieran O’Donnell

What does Mr. O'Brien mean by taking steps? What steps should be taken that are not being taken already?

Mr. James O’Brien

I refer to the initiative whereby provision should be made against loans that are being rescheduled. While the intention of the borrower is to repay, he or she may not do so.

Deputy Kieran O’Donnell

Could section 35 not be amended to deal with the specifics rather than introducing a general provision?

Mr. James O’Brien

The intention is to introduce those conditions in the section. We do not have the power to force credit unions to make provisions against their loans. We need this power.

Deputy Damien English

Mr. O'Brien said the review is to examine that matter also. If one realises next January, prior to September 2011, that one does not need to go to the 20%, will it be possible to change it?

Mr. James O’Brien

We can if it is structured as it is now.

Deputy Damien English

Can it be done without introducing new laws?

Mr. James O’Brien

Yes.

Deputy Damien English

The 1997 Act was amended at some stage in the early 2000s to give powers to the Minister in respect of the section in question. The Minister is not using these powers. What is the position on the amendments made a number of years ago? Is the delegation familiar with them?

Ms Aoife Langford

The amendment of 2007 did not give powers to the Minister but made it possible for credit unions to get approval from us.

Deputy Damien English

My reading was that the Minister had the power.

Ms Aoife Langford

No. The registrar has the power to approve credit unions that comply with certain conditions.

Deputy Damien English

Similar to these.

Ms Aoife Langford

An approval process is required to lend up to 40% of the loan book over five years and up to 15% of the loan book over ten years.

Deputy Damien English

Is that option still available?

Ms Aoife Langford

It still exists.

Deputy Damien English

I know it is not very common.

Deputy Kieran O’Donnell

How small is the number of credit unions?

Ms Aoife Langford

Fewer than 10%.

Deputy Kieran O’Donnell

Fewer than 10% have availed of the mechanism but it is still available.

Ms Aoife Langford

Yes.

Deputy Kieran O’Donnell

One could amend section 35 in specific terms. The point is that there is a general view in the credit union movement that there was insufficient consultation on section 35A and its implications. Will the registrar allow for a period during which the section can be examined in a post-review context?

Ms Aoife Langford

It is common sense.

Deputy Kieran O’Donnell

It is common sense.

Mr. James O’Brien

We believe we need these powers to be able to direct credit unions to take the steps necessary with regard to provisioning. This is a critical period for credit unions and they need to recognise that if they reschedule loans and drop them out of the provisioning pot in terms of their reserves, they will have difficulties if the loans are not repaid.

The economic environment will not improve dramatically and we are, therefore, asking credit unions to work with us on this and take the steps necessary to protect themselves.

Chairman

I thank the delegation for attending. I have no doubt but that we will be reviewing this matter again.

The high-level group on business regulation will be in attendance at our next meeting.

The joint committee adjourned at 1.30 p.m. until 1 p.m. on Wednesday, 2 June 2010.