Joint Committee on Finance, Public Expenditure and Reform debate

Credit Union Bill 2012: Discussion (Resumed)

Chairman

This is a public consultation on the draft general scheme of the credit union Bill 2012. In the first section of today’s hearing, we are delighted to welcome representatives from the financial professional and accountancy bodies.

I welcome Ms Eileen Fitzgerald and Ms Annmarie O'Connor, MABSndl; Ms Eimer O'Rourke, director of retail, and Mr. Felix O'Regan, director of public affairs, Irish Banking Federation; Mr. Kevin Morris, Mr. Tom Fitzpatrick, FMB Chartered Accountants. The format of this meeting will be that we will take a question and answer session with regard to the substantive submissions made by the various bodies to the public consultation process run by the Department of Finance that concluded last August.

I remind members, witnesses and those in the public gallery that all mobile telephones must be switched off. The meeting is being broadcast by UPC on its 801 channel and if a mobile telephone is switched on, it almost certainly will interfere with the broadcast, even if the telephone is in silent mode, sometimes to the extent that the broadcast is disrupted seriously and those watching cannot follow or hear the questions being asked or the answers given. Consequently, I ask everyone to disable the mobile telephones.

I wish to advise the witnesses in the normal way that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. However, if they are directed by it to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person, persons or an entity by name or in such a way as to make him, her or it identifiable. Members similarly are advised and reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

MABS set out in its submission some general arguments about the challenge to ensure we stay faithful to the credit union ethos on the one hand and that there should be adequate and robust regulation of the sector on the other. This is the balancing exercise that needs to be determined in the course of preparing this legislation. As I stated earlier, we have read the submissions. If the delegations wish to emphasise part of them, they can take the opportunity to do so. The submissions have drawn us to several specific elements of the draft legislation. We have a day of hearings today as we have to complete this exercise quickly because the Bill must be published by the end of September.

We only have a day of hearings - briefly yesterday and today.

I ask MABS to address some of the specifics in its submission, for example, prudential requirements. In that regard, MABS draws the committee's attention to heads 3, 6 and 8 in particular. Would Ms O'Connor address MABS's concerns in turn? On head 3, MABS has a concern about a lack of contingency in respect of borrowers who are unable to make their loan repayments. I understand MABS thinks that is overly restrictive. Ms O'Connor might tell us what her concern is in that regard.

Ms Annmarie O'Connor

Our submission is limited on the basis that we fully respect that the heads deal with regulatory and governance matters and the Money Advice and Budgeting Service's primary concern is the clients with whom we deal.

Chairman

MABS also has suggestions about amendments to the Credit Union Act 1997 but, first, I will turn to my colleagues, Deputies Pearse Doherty and Michael McGrath, in particular, who may wish to comment.

Deputy Pearse Doherty

May I direct a question to any of these groups?

Chairman

Given that MABS is so specific in terms of heads 3, 6 and 8, it would be better to direct any questions to Ms O'Connor in their regard.

Deputy Pearse Doherty

On social lending, the MABS presentation states that in personal lending and social lending certain persons are driven to alternative higher costs. It is an area in which I have particular interest. I have brought forward legislation on this. The Irish League of Credit Unions made a presentation here yesterday and one of the gaps it saw in the legislation was that credit unions could not lend to the community. When one looks at the ethos of credit unions, they are very much voluntary and democratic, and not for profit. The ethos is that they want to part of and give back to the community. They do not want their money sitting in the large financial institutions that make millions of euro for speculators. How important is that aspect in this legislation? Ms O'Connor mentioned that it is focused on regulatory matters but it is missing that other social element. Is it only the change to allow the credit unions to do that which is required, or what other areas would need to be developed?

I have another question for MABS, since its representatives are here. I commend the work MABS does. How do lending restrictions set down by the Financial Regulator on credit unions impact on their members or how is that seen by MABS?

Ms Annmarie O'Connor

On social lending, we would hope that within the legislation there would specific provision within a lending class for social lending so that it would be specifically addressed and permitted. We see it as being vitally important to those with whom we work. Of course, against that one must balance the risk involved in social lending but it goes without saying that it is essential that people, particularly those living on a low income, have access to affordable credit. MABS and the credit union movement have worked together to support that goal, certainly, in MABS, over the past 20 years. It is vitally important and the legislation must address it in some form.

Access to credit generally for those with whom we work is a concern. We would be concerned that if there were greater prohibitions on access to credit in the future people would take recourse to high-cost credit forms, in particular, the likes of catalogue companies and legal moneylenders, and, potentially, illegal moneylending as well. There needs to be a source of mainstream access to affordable credit for those with whom MABS is working. The credit histories of such persons may have been impacted by their financial difficulties.

Again, our concern relates to the wording used. Specific reference is made to the savings of members of viable credit unions being secured. We wonder whether this will apply in respect of credit unions that are deemed non-viable. Our view is that the savings of all credit union members should be secured. What we are seeking is to encourage an exploration of the wordings proposed.

Deputy Michael McGrath

I welcome our guests. I wish to comment on a couple of the points that were made. In view of the fact that MABS deals with many distressed borrowers, I would be interested in hearing the views of the representatives from MABS on the essential differences they experience in the context of their interaction with banks, on one hand, and credit unions, on the other. Quite justifiably, they placed a great deal of emphasis on the role of credit unions in the areas of social inclusion, financial inclusion and social lending. What are their views on how this role can be protected, particularly as it is going to be placed in a proper regulatory context? There is a great deal of concern among banks and credit unions with regard to the Personal Insolvency Bill 2012 and the impact it is going to have on their capital bases and financial reserves. Does the credit union Bill, as proposed, strike the correct balance between protecting the unique role of the credit unions in society and ensuring that there will be an adequate prudential and regulatory regime in place?

Ms Annmarie O'Connor

To clarify, I presume the Deputy is referring to the heads of the credit union Bill.

Deputy Michael McGrath

Yes.

Ms Annmarie O'Connor

Deputy Peter Mathews

The credit union framework for prudential business has operated well over the years. It is inappropriate for the IBF to make any remarks on this subject because the credit union movement has, through its experience and operation, carried out the type of prudential assessment appropriate to the business it conducts. Credit unions are in a position to evolve and address any new risks that may arise as well as old risks that have to be faced in a different manner. It is not appropriate for the IBF to suggest the frameworks that operate in the banking context.

Deputy Heather Humphreys

I agree with previous speakers. Credit unions have always had a concern for their members and customers. We cannot say the banks have shown the same concern given the role that the pursuit of profits has had in causing our current mess. The credit unions have been mindful of the needs of their members and customers and this has to be taken into account when we consider governance and regulation in the sector.

Ms Eimer O'Rourke

We are not seeking to push a view. We asked a question in response to consultation and we responded to an invitation to appear before the committee.

Chairman

The IBF is entitled to appear before the committee to make its submission. I now invite Mr. Kevin Morris to make a submission on behalf of FMB Chartered Accountants. I understand his comments pertain to a number of net issues. One issue that arises is that of public interest entity. He is concerned that the level of intervention in forthcoming European measures will be relatively onerous but fears that what is envisaged in this legislation may be even more onerous. Does he think we should wait for the European measures to be finalised? I ask him to explain to the committee the context of the public interest entity and the audit requirements.

Mr. Kevin Morris

I thank Ms O'Connor, Mr. Morris and Ms O'Rourke for attending the meeting. The submissions will be published and we will forward a transcript of the hearings to the Minister for Finance. We will try our best to produce a summary of the issues as the committee sees them to furnish to the Minister within the next few days and certainly within the next week. I thank the delegation for attending the meeting.

Sitting suspended at 11.08 am and resumed at 11.30 am.

Chairman

I welcome Mr. Gerard McConville, Dundrum Credit Union, Mr. Philip Hosford, Gurranabraher Credit Union and Mr. Pat Owens, St. Mary's Parish Credit Union, all of which made submissions to the joint committee on this exercise. I want to remind everyone that as this meeting is being broadcast by UPC on its channel 801 they should ensure their mobile phones are switched off as they have a tendency to interfere with the signal, thus disrupting the transmission.

I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. However, if they are directed by it to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person, persons or an entity by name or in such a way as to make him, her or it identifiable. Members similarly are advised and reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

As we are under some time pressures in this exercise, in terms of the requirement on the Minister to publish the relevant legislation by the end of September, we will move directly to engagement with members. This is an important exercise on which the joint committee has received a considerable number of submissions, which have been published. The transcript of the joint committee's meetings will be sent to the Minister. The committee will also attempt to put together a list of the main issues arising out of these hearings.

While it is clear from the submission received from Mr. Philip Hosford that Gurranabraher Credit Union supports the findings of the commission and believes that as far as possible they should be implemented he has, nevertheless, raised a number of points, largely on prudential requirements, governance, stabilisation and restructure, which it is fair to say are the issues of most concern to people commenting on the heads of the Bill. On prudential requirements, Mr. Hosford has drawn our attention to heads 2, 6, 7, 10 and 16. I will ask him to deal specifically with those points first, although Members may have more over-arching questions which they wish to ask of him. We will have an opportunity for that debate later.

The point is made in Mr. Hosford's submission that head 2, which relates to reserves, is not sufficiently clear in the Bill. Perhaps he would elaborate briefly on that point.

Mr. Philip Hosford

We are very much in favour of having strong capital. Head 2 provides detail on the capital levels for credit unions, namely, a basic capital level plus a capital level around the risk weighting of assets and a capital level around operational risk. We would like more detail in the legislation around how this would be put together, in particular on the risk weighting of assets. The main assets in credit unions would be loans, investments and fixed assets. We believe that if there was more detail embodied in the legislation it would provide a safeguard for credit unions that there might be caps in particular areas and different capital requirements which apply to different types of assets.

There are other sections which indicate that a directorship can only be held for nine years in a 15-year period.

This suggests that the nominating committee can allow a breach once it documents the rationale for it. Although it may not be the intention, it seems to conflict with other provisions in the draft. If it was clearer, it would avoid potential issues in the future.

Chairman

Regarding No. 30 in Part 3, on stabilisation, the witnesses draw attention to the definition of viability in the explanatory note. Given that it is defined in the explanatory note, it is a fair point that the Minister should consider a definition of viability in the body of the text of the Bill.

Mr. Philip Hosford

That is the point.

Chairman

Regarding restructuring, which has arisen in other submissions, the suggestion is that levies could become a runaway element if there is no limit on the number of levies that can be imposed.

Mr. Philip Hosford

We have no issues with levies but we considered putting caps on them in particular areas. One cap is in place in respect of a maximum of 50% of the cost of the Credit Union Restructuring Board, ReBo. If we had more detail on caps on levies, the levies cannot run away.

Chairman

We have until one o'clock so we can ask each of the three gentlemen about the overarching issues. Are there any questions on the specifics of Mr. Hosford's points?

Deputy Michael McGrath

I welcome the delegations and I thank Mr. Hosford for his remarks. On the issue of levies, the draft scheme provides for three separate levies. What will be the impact of that provision on Mr. Hosford's credit union in terms of its viability? There is a concern that levies are open-ended and that there is no indication of a likely liability. It could result in some credit unions becoming non-viable. This is separate to the restructuring and consolidation that will inevitably happen within the sector.

I am interested in the different perspectives contained in the submissions. We will deal with the submission from Mr. Owens, in respect of St. Mary's, presently. Mr. Hosford appears to be taking a positive view of the Bill and saying he does not see a major difficulty for the operation and governance of the Gurranabraher Credit Union whereas the representatives from St. Mary's Credit Union are saying the Bill will strangle the life out of credit unions and that there is no attempt to preserve that which is good about credit unions. These are different perspectives and perhaps that is related to the circumstances of individual credit unions. Perhaps that will emerge over the course of our discussions.

Regarding term limits, what practical difficulties will it cause if the credit unions must rotate board members along the lines proposed in the general scheme of the Bill? Will it cause direct difficulties for Mr. Hosford's credit union?

Mr. Philip Hosford

Regarding the board and its rotation, we do not see any difficulty. The board is quite happy with the fact that the term of a director is limited to nine years and the term of executives is limited to three years. The view of the board is that governance is essential and best practice is very important. It is a voluntary position and if one has completed nine years it may be time for someone else to take on the mantle. People on the board are voluntary directors. The credit union should not be their top priority in life and if one gives nine years of one's life, perhaps one has done enough. It is a time-consuming role. Nine years is enough and perhaps we should allow others to come in and take on the mantle.

The board does not have an issue with the rotation of the executive positions on the board. In certain credit unions, the chairman has been the same person for 25 years. That is not to say that the person is not very capable but it is not best practice to have the same person as chair of the board for that length of time. The board has taken the view that this is a positive step. One is not precluded from being involved if one is not a director.

Another question concerns the impact of the levies. As a larger credit union, this year we have a surplus of €2 million and levies may amount to 10% or 20% of the operating surplus. It is a more serious situation if a credit union does not have a surplus as the imposition of levies could push a credit union into deficit. Difficulties arise in this situation because the credit union must use its reserves, which affects its capital levels.

Regarding the overall perspective, different credit unions have different views and size is a major factor. We are not a very big credit union, with €85 million in total assets and 16,000 members. On an overall basis, the draft Bill and the commission report are very positive and will provide a platform for a sustainable credit union model into the future. Restructuring is an important part of that. There will be changes and challenges and not everyone will like them but overall it is the best thing for the credit union.

Chairman

We have plenty of time for discussion on big-ticket issues so we will remain on the specifics of the Gurranabraher Credit Union.

Deputy Pearse Doherty

The presentation and the submission are very helpful. The issues raised are detailed and I cannot see why the issues cannot be addressed in legislation. Like the previous speaker, I am surprised at the divergence of opinion on the board of directors and the changes to the term limits but I understand there are different views in the credit union movement.

Mr. Hosford talked about how new entities - the audit committee and the oversight committee - will fit together. He seeks clarity on this point. Does Mr. Hosford have a view on how the committee should gel? Should the legislation go into detail on how the committees should fit together?

Mr. Hosford mentioned being supportive of the commission's report and, broadly, the legislation. While the legislation deals adequately with some areas, some credit unions have spoken to me about their issues in respect of governance. There is also concern that certain elements are missing.

No, not that we are aware of.

Deputy Pearse Doherty

It is a very interesting concept. Will Mr. McConville give me an example? It is my understanding that if a flexi-loan arrangement was worked out, I could go to my local credit union and say I was pre-approved for a loan up to say €10,000 based on my income and so on. Would that be for a year or for two years? If it was for a year and my car broke down, I could use €5,000 for the car and I would still have €5,000 left if I wanted to go on holidays. How does one then put in the safeguards?

The bank used to telephone me and, I am sure, many other people to say we had been pre-approved for an increase in our overdrafts and in the limit on our credit cards, which kept going up, and everybody was spending like crazy. Then overnight the bank said that our overdrafts were gone. People who were pre-approved for overdrafts lost their jobs and fell into arrears and so on. How does one put safeguards in place in regard to somebody who presents today and is pre-approved for €10,000 but in six months time, loses his or her job and is in a terrible situation?

Mr. Gerard McConville

We do not like the term "pre-approve". We would not pre-approve anybody. There would be modest limits of €1,500 to maybe €3,000. We would have no objection to that limit being set in the legislation, at perhaps the discretion of the Minister or the Central Bank. We see it very much in terms of day-to-day expenditure. One of the issues credit unions have had is that because they have only offered one loan, big ticket items, such as home improvements and car loans, have got mixed in with the day-to-day borrowing requirements. The consequence of that is that if one borrows for a car loan and six months later one requires a small Christmas loan, a holiday loan or whatever, that all gets mixed into the one loan so, effectively, one is putting short term credit over a longer period of time. We would see this as a safeguard for people that they are separating out their short term needs from their long-term needs. The safeguard would be that there would have to be a limit which could only be increased if one did a full review of the account. There would be an annual review so that one would re-establish the person's ability to repay on an annual basis. Those are the sorts of safeguards we would have in place.

Deputy Kevin Humphreys

Mr. Pat Owens

The Bill suggests an asset base and we think this should be an interim measure only. The regulation should be linked to risk and asset base is only one measure of risk. The more assets that a credit union has, if they go bad, the greater the damage, as we have seen in the country in general. That is not the only measure of risk but to bring that aspect into the legislation, the present tiers, as suggested by the commission, particularly that between €10 million and €100 million, are much too broad. A credit union with assets of €12 million is a different operation from a credit union like that of Mr. McConville, with €90 million in assets. St. Mary's parish credit union has €49 million in assets so we are in the middle. We feel that it is fine for credit unions up to €10 million, but there should then be tiers of €10 million to €30 million, €30 million to €60 million, €60 million to €100 million and then over €100 million. That would bring us to a situation where we are treating like with like in the services each credit union can offer. A credit union with an asset base of €49 million might not have the resources to offer some of the services the larger credit unions could offer but we are going to be subject to the same level of regulatory interaction as them.

Mr. Pat Owens

There is no cap. There is no indication of what the percentage will be. There is no indication of what they will be based on; however, there is an indication that credit unions that cannot afford them will not be charged. Does this mean that the other credit unions must pay an extra amount to cover this? There is no certainty around any of the measures. The big issue for us is that we are being asked by the Central Bank on an ongoing basis to prepare projections for three to five years? How can we build projections when we have no idea of the sums of money that we will be charged?

Deputy Pearse Doherty

Deputy Richard Boyd Barrett

I thank the witnesses for providing highly educational perspectives on the credit union movement. As the meeting proceeds, I am learning a great deal about issues affecting the movement. I have great sympathy for the views being expressed by Mr. Owens. If I understand his argument correctly, the one-size-fits-all approach to credit unions, which essentially amounts to over-regulation, could undermine the fundamentally democratic ethos of the movement. That is a compelling argument.

On the question as to whom we trust to regulate the credit unions, I am happy to have the State step in and regulate the banks much more thoroughly than was previously the case. It appears, however, that the credit unions are about to suffer a backlash arising from what the banks did when they were not subject to regulation. Despite not being guilty of the types of reckless behaviour in which the banks engaged, the credit unions are being placed under serious threat. While it is preferable that the State regulates the banks rather than having the banks regulating or failing to regulate themselves, as was previously the case, I would prefer the credit union members rather than the State to regulate credit unions because I trust the former more than the latter to perform this function. I need to be convinced of the need to regulate credit unions or permit the State to interfere in them in such a way that may undermine the democratic control of the membership. I am very sympathetic to that point of view. The arguments made by Mr. Owens are extremely compelling.

The other issue that appears to arise is size. This is partly an issue of defending the principle of members exerting democratic control over their credit unions. However, it also appears to be the case that a different perspective is taken depending on the size of the credit union in question. I have sympathy on the need to address the issue of conflicts of interest because it is one which arises. Again, however, are credit union members not the best people to decide on this matter? If there is a potential conflict of interest, I presume the issue can be raised by members at the annual general meeting. Are members not the most appropriate people to make a decision on such matters? If one chooses not to allow members to make such decisions, it may not be a major problem for larger credit unions which have larger pools of people but in smaller credit unions it could have the inadvertent effect of hampering their ability to function because they cannot draw on a sufficiently large pool of individuals to allow them to engage in rotation. The point about maintaining experienced people in the credit union is a valid argument because one must build up skills and knowledge. I am also sympathetic to the idea that ordinary people can decide to elect people who they believe to be competent and those who they elect can then educate and train themselves in the relevant area and build up a skills base.

Does Mr. Owens agree that the credit unions are suffering a backlash arising from the actions of the banks? The irony is that the credit unions could become more like banks as a result, which is the last thing we need. We need the credit union model to continue because credit unions provide the type of financial services we need as opposed to the chaos we had in the for-profit banking sector.

Chairman

The next speaker is Deputy Kevin Humphreys. Mr. Owens will have an opportunity to respond later.

Deputy Kevin Humphreys

Deputy Richard Boyd Barrett's passion for the credit union movement is clear to us and Mr. Owens. There is merit in the band element. Maynooth Credit Union has been in touch. While it only has assets of €17 million, it is being lumped with those which have assets between €10 million and €100 million. Therefore, there would be merit in looking at the bands.

I disagree with Mr. Owens with regard to the manager's responsibility. His or her responsibility is to make a report to the board and no matter the size of the credit union, I would not like to see the manager also being a director. This should apply, even for smaller operations outside the credit union movement.

The credit union movement must be regulated, as credit unions control a sizeable portion of the market. The credit union managed by Mr. Owens is at a figure of €47 million, while those of his colleagues are approaching the figure of €100 million. The State has a responsibility to regulate this sector. A small number of quite large community credit unions have run into difficulty owing to the lack of regulation. As colleagues have said, we need a clean sweep. There is a role for regulation. We have a responsibility to citizens to ensure the sizeable financial institutions a number of credit unions have become are regulated. There is merit in considering bands, but I disagree that managers should be directors.

Chairman

I will change the plan somewhat and continue with the contributions of members and then wrap up with the responses of our guests.

Deputy Dara Murphy

I want to direct my questions towards a particular area. Based on the comments and submissions made yesterday and today, particularly by the two larger credit unions, there is broad support for the Bill and its motivation. The focus of discussion is on a small number of sections. It will be interesting to see if our guests argue or make incendiary comments such as that the Bill is a "backlash against what has happened" or "endangering the credit union movement." The motivation of the Bill is to protect the credit union movement; it is certainly not a backlash as suggested yesterday when it was said that at the end of this process, the 3 million credit union members would be out on the streets with placards. That will not happen.

One of the issues raised yesterday by the Irish League of Credit Unions which we have not yet discussed was the issue of social finance. While there are disputes between the ILCU, managers and the other association about tiers and regulations and for how long people can serve on boards, it appears there is no real argument against allowing credit unions lend money for social benefit projects guaranteed by the State. This proposal from the ILCU has huge merit. Is there a reason clubs seeking sports capital are precluded from applying for credit union loans? Many clubs applying for sports capital are getting some money from the State, using some of their own money and borrowing the rest. However, they are precluded from applying to credit unions. Why is that? Should the Credit Union Bill be amended to allow Government-backed schemes to become customers of credit unions?

Deputy Heather Humphreys

There is no question but that volunteers have played a huge role in the credit union movement and that it is very important that we protect them. The credit union movement has changed completely and volunteers and their role need protection. We must ensure they will continue to play an important role.

Yes. With regard to a manager being a director, we do not see that as a runner at all. There should be a clear division between the executive and governance functions.

On the issue of there being a backlash, I will confine my response to the flexi-account. We see it as ironic that credit unions are now more heavily regulated, yet there are unregulated companies such as department stores that are allowed to maintain running accounts or flexi-accounts whereby people can run up a large bill. There is no regulation and we would see the proper place for this being within a regulated entity.

Mr. Pat Owens

To clarify, I did not suggest at any stage that a manager should be a director. What I said was that, according to the draft Bill, the manager should take the place of treasurer or financial officer on the board. However, he or she is not on the board.

Deputy Kevin Humphreys

I apologise; I picked Mr. Owens up wrongly.

Mr. Pat Owens

I just wanted to clarify that matter. We do not advocate the manager should be a director.

To respond to Deputy Richard Boyd Barrett's comments, as we stated clearly in our submission, we would welcome appropriate regulation. There is a role for State regulation, but this should support the concept of democratic control by the members rather than take it from them.

Credit unions have been involved in social lending during the years. While many sports clubs may receive grants, they also come to us to borrow to fund the provision of facilities and equipment. The ILCU's suggestion is that the Government roll out some sort of bond which credit unions could buy that would be used specifically for the purposes of social lending.

We have funds to invest and if the Government gave us a reasonable return on our money and it went into social lending, we would be quite happy to lend funds.

Mr. Philip Hosford

First, we are totally in favour of social finance.

Regulation and democratic control, from our point of view, are two very different things. There has been a slight backlash in that there is a lot more regulation of the credit unions now. We welcome regulation, as long as it is proportionate and does not become excessive. There has been much talk about democratic control. To give the committee some context here, we have 16,000 members but only 160 turned up to our annual general meeting last year. In essence, only 1% of our membership turned up to vote. We are struggling with democratic control ourselves. There is no question that the draft Bill before us takes away democratic control because directors can remain in place for nine years. Even after that, they can still be involved in the credit union in other roles, even if they are not elected members of the board.

The meeting is suspended until 2 p.m.

Sitting suspended at 1.05 p.m. and resumed at 2 p.m.

Chairman

I welcome Ms Carmel Motherway of Motherway Consulting, Mr. Eoin O'Sullivan who is representing Enterprise IT, Mr. Des Gunning who is a member of the Dormant Accounts Fund Disbursements Board and Ms Noreen Byrne of the UCC Centre for Co-operative Studies. This is the third session in our consideration of the draft Credit Union Bill. I will ask delegates to speak briefly to the submissions they have made, but this will be, largely, a question and answer session.

I remind members and delegates that mobile phones should be switched off completely. The meeting is being broadcast by UPC on channel 801. If a mobile phone is switched on, it may interfere with the broadcasting signal and disrupt the broadcast.

I advise that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are advised that only evidence connected with the subject matter of the proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person, persons or an 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 that they should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable.

Heaven forfend that anyone would impose the ne plus ultra on credit unions for the sake of it. Alex Laidlaw is a credit union guru and I will paraphrase his advice. He advised credit unions not to grow for the sake of growing either; to keep it realistic to the needs and wants of the members in the bond. I will list the very simple ways this problem can be addressed. One way is to remind the credit unions, in a gentle but persuasive manner, that only part of their job is to make funds available for access to credit. I refer to section 6, subsections (a) to (g) of the Credit Union Act 1997, which lists the objectives of credit unions and refers to their remit to educate people about the wise use of credit. The big aspect in the commission's report and the heads of the Bill which we tend not to talk about too much is the promotion of thrift. I know this is deeply unfashionable and untrendy but I am unapologetic. We cannot make people better off or more financially independent or autonomous by lending them money. This can actually become more dependent if we continue to lend them money. The only way to make people better off is by increasing their store of wealth and their autonomy, by them having savings. That is the other half of the job. It is not a question that we are worried about cutting the big savers out of the picture; we are quite happy to keep the big savers, Chairman, but what we would like to do is to give credit unions sufficient operational flexibility to allow them to create and craft products that incentivise savings.

I am conscious of time but I will give an example. Many people are bringing their debt problems to the credit unions. They want to get better value from the credit union than they currently get from other lenders. Those loans are seen as quite risky and they necessarily need to be approached with a degree of caution. We could craft a product that allows us to charge, for example, the 12% allowed by law - the normal percentage for that credit union rate of charge might be 9%, these are all nominal figures, not APRs, to keep it simple. If we decide this is a debt loan which is riskier - it is a debt consolidation - we will recognise that fact and we will price in the risk, something the Central Bank has been encouraging us to do for a long time. We will charge 12%. If that loan is repaid correctly over the full period the difference between the 12% we have charged and the 9% we would have liked to charge, will be owned by the member by way of savings. Instead of giving it as a loan interest rebate at the end of the year, it is given as a lump sum - complete with any accrued interest or dividend that would have happened in the meantime - to the member for his or her own use. By the same token, if the member has not repaid the loan in the correct manner and there is a problem of arrears or delinquency of some sort, then the credit union retains those funds and writes them off against the outstanding principal on the loan. That is a simple solution and not difficult from an operational perspective but that would need to be enabled in law.

Chairman

I am sure members will have questions about that. If I may ask a question on the other net issue, the proposed amendment to the Credit Union Act 1997, in respect of the permission to withdraw one's savings. As I read it that is a proposal to liberalise the position, in a sense, compared to where matters currently stand. I believe Ms Motherway has a concern about that. I ask her to tell us about the proposal and then to state her concern. I think I am right in how I have described it.

Ms Carmel Motherway

Yes, although I can see how it seems counterintuitive for somebody like me to be concerned about this. As it stands, where a credit union member wishes to withdraw his or her savings, the latter are held, notionally and in most cases actually, against any outstanding loan. The member must apply to the board for permission to withdraw and permission may be granted up to a level of 25% of the contingent liability, that is, the member's own liability or any guarantee for which he or she is responsible. The proposal in the heads of the Bill is to remove that requirement in order that, in effect, a member can withdraw shares that are put into play after the loan is issued. In other words, the shares at the time the loan is issued may be attached to the loan and cannot be withdrawn, although anything that comes in afterwards may be. Our concern in this regard is that a relatively liberal arrangement is being exchanged for something more restrictive. Take, for example, a person who owes €4,000 in principal and has €6,000 in shares. The loan, in other words, is covered and everybody is happy. Under the existing arrangement, if the member needs access to these funds, he or she can request a withdrawal up to 25% of the contingent liability. Under the new proposal, however, the shares attached to the loan at the time of issue cannot be withdrawn. That is a cause of concern to us.

Our second concern is slightly more esoteric. As I said, part of our job is to promote and incentivise savings in order that people can build a store of wealth and thus live more independently. The credit union does so by encouraging a model of saving while borrowing which facilitates members in setting aside even modest amounts in savings at the same time as they are repaying a loan. The proposed prohibition in terms of attaching shares to the existing outstanding loan balance removes the credit union's capacity to mitigate risk and could hinder it in doing its job.

Deputy Michael McGrath

I welcome the delegates and thank them for attending. Ms Motherway has made several interesting observations. On the issue of the funding imbalance, if I am correctly interpreting what she is saying, the risk is essentially one of an over-concentration of the deposit base among a relatively small percentage of savers. There are clearly risks inherent in this because if these savers move their money out, the funding base is undermined. Likewise, the loan-to-deposit ratio at an overall level within the credit union would be impacted upon. Are there controls or rules governing this situation as it stands?

Ms Motherway expressed the view that a small credit union with a low level of reserves might be in a better position than its larger counterpart with large capital reserves but an over-concentration of depositors. That is an interesting observation. However, the function of the reserves is to act as a buffer for absorbing losses and any bad debts that might emerge. There is an increasing trend in that regard. Surely, therefore, depleted reserves present a greater risk than an over-dependence on savings.

Ms Carmel Motherway

We will take that question from the Deputy but I am concerned to ensure that we do not stray beyond the specifics of the information contained in the individual submissions. We can deal with more general matters at the end of our discussion.

Deputy Kevin Humphreys

I just want to discuss these flexible or top-up loans from the point of view of interest rates, etc.

Chairman

Fine. We will deal with that matter later.

Deputy Kevin Humphreys

I am not seeking an answer, I was merely outlining the reality.

Ms Carmel Motherway

If I could comment briefly, the leeway exists in extending the loan out by reducing the principal component. That is where the wriggle room is to be found. However, there is a line of reasonableness one does not cross. It is down to each loan officer and member to discuss the best way forward. Most of the time we get it right, but not always.

Deputy Paschal Donohoe

I thank Ms Motherway for her presentation. I have two questions in respect of her oral submission. The first of these relates to the analysis she put forward to the effect that a solvency problem could be triggered by a liquidity issue as a result of the high concentration of the deposit base within a particular group of depositors. I am unclear as to what Ms Motherway believes should be done about this core issue. As a result of what has occurred in other areas of the economy, we are, tragically, all too aware of what can happen when things of this nature go wrong. Will Ms Motherway outline her specific ideas on what can be done to tackle this issue?

My second question relates to a phrase Ms Motherway used when referring to the model for regulation. She stated that if a model of self-determination is used, then individual credit unions are allowed to set their own appetites for risk. How realistic and credible is such a model, particularly in view of the fact that - as we have seen in the past - if bodies are allowed to set their own appetite for risk, the consequences of this go beyond such bodies when things go really wrong?

Chairman

We will note both of those questions. Deputy Mathews wishes to pose a question. We will return to the matters that have been raised before we conclude.

Deputy Peter Mathews

Mr. Eoin O'Sullivan

I wish to provide some information on the savings stamps service and how it is traditionally realised. At present, this service is realised on a paper-based medium. In other words, if a member goes to his or her credit union and hands over €2, he or she will get a paper savings stamp in return. We have been made aware of a number of issues in this regard, including loss and theft of savings stamps, a risk in the context of fraud and money laundering and the lack of an audit trail. At present, there is no information which links a member to any stamp which he or she purchases.

Are there any other questions on this issue? If any occur to colleagues, they can return to it before we conclude and if the witnesses want to add anything further during the general discussion we will have later, they can do so.

I thank Mr. Gunning for his attendance. I mentioned that he is a member of the dormant accounts board but emphasise that he is not here on behalf of that board. Is it not correct that the issue he has raised relates to the work and remit of the dormant accounts board in terms of having the credit unions listed as bodies that would also be would be covered by it? Mr. Gunning might explain the position.

The Oireachtas has an instrument available to it in the matter of tax expenditures. All credit unions gain from tax expenditures, even credit unions that serve relatively small numbers of relatively affluent people. By virtue of being organised as a credit union, they gain from tax expenditures. The gain that credit unions get from tax expenditures has not been quantified on either side. The lack of information on that is regrettable and it would be better if it were quantified. There should be a trade off between the State and the credit union movement or the application of tax expenditures to continue in return for something on local investment.

Chairman

Excuse the naive character of my question but the legislation that is going through the Houses will bring under the Minister's remit the disbursement of funds.

I am speaking here about the generality of dormant funds. Is there a role for the process in what Mr. Gunning has in mind or would this be separate to that? Would it be a separate track of dormant funds disbursement by the credit union movement or would the Minister, as successor to the dormant accounts board, have a role in it?

Mr. Des Gunning

I will back-track slightly. I am happy that Mr. Michael Morley, the chairman of the board, has taken time to attend this afternoon. The dormant accounts board made two submissions on this matter, one to the Minister on the Dormant Accounts Act, and one to the Commission on Credit Unions. The dormant accounts board said that a credit union should quantify its dormant balances, report on them and then decide either to put them into a section 44 fund locally or remit them to the dormant accounts board. Personally, I support the dormant accounts board. I suggest to the committee that is what each credit union would be empowered and challenged to do. Credit unions have been enabled to put funds into a section 44 fund for the past 15 years but they have not done so. In the eight years after the section 44 provision was enacted, as Mr. Brendan Logue gave evidence to an Oireachtas committee in May 2010, credit unions got very much involved in investing in exotic financial instruments, perpetual bonds, instruments that yielded losses something exceeding 100%. It is a pity that happened in the eight years after the provision was made for a local investment clause and there was no local investment whatsoever. That must inform the approach taken in this regard. Where there are dormant balances I emphasise that they would be better applied to some local development use outside of the credit union itself.

I have a quote from Séamus P. MacEoin, whom I consider to be a sort of intellectual pillar around whom the credit union idea took shape in this country from 1951 to 1956. Before we had any credit unions he was sculpting the idea out of the notions of Alphonse Desjardins and Raiffeisen. One of Séamus P. MacEoin's final legacies to the movement was to drive the adoption by the Irish League of Credit Unions of a set of operating principles. To quote briefly:

The credit union vision of social justice extends to both the individual members and to the larger community in which they work and reside. The credit union ideal is to extend services to all who need and can use it. Every person is either a member or a potential member and appropriately part of the credit union sphere of interest and concern. Decisions should be taken with full regard to the interests of the broader community within which the credit union and its members reside.

That is an operating principle but it is very difficult to travel around this country and look at magnificent credit union premises and have it clear and manifest that the credit union within those doors is operating that particular principle as a priority. The opportunity is there and that is why I make this submission on the widening of the dormant accounts fund and a greater focus on creating special funds under section 44 at local level.

Deputy Michael McGrath

I thank Mr. Gunning. Could he remind us of the definition of a dormant account, in terms of the period for which an account must be inactive? Given his experience of the amount of dormant accounts that were in the banks and financial institutions, could he give an estimate of what might be the percentage of the deposit base that could be classified as dormant accounts? What was the typical percentage in the banks, for example? If credit unions set up a section 44 special fund, as opposed to transferring dormant accounts into the dormant accounts fund, what would they do with such a special fund and what would be the status of it and its intended purpose?

Mr. Des Gunning

The Dormant Accounts Act refers to a balance that has not had a customer-initiated transaction in 15 years. Internationally, that is at the conservative end of the definition. In the state of California it is three years but I am sure they have more repayments in California than they have in Ireland. I have not been able to estimate the quantum of dormant funds in Irish credit unions.

Deputy Michael McGrath

What was the level in the banks?

Mr. Des Gunning

There is no record, as there is no requirement to report. As far as I understand it from my informal inquiries of credit union board members, who are cautious and discreet people, a mid-sized credit union with about 35 years in business, dating from the 1950s on would expect to have between 2,000 and 10,000 dormant accounts. A lot is down to the personalities of boards, management and their turnover. It would vary quite a bit. Anyone I have asked agrees with me that if it is there it is in the general reserve, as likely as not, and it would be better if it were documented.

The third question Deputy McGrath asked me is to what purpose funds might be put. There are two parameters in that regard. One is the discretion of the credit union and the other is legislation. Even as it stands, a section 44 fund where established can be used for social, cultural or charitable purposes, including community development. The establishment of such a fund at present is entirely a matter for decision by a majority of the members.

To return to the evidence given by Ms Motherway, it is for the members to decide, but Mr. Logue, who is a former regulator, said in his testimony to the committee on regulatory affairs in March 2010 that the democratic system of credit unions has broken down. It is a dramatic statement but from my observations I tend to agree with him for the reason that we just heard about, namely, that if I have a large amount of money on deposit in a credit union I have a huge incentive to be on the board of the credit union but if I am getting on with my life and I have a loan out for a few grand that I might clear off or get re-financed, I am probably less likely to be highly motivated and focused on being on the board of the credit union. Based on analysis, one will see from Ms Motherway's evidence that there tends to be a greater than average proportion of people representing the group identified. That affects decision making, so when it comes to a decision to establish a section 44 fund, one is asking perhaps the more conservative and older cohort of the credit union to make the decision on behalf of the credit union, which is a challenge.

Deputy Peter Mathews

I thank the witnesses for their contributions. I did not understand the reference to tax expenditure. What is it? The definition of a dormant account is that there has been no customer-originated activity for 15 years. That means one could have an interest roll-up for 15 years because it would not require the customer to intervene. People hold prize bonds for 20 years and 25 years but they are by no means dormant. Balances on deposit at a credit union or even in an old-style mutual building society for 15 years are far from dormant.

I suspect that perhaps directors might not have large balances at all. People go onto boards of directors of various types for different reasons than for protecting the investment they might have. In fact, often people are tempted onto boards because they are controlling other people's money, OPM, as I call it. That is the biggest temptation of all. That is why things go wrong.

Chairman

I invite Mr. Gunning to make a note of those points Deputy Mathews has just made. He will remind Mr. Gunning of them if he forgets. I will take questions from other members before Mr. Gunning replies.

Deputy Heather Humphreys

I thank the witnesses for the presentation. One point we have failed to take into account is the fact that credit union membership is part of a common bond and they are very restricted in their membership. I do not think the rules relating to dormant accounts apply in the same way as they do to banks because credit unions are based in the community.

Prize bonds are not covered by the dormant accounts legislation. A prize bond is never deemed dormant in law. At one time the board examined whether there were any dormant prize bonds and we were assured there is none, therefore, the question of age does not arise with prize bonds.

I have not researched them for this meeting. One I can bring to mind is that in 2003-----

Chairman

I thank Mr. Gunning. I welcome Ms Byrne from the UCC centre for co-operative studies. We have her submission in which a number of issues are identified. I believe we got additional documentation from Ms Byrne-----

Ms Noreen Byrne

You did.

Chairman

-----which was very helpful. We will go through each of the issues on which members may have questions. The first has to do with lending, and Ms Byrne refers to head 6 of the scheme. She states that the requirement that a loan ought to be made for provident or productive purposes should remain in the Act. What is the proposal in that respect? Is Ms Byrne saying it has been taken out and it should be left in?

Ms Noreen Byrne

It is very hard to set out clear criteria for viability. However, one can be more prescriptive regarding transparency. It is a question of determining how a decision on non-viability is reached. Perhaps the legislation could be prescriptive on transparency.

Chairman

Ms Byrne touched on a number of aspects that ought to be considered in her submission, which is very helpful.

Head 47 pertains to restructuring and the submission of a restructuring plan. Could Ms Byrne explain her concern in that regard?

Ms Noreen Byrne

My key point is that, in the legislation, restructuring is defined quite narrowly. It only revolves around amalgamations, transfers of engagements and resolutions. The commission report is much broader and the definition therein includes not only amalgamations, etc., but also the idea of shared service networks, such as CUSOs. The legislation is supposed to be in line with the commission report but it is clearly not.

Deputy Michael McGrath

This is even more of a factor at present, with bank branches closing nationwide.

Chairman

Each of the four submissions has been enormously informative. I compliment the witnesses on the clarity of their responses. The joint committee is moving through this material quickly and it is evident that some members, myself excepted, are quite expert while many of us have a lot less expertise. Consequently, this session has been extremely informative and definitely will inform the process in which the Minister and the Oireachtas are engaging to prepare this legislation and presumably its ultimate passage in whatever shape it will take on foot of the outcome of these deliberations. I thank the witnesses for their attendance and submissions, which I emphasise have been extremely helpful in the case of all four contributors.

I propose members take a five-minute comfort break. On a formal note, I seek the joint committee's agreement to do what I have been saying it will do all day, namely, to publish forthwith all the submissions on the committee's website, including all the additional documentation, as well as the summary by the clerk to the committee, Mr. Lenihan, of these submissions, which also would be helpful. Is that agreed? Agreed.

Sitting suspended at 3.29 p.m. and resumed at 3.39 p.m.

Chairman

We will resume our consultation of the draft scheme of the credit union Bill 2012 with credit unions representative bodies. I welcome Mr. Joe Mulvey from the National Supervisors Forum, Mr. Kevin Johnson who is chief executive officer of the Credit Union Development Association, Ms Selina Gilleece from the Credit Union Managers Association and Mr. Pádraig Ó Cearbhaill who is chairman of the Credit Union Advisory Committee.

We will move swiftly to engagement of members with witnesses on the basis of their submissions to the joint committee, for which I thank them. I can assure the witnesses that members have seen the submissions and are aware of their contents.

I remind members and witnesses that this meeting is being broadcast by UPC on its channel 801 and that all mobile phones should be switched off for the duration of the meeting as they cause interference with that broadcast, making it difficult for people watching to hear what is being said.

The joint committee will hear first from Mr. Joe Mulvey of the National Supervisors Forum on the four main categories of the draft scheme of concern to it as set out in the forum's submission. The first issue of concern is head 17, prudential requirements and the term "oversight committee". Am I correct that the forum believes the oversight committee should be called the "oversight board" to signify its particular importance?

Mr. Joe Mulvey

I thank the Chairman and members for the opportunity to appear before them today. The forum has some reservations about the name. While the legislation in this area in the Six Counties retains the title "supervisors", the trend here is to use the term "board oversight committee". The word "oversight" causes us some concern in that it could be understood to mean we will have an oversight function, or not, as the case may be. In every other jurisdiction in which credit unions operate the term "supervisory committee" and its role is clearly defined. No one has ever sought to change that title or role. Our proposal is in some way conciliatory to the desires of the people who drafted this Bill. While we are were willing to meet them half way we would wish to retain the identity of being independent of the board and of our being not just another committee within the board but a supervisory committee of the boards and their activities around credit unions countrywide. That was the reason for our original suggestion. Our preferred choice would be to retain the title of supervisory committees within the credit union structure. However, failing this we would prefer to be renamed "oversight board", which ensures our autonomy and identifies our independence and the role which we play within the credit union structure.

Chairman

On subhead 6 of head 17, internal audit function, it is proposed in the draft scheme that the internal audit function would report the results of its evaluations and recommendations to the audit committee, where one exists. The forum is proposing that the internal audit function should in addition also report to the oversight board.

Mr. Joe Mulvey

Yes. This, of all the issues highlighted in our submission, is the one of most concern. We must rid ourselves of the idea that the board of a credit union would appoint an internal audit function - it may be an internal or external appointment - which would carry out the internal audit. This would simply be a case of the piper calling the tune because there would be no independence of stand back in terms of the operation of the credit union. In addition, where an internal audit function identified any issues of concern to the credit union these could be swept under the carpet. We have had evidence of internal audits within our banking structure not being taken seriously. We welcome the introduction of the internal audit function. It is good housekeeping in any commercial organisation to have an internal audit function. However, we would argue that when making its findings it should report to the proposed supervisory committee-board oversight committee. We believe it is important that the committee be the third point on the triangle, thus ensuring any findings or recommendations are acted upon quickly.

Currently the supervisory committee can engage experts to look into aspects of the credit union which it believes needs to be looked at from a governance point of view.

Yes, this would reinforce the idea in the legislation that the board oversight committee would be provided with all necessary documentation and facilitated in doing its work, which is overseeing the operation of a credit union from a governance and compliance point of view. We are just trying to make sure we are dotting the i's and crossing the t's while the Bill is at this stage.

The beauty of it would be that there would be no contamination between the two boards in so far as they could maintain their independence. Flawed as it may be, the oversight board would be independent and could not carry on a legacy from the board of directors.

Germany has a tried and tested system of oversight committees that works. Many companies there have a board of directors but also have a supervisory board to ensure the board’s work does not go untoward. This two-tier senate board is used in many companies there and they have found it works quite well. I know we are subject to much German influence in finance. We examined this system and noted it works. It is also used in Canada. The supervisory board does not get involved in the business of the board but ensures it is carried out.

Chairman

Head 29 concerns the titles of the members of the oversight board. If the committee is to be retitled as proposed in the legislation, the National Supervisors Forum wants the members of the board to retain the title of supervisor.

Mr. Joe Mulvey

We would like them to retain the title of supervisor. This is purely for identification purpose and clarification of the role. We are there to supervise the whole operation of a credit union from a compliance, governance and best-practice point of view.

Chairman

Are there any questions for other members?

Senator Thomas Byrne

Yes, I found this submission interesting and persuasive. While at first glance one would question some of the suggestions to change the titles proposed, when one listens about it in-depth one can see the reasoning behind it.

Mr. Joe Mulvey

We are doing this to get a best-practice point of view. It is all about governance and making a credit union operate as efficiently and effectively as possible.

Chairman

That is appreciated.

Mr. Kevin Johnson of the Credit Union Development Association, CUDA, made a submission to the committee. Again it concentrated to some considerable extent on this broad question of governance. It is an area that has preoccupied most of the delegations that have presented to the committee. We have had much discussion on head 20 concerning term limits. What is Mr. Johnson’s view on the nine-out-of-15 rule proposed in the draft Bill?

Mr. Kevin Johnson

First, I thank the Chairman and the committee for the invitation to attend today’s meeting.

For those who may not be familiar with us, CUDA is a legally incorporated representative body. We currently represent 12 credit unions in the Republic of Ireland. Those 12 credit unions are owned by and serve approximately 250,000 members and they would represent a little over 10% of the assets of the credit union sector.

We have consistently campaigned for the reform of the legislative and regulatory framework for the credit union sector. We were active participants in the Commission on Credit Unions and we continue to strongly endorse its findings and recommendations. We very much welcome this draft general scheme of the Bill as it reflects the commission's findings and recommendations.

Five months have passed since the commission published its recommendations and we have had an opportunity to move into an implementation phase where we have started to do work on preparing for all of this change. As has been acknowledged in the past day and a half, it is a significant amount of change and a number of items have surfaced. As the Chairman mentioned, the nine years in 15-----

Chairman

I stressed that one. I will go through the others.

Mr. Kevin Johnson

There are a few others.

Chairman

I have now found Mr. Johnson's submission and will be able to take him through the issues he identified. I have read it also but I could not find it momentarily. Would Mr. Johnson deal with the nine over 15 first?

Mr. Kevin Johnson

It is in the context of new thinking about the implementation phase. Our member credit unions very much look forward to embracing these challenges, stepping up to the plate and embracing the voluntary approach to the restructuring. During a period of change, and particularly around consolidation and mergers, we do not want a situation where a board is totally focused on the merger and then taking its eye off the ball. It probably ties in a little with the next item, which is around the numbers. We merely want to ensure that the board maintains the appropriate level of experience to be able to implement and cope with the change, and also ensure that members and their communities continue to be served.

Mr. Kevin Johnson

It is as the Chairman summarised. We would like to see the commission's recommendation implemented. The commission's recommendation was that there should be a thorough analytical assessment of the affordability of this to credit unions. There are a number of levies. There is the regulatory levy, there will be the resolution levy the Chairman mentioned and there is a restructuring body, ReBo, levy. Rather than looking at these individually, it is essential that we get a handle on the full cost of these to ensure the affordability of them in their totality. That is the point.

Chairman

I understand that.

On the tiered approach in respect of restructuring, we heard a number of bodies questioning the various bands. Is that also the point CUDA is raising?

Mr. Kevin Johnson

Yes. If the Chairman will forgive me, I would add a minor clarification. First, a table, on page 96 of the commission's report, sets out the three bands and it is clear that the table is illustrative. It was never set in stone that way. We simply acknowledge that the middle band, from €10 million to €100 million, is a broad band and another one can be put in there.

If I may expand a little on the idea of the tiered approach by way of clarification, our understanding and interpretation of it is that it is not trying to punish or restrict anybody, particularly smaller credit unions. What it is trying to do is ensure that there are appropriate levels of regulation. If one looks at it, the middle tier is very much the current position. The idea is that the smaller credit unions would have less onerous responsibility and regulation foisted upon them and other credit unions that wanted to grow and develop their services would have additional requirements to meet.

Chairman

As there are no further questions for Mr. Johnson, we will proceed to the Credit Union Managers Association. I welcome Ms Gilleece and I thank her for her submission. The chief point is that the association supports the final report of the commission. It makes the observation that the commission's report was agreed unanimously by those who attended and participated. It also takes the view - we have had some discussion on this - that the general scheme reflects and is faithful to the contents of the commission report. That is the essential message in the association's submission. However, I ask Ms Gilleece to elaborate.

Ms Selina Gilleece

I thank the committee members for giving us the opportunity of addressing them. The Credit Union Managers Association is the representative association for professional credit union managers in Ireland. Our membership comprises approximately 260 credit union managers. The function of the credit union manager is to work at the coalface with credit union members on a consistent daily basis and to liaise with our voluntary boards. As Mr. Kevin Johnson has already indicated there is a very strong and healthy relationship at the moment between credit union managers and credit union boards of directors which we would like to see continue.

The Credit Union Managers Association felt there was an absolute need for new legislation on credit unions. We are acutely aware of the difficulties credit unions are experiencing in the current economic environment. Much of the discussion in the past two days has centred on what I would consider to be minute matters considering the major difficulties for all financial institutions and, in particular, credit unions. Mr. Kevin Johnson alluded to the forthcoming personal insolvency legislation and its potential impact on credit unions.

Credit unions have sustained themselves throughout the economic storm the country has faced in recent years. It is a credit to the volunteers and the credit union members and staff that we have managed to do that. However, we are by no means perfect. It is commendable that credit unions are still lending and have not sustained the levels of losses of other financial institutions. However, it would be remiss to say we are perfect - we are not perfect and have our faults.

In September 2010 the Registrar of Credit Unions said that without proper systems of accountability, risk management and control, credit unions would continue to struggle to meet the demands of an increasingly sophisticated member base in which they operate. In most cases, problems arising in credit unions can be traced back to poor governance. Historically where there are problems in credit unions in many cases those problems have been caused by poor governance. We are delighted the draft Bill reflects the commission report's recommendations on proper governance. As a credit union manager representing credit union managers, I can say that we believe all aspects of the draft Bill reflect the changed economic environment and increased levels of regulation, and that it is balanced and proportionate.

I have some concerns over some of the comments about the proposed tier structure for credit unions. Members should recognise that the tier 2 structure for the €10 million to €100 million-credit unions will not change how we are regulated at present. It is important to clarify that point because people might be under the impression that if the Bill is introduced all sorts of weird and wonderful things will happen in regard to regulation. We are being regulated and will continue to be regulated in regard to tier 2 credit unions. As Mr. Johnson has said, tier 1 credit unions with low risk levels might be regulated less severely which is positive. Obviously it is important from a prudential perspective that credit unions with an asset base in excess of €100 million should have stronger regulation. Credit union managers have no difficulty with that.

The other aspects of the Bill have really not been discussed in the past two days. They deal with matters such as the central rulebook. We welcome this because it provides clarity to us when we are doing our jobs. In order to find out what is wrong with the HSE it is necessary to ask the nurses and doctors, who are doing the job of dealing with patients on a daily basis. We are dealing with members who are under severe financial difficulty and we are acutely aware of these difficulties.

We welcome the fitness and probity regime. We believe it is appropriate for credit union volunteers, managers and staff to have the appropriate skills, capacity and competency to look after members' money. Protection of members' money is the most important thing.

I will deal with the role of the manager. We welcome that the function of credit union managers is being recognised as separate from that of the board. I wish to clarify any ambiguity as to why these changes are being promoted. The commission's report recognises that the manager and staff are responsible for the operation of the credit union on a daily basis. The board is responsible for the governance and future strategy of the credit union. It is important to have clarity on those two distinct roles and we welcome those changes.

Deputy Kevin Humphreys

I thank Ms Gilleece for her submission and presentation. I ask her to expand on the tiered approach. As Mr. Johnson stated earlier, it is only an indicative figure. Would Ms Gilleece see a benefit in widening the tiered approach to have another tier between the €10 million and €100 million?

I believe Ms Gilleece is in a unique position to comment on a matter dealt with earlier - the requirement for the auditor to step down after six years. I ask her to give her views on that. This morning we heard from representatives of MABS. What is Ms Gilleece's opinion on the development of a protocol with MABS? How can MABS work with Ms Gilleece's association in the case of credit union arrears? I also ask her to touch on the issue of social financing. I ask Ms Gilleece, as a manager, to give us a brief flavour of the flexi-loan mentioned earlier.

Ms Selina Gilleece

I will deal with the tiered approach first. The Deputy asked if we thought there should be an additional layer or tier included in the current proposed three-tier structure. I have listened intently to some of the arguments on the proposed tiered system. Yesterday there was considerable debate on promoting the UK two-version model.

It was certainly indicated this would be a preferable approach with regard to credit unions in Ireland. I want to ensure Deputies are very clear on the alternative proposal. Credit unions in the UK have 1% market penetration and £1.6 billion in assets as opposed to more than €13 billion in Ireland. The credit union is a relatively new phenomenon in the UK whereas the credit union movement has been in Ireland for 50 years. Version 1 credit unions in the UK are required to have a reserve level of only 3% and version 2 credit unions are required to have an 8% level, whereas in Ireland credit unions are required to have a minimum reserve base of 10%. It is inappropriate to tinker with what is being proposed. As was stated yesterday, credit unions in the UK want to emulate what is happening in Ireland.

As I outlined, tier 2 credit unions will continue to be regulated as they are at present and this is a very important point. Tier 1 credit unions, which are those with less than €10 million, will have slightly softer regulation because of the reduced risk. I use the word "softer" although it is probably not appropriate. Tier 3 credit unions, which have a wider range of investments, risks and activities, will require stronger regulation. This is appropriate because it is about saving and protecting our members' money and we do not have any difficulty with this.

With regard to the terms of office for the auditor, credit union managers work with auditors more closely than anyone else in the credit union, with annual and interim audits being conducted. We have good and strong relationships with our auditors. The commission has stated it is appropriate for a credit union to seek to replace its auditor at the end of a six year term and this new auditor should not be from the same practice. We believe this is good governance. It reduces the risk of over-familiarity and, as Deputy Mathews stated this morning, it allows the accounts to be seen by a fresh pair of eyes. The suggestion of passing on information from one auditing company to another when an order is being replaced is very good and is best practice.

A question was asked about the development of a protocol with MABS. Credit unions recognise it is important to have such a protocol, but we have difficulties with the fact that at present credit unions working with members in arrears are categorised by MABS as less important than other creditors. Credit unions were responsible for founding MABS 20 years ago and many of us have been involved in the management committee of MABS during the past 20 years. It creates a difficulty for us when MABS approaches us that credit unions are towards the end of the list for repayments. We have seen instances where catalogue companies have had priority over us. We need to work with MABS on a protocol. Other financial institutions have signed up to a protocol with MABS. We see the impact of the mortgage arrears resolution process on credit unions. We have always worked with MABS and wish to continue to do so, but we need to be very careful because personal insolvency legislation is being introduced and we do not know what its impact will be on credit unions. We do not even know what shape it will take or how it will apply to our members. If we want to protect our members' money we must be very careful in our relationship with MABS.

Deputy Kevin Humphreys

What about Dundrum Credit Union's flexi-loan?

Ms Selina Gilleece

We welcome new initiatives. We do not feel the flexi-loan needs to be reflected in the new draft scheme. If a credit union desires to offer an additional service which falls outside of accepted services as defined by the regulator the credit union can apply to the Central Bank and indicate its capacity, competency and risk management with regard to offering the service. We have concerns about introducing credit cards. I mention credit cards because this morning it was described to some degree as a credit card.

Chairman

The Deputy drew an analogy rather than stating it was the same thing.

Deputy Peter Mathews

It is a credit line.

Ms Selina Gilleece

We have reservations. We believe going through the process of signing credit agreements and running Irish Credit Bureau checks on members is a prudent way of assessing capacity to repay. If credit is pre-approved and the member's circumstances change one or two months later, such as he or she becomes unemployed, it could cause difficulties further down the line.

Deputy Dara Murphy

I thank the witnesses for coming before the committee. It is significant that an organisation such as the Credit Union Managers Association, CUMA, which represents so many of those who deal face-to-face with customers are so supportive of the Bill as it is drafted. From both it and the Credit Union Development Association I get a sense that while there may be small areas of dispute we should get on with it and deal separately with other areas of reform to the credit union movement later. I get a sense of urgency from the witnesses.

Yesterday, reference was made to the process. Do the witnesses feel nine months was adequate? Do they feel enough time was given at the meetings to deal with all of what we are now discussing? It was stated the report was agreed unanimously by all participants. Was it reluctantly agreed unanimously?

Are the witnesses satisfied the deliberations of the commission were followed through in its report and in the draft legislation? Is there an unbroken chain of integrity between the three? Some groups have suggested that what we see in the draft legislation does not reflect the views expressed during the process. The witnesses seem to suggest they are happy with the process and its integrity and I ask them to restate this.

Ms Selina Gilleece

After I comment I will defer to Mr. Johnson. CUMA was represented on the commission by another manager, Mr. Tim Molan, who is not here today. CUMA was involved at every level, including making submissions. We were very happy with our representation on the commission. As someone who was outside the commission and who is very involved in credit unions, it was my clear understanding that when the commission finalised its report the decisions made were unanimous. We were told by everybody they were fully supportive of the commission's report.

I would not like the impression to be given that, following the issuing of the commission's report and the draft scheme's publication, there is a groundswell within the credit union movement because of difficulties with the Bill. That is not the case. When submissions are made, it is important that they be balanced and reflect the comments of those who are supportive of the commission's report as well as those who are negative towards it. The Credit Union Managers Association, CUMA, has close contact with many of those involved in the movement and we believe that there is considerable support for the draft scheme and the report, but I will defer to Mr. Johnson, who was on the commission.

Mr. Kevin Johnson

The process lasted for nine months, although a great deal of preparatory work was done during the lead-in time. Our colleague, My. Billy Doyle, was our representative on the commission. I deputised for him and participated in many of the meetings.

Without getting into the specifics of the sessions, there was an open and fair exchange and opportunity for all stakeholders to make submissions, which our organisation did on every matter. Ample time was given for every submission brought to the table to be discussed. Our debates were robust at times, which was healthy.

An interim report was published at the end of last year. It gave people an opportunity to see the prudential matters being discussed. Almost a year has since passed. The following stage involved a public consultation process, one that was open to everybody to bring forward proposals. The commission took presentations from various other stakeholders and interested parties.

The draft scheme is somewhat unique, in that it follows an extensive piece of work. The process allowed all stakeholders to have a say. Parties that may not have been represented directly on the commission had an opportunity to present on the matter. I could not fault the process, which explains why we have been so supportive of it. The start and end of our submission to the committee state the overwhelming opinion of our members, namely, let us get on with it.

Deputy Dara Murphy

That is where I got the "Let us get on with it" line.

Deputy Heather Humphreys

I thank Ms Gilleece for her presentation. We have discussed the restrictions on board memberships and terms of office. What is her opinion in this regard and why did the commission impose some of these restrictions on persons eligible for board membership? How many boards will be affected and what will its impact be? What are the barriers to the formation of credit union service organisations? What are the barriers to the delivery of electronic fund transfer and online services? We have discussed the Dormant Accounts Fund. From the perspective of credit union management, what are Ms Gilleece's views in that regard?

Chairman

As Ms Gilleece is diligently taking a note of the questions, I will take advantage and allow more questions instead of reverting to her directly, if she does not mind. Deputies Spring and Boyd Barrett are next.

Deputy Arthur Spring

Two of my colleagues picked up on the matter I wish to address, namely, the consultation process. Point 2.2 of the CUMA's submission states that there is unanimity on the process, but many people seem to have problems with what has followed. Are the organisations working closely enough together?

Chairman

We can only take that issue so far. The point has been well made.

Deputy Arthur Spring

Yes. I will not delve into it further. I agree with Ms Gilleece, in that the UK is trying to emulate what has been achieved in Ireland. I have researched the issue via the economic forum.

There is a difference between rural and urban credit unions, yet I am not sure that it is reflected by the regulator or in the draft Bill. It should be taken into consideration. Deputy Heather Humphreys referred to it in her question on replacing directors. Although it might seem that a small nucleus of people are incessantly involved, they are the core. It is the same with clubs in rural areas. If the core people are removed, there may not be many replacements. The same applies in the case of auditors, in that a rural area might have only one or two people with the necessary skillset to look after credit unions. Has this matter been taken into account?

Deputy Richard Boyd Barrett

I thank the witnesses for their presentations. I apologise for missing the first of them, but I had another meeting to attend.

I was going to use it as a general lead into some of the more controversial issues.

The witnesses see the term limits as a positive aspect on the basis that they would promote renewal at board level. Some of our other contributors saw it as problematic because it lessened the democratic right of members to decide who they wanted. Is there a problem with renewal? The witnesses went on to state that many of the problems experienced by credit unions stem from their governance. Is there a connection between the two issues? Are the lack of renewal at board level and the lack of clarity between the board and people on the front line contributing to problems? Will Ms Gilleece elaborate on this matter?

Other contributors seemed to be very concerned about the role of treasurer, in that they viewed maintaining members' direct line into what is happening with a credit union's finances as being important.

Perhaps Ms Gilleece would quickly dispose of her response to Deputy Boyd Barrett's questions and move on to Deputy Humphreys' questions.

Ms Selina Gilleece

Deputy Boyd Barrett also asked if credit unions are experiencing problems as a result of poor governance. While this may be a question for the Central Bank rather that me, that is the case. I quoted the regulator's most recent comments on poor governance. This is repeated in previous statements by the Central Bank. It is an issue in credit unions. I cannot go into detail on the matter now. However, if the Deputy requires more information it might be worth his while asking the Central Bank the reasons it believes poor governance has caused problems in credit unions.

On Deputy Humphrey's question - this also addresses Deputy Boyd Barrett's concerns around terms of office - it is unfortunate that we appear to be poles apart from other organisations. However, we believe it is appropriate for a board member to step down after nine years, which is a long time, but to continue if he or she so wishes as a member of the audit, credit, credit control or other committee. There are many committees within the credit unions and a huge amount of work to be done. We are suggesting not that a board member step down after nine years and leave the credit union but that he or she step down after that period, upskill and become involved in other areas within the credit union and, if he or she so chooses, to take up a position on the board again after six years. I do not understand why this proposal is at issue. The person will continue to volunteer and give his or her service. We are not in any way seeking to undermine the work of the volunteer. We are simply seeking to reorganise, to improve and upskill and ensure that the board and nominations committee canvass within their common bond to get new people involved in credit unions. It may not be popular to say this but many of the people currently on credit union boards have been there for 35 or 40 years. The proposal being put forward seeks to change this and to bring in new people and skills. We do not have any difficulty with that and cannot understand the reason anyone else would have a difficulty with it.

Chairman

Mr. Johnson wishes to add a postscript. Has Ms Gilleece completed her responses?

Ms Selina Gilleece

Perhaps I could make a brief comment on dormant accounts. A witness at the committee earlier spoke about changes to dormant accounts legislation.

It is important to point out with regard to dormant accounts in credit unions that there may be a member with €10,000, €5,000 or €2,000 in a credit union share account, for example. The person may have no need for the money but it is in the account for a specific purpose that in the event of the person's death, the money saved will be automatically doubled, and the person may want to leave the money to children, a spouse, etc. If we start fiddling with that and requiring credit unions to take out money that is considered dormant, that insurance is gone. There are many credit union members who save because the additional insurance exists at no cost to them. It is a very important point about dormant accounts.

Mr. Kevin Johnson

Mr. Padraig Ó Cearbhaill

We came to the same conclusion as the lady who spoke earlier. The Department has taken this point on board.

Chairman

We also have the point about the fact that there is no definition of member in the definition section of the Act.

The witnesses are in favour of making the credit unions subject to legislation on dormant accounts.

Mr. Padraig Ó Cearbhaill

The joint committee adjourned at 5.25 p.m. until 2 p.m. on Thursday, 27 September 2012.

Joint Committee on Finance, Public Expenditure and Reform debate - Thursday, 20 Sep 2012

Credit Union Bill 2012: Discussion (Resumed)

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Annmarie O'Connor

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Mr. Kevin Morris

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Ms Eimer O'Rourke

Mr. Kevin Morris

Ms Annmarie O'Connor

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Philip Hosford

Mr. Gerard McConville

Mr. Gerard McConville

Mr. Gerard McConville

Mr. Gerard McConville

Mr. Gerard McConville

Joint Committee on Finance, Public Expenditure and Reform debate -
Thursday, 20 Sep 2012