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Joint Committee on Finance, Public Expenditure and Reform debate -
Wednesday, 16 Dec 2015

Credit Union Sector: Discussion (Resumed)

I welcome the Central Bank's Registrar of Credit Unions, Ms Anne Marie McKiernan, who is accompanied by Ms Elaine Byrne, the deputy registrar. On behalf of the committee, I apologise to them for the delay and thank them very much for waiting. Unfortunately, we were delayed by a Dáil vote and some other matters.

Following our engagement with credit union officials in November and noting the concerns raised by their representative body on the impending legislation, it is appropriate that we have the opportunity to discuss these concerns with the Registrar of Credit Unions today, given the important alternative that the credit union movement provides to the pillar banks. Ms McKiernan will first make her opening remarks, which we will follow with questions and answers.

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 committee. However, if they are directed by the committee 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 evidence connected only with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. I invite Ms McKiernan to begin.

Ms Anne Marie McKiernan

I thank the committee for the invitation to attend. I am accompanied by the deputy registrar, Ms Elaine Byrne. As members will know, our statutory mandate at the registry is to protect credit union members' funds and maintain the financial stability and well-being of credit unions generally.

I welcome the opportunity to discuss the current challenges facing the sector and our regulatory and supervisory approach in this regard. I acknowledge the important role the credit unions play within communities and the financial sector more broadly. Our actions are taken to ensure the sector will survive and thrive and have the capability to adapt to the changing environment and meet the needs of members in a modern and progressive way. In my statement, I will focus on three main areas: the current position of, and main challenges for, the credit union sector; the standards the Central Bank requires of credit unions so they will protect members' funds and remain stable; and the requirements for the growth and development of the sector.

With regard to the profile of the sector, for a number of years credit unions have been dealing with the effects of the financial crisis, fundamental change and structural factors. Recent legislation and regulatory actions have been designed to better position the sector for the future. The prudential decisions that we in the registry have taken are to ensure credit unions will be more robust and, therefore, better able to serve their members' needs in the future. The decisions included restrictions on inappropriate lending, stronger liquidity and reserves requirements, and emphasis on improved provisioning levels. In addition, we used extensive on-site engagement with credit unions to focus on strategic planning, governance, risk management and controls, and remediation of priority actions.

Today there are 339 active credit unions, with a total asset base of €15 billion. When we speak of the sector, it is important to remember we are dealing with a large number of independent entities varying in size and resilience. The majority of credit unions have assets worth under €25 million. Some 170 credit unions have an average individual asset size of just over €12 million. It is these small credit unions that often face particular challenges given their limited capacity to invest in new products and delivery channels, which would best position them to attract and retain younger active members. Some 37 credit unions have average asset values of over €100 million, and they account for just over 40% of sector assets. It is for these entities that our supervisory expectations are highest.

The biggest challenge facing the sector is the fall in income from core lending. Loans to members have decreased to €4 billion from €7 billion in 2008, while total interest income has fallen by 40%. The key indicator of sector growth potential, which is the loan–asset ratio, has almost halved, to 28%, since 2008. Nearly 200 credit unions are below the average. The reasons for this include the impact of both the crisis – especially the fall in household and small business borrowing – and underlying structural factors. These structural issues include the ageing membership base of the sector and the difficulties many credit unions face in changing their business offerings to attract younger borrowers by offering the services they want via the channels they expect. This often requires technology investment that smaller credit unions, in particular, struggle to deliver.

Investment income helped to offset some of the declining loan income, but this is now under pressure in the low-yield environment. At the same time, the cost-income ratios are rising. Together, all these factors present an important challenge to the viability of credit unions. While many are reasonably well provisioned and have adequate reserves, we are concerned about current loan arrears, which remain significant at 13.5%, on average. A number of credit unions have arrears of almost one third of their loan books.

I acknowledge the scale of the challenges that credit unions across Ireland have dealt with over the past decade and the efforts undertaken by their management, boards, members and volunteers to deal with the impact of both the crisis and its aftermath.

Many credit unions took appropriately conservative responses, such as increased provisioning, cutting dividends and adopting new regulations, to steer through the difficult period but further strong efforts and strong leadership at the sectoral level are now required to address the financial weaknesses and, in particular, the structural challenges.

Turning to the standards required for the stability of the sector, the Commission on Credit Unions in 2012 recommended the introduction of a strengthened regulatory framework for credit unions. The Credit Union and Co-operation with Overseas Regulators Act 2012 significantly reformed the governance and risk management requirements of the sector in a manner proportionate to the nature, scale and complexity of the Irish credit union sector. Our on-site engagement is focused on implementing these requirements in a proportionate way. In May 2014, we summarised our findings from on-site engagements in a published report. We found significant weaknesses in governance and risk management standards and practices, as well as a fundamental business model weakness in many credit unions. That report set out our minimum supervisory expectations for credit unions, which reflect our statutory requirement to safeguard members' funds.

This year, an external review of the Central Bank's performance of its regulatory functions in respect of credit unions, which is required by law, was also conducted. The review determined that the Central Bank effectively performed its regulatory and supervisory functions and that our supervisory practices were commensurate with the complexity, size and risk profile of the sector. It also made recommendations for enhancement and we have adapted our inspections and engagement model to target supervision in a proportionate way. We have minimum standards expected of all credit unions and higher standards expected of larger and more complex entities. We continue to focus our efforts on strengthening the regulatory framework in a proportionate way.

Concerns have been raised about some of our proposed new regulations, especially the cap on individual savings of €100,000. We have considered all of the arguments put forward but we remain convinced that this cap is the right decision for the sector at this time. It ensures that members' savings in a credit union will be fully protected in the event of a resolution, which will also help to protect the stability of the sector by avoiding the potential negative impact of any credit union member losing any of his or her savings. It is our responsibility as regulator to take measures at the sector-wide level in order to minimise risks or vulnerabilities, especially at a time when the sector is going through a major restructuring and facing significant challenges.

One of the arguments put forward against the cap is that it will limit the ability of credit unions to develop their business models. This is difficult to accept, given the fact that the figures show that savings of over €100,000 represent only 1% of total savings. We note that, at the sector-wide level, credit unions are holding extensive deposits - €11 billion - relative to their lending of €4 billion and many have self-imposed deposit caps well below our proposed limit. However, we have indicated to the sector that, where there is a clear business case and sufficient safeguards in place to protect members' funds, we will permit credit unions to retain existing savings over €100,000 and, in exceptional cases, take in new savings of over that limit.

Turning to the sector's future sustainability, our vision is for a thriving credit union sector that provides choice in the financial system while carrying out its important role at community level and meeting our regulatory requirements. To get from where we are now to where we need to be will be difficult but we have set out four main requirements: further restructuring; a further drive for new, younger, active borrowers; a marked increase in core lending; and business model development in a multi-step, well-managed way.

Restructuring, as acknowledged by the Commission on Credit Unions, is necessary to address the viability and operational challenges that continue to face many credit unions. There has been solid progress in recent years, which has been significantly facilitated by the restructuring board. However, more needs to be done to provide the capacity to tackle structural weaknesses. We have worked closely with credit unions and their representative bodies to resolve a number of non-viable credit unions that could not demonstrate their ability to safeguard their members' funds adequately. We have done so with minimal disruption to services, no loss of funds to any member and via solutions within the sector itself. The drive to attract and retain active borrowers is the cornerstone of the sector's future. I urge the sector to consider further how to leverage its community advantages and its trusted brand to become more relevant to a new generation of borrowing members while pricing appropriately for risks and services.

Regarding business model development, there has been some criticism that the Central Bank is holding back the development of new business lines or that regulation is too restrictive. I wish to respond to these points. At the registry, we have not seen often enough from credit unions well-structured, viable and sustainable plans for development that also address the current operational and financial challenges that must be dealt with to move forward successfully. Our focus is always to ensure that proposed developments are carefully assessed, properly costed and consider risk and potential return. The prudent approach is a multi-step development of the business model, as this would best protect stability and members' funds.

Where credit unions set out a clear path on how they wish to develop, we consider any amendment to the regulations that may be appropriate. A recent example is the change to our forthcoming regulations to include explicit reference to "projects of a public nature", which would include, but not be limited to, social housing. We are fully committed to using all of the powers within our regulatory remit to help credit unions to help themselves and, thereby, their members. In this regard, we recently undertook a review of lending restrictions across the sector. Our review was to bring a renewed focus on improving standards of credit risk management and controls across credit unions. We have been able to lift restrictions at 55 credit unions where they prioritised improvements in their credit risk systems and met our requirements. Unfortunately, we also rejected 20 cases where credit unions had still to undertake further work in that regard.

It has been a challenging period for the credit union sector. I wish to acknowledge the constructive and positive engagement of individual credit unions, their representative bodies and other key stakeholders as we work to improve the resilience and future prospects of the sector. The sector has benefited from many conservative actions in recent years through increased provisioning, cutting dividends, adopting regulatory requirements and entering into mergers that provide better long-term prospects for many members. The most important challenge remaining is to drive sustainable, appropriate and prudent development of the sector while retaining the important voluntary ethos and community spirit. I thank the committee for its attention.

I thank Ms McKiernan. Turning to members, the normal procedure is for principal spokespersons to have ten minutes to ask questions and for ordinary members to have five.

I welcome Ms McKiernan and Ms Byrne and thank Ms McKiernan for her opening statement. I will start by asking her about an issue that is consistently raised by the movement, that is, tiered regulation. The movement argues strongly that although tiered regulation was a feature of the Commission on Credit Unions, it has not happened yet and that the one-size-fits-all style of regulation which is being applied to the sector is hampering its development and growth.

How would Ms McKiernan respond to that?

Ms Anne Marie McKiernan

We consulted the sector on tiered regulation in 2014. The feedback received from the majority of respondents in the sector at that time was that while they might wish for tiered regulation, it was not the time to proceed with it. The main reason for their stance was that there was a significant amount of change under way in the sector at the time, including restructuring, and that it might be more appropriate to revisit the issue when the future shape and development of the sector was clearer. We have always indicated to the sector that we are willing to engage further with it on both business model development and any future approaches to tiered regulation it wishes to take. At that time, part of the sector's submission suggested its members had a wide range of views regarding the form or specific scope of tiered regulation they would like. Smaller credit unions had their views and larger credit unions had different views. We have engaged constantly with the sector and are willing to hear any united or firm views on how to take the issue forward and that remains the case.

Is it the intention to revisit that issue and seek to introduce tiered regulation?

Ms Anne Marie McKiernan

Our view on this is that the business model development of the sector ought to be taken forward in the context of the priorities of the sector. From that, it might be appropriate to consider whether a tiered regulatory approach is needed or relevant. We are currently involved in a business model dialogue process with the sector to help understand the priorities the sector wishes to move forward with us and whether any aspects of our regulatory framework need to be adapted to accommodate those business model proposals. As the future development of the sector becomes clearer, this will be the appropriate platform on which to consider whether tiered regulation or some other proportionality in our approach is required.

In case members had not noticed, there is a vote in the Chamber.

Ms Anne Marie McKiernan

I would also highlight that we have an element of tiering within our current approach because we apply our rules in a proportionate manner. As I mentioned in my statement, we have higher requirements for the larger and more complex credit unions and somewhat simpler requirements for the smaller institutions.

Are we going pair for the vote?

We can pair among ourselves here.

That is fine, provided it is agreeable with members.

I am not agreeable to that.

We will have to suspend the meeting.

Sitting suspended at 5.35 p.m. and resumed at 5.50 p.m.

I invite Deputy Michael McGrath to continue.

Will Ms McKiernan indicate if there is an agreed strategy for the growth and development of the credit union movement? Her primary focus is obviously on regulation. We have the commission's report which, by and large, has been implemented, although the movement argues that it has been implemented selectively. Is a strategy for growth and development at the core of Ms McKiernan's functions?

Ms Anne Marie McKiernan

Our statutory mandate is to protect members' funds in the credit union sector and ensure the financial stability and well-being of credit unions generally. We have not been mandated to direct the business model development of the sector. We put the regulatory framework in place and supervise it. We are mindful of the fact that the sector needs to change part of its business model to stay relevant and thrive into the future. We work closely with it to see where our regulatory framework may need to be adapted now or in the future to accommodate such development. To ensure there is an appropriate focus in the sector on the need to transform the business model appropriately, we initiated engagement with it on that very theme. We brought all of the key stakeholders together with the focus on understanding their agreed priorities and various options for business model development. We also focused on understanding where we could help them to help themselves and where our regulatory framework might need to be attuned to that development. It is not our role to run credit union businesses or drive future business development and strategy, but we are certainly facilitative of that process.

Is there a need for an agreed strategy?

Ms Anne Marie McKiernan

I have called publicly for more leadership at sectoral level to enable the sector to deal with its particular structural challenges. As the majority of credit unions are at the smaller end of the scale, sub-€25 million entities, they are going to find it very difficult to undertake the investment required in new technologies or platforms to retain younger, active borrowers, who increasingly expect their financial services to be conducted via technological means. It is extremely difficult for individual smaller entities to undertake these proposals and in that sense sectoral leadership would be of importance to help them. Undoubtedly, sector-wide representative bodies have focused increasingly on the need to develop the business model and we work very closely with them. Our engagement is based on understanding their proposals, challenging them for improvement, ensuring all appropriate risks are identified and that proposals are based on current realities in the sector. There should not be too big a gap between where it might need to go and from where it is coming. I believe they find this input very constructive.

Does Ms McKiernan have a view on the review of the implementation of the commission's recommendations?

Ms Anne Marie McKiernan

Such a review would be a matter for the Minister. It was actually included in the external review of our functions, to which I referred in my opening statement. That peer review was carried out by the International Credit Union Regulators Network, ICURN, and included a recommendation that a review of the implementation of the recommendations of the commission on credit unions in 2012 be undertaken. It also acknowledged that it was not exclusively a matter for the registry.

Regarding the changes to the level of savings above €100,000, Ms McKiernan said:

Savings of over €100,000 represent a very small proportion, 1%, of total savings. We also note that, at the sector-wide level, credit unions are holding extensive deposits relative to their lending needs and many have self-imposed deposit limits well below our proposed cap.

While I know that Ms McKiernan's priority is to protect members' savings, does she accept that there is a reputational issue for credit unions? The signal that it sends is that any sum in excess of €100,000 is not safe in credit unions. That is a very negative signal to send.

Ms Anne Marie McKiernan

In all of the measures we take we constantly assess the risks we are seeking to close off to adequately protect members' funds and the stability of the sector. We judge that there is a risk that some members could potentially lose savings above €100,000. In aggregate, there is a very small volume of such savings. We recognise that the proposed cap of €100,000 gives very significant head room to credit unions because the average deposit is €4,000. We propose to put that limit in place, notwithstanding the reputational risk mentioned by the Deputy, because we are trying to reduce other risks across the sector. We judged that there was no impact on the business model of credit unions because such a small proportion of overall funding in the sector comes from deposits above €100,000. I also highlight the fact that, at sector-wide level, there are very significant deposits of some €11 million relative to the sector's lending of €4 million. A shortage of deposits is not among the structural factors weighing on the sector. We, therefore, felt it was an appropriate risk management response at this stage to close off a vulnerability, particularly in a period of heightened restructuring and transition. We would be open to reviewing it in time, if such a review were to become relevant and credit unions were able to show it was needed.

In her opening statement Ms McKiernan said:

To bring additional clarity to the challenges around business model development, we recently initiated a stakeholder dialogue process, where we engage with credit union stakeholders on their priorities for business development and our expectations to ensure that regulatory standards are met and members’ funds are appropriately protected.

This seems to be a very good idea. How many such meetings have been held to date? Would Ms McKiernan consider holding off on further implementation of CP88 pending the outcome of these consultations?

Ms Anne Marie McKiernan

There are a number of issues there. We have ongoing contact with the representative bodies and individual credit unions regarding business model proposals. Some of these consultations are by groups of credit unions and some are by representative bodies on behalf of the sector itself. We held preliminary meetings about our intent and objectives with the stakeholders dialogue and then held a formal meeting with stakeholders on how we would take it forward. We held a significant number of informal and regular engagements to discuss what we are seeking to achieve. The aim is to keep the focus on this big structural issue and to understand what the sector really needs from us around its business model development so we can consider how we need to change either our supervisory or regulatory framework accordingly. We continue to hold these meetings. We did not think it appropriate to hold off until after the regulations were signed. It will be a long road and a multi-step process to see significant business model change, and we should start on that road early.

I welcome Ms McKiernan and thank her for her contribution. I have met with credit unions over the last while and it is very interesting to see the huge differential in scale between credit unions. It has become clear that the credit unions are unhappy with the €100,000 deposit protection. I understand Ms McKiernan's argument but they do not seem to accept it and the gap needs to be bridged and dealt with. They are not happy with the engagement. Many people put a lot of their time into this voluntarily and they feel almost hounded out of existence. While Ms McKiernan may have a remit it is important that the remit does not sound the death knell for credit unions. That needs to be kept in the back of Ms McKiernan's mind all the time. I acknowledge that, like all lending institutions, bad decisions were made by some credit unions - but we do not live back there, we live in the present and the future.

The witness said that some credit unions would find it hard to go onto new platforms. I have been in business for many years and in the last few years we have concentrated on doing the simple things effectively and sticking to our core business model. We have seen many examples of other insurance companies etc. losing fortunes by veering too far away from their core client base and they have gone back to their original client base. Maybe credit unions should be helped to go back doing what they are best at which is lending low amounts and keeping people away from loan sharks, with all the important social dividend that brings. We are veering into social projects and social housing but I suggest the credit unions should get the basics right first. The statistics reported by the CSO today indicate that car sales have increased by 30%. Credit unions were always good for car loans. A platform is not needed for that, a person just goes in looking for a car loan. We need to find out why this is not happening. If businesses are falling from €7 million to €4 million in lending is it because of the restriction under which they operate or has there been a fundamental change? If demand is there for car loans - which the credit unions were traditionally involved in - why is that business not going to credit unions now? These are the questions I would like answers to.

I do not agree with a one size fits all approach. It certainly does not fit in this area. Projects of a public nature were mentioned. I came across a particular credit union which was involved in lending to a crèche. This was fine but there was another private crèche over the wall. Two crèches in business back to back in a medium sized town does not suggest a very sound business decision. With declining loan books the credit unions are under pressure and not happy and I reiterate that credit unions need help to do their basics and then they can look at other dreams and platforms. The dialogue between Ms McKiernan's office and the credit unions needs to ramp up and those ideas need to be teased out. I would be interested to know how much communication she has with them and if she see a favourable outcome for credit unions.

Ms Anne Marie McKiernan

I thank Deputy Barry and I will try to address as many of his points as possible. I completely agree it is most important for credit unions to focus on getting the basics right. In my statement I referred to the four areas to focus on, one of which is to increasing core lending which is personal finance to small businesses and households. That is the area in which the credit union brand is best established and where it has expertise. While mistakes may have been made in the past, credit unions are generally now working to put in place the higher regulatory requirements and better practices. We are very happy to work closely with them to do that. It is a significant part of our supervisory on site engagement with the credit unions. However, where proposals for the sector are being developed - and we could mention social housing here - we do want to work with the sector bodies and the credit unions to see whether the proposals are proportionate, appropriate and viable for the sector. We have a two-pronged approach to ensure they can do their core business well and grow it in the current environment and that they are positioned to take on any new business model development where necessary or appropriate.

I will now turn to the issue of the significant fall in the core lending. Some of the drop in lending is to be seen in the context in which the credit unions were operating; an environment in which households and small businesses were cutting back significantly on borrowing. All financial institutions were affected. The Deputy asked if the lending restrictions which we put in place were a factor. Our view is that they were not. Our lending restrictions were calibrated to reduce excessive risk taking but to not impact on the core and small personal loans that could be undertaken. Some years after lending restrictions were introduced we conducted research to see if they were biting credit unions and forcing them to turn customers away and the answer was they were not. In general the restrictions applied to loans of between €10,000 and €30,000 but the average loan size in the sector is between €6,000 and €8,000, depending on the time of year. Lending restrictions were introduced because we saw instances of excessive risk taking out of line with the kind of model and practices for which we advocate. Restrictions were imposed to help reduce the vulnerability of the sector and with the intention to putting an impetus on credit unions to improve their basic practices. In our supervisory engagements it was subsequently found that some credit unions were not addressing those basic weaknesses, so short-term restrictions became longer-term.

To bring focus back onto getting the basics right and on having the right credit control standards, we initiated a review earlier in 2015. This was to ensure that credit unions could act proactively on their credit risk management practices. It is a good news story that 55 credit unions were able to meet our requirements and better protect their members' funds by having the adequate risk management standards in place. It is unfortunate that there are still a number of credit unions that cannot meet those basic requirements. We have had to turn down 20 applications for lending restriction reviews. It says something about the sector that in many cases credit unions are happy to live under lending restrictions and that sets their appetite for how much lending they are willing to do.

In the context of dialogue with the sector I accept the Deputy's point that some credit unions are unhappy with some of the measures we have introduced. However, our mandate is to protect credit unions' funds which, through their lending, is other people's money.

Our requirements are proportionate to the nature, scale and complexity of the Irish credit union sector and that has been reviewed externally. We would highlight that the peer review found evidence of poor quality underwriting still in place in many credit unions. One can expect that we will put standards and engagements in place to try to improve that. On the issue of dialogue, Ms Elaine Byrne is better placed to answer that question than we, we have a series of information seminars across the sector and across the country to ensure that credit unions are aware not only of what we are doing but why we are doing it and how it is all based on our mandate to protect their funds and the stability of their sector.

Go raibh maith agat. Will the witness explain the risk-based rationale that the credit union sector has the support of the imposition of the savings cap at €100,000?

Ms Anne Marie McKiernan

Only a small amount of funds is affected by the cap. With an average deposit size of €4,000 in the sector and with many credit unions having self-imposed caps, well below €100,000, we felt it was an appropriate risk-based measure to reduce the prospect of members losing funds in a credit union if their credit union needed to be resolved or if there was any unexpected matter that would cause the failure of a credit union. It does not impact on the business model of credit unions because there is such a small percentage of funds over the cap already in place. We felt that a measure that can reduce risk and vulnerability and at the same time not negatively impact on the business model or the development of the sector was an appropriate risk-based measure to undertake at this time.

What is that risk-based rationale? I am well aware from previous statements and the knowledge we have of what is the average deposit in savings in credit unions but what is the risk-based rationale that the witness carried out within the bank that led to the belief that a cap of €100,000 was appropriate?

Ms Anne Marie McKiernan: There are a number of credit unions which have faced difficulties, as the Deputy will be aware, and have needed resolution in recent years. Some of those resolutions have used legislation and a court process to have them either directed to transfer or liquidated. In those cases we have worked very hard to ensure that in the course of those resolutions no members lost any funds. Obviously, that is a very difficult process. This year we have also carried out a number of restructurings, effectively resolution, within the sector using private funds which the sector pays into in a fund under the offices of the Irish League of Credit Unions. In all the cases that we are undertaking we are always very concerned that any unexpected events could happen and that there is the potential for members to lose funds. We judge that if any member of a credit union was to lose funds, however small, over €100,000, that would have a very significant confidence spill over across the sector. That is a very big risk which we intend to reduce. We feel that is very much in line with our mandate to help ensure the financial stability of the sector.

The same risk would apply to any financial institution out there, whether the AIB or Bank of Ireland, if there were depositors, savers, in those banks who were to lose funds as a result of resolution or liquidation. We have seen a number of situations in the past but there is no imposition by the Central Bank to say that nobody can save above €100,000 in those institutions. What is the increased risk that the witness has seen? Can Ms McKiernan outline to us who within the bank came up with the approval for a €100,000 cap on deposits?

Ms Anne Marie McKiernan

On the point of no equivalent cap in other financial institutions such as the banks, I would point out that banks are subject to a very different type of regulatory framework. It is enormously more complex than that applying to credit unions. The framework for credit unions has developed to be proportionate to the type of sector we have in Ireland. While there may not be a cap in place for the banks, there are many other requirements put in place to ensure that the risk of loss of members' funds, in the case of banks, are covered by many other safety nets. Banks are also now subject to the bank recovery and resolution directive which requires for bail in; in other words a significant number, a waterfall of safeguards to reduce the chance that some bailing of depositors funds over €100,000 will ever be needed. There is such a different regime applicable there that it is not really possible to compare across to the credit union. Also the average deposit in banks is in a different scale from what one finds in the credit union sector. We are very mindful that the core business of credit unions - coming back to Deputy Tom Barry's point - has been small scale lending and small scale deposits and that putting a very high cap in place, albeit linked in with the DGS limit is a very good risk management response at this time and it safeguards members in credit unions from losing any funds. There is not a queue of depositors going into credit unions seeking to deposit volumes over €100,000.

Who came up with the idea?

Ms Anne Marie McKiernan

We judged it as part of our regulatory response, our consideration of risks, our understanding of the evolution of resolution scenarios, the kind of issues that would-----

When the witness says "we" I am looking for a specific-----

Ms Anne Marie McKiernan

The Central Bank.

Yes. The Registrar of Credit Unions is not autonomous. It reports to banking supervision and falls under the remit of banking supervision. Was it the witness who came up with this idea, was it a higher level which deals with banking supervision in terms of not just credit unions but all the other banks or was it at a higher level, in terms of Mr. Cyril Roux, or the Governor of the Central Bank. From which level did this emerge?

Ms Anne Marie McKiernan

The process of developing regulations generally-----

Just generally, from where did the proposal of the €100,000 cap emerge?

Ms Anne Marie McKiernan

My statutory mandate is to protect members' funds and the stability of the sector.

It is not. Sorry, just to correct the witness.

Ms Anne Marie McKiernan

We looked at a range of options.

The statutory mandate of the Registrar of Credit Unions is not to protect members' funds, its statutory mandate is to ensure that the credit unions protect members' funds. There is a very clear distinction because one is going over the head of the credit unions and the other is working with them to make sure that the appropriate regulation is in place to ensure there is no risk to members' funds. Will the witness please answer the question? At what level did the cap of €100,000 emerge from in the Central Bank?

Ms Anne Marie McKiernan

We developed the proposals in the registry. We considered it is an appropriate risk-based approach to try to ensure that members of credit unions were adequately protected. As the Deputy rightly says it is the first line of responsibility of credit unions to protect their members' funds and it is the second line of defence by us, as regulator, to ensure that we take sector-wide responses as necessary to ensure that-----

So the proposal originated from the registry-----

Ms Anne Marie McKiernan

If I could finish - and then we would always both challenge ourselves and subject ourselves to internal challenge and, indeed, external challenge by the consultation process before we would finalise any such proposals.

The proposal originated from the registry. Is that correct?

Ms Anne Marie McKiernan

I would say the proposal originated within the registry.

Ms Elaine Byrne

May I also add a point? It goes back to the report on the commission on credit unions when it was considering illustrative asset bands in the tiered regulation concept. In that report there was a table on savings that gave an indication of the way that could look in a tiering context. Limits in savings were proposed there. For the very small credit unions a maximum of €50,000, for the majority of credit unions, that would be in €10 million to €100 million, a limit was specified of a lower percentage of assets or a €100,000 maximum. It was only for those credit unions over €100 million that there was any concept of savings being at a higher amount. That was very much envisaged for the majority of credit union compilation, a €100,000 so there was a basis where it had been referred to in that external context.

And the proposal was obviously a tiered approach which the Registrar of Credit Unions has decided to scrap and go with the blanket approach across the credit union sector. Can I put it to Ms McKiernan that, basically what she is telling the committee is that some credit unions may go into resolution in the next number years and there may be losses to members' funds if they have deposits above €100,000 and she believes that risk is such that she has decided to come in with this instrument to cap funds at €100,000.

There can be no other logic to the blanket approach that the registrar has taken on this issue.

Ms Anne Marie McKiernan

I would describe this as a pre-emptive measure to ensure that the financial stability of the sector is best protected by removing the vulnerability that any members may lose funds over €100,000. It does not make any statement about expectations or probabilities of any credit union getting into resolution difficulties. Clearly, we cannot also see the future in terms of what might evolve with the sector, but it is our job to look to where the vulnerabilities are and to take the pre-emptive actions that best protect the sector. If we are able to take a measure that at the same time does not compromise the business model and the development of the sector, then that seems to us like a reasonable risk response.

I have two questions and I will try to be brief. The registry previously stated that the credit unions would need up to €500 million, which, obviously, frightened members at the time. It turns out that only €20 million was required and has been drawn down. Does the registrar regret using that figure and how was it got so wrong? Does the registrar also believe that the money in ReBo could be used to invest in the sector? With the indulgence of the Chair, I have a final question on the capital requirements that the registrar is requiring of credit unions.

Ms Anne Marie McKiernan

The figure of €500 million is based on a stress-test scenario that was undertaken in 2011. The purpose of the stress test at that stage was to assess what were either central or worse-case scenarios that could occur. There was a stress test carried out in the credit union sector and a stress test carried out in the banking sector. Clearly, stress testing is a regular feature of any regulator's role.

At that time, the stress-test estimates were that there was a possibility of a very severe outcome for the credit union sector and, indeed, for other sectors. That stress-test message allowed us to consider at the Central Bank what pre-emptive actions would be good to offset the worst possible outcome and a number of measures were then undertaken, some of which I referred to in my opening remarks. These included increasing reserve requirements in credit unions and encouraging a better provisioning approach. Many credit unions also undertook appropriately conservative measures to safeguard themselves against worse outcomes, including cutting back on their dividends to reinforce their reserve base.

The fact that amount of €500 million or any other stress-test estimate amount has not been needed is not because the figure was in any way inaccurate. It is because the scenario for which it was developed prompted actions that were taken to stop the worse outcome from being realised. It is a good news story for the sector that combined actions, both by credit unions and by us as regulator, ensured that they are now recovering part of their financial resilience and able to face into dealing with their structural challenges which pre-dated the crisis but which they were not able to deal with at that time because of other, much more urgent, financial challenges.

Can I ask my final question?

Deputy Pearse Doherty is three minutes over time and I still have to call Deputies Creed and O'Donnell.

I got to ask two questions. I had to press the first question a number of times. I only asked who came up with the idea and it took approximately seven minutes to answer the question.

Okay, one minute.

On the Central Bank's 10% of capital-to-total-asset requirement, can the registrar explain where the 10% comes from? What is the rationale for 10%? Why was it not set at a lower, or indeed higher, level? Where is the analysis in this regard? I understand that it has been said previously that the World Council of Credit Unions has been used as a reference point, in case Ms McKiernan wants to mention that, but the council disputes this and states that the asset ratio over 70% requires a 10% risk capital element. The registry has no risk weighted at all. Is it the case that this is another blunt instrument from the registry to impose on credit unions?

Ms Anne Marie McKiernan

Deputy Pearse Doherty is correct in referencing the World Council of Credit Unions, WOCCU, as having given guidance that a 10% regulatory reserve ratio is an international norm or an indicator level that we could use.

The level of 10% was brought in to increase the reserve requirement on credit unions during the crisis period in recognition of the fact that many credit unions were coming under significant pressure and we needed them to work on their resilience to withstand some of the negative impacts of the crisis. Bringing in the higher level was very much related to ensuring that they had the capability to remain financially sound in the future.

At this time, the reserve ratio remains appropriate for the sector that we are dealing with. In the sector there is a very significant excess of available funds - I mentioned the €11 billion in deposits - relative to the amount of lending by the sector of €4 billion. The regulatory reserve ratio is there to ensure that credit unions are well run and have a fundamental base on which to remain strong.

Is it risk weighted at all?

Ms Anne Marie McKiernan

It is not risk weighted.

That is what should happen in terms of regulation in financial institutions. It should be based on risk, not on the number of one's assets. If one looks at other products, mortgage lending has a risk weight of 50%.

Deputy Pearse Doherty can come back in as soon as other members have had a chance.

Ms Anne Marie McKiernan

I can answer that. I refer to what Deputy Barry mentioned earlier about credit unions getting back to their core business of personal finance short-term lending. That remains the vast majority of the lending activity that is undertaken in credit unions. Apart from a few exceptions, that is what they do significantly. It is not a complex business model that would require significant types of risk weighting for the reserves to accommodate different types of practices. However, if the business model of credit unions changes dramatically in the future as a result of initiatives that they drive forward, we will review whether risk weighting becomes appropriate but at present it is a fairly unsophisticated non-complex business model and we believe that the straightforward non-risk-weighted approach is most appropriate, particularly when one takes into account the significant number of smaller entities.

I welcome Ms McKiernan and Ms Byrne and thank them for their presentation.

I get the overall impression from the presentation and from the question and answer session that it is the registry's view that there are too many credit unions. Ms McKiernan acknowledged the role of community. That is really important because if that goes, the credit union movement, and the linked sense of ownership, goes. Ms McKiernan stated that she wants "to acknowledge the important role which credit unions play within communities". She continued: "Our regulatory and supervisory actions are taken to ensure that the sector can survive and thrive into the future, and has the capability to adapt to the changing environment and meet the needs of members in a modern and progressive way." She went on to talk about "underlying structural factors... which often require technology investment that smaller credit unions, in particular, struggle to deliver", and said: "Further strong efforts and indeed strong leadership at the sectoral level are needed now to address the financial weaknesses and especially the structural challenges, to position credit unions for growth and development ahead."

Ms McKiernan also stated: "To get from where we are now to where the sector needs to be will be difficult but we see four main requirements for sector recovery and growth: further restructuring, drive for new younger active borrowers, marked increase in core lending, and business model development in a multi-step, risk-managed way." To me, that is code for fewer credit unions. Would Ms McKiernan care to comment on that?

Ms Anne Marie McKiernan

The need for sector restructuring was a central set of recommendations in the Commission on Credit Unions in 2012 and arising from that, the restructuring board was set up to prompt voluntary and incentivised restructuring. Significant progress has been made on that front. Even this year, we have gone from having 374 active credit unions at the beginning of the year to 339 now.

As for whether there is a number or if I think there is some target in terms of credit union restructuring, we do not have a target number but we certainly see that there are still so many challenges to the viability of credit unions that more restructuring is undoubtedly needed.

Was the basis of restructuring that these were not financially sound post the crash?

However, the evidence in terms of the draw-down of restructuring funds, as alluded to by Deputy Pearse Doherty, does not sustain the argument that these credit unions were badly governed. There are undoubtedly issues that need to be addressed, but the concern expressed by the Deputy is not backed up having regard to the amount accessed from the fund put in place to position the credit union movement to meet the challenges following the economic crash and put it on a good footing for the future. The draw-down of €20 million from a €500 million provision suggests the sector is pretty healthy.

Ms Anne Marie McKiernan

I refer the Deputy to the remarks we and others made about the financial, operational and structural challenges facing the sector. There are some business realities with respect to the pressures they are operating under. I have referred to the long-term viability pressures they face. Their income has continued to decline, while their core lending has contracted enormously. The investment income on which they relied to continue their income steam has weakened significantly. Having regard to its ageing membership base, many of them are struggling to generate the lending business that will keep them viable into the future. Therefore, for many of them, restructuring provides an opportunity to invest in new products or developments that could attract younger active borrowers in the age cohort more likely to borrow for holidays, the building of kitchen extensions and so on.

Is it not the case that credit unions have strayed from the category of core lending, their original raison d'être? Core lending in all financial institutions in the period since 2007 has been on a downward trajectory. People have been repairing their domestic balance sheets and have not been in a position to borrow, rather they have been repaying loans, which is the reason deposits in credit unions have risen. Whether core lending will be driven by car sales or loans to cover the costs holidays, education or house repairs which have been put on the longer finger, what the registrar is doing in using the decrease in core lending as a stick with which to beat the credit union movement is unfair because it has been the hallmark of all financial institutions following the crash. The credit union movement is now positioned to release funds to meet the pent up demand for loans.

Ms Anne Marie McKiernan

On the Deputy's point about restructuring, the mandate of the restructuring board which was due to come to an end at the end of 2015 has been extended into 2016 in recognition of the fact that many credit unions are stating mergers with other stronger credit unions would represent the best outcome for them. It would allow them to provide the different products or services their younger membership base requires to stay viable into the future. The restructuring board has been working very closely with these credit unions to ensure as many of these mergers as possible will be sustainable and that there are good partnerships between stronger and potentially weaker credit unions.

As to why more funds were used in the restructuring process, while funding was available, it came with terms and conditions, it was judged by many credit unions to be expensive for them or they did not want to leave themselves in a position where they would have to draw down funds and then repay them. It has been a process of self-selection by credit unions not to use the available funds, but that does not read that there has not been a need for more restructuring in the sector. My understanding is the restructuring board has seen a large number of credit unions express an interest in continuing with restructuring proposals into next year.

How can the community ethos be protected in the context of restructuring or rationalisation? How can the registrar protect the community ethos in terms of the reach of the credit union movement into the communities that I represent and yet have fewer credit unions? Ms McKiernan referred to there being a current loan arrears figure of 13.5% and, in some instances, up to 30%. Is there a direct correlation between credit union size, governance and the size of arrears?

Ms Anne Marie McKiernan

On the Deputy's first point about the community ethos, clearly, we strongly believe in it and the importance of the credit union sector to both the financial system generally and communities. We very much want to see it protected as we move forward. At the same time it is important to recognise that credit unions are dealing with some very difficult realities, some of which involves giving up local independence in return for staying part of the credit union movement into the future which may involve mergers with neighbouring credit unions. My understanding of the mergers that have taken place is that the vast majority of credit unions work very hard to sustain the community ethos. It often extends to keeping local branch offices open in the communities where credit unions have merged. Undoubtedly, it is a challenge as we move forward in terms of how credit unions can restructure and at the same time retain the same identity within the local community.

On the issue of arrears, we have not seen a very strong correlation between governance and arrears and size. With regard to governance, it has taken a period of time for the improved standards we expect which are set down in the new regulations to become embedded across the sector. Our requirements are proportionate. We only have a small number of required pre-approved control functions, for example, under the fitness and probity regime. Certainly smaller credit unions, in general, struggle with meeting all of the requirements and at the same time deal with their financial, structural and operational challenges.

Ms McKiernan spoke about the requirements of modern day financial systems and the credit union movement being ill-equipped to meet them, but it has been alleged to us that the Central Bank drags its feet, even in facilitating those credit unions that want to move towards the use of new technology, different platforms and so on. Would she care to comment on this?

Ms Anne Marie McKiernan

Yes. I read the comments made at this committee when the debate on credit unions started in November. I highlight that our engagement with credit union representative bodies and credit unions is constant. It is designed to ensure we prompt a focus on developing new products or services and that the way in which such products and services are developed be appropriately risk managed and prudent. Credit unions may see this as taking longer than they would prefer, but certainly it has all been designed to ensure the outcome will be the best possible from a risk-assessed and cost perspective and appropriate to meet the current challenges credit unions face. I could give the Deputy an example of where there was considerable engagement across the sector on the improvement on one particular proposal. Some of the parties involved failed to meaningfully address the concerns raised. We called a particular risk which materialised some months later and a proposal had to be put on hold because of it. We make no apologies for ensuring we are focused on the stability of the sector and our challenge is to make sure this is taken care of as much as possible. I dispute that it is foot-dragging; it is not. It is rooted in carrying out our strategic mandate to protect members' funds.

In her presentation Ms McKiernan stated: "The key indicator of sector growth potential – the loan-to-asset ratio - has fallen to 28% from its 2008 level of 52%." What loan-to-asset ratio does she believe a credit union should have to ensure it is viable in the long term?

Ms Anne Marie McKiernan

There are international norms on which we can draw in that respect. In general, rates of between 40% and 50% would be considered viable in the long term for the sector.

I have dealt with credit unions on a professional level for many years and have great time for them. They kept small businesses operating in instances where the banks would not give them funding. They have cost the State €20 million to date, while the gross cost to it of bailing out the banks to date has been €64 billion.

Anglo Irish Bank will cost us €30 billion, yet we are debating - in the twilight zone - about a group which is trying to survive. I put it to Ms McKiernan that the reason the loan-to-asset ratios of many of the credit unions in the State have fallen by a half is that they cannot lend money due to the restrictions put in place by the regulator. Will Ms McKiernan address a point that has been made to us by many people, namely, that the credit union movement, because of the restrictions being put in place, is driving people to resort to moneylenders? I see where the registry is coming from. It is seeking to create a structure that is viable but the credit union movement is far bigger than that. I put it to Ms McKiernan, as the regulator, that we have to find a means by which we can support the credit union movement. A loan-to-asset ratio of 28% is too low and will force many of the credit unions to amalgamate and others to disappear. I have a problem with that prospect. Will Ms McKiernan address those two issues, namely, that the imposition of the restrictions has, by stealth, driven the ratio down and that the restrictions are sending people to moneylenders.

Ms Anne Marie McKiernan

I thank Deputy O'Donnell for his questions. The lending restrictions were imposed to a greater extent at the height of the crisis but they were calibrated in such a way as to reduce excessive risk-taking. They were not calibrated to impact on credit unions' core short-term financing standards.

What does Ms McKiernan regard as being their core lending in terms of the nature and period of such lending? What does she, as regulator, regard as core?

Ms Anne Marie McKiernan

The area in which they have significantly built their business model to date is around short-term personal and small business finance.

What does Ms McKiernan define as "short-term"?

Ms Anne Marie McKiernan

Generally, sub-five years. However, we allow longer-term lending and mortgage lending for credit unions that can undertake the appropriate risk management for such practices. We, in turn, have prudent rules in place to ensure the special risks that exist around longer-term lending are appropriately managed. Our rules also take account of the fact that the funding model for credit unions is largely on-demand deposits. We need to balance the risks around that with their entry into longer-term lending.

Does Ms McKiernan think it valid to state that the restrictions being put in place will, by stealth, force credit unions to amalgamate?

Ms Anne Marie McKiernan

I would like to come back to the point about the lending restrictions programme and the progress in that regard. As I mentioned, the programme was put in place to limit excessive risk-taking lending. The size of the restrictions was calibrated to allow all the credit unions on which they were imposed to do normal and appropriate credit risk management and lending. We continued to see poor practices across credit unions during our supervisory engagements. These showed that, in many cases, they were not doing the appropriate credit risk management. We bear in mind that it is the funds of one group of members which are being lent to another group of members, that is, borrowing members. We want to ensure that those funds are appropriately safeguarded. We make no apology for putting in place regulatory requirements which are proportionate to the size and complexity of the credit union sector. Again-----

Has it been looked at-----

Ms Anne Marie McKiernan

If I could just finish the point-----

I am limited in terms of time. I understand what is being said but has the registrar examined the possibility of providing back-up services? The credit union movement is based on community. A person is able to go to the local credit union and deal with someone he or she knows. In my experience, most people want to repay their credit union loans. My worry is that credit unions will get bigger and the smaller credit union with its community ethos will disappear. Before we know it, credit unions will get bigger and bigger and end up being banks, which is not what they are supposed to be.

Instead of going to a credit union, carrying out an audit and indicating that its standards are not up to par, has the regulator examined the possibility of having an alternative process? The regulator is dealing with very decent people. Could the registry put back-office facilities in place? This has happened in Canada and other countries. If someone comes in with a proposal, the credit union could avail of back-up facilities provided by the registry through the league or otherwise. It would be assisted in putting in place the necessary due diligence and risk assessment.

We all want to get to the same point. I am concerned, however, that in getting to the point of having very sound credit unions, we will lose too many of them. They will be lost overboard from the credit union movement. I know from first-hand experience dealing with people that we owe a debt of gratitude to the credit union movement. My concern is that they are coming under enormous pressure. I know and accept that the registry has a job to do but what can we do to assist the credit union movement put these measures in place? Many of them would not be able to afford the level of regulation that could be required. At the same time, they are the ones providing the money, which means people do not have to resort to moneylenders and pay exorbitant rates of interest.

What action is the registry taking to help the credit union movement survive and how will this facilitate the implementation of the type of standards it wishes to see put in place? Rather than going in and saying credits unions are not meeting the mark, will the registry not ask them what it can do to help them meet that mark? Will Ms McKiernan address that matter?

Ms Anne Marie McKiernan

I will start by saying that we share the same vision for the credit union sector. We want to see a thriving credit union sector. It provides choice and competition across the financial system and it also serves community interests. We are very much aiming for the same end but we have different responsibilities along the way. What can we do to help the sector? We are already doing a couple of things. We are engaging consistently with the sector bodies around the proposals they are bringing forward to address exactly some of the issues raised by Deputy O'Donnell, namely, how it can provide services to credit unions which, effectively, give them the economies of scale they will not get themselves.

Ms Anne Marie McKiernan

Our role is to look at those proposals and see if they are appropriate for the credit union sector now and in terms of how it might evolve in the future. We work with those bodies to develop those proposals so that they will have a better chance of success and of saving the sector. The second thing we can do is ensure - while all of the latter are moving from being emergent proposals to better developed proposals to, eventually, it is hoped, successful proposals - that we work with credit unions through direct contact and our supervisory engagement so that they focus on ensuring they meet the basic standards that protect their members' funds. They will, therefore, stay relevant, viable and safe while on the way to potentially taking on new business product approaches.

I will conclude on this point. The credit unions will not be able to grow their loan books unless the restrictions are somewhat lifted. How can we get to a point where the registry will feel comfortable enough to lift the restrictions so that they can grow their balance sheets again? They are currently shrinking and if that process continues, they will not survive.

Ms Anne Marie McKiernan

This year we set out on a journey to find out how we could lift restrictions in a safe and sound way. This was our lending restrictions review programme. Having started with 199 restrictions in place, as of today we have lifted 55. We focused resources on ensuring that if they meet the basic requirements, they can get their restrictions lifted and many of them have.

Ms Anne Marie McKiernan

Those that we refused are now in a situation where a focus is being brought on what they need to do, which is what their peers in the sector have already done. If a lending restriction exists in a credit union, it carries a certain amount of information value, which is that the credit union needs to do more to protect its members' funds. If there is no lending restriction, it equally carries information value, which is that the credit union prioritised its efforts in terms of its basic credit practices.

I thank Ms McKiernan.

I am all for very strong regulation of the financial industry but I have serious concerns over the fact that the regulation is not based on risk. We talked about the requirement for 10% capital in proportion to total assets. Do the witnesses accept that this is more than double what international peers have to carry? That is because it is not risk-weighted.

Ms Anne Marie McKiernan

We have a supervisory engagement model which is adapted to take account of risk as well as impact. From the beginning of 2016 all our supervisory engagements will be prioritised on a risk basis. We will look at all the risks that exist across the credit unions, including their risks relating to viability, their practices and their governance, and we will prioritise the frequency and scope of our engagements with those credit unions that exhibit the highest risk. In this way we will fulfil our mandate to protect the sector.

The Deputy mentioned the reserve base and our current ratio. The credit union sector in Ireland is generally of a very different level of complexity, size and model from what one finds in most other jurisdictions. We are often compared with credit unions in the US or Canada but those are, in general, far more complex, far more bank-like in their product base and significantly larger in scale. Comparing their base requirement to ours is not comparing like with like.

The Registrar of Credit Unions is asking credit unions to carry a capital risk weight of 100% for investment in Government bonds when, by international standards, it should be down at 20%.

My next question is on lending to small businesses. Ms McKiernan said that lending to small businesses has to be 50% of the total capital requirement. Given that the capital requirement has no connection whatsoever to the risk asset mix, this will force credit unions to engage in unsecured lending when they reach 50% of capital in order to increase their capital so that they can lend on to small businesses. Mortgage lending, which is secured, must not exceed 10% of the total loan portfolio over a ten-year period so, when they hit 10%, the same situation arises. They cannot lend any more in mortgages so they increase unsecured, riskier lending to increase their overall loan portfolio and thereby increase their secured lending. This does not make sense.

Ms Anne Marie McKiernan

When we carried out all our supervisory engagements across the sector and published our report on standards, we were disappointed to find there were significant weaknesses in the business model, credit risk standards and governance standards across credit unions. One would expect us to be conservative and not to loosen requirements until the basics were met to sufficiently protect members' funds and the stability of the sector. We are going through a period of significant transformation in the sector around restructuring. A large number of credit unions are still engaging with ReBo, acknowledging that a merger is probably in their best interests to provide the best service to their members into the future. That also provides an opportunity for credit unions, as they get more scale and capacity, to tackle their business model weaknesses and we believe that is the point at which we will revisit several of these rules and see in what way the regulatory framework can be adapted to give more flexibility while we still prudently manage the sector to ensure its stability.

That time may have come. Surely not all of the 300 credit unions are going into ReBo. This crisis did not hit us just last month or last year. Surely the registrar knows that certain credit unions are sustainable, on a sound footing and with no questions over systemic risks, but measures are still in place which limit their potential and drive them into riskier lending. When will this review happen? The instruments seem very blunt and designed to hold back the water. The estimate was for a figure of €500 million but if we had come up with a similar miscalculation for the banks we would have estimated their cost at €1.6 trillion. The instruments do not seem to be connected to risk and are simply designed to hold back the dam and there does not seem to be an acknowledgement, other than what Ms McKiernan has just said, that some of this needs to be revisited.

We are coming close to 7 p.m. and I am drawing the meeting to a conclusion.

Ms Anne Marie McKiernan

Mortgage lending is already provided for in our regulatory framework. Only a small number of credit unions choose to use the scope they have in the regulatory framework to undertake that business. They rightly recognise that long-term secured lending is very different from what most of their business is built on, which is short-term personal financing. Mortgage lending is a competitive market with experienced players so we would expect credit unions to consider very carefully whether a major move into that market was best suited to them in the context of their current and future challenges.

What do we think credit unions most need to do at this stage? They need to work with us to meet their regulatory requirements as this best protects them, their members' funds and the stability of the sector. Second, they need more mergers as this will help them to get stronger, financially and operationally, and to gain efficiencies that can be used to develop their business. Third, they need to focus on the product and service development and new delivery channels, not necessarily in an overly ambitious way but in a way that will attract and retain younger borrowers and give them the services they need in the way they expect. If credit unions can get those three things right, there is no reason they cannot recover their strong place in the financial system and be a thriving force into the future.

Can I ask a final question?

It relates to the guidance that has been issued. When was the last time the registrar issued guidance on lending and credit risk management practices? The handbook does not cover these areas. Ms McKiernan has spoken of what the credit unions need to do but I want to ask what the Registrar of Credit Unions needs to do, and what the Central Bank needs to do.

Ms Anne Marie McKiernan

I referred to the report we published in May 2014 on the standards we observed during our on-site engagements. That document also set out our expectations on the standards the sector needed to meet. We issued a prudent lending circular in 2013, which contained more granular information on our expectations and our standards around lending and the limits thereon.

I will make three very brief comments. We have to acknowledge that there has been a significant slimming down of the financial offering, particularly that available to people on low incomes, since the financial crisis. A number of good points have been made about what is expected of the credit union movement, about the uniqueness of the movement and what it has to offer, which is something that, increasingly, our high street banks are not offering. Some banks have even taken measures to remove themselves from public engagement, which the credit union has not done.

In fact, the credit union movement seeks to engage directly with borrowers, which is a significant strength. Deputy O'Donnell asked whether we will reach a point where we will no longer recognise the difference between a credit union and a bank. That is an important point. It is perhaps a matter of policy that this committee needs to revert to with the Minister.

After our previous meeting, we wrote to the Minister to ask him to delay implementing the rest of the legislation until we met the Registrar of Credit Unions. It may now be appropriate to write again to say that we have met the registrar, that concerns remain and that we hope officials from the Department of Finance, the Central Bank and the credit union representative bodies will continue to meet to find an effective solution to the difficulties the committee has identified. Is that agreed? Agreed. The clerk to the committee will send a summary of this discussion to the Minister.

I thank Ms McKiernan and Ms Byrne for appearing before the committee today.

The joint committee adjourned at 7.05 p.m. until 2 p.m. on Tuesday, 26 January 2016.
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