I thank the Chairman and members of the joint committee for the kind invitation to the Credit Union Development Association to give this presentation. The other members of the delegation are Mr. John Kelly, a member of the management committee of CUDA and a manager of Dubco Credit Union, Mr. Denis Daly, also a member of the management committee and a manager of Tullamore Credit Union, and Mr. Michael McHugh, a member of CUDA's management committee and manager of Comhar Linn INTO Credit Union.
CUDA represents 16 credit unions which collectively have more than 300,000 members and assets of approximately €1.8 billion. It is a progressive representative and development organisation representing member-owned, member-governed and professionally-managed credit unions in Ireland. The organisation was formed in 2003 by its members in recognition of a need for positive credit union leadership and a new form of co-operative engagement in response to a more competitive and increasingly complex operating environment.
The philosophy surrounding CUDA is about ensuring that credit union members benefit from the highest possible levels of accountability, transparency, integrity and secure value for money. Our credit union members include, among others, Blanchardstown and District Credit Union, Lucan and District Credit Union, Tullamore Credit Union, Coolock and Artane Credit Union and Dubco Credit Union. Credit unions which form part of CUDA comprise a mix of credit unions based within local communities and credit unions organised around the workplace.
The fundamental social and economic mission of the credit union is to give ordinary people a better deal on financial services than they can get from the for-profit sector. This was the reason credit unions were founded and it is a mission just as relevant to the citizens of 21st century Ireland as it was 50 years ago. Equally relevant today are the core values embodied in the co-operative structure of credit unions, values that form the basic philosophy of credit unions, namely, that the customers credit unions serve are their members who are also their owners. There is no tension between producing profits for owners and a better deal for customers because both are one and the same. To ensure that they are always guided by their members' welfare, credit unions are governed by volunteers elected from their membership democratically on the basis of one member, one vote. Governance by volunteer representatives helps ensure that members are treated with dignity, fairness, honesty and transparency. Members share a common bond through their membership and participation in the credit union. Due to their ownership structure, it is in the nature of credit unions to encourage thrift and educate their members in the wise use of their money.
Together with their mission, these philosophical values are the essence of the credit union ethos. They define what credit unions are and are not up for debate or compromise. These core values and mission of the credit union movement are timeless and have been the great success story of volunteer community action in Ireland. Credit unions must remain rooted as community-based organisations focused on those in communities whom they are mandated to serve. It must remain the fundamental and ongoing mission of credit unions to give ordinary people a better deal on financial services.
There is no doubt that the credit union movement has been highly successful. Having developed at a time when bank loans were out of the reach of most people, credit unions stood for the revolutionary idea of ordinary citizens starting their own bank and sharing in its profits. They grew and became the most trusted source of financial services to the point that today nearly half the population are members of credit unions. They cannot, however, be blinded by this success and must recognise some of the challenges that affect the movement in Ireland. The environment has changed and commercial banks now compete vigorously for members' business, offering the added convenience of 24-7 services, Internet access and attractive rates on loans and deposits. Increasing competition in the financial services market has had a direct impact on credit unions.
The reality that confronts credit unions today is that products, delivery systems, marketing approaches, methods of management and governance, legislation and regulation — all the elements of the credit union model — were designed for a country that barely exists any more. It is not that credit unions failed to change but that Ireland has changed so much more and so quickly. The 21st century challenge for credit unions is to become once again the best place for people to save and to borrow and the primary source of funding for social finance initiatives in the community.
According to a report compiled by Mintel International Group in 2005 there are some worrying signs for the credit union movement. Fewer than half of all members use their credit union in any given year and the percentage of borrowers is even lower and declining. Similarly, credit union membership is ageing as younger people tend to go elsewhere for the convenience and accessibility that many credit unions cannot provide. Of particular concern is that the unpaid volunteers who govern and in many cases staff credit unions are becoming more and more difficult to recruit. Concerns also arise about increasing levels of bad debt at some credit unions which has necessitated the recent intervention by the Financial Regulator.
Credit unions also need to adapt in response to demands for increased levels of corporate governance and should move away from industry self-regulation, as has happened elsewhere in the financial services sector in recent years. Regrettably, many of the existing models of credit union governance and self-regulation are obsolete in a modern, dynamic economy such as Ireland in which there is an increased emphasis on service, value and accountability.
Irish credit unions are at a crossroads and the future success and durability of the sector will in part depend on how responsive the credit union movement is in reforming and adapting to change. Some of these changes require a shift in mindset within the movement to be adaptable to changed circumstances and recognise the needs for better corporate governance and greater transparency and accountability as they move away from self-regulation. The success of other changes will depend on the attitude of the Government and Oireachtas to removing some of the unnecessary and burdensome restrictions which disproportionately inhibit credit unions in the effective delivery and expansion of services to members.
As I indicated, the discussion on the future of credit unions must focus on the needs and requirements of members of the credit unions to determine how they are being served at present. CUDA believes that Irish credit union members currently receive a restricted service from credit unions, largely due to legal inhibitions on the products and services that can be offered. This is a problem that inhibits competition, innovation and choice and prevents credit unions from competing with the mainstream banking sector. In particular, credit unions should be able to provide a full range of updated savings and lending products which meet the needs of members as modern consumers. These include: the ability to offer members a variety of different deposit accounts, with interest rates tracking the market but exceeding what the banks pay; the ability to offer members open-ended loans under lines of credit; the ability to offer longer-term loans beyond section 35 limitations; the ability to partner with mortgage lenders to finance members' homes by making long-term mortgage loans available at the credit union; and as credit unions develop expertise in residential finance, they should be able to obtain legal authority for direct mortgage lending.
These and other reforms are necessary to allow credit unions to retain members and compete with the high street financial institutions in offering the sort of services members have come to expect. However, CUDA also recognises that offering more complex services will bring with it an increased level of regulation and oversight. It is unrealistic and naive to expect that the State will confer additional powers and opportunities on credit unions, without seeking a concurrent enhancement of governance, management and operational competencies and enhanced internal controls to ensure credit unions' continuing safety and soundness and the protection of members' savings. Increased regulation may be the necessary price that credit unions have to pay for access to a wider range of more specialised services.
In addition to receiving a more restricted range of services from credit unions, there is one important area in which credit union members are at a distinct disadvantage which needs to be addressed urgently. Members of credit unions have second rate and inadequate protection of their savings, both in comparison with schemes in other countries and also the protections afforded to savers with banks and building societies.
The Credit Union Act 1997 introduced a statutory requirement that all credit unions participate in a "savings protection scheme" approved by the registrar, according to section 46(2), to "protect in whole or in part the savings of members of a credit union in the event of insolvency or other financial default". This legal requirement was important as it involved the Government and the Oireachtas recognising that credit union savers, like depositors in banks and building societies, deserved to be protected from loss in the event of a financial institution's failure. However, approximately ten years after the passage of the legislation, with €11 billion in savings held by Ireland's 2 million credit union members, we still lack this essential consumer safeguard of a statutory scheme. The only available scheme is offered by the Irish League of Credit Unions, ILCU, namely, the savings protection scheme, SPS. However, this is not a State guaranteed scheme. It operates as a discretionary stabilisation scheme controlled and administered by an unregulated trade body. There are concerns that it is underfunded. At the end of 2005 it amounted to €92 million before liabilities and guarantees, or only 0.73% of savers' deposits. Expert evidence given to the High Court in 2004 suggested the fund should comprise at least 1.25% of total deposits.
The ILCU SPS is not a deposit insurance scheme and does not provide any guarantee for consumers in the event of a credit union failing. Essentially, it is a fund to assist or stabilise troubled credit unions, operated on a discretionary basis by the ILCU. It is not sufficient protection for members of credit unions in modern Ireland. Such stabilisation funds fulfil an important role in nascent credit union movements but are wholly inadequate in developed movements. They have been replaced by state-backed deposit insurance schemes in countries such as the United States and Canada. Ireland is no different.
The protection required 20 years ago is vastly different from that required today. Government-backed explicit limited depositor protection is a necessity and a consumer right in Ireland's modern mature financial system. It is also the best practice preferred model of the IMF and the Financial Stability Forum and a necessary component part of a well designed financial safety net, alongside proper laws, prudential regulation, supervision and transparency. The savings of members of Irish credit unions deserve better protection which should be on a par with that offered to savers of other authorised credit institutions such as banks. There is no logical or prudential reason not to include credit unions in the existing State compensation scheme for customers of banks and building societies.
Under the Central Bank scheme, each individual depositor will be compensated for up to 90% of losses from a bank failure to a maximum of €20,000. The scheme is funded by the banking industry at no cost to taxpayers. Including credit unions in this scheme would involve them paying their share of the scheme costs. Critically, it would give credit union savers the deposit insurance protection which all consumers of financial services deserve. There is a precedent for this, as in 2000 the British Government wisely brought credit unions in England, Scotland and Wales into the same deposit insurance scheme it had established for banks. It did so as a matter of sound public policy, recognising that credit unions savers should have the same protection as bank customers.
It is important that members of Irish credit unions should have a fair deal in the protection of their savings. Thankfully, a credit union has never failed. However, this does not mean one can never fail, which is precisely why deposit insurance is required. The time to test the robustness of a deposit insurance scheme is before a crisis occurs, not afterwards. A simple two-line Bill would extend the protection of the current State-backed deposit guarantee scheme to customers of credit unions and be a welcome and long overdue development.
What happens to the existing stabilisation fund is a matter for the ILCU and those credit unions which have contributed to it since 1986. It could be used to augment the protections offered by the deposit guarantee scheme. Consumers' rights to proper Government-backed depositor protection must not be subordinated to institutional interests.
Offering more complex financial products would bring a greater need for regulatory oversight. It is an inevitable consequence of the regulator's role that it will wish to ensure savers' funds are not exposed to undue risks if credit unions are permitted to diversify and move into more complex and risky areas. CUDA recognises this involves credit unions accepting the reality of regulation and understanding the role and function of the regulator as a public watchdog. CUDA's views on effective credit union regulation may differ at times from those of the regulator. However, we recognise the public policy objectives behind the establishment and operation of the office in the wider public interest. It is right that as voluntary, community-based organisations, credit unions should be regulated differently from other institutions. This does not mean, however, that consumers' rights should be subordinate to the institutional rights of credit unions and their trade bodies, or that lower standards of governance and operational management apply. We find the regulator to be sensitive to the various needs of credit unions which operate primarily with a community focus and are governed and staffed in full or in part by volunteers. However, we must be constantly vigilant to ensure there is no over-regulation or burdensome regulation which would militate against the core aim of credit unions.
Credit unions should not be spectators on the future of their movement. With this in mind, CUDA and its member credit unions prepared a discussion paper, Reinventing Credit Unions for the 21st Century, which we will circulate during the coming weeks to all key stakeholders, including members of this committee. This important document will elaborate on observations made in this presentation and, in particular, cite new products and services which credit unions should be able to offer, by identifying the regulatory and legislative changes required to modernise the sector. We see this committee playing a pivotal role in defining the future of credit unions.
Credit unions' philosophical values and fundamental mission are different from operational methods, techniques and day-to-day business practices. Credit unions should not confuse how they have always acted with what makes up their true philosophy. It is good that they have made philosophy a habit, but not all their habits are philosophical. The document will also identify the changes credit unions must take on board in order that they can continue to play a core and vital part in the communities they serve.
The time has come for a root and branch review of the entire Act, as the present law is far too detailed and prescriptive. It spells out too many specifics which are best left to the judgment of a credit union's elected board of directors and its management team. The 1997 Act should be replaced with a new law which meets modern standards for credit union legislation in advanced countries.
The need for action goes beyond revisions to primary legislation. A modern and progressive credit union movement also requires the regulator to have a robust system for credit union examination and supervision to assure the public that credit unions operate in a safe and sound manner. Such a regulatory system should be flexible to allow for the various forms of credit unions which emerged during the past decade. It is important that regulation does not stifle or impede a credit union's ability to respond to its members' needs, while ensuring at all times credit union safety and soundness.
Credit union members should be at the heart of the debate about the future of credit unions. The focus should be on ensuring members have access to services from well run, accountable and transparent credit unions effectively regulated by an independent regulator, as well as proper State-backed protection for their savings at all times. As an organisation of member-focused and progressive credit unions, CUDA remains determined to contribute constructively in this debate to secure the changes necessary to maintain a vibrant credit union movement.
I thank the committee for inviting us to come before it. We will be happy to answer any questions members may have.
