We are now dealing with No. 8, the overview of the credit union sector and review of implementations of recommendations and the Commission on Credit Unions report, the credit union advisory committee report 2016. Mr. Des Carville and Ms Deirdre Aherne of the Department of Finance are very welcome to the meeting. I ask members and those present to please turn off their mobile phones. 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 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 directed that only evidence connected with the subject matter of these 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 any person or an entity by name or in such a way as to make him, her or it identifiable.
Overview of the Credit Union Sector: Discussion
Mr. Des Carville
I thank the committee for inviting the Department to attend this meeting to discuss credit union matters and, in particular, the credit union advisory committee's recent report. I am accompanied today by Ms Deirdre Aherne, assistant principal in the credit union policy section of the Department.
We will first comment on the role of the Department of Finance. As the committee is aware, the Department's role is the provision of high quality information, advice and analysis on credit union policy matters to the Minister and to oversee and implement policy and legislation relevant to the credit union sector. The credit union policy team within my division is well resourced and is headed by Mr. Brian Corr, who, unfortunately, is unavailable to be here today due to work commitments in Brussels. Along with Mr. Corr and Ms Aherne, the team also has a higher executive officer, Mr. Tom Byrne, and an executive officer, Ms Joan Finnerty. In addition, the credit union team can freely draw on the resources and expertise within my division and the wider Department. In order to assist our work we have ongoing communication with credit union representative bodies, the Central Bank and other credit union stakeholders on a wide range of matters, both formally and informally, and we regularly attend at sectoral events. My statement will cover five separate areas that I believe will be of interest to the committee. These are an overview of our recent work in the Department of Finance; the Commission on Credit Unions report; credit union restructuring; the credit union advisory committee's report, recommendations and the implementation group; and challenges and changes in the sector.
The first topic is our recent work. In line with the Government’s position, the Department believes credit unions have a key role to play in providing access to credit and other important services in local communities. The Government has put in place a number of measures to ensure credit unions can continue to provide these services to their members and ensure the stability of the sector into the future. These measures include the establishment of the Commission on Credit Unions in 2011; the publication of the Credit Union and Co-operation with Overseas Regulators Act 2012; the establishment of the Credit Union Restructuring Board, ReBo, in 2013; the availability of €500 million to support the stability of the credit union movement; the introduction of the stabilisation support scheme; the request to the credit union advisory committee, CUAC, to review all recommendations in the commission report; and the establishment of an implementation group to oversee implementation of CUAC’s recommendations.
With regard to the Commission on Credit Unions, on the publication of the programme for Government for 2011 to 2016, the Government agreed to establish a commission on credit unions to review the future of credit unions and to make recommendations on the most effective regulatory structure, taking account of their not-for-profit mandate, their volunteer ethos and community focus, while paying due regard to the need to fully protect members’ savings and financial stability.
The report of the commission includes recommendations on a broad range of measures, including governance, prudential regulations, restructuring and stabilisation. More than 60 of the recommendations were implemented in the Credit Union and Co-operation with Overseas Regulators Act 2012, the first new legislation in 15 years specifically for credit unions.
One core recommendation of the commission was for the establishment of the Credit Union Restructuring Board, ReBo, to facilitate and oversee restructuring of the sector. The commission was clear that restructuring was to be carried out on a voluntary, incentivised and time-bound basis. Accordingly, ReBo was established and during its four-year lifetime it has assisted in 82 completed mergers, involving 156 credit unions with combined assets in excess of €6 billion, at a cost to the Exchequer of approximately €20 million. While not directly attributable to ReBo, at the end of September 2016, there were 48 credit unions with assets greater than €100 million compared to 30 such credit unions in 2011, an increase of 60%. On the other hand, there were 117 credit unions with assets of less than €25 million in 2016 compared to 231 such credit unions in 2011, a 49% decrease. While consolidation of the sector - to 283 active credit unions - has occurred, it is too early to assess whether the benefits of additional scale have been realised.
ReBo is on course to complete the performance of its functions by 31 March 2017. As part of our preparations for its eventual dissolution, I expect to bring a final report under section 43 of the 2012 Act to the Minister, following which the report will be laid before the Houses. I understand the ReBo board will also publish a final non-statutory report of its work during 2017. It is worth drawing to the attention of the committee that the Minister extended the deadline for credit unions to receive a letter of acceptance from ReBo, enabling them to merge with ReBo's assistance, from 31 December 2015 to 31 March 2016.
The Credit Union Advisory Committee, CUAC, is a committee established under section 180 of the Credit Union Act 1997. The current CUAC was established in September 2014 and consists of three members, namely, Professor Donal McKillop, chair and professor of financial services in the school of management at Queen's University Belfast; Ms Denise O'Connell, partner, audit and assurance services, Grant Thornton; and Mr. Joe O'Toole, former Senator, who previously served as general secretary of the Irish National Teachers Organisation and president of the Irish Congress of Trade Unions.
The Credit Union Advisory Committee presented its report - review of implementation of the recommendations in the Commission on Credit Unions - to the Minister on 29 June 2016 with recommendations summarised under the following seven specific headings: tiered regulation; section 35; consultation and engagement with the Central Bank; governance; restructuring; business model development; and additional matters. The report is available on the Department's website.
CUAC also recommended that an implementation group be established for a specified period of time to oversee and monitor implementation of those recommendations. This recommendation has been accepted and I am pleased to report to the joint committee that the implementation group has been established. It consists of representatives from the main credit union stakeholder bodies - the Irish League of Credit Unions, ILCU, Credit Union Development Association, CUDA, Credit Union Members Association, CUMA, and National Supervisors Forum, NSF - the Central Bank and the Credit Union Advisory Committee, and is chaired by the head of the credit union team in my division. The implementation group held its inaugural meeting on 20 February 2017 and met again yesterday, primarily to discuss section 35.
I will now address section 35, which relates to lending limits. CUAC recommended a review of section 35 and the implementation group will consider this matter in more detail. In the year ended 30 September 2016, credit unions advanced €2.2 billion in new lending, primarily unsecured consumer lending, with a total stock of loans at September 2016 of €4.1 billion. We estimate the market share of credit unions in the €12 billion consumer lending market has risen from 29% in 2009 to approximately 35% in 2016. Growing lending in a prudent manner is important to the sector as loan to asset ratios are too low, driven partly by a 50% contraction in consumer lending since 2009, increased competition in certain niches, such as new car finance, and growing deposits. In other words, the denominator has increased and the numerator has decreased. The challenge faced by credit unions is that funds not lent earn very low, if any, income in the current low interest rate environment and their growing deposits increase their asset base which, in turn, requires additional regulatory capital.
Under the 2016 regulations introduced by the Central Bank, credit unions are allowed to lend up to 30% of their loan book over five years and up to 10% of their loan book over ten years, subject to a maximum maturity of 25 years. In addition, credit unions are able to apply for an extension to their longer-term lending limits, namely, up to 40% of their loan book over five years and up to 15% of their loan book over ten years. Approval is subject to conditions set by the Central Bank and I understand there are 11 credit unions currently approved to avail of the increased limits.
It is clear that credit unions can provide mortgages to members and many do so. However, there is a persuasive argument that the lending limits constrain upfront investment and this will form part of the implementation group discussions on section 35. We all know from experience with the banking sector that mortgage lending is an activity that is by no means risk free and it is reasonable to state that proposals to become involved in mortgage lending in a significant way must be scrutinised carefully. We are pleased to note proactive steps are being taken by the representative bodies to assist credit unions in building controls for the processing of mortgage lending, including underwriting and security documentation, both of which are complex areas in which credit unions currently have limited expertise.
While not part of the same process, the wider review of the mortgage market by the Competition and Consumer Protection Commission may raise additional matters which would also need to be considered by the implementation group. I fully expect the implementation group to progress the report's recommendations, including section 35, in the coming months.
On challenges and changes in the sector, we recognise the important role of credit unions as a volunteer co-operative movement and their role in communities and the financial sector more broadly. We appreciate that there is significant diversity in many aspects of the business model for the 283 active credit unions. These credit unions can be large or small, rural or urban, industrial or regional, and can have business models adapted to their particular membership base. We understand the challenges this raises and that flexibility and proportionality are required both in policy and regulation to support this.
In looking back at the 2011 position of credit unions, it is clear the sector overall has managed to come through the financial crisis much stronger than expected and we recognise this. We also appreciate that the sector has undergone fundamental change since 2011, managing many complex and difficult issues including elevated arrears, reduced lending, an ageing membership base, low investment returns, restructuring activity and a more intrusive regulatory environment. Further change is inevitable and we are playing a constructive role, together with the sector, the Credit Union Advisory Committee and the Central Bank in supporting credit unions in continuing to progress and develop. I thank members for their attention.
Mr. Carville described credit unions as diverse and stated their mode of operation presents challenges in that there are 283 different boards and entities. He also referred to the need for flexibility and proportionality in policy and regulation to support the credit union framework. Does this involve having a process of tiered regulation and, if so, when will such a process be in place?
Mr. Des Carville
That is an interesting question which we could discuss for some time.
I ask Mr. Carville to provide brief, concise answers because I have only a short time to question him.
Mr. Des Carville
I understand that. Following on from the commission report, the Central Bank of Ireland consulted on tiered regulation. The outcome of the consultation was that there is a wide range of views and tiered regulation means different things to different stakeholders. There is no consensus view on the issue. We agree with the Central Bank that business model development is not linked to tiered regulation. Officials from the Central Bank will appear before the joint committee later today and questions on this matter could be more pertinently addressed to them. What the Central Bank is trying to do-----
I would prefer the view of the Department of Finance. The credit union representative organisations appeared before the joint committee on Tuesday last. Tiered regulation does not appear to feature in the model being pursued from a policy perspective, that is, by the Department, or by the Central Bank. According to one school of thought, a rural credit union cannot be assessed in the same way as an industrial credit union, to use Mr. Carville's term, or any other type of sectoral credit union. Members need to find out whether there will be movement towards tiered regulation. The question requires a "Yes" or "No" answer.
Mr. Des Carville
To give the Deputy a simple answer, the implementation group will examine the concept of tiered regulation and report in due course.
When will it report?
Mr. Des Carville
It will report in the coming months. The implementation group was established for a one-year period. Its first meeting was in February and it met again yesterday on section 35. It will meet and discuss tiered regulation in due course. The group is taking what can be described as a modular approach. I do not expect it to wait for a full year before producing a report on all matters. It will produce reports as it proceeds.
I am failing to grasp something here. We all offer platitudes on the importance of the credit union sector. How long has the CUAC report been in existence?
Mr. Des Carville
Since July last year.
Time is passing. We need a definitive answer as to when tiered regulation will take place. Mr. Carville says the implementation group is meeting. Can we have an expectation that it will be in the first, second, third or fourth quarter in 2017 or the first quarter in 2018? We need definitive timelines.
Mr. Des Carville
I cannot speak for the implementation group. All I can say is that it will report on tiered regulation in the coming months.
The Department will have oversight of that process.
Mr. Des Carville
The Department is a member of the group. It provides secretariat support to the group and chairs the group, but the group is comprised primarily of the representative bodies and a representative of the Central Bank. We expect the implementation group to report in the coming months.
Ms Deirdre Aherne
Can I intervene on that?
Mr. Des Carville
Ms Aherne sits on the group.
Ms Deirdre Aherne
Perhaps I can clarify. CUAC made seven recommendations and the implementation group is examining implementing them in a logical fashion. Section 35 is one of the first recommendations being examined in detail. We are starting out from there because everything will stem from the results of the analysis and review of section 35. ReBo has been in existence for a number of years and has restructured 152 credit unions and 82 projects. We now have 286 active credit unions. In 2011, 7% of credit unions had assets in excess of €100 million. Now, 18% of credit unions have assets in excess of €100 million. They control 52% of the sector's assets. When restructuring is finished, we will see two tiers coming from the credit unions themselves. The regulator said that because of this they will be expected to take on a more sophisticated business model and that the regulations will be looked at then.
This is what I do not understand. As parliamentarians, we are aware of the restructuring that has taken place because it has happened within our communities. However, there was a clear message on Tuesday that the regulation does not reflect the reality. The witness says that once the ReBo process is completed, the tiered regulation will follow, if I interpret her correctly.
Ms Deirdre Aherne
Business model development will follow and, with that, one would expect some of the bigger credit unions to develop-----
What does business model development mean from the Department's perspective? I ask the witness to give me definitive answers.
Ms Deirdre Aherne
Like tiered regulation, it means different things to different people. Business model development is really innovation.
What does that mean?
Ms Deirdre Aherne
It means doing things differently from how they were done previously.
What does that mean?
Ms Deirdre Aherne
Credit unions believe that business model development is moving into mortgages and housing.
What is the Department of Finance's position on that, given that there is a clear programme for Government commitment around social housing and there has been engagement with the Minister for Housing, Planning, Community and Local Government on including the credit union movement? Why has that not moved on?
Ms Deirdre Aherne
It is primarily a matter for the Minister for Housing, Planning Community and Local Government. We have met the representative bodies, the Central Bank and the Department of Housing, Planning, Community and Local Government regarding the proposals that have been put forward. However, it is really a matter for credit unions and their members to develop a business model.
The credit union representatives told us on Tuesday that they have been going around in circles. I am sure the witnesses have read what they said.
Ms Deirdre Aherne
Yes, but it is ultimately a matter for the regulator to approve any change.
The witness sits on the implementation committee and I am trying to understand the position of the Department of Finance. What is its position regarding the potential of the credit union movement, which is sitting on a myriad of assets? Many of the credit unions have restructured already, so please do not tell us that there is a further process to be undertaken. The bulk of the larger credit unions are sitting on massive reserves and have potential. They say they are going around in circles to Departments and the regulator but nothing is moving on this matter. Why is that the case? Is it the case that the Department and the Central Bank are taking a view that they do not want the credit union movement to move into these spaces? I hear words such as "innovation". I was formerly a Minister of State with responsibility for innovation. What does it mean? What does business model development mean? Many credit unions have moved into smart payments and so forth. They are trying to innovate in the products and services they are providing, but it appears that they are constrained in doing that. I cannot understand why and I am not getting answers here either.
Mr. Des Carville
I am not aware of any constraints coming from the Department of Finance. We are very open and we engage with all the stakeholders regularly. To return to tiered regulation, we have no fundamental difficulty with tiered regulation. The Central Bank, which is the regulator and is responsible for regulation, is open to tiered regulation and has stated as much on a number of occasions. The Deputy's question moved on to social housing. We have seen proposals from the two representative bodies, the Irish League of Credit Unions, ILCU, and the Credit Union Development Association, CUDA, and have had several meetings with those representative bodies and with the Central Bank. We are supportive. We have had plenty of correspondence with the ILCU, in particular, on the topic. However, these are commercial arrangements between credit unions, not the representative bodies, and approved housing bodies. It is up to the credit unions and the approved housing bodies. It is hard to see where we fit into a commercial arrangement between such entities.
The witness is telling me that I have to ask these questions of the Central Bank.
Mr. Des Carville
The Deputy's question about tiered regulation is more properly addressed to the Central Bank as the regulator.
What is the current state of the €250 million restructuring fund and the €250 million resolution fund?
Mr. Des Carville
The stabilisation fund holds €6.4 million. It is sector funded and there have not been any drawdowns. It is up for review in 2017 so we will do that this year. The credit institutions resolution fund, CIRF, is managed by the Central Bank and holds €250 million. It was established in 2011 and levies from the credit union sector amounted to €29 million. It has paid out approximately €30 million in respect of three resolutions, Newbridge credit union, Howth-Sutton credit union and Killorglin credit union. In addition, there is a ReBo fund of €250 million from which we have drawn down approximately €20 million to support ReBo's work.
On Tuesday, the league of credit unions raised the over-collection of levies. How does the witness respond to its assertion that there is an over-collection of levies?
Mr. Des Carville
I am familiar with the comment made on Tuesday. To be honest, it was the first time it was drawn to my attention. It was unclear from the recording which fund it was referring to. Perhaps the representative body concerned might raise it with us directly. I am unsure to which fund it was referring.
If any party refuses to implement any element of the commission report, will the Department report that refusal to this committee and to the Minister?
Mr. Des Carville
What party does the Deputy mean? The implementation group-----
I mean any party that is a party to that, including the Central Bank.
Mr. Des Carville
It is a hypothetical question. I hope the implementation group reaches a consensus view and reports accordingly. If there are divergences in views, that is hypothetical at this point. I cannot predict or answer.
Does the witness agree with the assertion that CUAC has identified elements of the commission report that are outstanding? If he agrees with that assertion and if those elements of the commission report that are outstanding have not been implemented, what happens?
Mr. Des Carville
The job of the implementation group is to implement-----
Mr. Carville is part of the implementation team.
Mr. Des Carville
The Department is part of it.
What will the Department do if parts of the CUAC report are not implemented?
Mr. Des Carville
There are parts-----
That is not a hypothetical question.
Mr. Des Carville
Correct. The implementation group has been established because parts of the CUAC report have not been implemented. The group's job is to implement and it is currently examining areas such as tiered regulation, section 35, consultation and engagement with the Central Bank, governance and business model development.
This committee is in something of a vacuum. We want to hear what the stakeholders have to say and we want to ensure that there is a vibrant credit union movement into the future. I am not convinced that a sunset is being put on actions or key deliverables within definitive and clearly defined timelines. It seems from what Mr. Carville is saying that the Department is not a million miles away from understanding the needs of the credit union movement and realising the potential of the movement. However, there is still a logjam. This is why we are trying to go hard on the questioning here. I suggest that tiered regulation is the nut that needs to be cracked.
The impression I get from the engagement of the Department and the Central Bank with the credit union movement is that one of them, or both, does not want to be dealing with 283 entities. I think there is a certain attitude that regards the credit unions as somehow amateurish because they are voluntary and non-paid. All credit unions have gone through the rigours in recent months. Some of them have spent hundreds of thousands of euro from members' money on consultancy fees to meet the needs and requirements of the Central Bank and the Department of Finance. They are not seeing light at the end of the tunnel. They need to see that happening. That is why I am asking about clearly defined timelines for the full implementation of the CUAC recommendations. We are depending on the Department of Finance as a stakeholder in that process. If we do not see progress in this respect within clearly defined timelines, that will not bode well for our confidence in the Department of Finance or the Central Bank. I hope that makes sense.
Mr. Des Carville
With respect, I have to disagree with the first part of the Deputy's statement. Ms Aherne and I are members of credit unions. We have the utmost respect for the movement and the voluntary ethos of the credit union sector.
Okay.
Mr. Des Carville
We recognise its unique characteristics. Credit unions differ from banks and other financial institutions. I need to make it clear that the Minister and the Department are very supportive of the sector.
The Deputy also asked about tiered regulation. As I said previously, I cannot speak for the Central Bank. I acknowledge the statement made by the Central Bank as the regulator to the effect that it is open to reviewing tiered regulation. The Department's position is ad idem with that. The implementation group is examining tiered regulation. It has been established for a one-year period, but that can be extended if needs be. As I mentioned earlier, we expect the implementation group to report on a modular basis. As Ms Aherne has explained, the first topic the group is looking at is the section 35 lending restrictions. The group will then quickly move on to examine the issue of tiered regulation. I expect it to report on that issue in the coming months. We are moving as quickly as we can. This is a complex area. Those who are regulated would always like the regulations to be changed more quickly than the regulator typically wants to move. That is a fact in all regulated industries. We are moving as fast as we can in this regard.
Ms Deirdre Aherne
The implementation group consists of members of each of the representative bodies. This means the bodies have a way of pushing things forward within the group. As we have said, section 35 is the first area to be analysed. CUAC is developing policy papers on the common bond, the interest rate and additional ways of voting.
Do the witnesses understand the frustration of the credit unions about the lack of progress?
Mr. Des Carville
Progress is being made.
Ms Deirdre Aherne
There has been-----
Mr. Des Carville
CUAC meets every month. It produced an admirable report last summer. It is continuing to work on its recommendations. It is not the case that CUAC produced a report last July and then disappeared. It had a day-long meeting in September, for example. It had meetings in October and November and so on. The implementation group has been established. I understand from Ms Aherne and other parties that the chair of the implementation group had a very productive and constructive meeting yesterday, following on from a similar meeting in February. Action is being taken. We would all like things to move more quickly, but rather than rushing unnecessarily it is important for us to make appropriate decisions on these complex topics so that we get this right.
I thank Mr. Carville.
I welcome the officials from the Department of Finance. I would like to follow up on Deputy Sherlock's questions. Did alarm bells not start ringing in the Department when it emerged that some credit unions were not taking deposits from people? One cannot get a loan from a credit union unless one has savings in the credit union. Many credit unions are not taking the savings of young people who want to save so they can get loans. Did alarm bells start ringing in the Department when certain credit unions said they were not taking any more deposits?
Mr. Des Carville
It is a matter for individual credit unions on an individual basis to decide what their appetite is for lending and for deposit-taking.
Can Mr. Carville see the problem that exists?
Mr. Des Carville
I can see it is a problem that the asset-to-loan ratio in the credit union sector is too low.
Of course. Does Mr. Carville not think there is a problem here? Does he think there is anything the Department can do to alleviate the problem so that young people can start saving to borrow money?
Mr. Des Carville
I am not sure what the Senator is asking us to do.
It is a problem if a credit union decides not to take savings from people because it cannot afford to do so on foot of the ratio. It may be a problem that has been created by the Central Bank, but it is a problem nonetheless. The Department of Finance is central to all of this as well.
Mr. Des Carville
I have no factual hard data concerning how many credit unions we are talking about. I do not know whether the number of credit unions refusing to take deposits is one, five or ten. I do not know whether there are monthly restrictions when deposits are deemed to be too high. I am sorry, but I cannot comment in the absence of data.
Mr. Carville will have heard that the credit union movement has quite a large amount of money - up to €10 billion - on deposit that it is willing to use for housing and other forms of infrastructure in this country. It has no home for that money. The only thing it can do with it at the moment is put it into the banks, where it probably gets no return on it because of low interest rates. This is creating problems for it. What is the Department's view on that?
Mr. Des Carville
The Senator is focusing on the investment restrictions that credit unions have. In other words, the deposits that credit unions hold on behalf of their members are liabilities to those members. The corresponding accounting entry is that they can invest those deposits in assets. There are restrictions in legislation on where credit unions can invest those assets. Consideration is being given to providing for flexibility around those restrictions.
That is being considered, but there are no proposals to do anything in this regard.
Mr. Des Carville
It is a matter for the regulator. The rules are set by the regulator and not by the Department of Finance.
I am sure the departmental officials tuned in when representatives of the credit unions were at this forum last week. It was evident that the credit unions are crying out for help. They need something to be done. They are trying to operate with their hands tied behind their backs. It seems, from what Mr. Carville is saying, that most of the problems being experienced by the credit unions have been created because the Central Bank has too much power.
Mr. Des Carville
I do not think I am saying that.
With due respect to the Senator, we recognise the challenges facing the sector. The challenges are well known and cover everything from the demographic profile of members to consumer borrowing generally. Borrowing, right across the board for credit unions and for all financial institutions has fallen since the financial crisis. This is just a fact. The interest rate environment being lower for longer is a problem in respect of returns for credit unions when they invest their surplus funds. There are a range of issues with which we are very familiar but there is only so much the Department of Finance can do to alleviate those issues.
The commission previously moved the rules around savings, lending and investments from legislation that was controlled by the Oireachtas into regulation that is controlled by the Central Bank. It was much easier to make changes when it was controlled by the Houses of the Oireachtas and one could bring in a change here or there. Most of the power now lies with the regulator. Would the Department have any plans to bring that power back into the Oireachtas, which would make it easier to make changes in legislation for credit unions rather than having all this power vested in the Central Bank? This appears to be a problem.
Ms Deirdre Aherne
I will take that question. As for the commission on credit unions, the regulation-making powers given to the Central Bank provide flexibility to allow the registrar in the Central Bank in the future to review and update regulations as appropriate and this can be done on a timely basis. I believe the regulator has indicated that the Central Bank will look at the investment side of things in 2017. It is appropriate that the regulator has those powers because he or she is the one who sees what is happening on the ground. We are a little detached from what happens within credit unions because the regulator has probability risk and impact system, PRISM, visits where it visits credit unions individually whereas we do not.
Does the Department of Finance speak to the Central Bank on those issues?
Mr. Des Carville
Yes, we speak to the Central Bank on a whole range of issues, as one would expect, including having conversations around the investment restrictions. I note the Central Bank has stated it intends to consult with the sector on the investment restrictions. The Department welcomes that. It is the role of the Central Bank to establish and police, and perhaps to change, such investment restrictions, presumably based on changing market dynamics for investments.
Would the Department speak to them on changing or easing up on the rules with regard to sorting out the problems the credit unions are having and which have been brought to the Department's attention or raised in the Oireachtas?
Mr. Des Carville
We take on board - from a myriad of sources - the issues facing credit unions and we talk with the appropriate parties. We make our views known to the Central Bank, as one such party and clearly, as the regulator, a very important stakeholder. I assure the Senator that we have those conversations on a regular basis with the Central Bank. It is a two-way dialogue to be fair.
My final question is about the credit institutions resolution fund set up some time ago. It was supposed to be around €100 million and credit institutions were to contribute some €25 million per annum, of which the credit union part was approximately €7 million. It was to be for a four-year period but it has now gone in to a five-year period. Can the Department tell the committee when this is to finish or if it is to continue? What is the position on this?
Ms Deirdre Aherne
The credit institutions resolution fund was set up for credit institutions that are being resolved by the Central Bank. The fund included levies from all the credit institutions but it now contains levies from credit unions only. It will continue for the time being until it is reviewed.
It is going to continue every year?
Ms Deirdre Aherne
There has not been a decision. The Minister will make a decision on that.
It was envisioned for a four-year period, but credit unions must continue to pay. The credit unions pay €7 million every year, when is it going to finish?
Ms Deirdre Aherne
It was envisioned that it would keep going until there was €100 million in the fund.
Is everybody not paying? The credit unions' portion was for some €7 million. They have paid their portion. Does this mean that if €100 million is not in the fund there are some institutions not paying or contributing to it?
Ms Deirdre Aherne
That will have to be looked at, at some stage, but we have paid out from that resolution fund for credit unions on a number of occasions so we need to make sure there is money in it in case we need it again.
Yes, but the fund was to be €100 million over four years. If the credit unions have completed their portion of the fund, is the Department telling the committee that some institutions have not paid? Is that what Ms Aherne saying?
Ms Deirdre Aherne
No. I am saying that because of the banking union, some other credit institutions are paying into a different fund now. The credit unions are just paying into the resolution fund at the moment.
So has another fund been set up?
Ms Deirdre Aherne
No we have not set it up, the other fund is because of a European Union directive.
Are the credit unions the only institutions paying into the resolution fund?
Ms Deirdre Aherne
At the moment yes.
Credit unions are the only ones paying in?
Ms Deirdre Aherne
Now.
So will they have to keep paying into the fund until the €100 million is reached?
Ms Deirdre Aherne
Or until a decision is made otherwise.
How many institutions were paying into this resolution fund before the European Union Commission made the change?
Ms Deirdre Aherne
I do not have that figure to hand but I can find out and revert to the committee with it.
Ms Aherne might come back to us on that. She did not say how many institutions were paying into it initially.
Ms Deirdre Aherne
No, I do not have that figure.
Where is the new fund into which the other institutions are now paying?
Ms Deirdre Aherne
It is an EU fund.
They are paying into the EU fund-----
Ms Deirdre Aherne
It is part of the Single Supervisory Mechanism as far as we understand-----
So are the credit unions paying into that fund also?
Ms Deirdre Aherne
No, they are not part of that.
They are the only institutions paying into the resolution fund?
Ms Deirdre Aherne
Yes, at the moment.
If things were to go wrong again with the credit unions could they be paid from the EU fund?
Ms Deirdre Aherne
No. They would be paid from the resolution fund because that is the one they pay into.
They will keep paying until they have €100 million there, as well as all their other moneys in the banks. Basically, this €100 million will just belong to the credit unions.
Ms Deirdre Aherne
That was the initial perception; that there would be €100 million in that fund.
I thank the witness.
Perhaps Ms Aherne could clarify some matters from the Department's opening statement. It was said that "the Department's role is the provision of high quality information, advice and analysis on credit union policy matters to the Minister and to oversee and implement policy and legislation relevant to the credit union sector." In the context of the existing legislation can the witness tell me if that role is adequate or is it too much? Is any new legislation is required? Does she envisage any legislation coming forward? Can she comment on the extent of the legislation that empowers the regulator and the empowerment of the regulator?
Ms Deirdre Aherne
To start with, the commission on credit unions produced a lengthy report and more than 60 of the recommendations within the report are in the Credit Union and Co-operation with Overseas Regulators Act 2012.
The report was agreed by all of the commission, which included representative bodies. One of the recommendations of the commission was to provide the regulator with more power than he or she already had. This was to provide flexibility in the regulations to enable the regulator review the regulations and ensure they are appropriate. That is one of the things the regulator is doing about the investments. She realised credit unions are having problems and she will consult with the sector.
Ms Aherne is saying existing legislation is alright because it was agreed.
Ms Deirdre Aherne
Existing legislation was implemented over several years to allow credit unions the time to implement each part in a cohesive way. The last part of that was commenced on 1 January 2016. There are some relatively new parts.
Is there any legislation Ms Aherne feels needs to be brought forward to deal with any issues that have arisen in the credit unions?
Ms Deirdre Aherne
At the moment we do not have legislation to deal with any of the issues.
Ms Aherne mentioned the word "flexible" in connection with the powers Government gave the regulator to regulate credit unions. Does she believe in the context of the issues being raised now by the credit unions that the regulation is flexible enough for the regulator to be able to address the different issues?
Ms Deirdre Aherne
The regulations were put in place on 21 January 2016, a little over a year ago. CUAC's report focuses on certain regulations, including section 35 and that will push forward change where appropriate for credit unions to try to deal with some of the problems the sector is experiencing. While CUAC made a fairly detailed analysis of the financial side, bringing in all the stakeholders from the Central Bank, individual credit unions, the representative bodies and the credit union restructuring board, ReBo and formed his opinions and recommendations on the matters discussed.
I am trying to determine the powers of the regulator to introduce regulation. That is not necessarily out of new legislation. The regulator regulates as he or she sees fit. That does not need legislation or change. Is that right?
Ms Deirdre Aherne
In certain areas yes, the regulator has been given the flexibility to make regulations and to change as appropriate.
Is the tiered regulation we spoke about a matter for the regulator entirely?
Ms Deirdre Aherne
Regulation is always a matter for the regulator.
Is the tiered regulation we spoke about earlier a matter entirely for the regulator?
Ms Deirdre Aherne
It would be a matter for the regulator to change regulations on a tiered basis if that is what-----
That is what the regulator wanted to do.
Ms Deirdre Aherne
Not if the regulator wanted to do it. This is one of the recommendations of the CUAC report and is one of the issues that will be discussed at and implemented by the implementation group.
The way things stand at present is the regulator empowered to bring in a tiered regulation?
Ms Deirdre Aherne
Yes.
The regulator can do that, regardless.
Ms Deirdre Aherne
Yes.
Mr. Des Carville
I know the regulator is coming in here after us but the regulator is open to examining tiered regulation and talks about proportionality.
That is what I wanted to know.
Mr. Carville made apologies for Mr. Corr. What is on in Brussels?
Mr. Des Carville
Today Mr. Corr is at a financial services committee, FSC, sub-group meeting on non-performing loans. It is a monthly meeting he attends on behalf of the Department.
I would have thought it would be important for him to be here.
I support what the Chairman says about Mr. Corr. In Mr. Carville's presentation he stated that the credit union policy within his division is well resourced and is headed by Brian Corr. If the head of the credit union policy team cannot be here today in this Parliament and feels that Brussels is of greater importance that is a bad day for our interactions with the Department
Mr. Des Carville
I take on board what the Deputy says but I am head of the division and am responsible for what Brian does. Ms Aherne works within a credit union team at assistant principal officer level.
I share Deputy Sherlock's view of that matter.
The following is part of Mr. Carville's opening statement: "CUAC also recommended that an implementation group be established for a specified period of time to oversee and monitor implementation of those recommendations". Is he happy with the implementation of the recommendations?
Mr. Des Carville
Does the Chairman mean the implementation group?
Yes.
Mr. Des Carville
We are very happy with the implementation group, in so far as we have taken on board the recommendation to establish the implementation group. That has been established. We welcome the fact that all key stakeholders are represented on it. It is incumbent on the group in aggregate to drive forward implementation of the recommendations from the CUAC report. As I mentioned earlier the second meeting was held yesterday and I understand it was conducted in a very constructive manner, just like the first meeting. Yes is the short answer. We are happy.
With no disrespect to Mr. Carville or the Department, his opening statement this morning does not address the issues we were dealing with yesterday. It mentions overview, reports, implementation groups. If I was running a business the witnesses would be the last people I would want to deal with because the credit unions have a view that they have a contribution above and beyond what they do now to make to their community and to what they see as the developing economy and therefore to people's lives.
Reading through the report of yesterday's meeting and the four submissions the anger and frustration jumps out from the pages. The credit unions do not know who to look to for support and help. That is how I would characterise what happened here yesterday. Mr. Carville's contribution this morning does not address any of those issues in a way that would give comfort to the credit unions that the Department understands them and what they are trying to achieve and the need for speed in respect of that. Yesterday, they spoke to us about tiered regulation. They are concerned about it. They say it was a key deliverable of the commission report and they are waiting for it. They said that consultation and engagement have been less consistent and transparent than was originally envisaged. Consultation was expected to be meaningful with clear impact analysis forming the basis of significant changes but where consultation has been triggered, sectoral views have often been ignored as was the case with CP88. They add that a one size fits all approach, a regulatory directive, can have significant adverse impacts, short and long term on a credit union. These are just some of the comments being made. In the main Mr. Carville will see that they express frustration. If they are frustrated their members must be deeply frustrated by not being able to access, borrow or deposit money, talk to the credit union about the needs of their communities, mortgages or whatever else.
On Tuesday, Mr. Brian McCrory, president of the Irish League of Credit Unions, ILCU, appealed for help.
He appeared before this committee and appealed to members to help the ILCU because nobody is listening to them. He said they are going around in circles. He told us they have €11.5 billion in the banks which he wants to put to good use. Housing was the example given. The ILCU has spoken to the Minister for Housing, Planning, Community and Local Government, who is keenly interested in its proposal. It was suggested the Minister asked the ILCU to help and asked for its proposal. The Department of Housing, Planning, Community and Local Government is in discussion with the Department of Finance but nothing has been resolved. Mr. McCrory was asked what has been achieved. He answered "nil". In this meeting, I have not got answers that would address any of the concerns or issues that the credit unions have. I ask Mr. Carville to respond.
Mr. Des Carville
My opening statement was submitted to the committee on Tuesday morning, in advance of the representative bodies' appearance at 4 p.m. on Tuesday. That is why I was not responding to points they made.
Is Mr. Carville saying he did not have time?
Mr. Des Carville
I am not. The invitation to appear before this committee asked me to submit an opening statement. I submitted it within the required timeline, in advance of-----
It could have been changed.
Mr. Des Carville
I did not realise I could change-----
Mr. Carville could change it. He could use the opportunity to answer the questions. That would be a help. He could then expand on the questions asked and give the committee the information which he knows concerns the credit unions. The regulator will be appearing before this committee next. I will not be getting on the merry-go-round with either the Department of Finance or the regulator which the credit unions have been on. That is how they described it. They said it is another tour on the roundabout. I am trying to break that process and get some information from the Department on its strategy without going back through all of the issues that brought us to this.
Mr. Des Carville
If I may comment on social housing, that was one of the tangible areas identified on Tuesday afternoon. We have had interaction in 2016 with both the Credit Union Development Association, CUDA, and the ILCU about social housing. I have written to the chief executive of the ILCU about its two proposals. From the Department's perspective, one of those proposals would not have worked. We explained why not in several meetings and I put it in writing. We are encouraging a separate proposal, which is for individual credit unions to invest directly with approved housing bodies. As I mentioned earlier, that is a commercial arrangement between two bodies. We are not part of that equation. We could be part of the equation in regard to investment restrictions. These are governed by the Central Bank, not the Department of Finance. The Central Bank intends to consult with the sector in regard to investment restrictions. We expect progress to be made on that issue over the next year.
Does Mr. Carville not agree that, in the context of housing in particular, as he oversees, gets reports, attends meetings and reports back, the train is beginning to leave the station, poorly equipped to deliver on the housing construction that is necessary? In spite of that, the credit unions, who continue to appeal to be allowed into the market, are not being allowed in because some report is being prepared. That is the issue here. I have no doubt that conversations are taking place. I doubt whether any action will ever arise as a consequence. Is that not a damning statement regarding the issue of housing?
Mr. Des Carville
That is a view. I hold a contrary view, which is that progress is being made and will be made.
Has any house been built arising from the proposals of the credit unions?
Mr. Des Carville
I do not know.
The witness does know.
Mr. Des Carville
I do not. I am sorry.
If Mr. Carville does not know, perhaps the head of credit union policy in the Department, Mr. Corr, should be here. The answer to the question is "No" and Mr. Carville knows that is the answer. The credit unions have not been able to do a deal to get into the housing market. They are being frustrated at every turn. That is what I see from this. I am quoting what Mr McCrory said but the Department does not appear to have any answers.
Mr. Des Carville
As it is a matter between credit unions themselves and approved housing bodies, I do not know.
The credit unions have stated the housing body is having conversations with the Department of Finance in regard to the credit unions participating in solving a major crisis that the country faces. What conversations have been had? How many meetings have been had? Where is the obstacle which is preventing this from being delivered?
Mr. Des Carville
The obstacle would appear to be in the area of permitted investments. As mentioned, the Central Bank is responsible for------
The regulator is responsible.
Mr. Des Carville
The regulator is responsible for regulating permitted investments. I am not here to speak on behalf of the Central Bank. However, I know it intends to consult with the sector in the coming weeks on this topic.
So the regulator is responsible, not the Department of Finance. That is all I want to know.
Mr. Des Carville
Yes.
I am getting there. Thus far, on all the questions Mr. Carville has answered, the regulator is responsible. In terms of the credit unions being able to participate in house construction and mortgages and so on, the regulator is responsible.
Mr. Des Carville
That is my understanding, yes.
That is fine.
Mr. Des Carville
I do not believe the Department of Finance is an impediment in that regard.
In the ILCU's opening statement, it was claimed "We receive political encouragement from [an] Oireachtas that [has] handed ... nearly all effective responsibility to the Central Bank." Is that true? Has all effective responsibility been handed to the Central Bank and the regulator?
Mr. Des Carville
In terms of regulating the sector, yes.
Who controls the merry-go-round in terms of regulation? Is there anything the Department can do in terms of suggesting legislation to the Minister that would change the approach to credit unions and give them a more flexible hand in dealing in a measured way with their community and in better engaging the €11.5 billion they have in the banks? Does Mr. Carville think the €11.5 billion is being locked in the banks deliberately, preventing the credit unions from using it, in order to protect the banks?
Mr. Des Carville
No. It is a commercial decision for individual credit unions to decide where they want to put their funds.
But they cannot put them anywhere because the witness controls where they put them.
Mr. Des Carville
I do not control where they put them.
The regulator does.
Mr. Des Carville
The regulator controls that, yes.
Mr. Carville is aware of the interaction between the committee and the various bodies that were in attendance on Tuesday. There was a palpable sense of frustration and anger in terms of them being on the merry-go-round, as they call it, where the Department of Finance says it is the regulator and the regulator says it is the Department of Finance while someone else says it is the Department of Housing, Planning, Community and Local Government or the Minister or whoever. Is there an expectations gap? I know Mr. Carville cannot speak for the regulator.
Are the credit unions discussing certain matters that in the opinion of Mr. Carville, the Department or the Minister are not as achievable as the credit unions believe they are? Are they barking up the wrong tree as far as the Department is concerned? They seem to believe they can do all these things, no one has told them they cannot do so but every time they try to do them they are being frustrated by responses to the effect that this is not a matter for us or for them but rather it is a matter for somebody else. Should they be told that they should not be engaged in this or that activity rather than being sent from committee to committee or having a sense that they are going from sector to sector? Should they be told that we do not want them investing their €11 billion on deposit in housing or in mortgages because it is believed such investments are too risky?
Mr. Des Carville
I do not believe the Department is an impediment to anything that the credit union sector wants to do. It is up to that sector and individual credit unions to decide how they want to deploy the surplus capital they have and where they want to invest their surplus assets. Certainly, it would not be our place to say "No" to them on that or to recommend they do not invest in housing or in mortgages. That is not the role of the Department of Finance. The implementation group will look at tiered regulation and the section 35 issues around lending. The Central Bank is positively disposed to that, based on public comments the regulator has made in regard to section 35 and tiered regulation. I believe progress can be made in the not too distant future. As I mentioned, we are supportive of credit unions. Both Ms Deirdre Aherne and I are proud members of different credit unions. To the extent that we can help, we are ready, willing and able to engage and assist.
Ms Deirdre Aherne
Social housing and small and medium enterprise lending are two of the areas that credit unions have flagged they want to get into. Such lending would be a new departure for them. It is not something they can jump into. The way they would do that must be properly devised. There are many restrictions in place, including the common bond from the lending point of view and the restrictions on investments. We are doing work on that to try to free it up and make the process easier. Also, the Central Bank is considering a particular plan in regard to social housing. Its representatives will speak more about that when they appear before the committee.
Are the existing restrictions on investment appropriate or could they be adjusted in terms of other relatively risk-free types of investment? The credit unions seem to be frustrated. It has almost got to the stage where they do not want to take in deposits because they are putting them in banks where they are getting a negative interest rate. They are being charged by the banks to mind their money and equally they have solvency and other ratios in terms of reserves with which they have to comply. People want to put their money in credit unions because they appear to members of the public to have a much less tarnished reputation following the past ten years than other parts of the financial services sector. People are comfortable putting their money on deposit in the credit unions and in the post office, albeit not getting a great return, but they would not be getting a great return on their savings in a deposit account in the pillar banks or probably anywhere else. It has got to a stage where credit unions are more or less putting a restriction on the taking in of deposits, be it a total amount of money on deposit or a particular amount per month. It is a perverse and unusual relationship for a deposit taker to no longer want a customer's money. Would Mr. Carville recommend changing legislation to allow the credit unions to invest in other areas, albeit not in very risky investment but in slightly less risk-free investments than they have made up to now? As the Chairman and other members said, their hands are tied. They want to take money in and to invest it but they are not allowed to invest it in social housing. Where are they to go next?
Mr. Des Carville
I would not disagree with anything the Senator has said. In particular, I would highlight the standing of the credit union movement in terms of customer loyalty towards the sector. I would endorse that. In terms of investment criteria, the world today is a different place from what it was a number of years ago. We are in this environment of lower interest rates for the longer term. I welcome the fact that the Central Bank will engage in public consultation in the coming weeks on investment restrictions. No doubt the Department will make its views known to the Central Bank in due course, perhaps the implementation group might do likewise, and, dare I suggest, the committee might also make its views on that known in due course. It is appropriate that the investment restrictions be looked at over the coming months.
While it is appropriate that they be looked at, does Mr. Carville envisage the Department either having or not having enormous concerns about the idea that those investment criteria would be adjusted and broadened out? There are very few places that credit unions can invest their funds. They are in an unusual position of having €11 billion on deposit and wanting to make investments with it for the good of their members and for society generally but they are restricted from doing so. Will the Department be positively disposed towards allowing that money be harnessed in a positive way?
Mr. Des Carville
In a risk-appropriate way in terms of the protection of members' savings and financial stability of the credit union sector but if there is an opportunity to relax regulations on investment in approved housing bodies, for example, subject to the devil being in the detail, I believe the Department would be very supportive of that and we will make our views known in that respect.
I was happy to be in the Chair when I was questioning the representatives of some of the bodies that appeared before the committee on Tuesday. They were agitated about the cost of the new regulatory environment under which they believe they are operating vis-à-vis a previous environment. I tried to tease out with them if they consider it to constitute excessive regulation. I did not get an answer from them that it was excessive but they said it was very costly and burdensome. Does the Department take the view that this level of regulation is appropriate, albeit costly, or is it excessive? We talked about tiered regulation and that it might come in at some point in time and, obviously, ReBo, the Credit Union Restructuring Board, has engaged in considerable consultation on this but there will not be much consultation on it as that board is being wound down by the end of this month. Can anything be done particularly for the smaller credit unions to make the regulation less costly for them to do what they have to do, as opposed to not doing what they are required to do? Some credit unions have breached the regulations. We asked the representatives of the Irish League of Credit Unions about that on Tuesday and they said they do not condone any breach of the regulations. Mr. Carville might outline some examples of where there were breaches of regulations and where the Department would take a view that there is a problem. Obviously, it is a matter for the regulator as well but nobody wants a credit union to go wallop and leave its members exposed.
Mr. Des Carville
I will start by addressing the move back to the €60,000 deposit figure, we had light touch regulation in the period prior to the financial crisis, we had a very costly financial crisis although obviously it was not anywhere near the same extent in the credit union sector vis-à-vis the banking sector. Regulation has increased across the board, right across world in European and in Ireland. In the case of a smaller credit union, if it has the right calibre of board members from a fitness and probity perspective and if there is a cost in that, that is just a fact of life. As credit unions are taking in members' savings, an element of that is to be expected and perhaps welcomed. What the Senator is probably getting at is tiered regulation or proportionate regulation. I feel a little like the entrée before the main course, but that is a matter for the Central Bank rather than the Department of Finance.
Somebody is sharpening their steak knife as we speak.
Mr. Des Carville
I take the Senator's point. As I mentioned, the implementation group will look at tiered regulation. The regulator in various speeches has talked quite a lot about proportionate regulation. I believe there is the ability to perhaps find common ground between the two concepts that balances the need for appropriate regulation but also protects members' savings on the other side.
I am glad the Senator mentioned ReBo and the work it has done, particularly on merging smaller credit unions that could then benefit from economies of scale and shared services, thereby reducing the monetary cost of regulation on an asset percentage basis.
What about the breaches of regulations that have occurred?
Mr. Des Carville
There have been a number of publicised cases over the past couple of years. They are deeply regrettable and unfortunate but there are currently 283 or 284 credit unions in existence. Based on the law of averages, it looks as if there will be one or two cases from time to time. Obviously, we do not condone those cases, but that is a matter for the regulator. We do not have any particular insight or knowledge of the specific cases over and above what we read in the media reports.
I have a couple of further points. One of the points made by the bodies on Tuesday was that there is a deficit of meaningful engagement with both the Central Bank, with which we can deal in the next segment, and the Department. The Credit Union Advisory Committee's report highlighted that the sectors concerned need to be taken on board and that serious engagement needs to take place. What engagement has the Department with the bodies? Prior to the current engagement of the implementation group, was there much engagement? The credit unions are making the point, which I am just passing on, that they just do not have the engagement. We asked them on Tuesday for points to be put to the Department. Is the credit unions' comment fair?
Mr. Des Carville
I watched the proceedings a couple of days ago and I heard the comment. I was not quite sure whether the comment was directed at us or other stakeholders. The Department of Finance genuinely has an open-door policy. I am quite happy to engage with the sector and meet representative bodies. I did a little work in that regard. Over the past quarter, we have had three CUAC meetings and two tripartite meetings, which involve the Central Bank, ReBo and the Department of Finance. We have met the Central Bank separately twice and we have been talking to advisers who advise credit unions on their investment activities. We are trying to understand directly from advisers who advise credit unions exactly what the issues are regarding the investment restrictions. We have had three meetings on this since the start of the year. We have met CUDA four times. ILCU we have met twice. We have attended CUMA-CUDA conferences. My colleagues and I will be attending the ILCU conference next month in Citywest Hotel. Those are the headline items I would flag. On a day-to-day basis, Ms Aherne, Mr. Tom Byrne and Mr. Brian Corr are in constant contact with individual credit unions and also the representative bodies. I am not sure whether the comment was necessarily directed at us. Is there anything Ms Aherne would like to add?
Ms Deirdre Aherne
I have never found that they have a problem picking up the telephone. They can call if they want information or just to discuss an issue that has arisen. I have been in this area for nearly five years now. I do not know where the comment came from because we feel there is an open-door policy and the credit unions know it. They have our telephone numbers. If they want meetings, we always organise them. Even the other day, we brought in representatives to discuss an upcoming European directive. It will not be introduced for a year or two but the meeting was to give them the heads-up on it. We have constant engagement.
I do not doubt that everything the delegates are saying is 100% true but the tone I am hearing regarding the interaction and list of meetings Mr. Carville outlined is quite different from that of the credit union sector. Mr. Carville heard what the representatives were saying because he was watching the footage of the meeting. There is a palpable sense of frustration. The credit unions feel they have all this money, doing all this work, much of it on a voluntary basis, and going nowhere. They said to us there would need to be a radical change in the mindsets of the people who regulate and govern. We can talk about the regulator next but ultimately the regulator is bound by legislation that comes from the Minister, Department and these Houses. If the credit unions are not going to be allowed to do things, they should be told, and if they are allowed do things, they should be allowed get on with it subject to normal oversight. It is frustrating for all of us to hear from them what they are saying. The Department is saying it is getting on with the credit unions and dealing with them on a day-to-day basis. Maybe it is the entity they feel they have difficulty with as opposed to the arrangement dealing with the operations on a day-to-day basis.
All members share the frustration that was absolutely palpable in the room. It was expressed by all the various witnesses, especially those from CUMA, CUDA and the ILCU on Tuesday. We probably need to have them back in again in three or six months, along with the Department and regulator, to see where things have moved on.
I thank the delegates for their presentations and their interaction. At this stage, we are probably ready for our main course.
ReBo was set up in 2012 for restructuring. It completed 82 mergers.
Ms Deirdre Aherne
Involving 156 credit unions.
Yes. Payments were made by the Department. It was said the Exchequer paid out €20 million. Was that paid from the resolution fund?
Ms Deirdre Aherne
The restructuring fund.
Is that the resolution restructuring fund?
Ms Deirdre Aherne
The restructuring fund.
That is not taxpayers' money, however. It is not really from the Exchequer.
Ms Deirdre Aherne
There was €250 million put into the restructuring fund specifically for restructuring.
By the Exchequer.
Ms Deirdre Aherne
By the Government, yes.
How much did the institutions pay into that?
Ms Deirdre Aherne
The way it works is that the €250 million was put in to assist with restructuring. It was specifically for restructuring. The legislation provides for ReBo to levy the sector to recoup some of that money. Some of that money has been recouped. It comes in by levy each year.
So the Exchequer put in €250 million.
Ms Deirdre Aherne
Yes.
Contributions are being received from the institutions.
Ms Deirdre Aherne
Yes. Each year, the sector is levied.
Was the pay-out in regard to the credit unions €20 million?
Ms Deirdre Aherne
Around €20 million.
They have paid back into the resolution fund at this stage more than what it cost.
Ms Deirdre Aherne
No, because the levy is to recoup 50% of ReBo's expenses and for restructuring costs. Credit unions that got financial support would pay back some of that.
Ms Aherne says the cost of restructuring was €20 million in regard to credit unions.
Ms Deirdre Aherne
There is €230 million in that fund now.
How much did it cost to restructure the credit unions?
Ms Deirdre Aherne
Around €20 million. We have not got an exact figure because-----
Was the cost to the credit unions of restructuring and pay-out roughly €20 million?
Ms Deirdre Aherne
Yes.
So they have paid more than that back. They have paid €25 million back into the resolution fund.
Ms Deirdre Aherne
No. The resolution fund is a different fund. That is the Credit Institutions Resolution Fund. The restructuring fund is a fund specifically for restructuring. There are three different funds: the resolution fund, into which €250 million was put, the restructuring fund, which also had €250 million, and the stabilisation fund, which is fully sector funded.
What happens to the funds, such as the stabilisation fund or the restructuring fund? Is the money just sitting there?
Ms Deirdre Aherne
The restructuring fund money was drawn down.
Is all the money that was in the restructuring fund paid out to various institutions?
Ms Deirdre Aherne
No. There is €230 million in it now because €20 million was used. There was €250 million in it starting off.
There is only €20 million gone from the restructuring fund.
Ms Deirdre Aherne
Yes, around €20 million.
A total of €230 million is sitting there.
Ms Deirdre Aherne
Yes.
What is that for? Is it for future restructuring?
Ms Deirdre Aherne
A decision will have to be made on that at this stage because it was specifically for restructuring under the Credit Union Restructuring Board. If the board is finishing its work, a decision will have to be made on where the money goes.
The total payout for the restructuring of all the credit unions was €20 million. Is that right?
Ms Deirdre Aherne
Yes.
Why would there have been €250 million put in? Was it for institutions in addition to the credit unions or was it specifically for the credit unions?
Ms Deirdre Aherne
It was for credit union restructuring.
How did the Department get that so wrong?
Ms Deirdre Aherne
That figure was the amount that was assessed as being necessary at the time.
I will return to a point made by Deputy Sherlock. For the purpose of understanding this issue, I will describe the credit institutions resolution fund. The target level of funding for the resolution fund was €100 million and it was envisaged that the credit institutions would contribute €25 million per annum for four years until the €100 million target was achieved. The credit unions' portion of the €25 million annual contribution was set at €7 million per annum. However, the credit union movement has now contributed its portion of the €25 million, that is, €7 million per annum for five years, rather than the expected four years. Frustratingly, neither the Central Bank or Department of Finance can tell us if and when the credit union movement will have to pay this substantial levy. That is the point that-----
I wish to support that statement if I may. At the start of the crisis, we were informed there was a €1 billion hole in the credit unions. The Department now informs us the sum involved is €500 million, consisting of €250 million related to restructuring and a further €250 million related to resolution. Of the €250 million provided for one of these two purposes, only €20 million was used as bail-out money. I use that term for the sake of argument. This means the extent of the crisis in the credit union movement was grossly exaggerated. If only €20 million of a €250 million fund has been required, the amount needed has been minuscule when compared with what was needed for the banks. It is certainly minuscule relative to the €1 billion we were informed would be needed for restructuring.
The credit unions are now being levied to generate funding for an unspecified purpose. It does not seem to be for any particular reason because two separate funds, each of €250 million, are already in place. This is akin to imposing a highway tax on the credit unions. Will the witnesses explain the reason for this in simple language, please?
Mr. Des Carville
There are three funds. We have the ReBo fund, subject to the Department producing a section 43 fund under the Act. It is then up to the Minister to dissolve ReBo. All things being equal, we expect, although we cannot guarantee, that the levy will terminate, finish and reach its natural conclusion this year. The stabilisation fund, a separate fund, is for review in 2017 and the Department will carry out this review.
Will the credit unions have their money returned to them?
Mr. Des Carville
With regard to the stabilisation fund, the money-----
Put another way, will the money be returned to us because we are all credit union customers?
Mr. Des Carville
We, on this side, are also members of credit unions.
This is taxpayers' money.
Mr. Des Carville
Of the €250 million in the ReBo fund, €20 million has been drawn down and the remaining €230 million is returned to the Exchequer. It is not a fund with a separate account, but Exchequer financing that has been effectively ring-fenced for that fund. I do not know today what happens with the €6.4 million in the stabilisation fund but I expect it will remain in the fund.
Mr. Carville did not address the credit institutions resolution fund.
Mr. Des Carville
That is the third fund. I was addressing the other two funds first.
Mr. Carville should address the fund we are talking about.
Mr. Des Carville
The credit institutions resolution fund holds €250 million and has paid out about €30 million. There have been three resolution cases, namely, Newbridge, Howth-Sutton and Killorglin credit unions. I think that answers the question.
There is a restructuring fund and resolution fund in place.
Mr. Carville stated there was €250 million in the credit institutions resolution fund, of which €30 million had been used to address difficulties in the credit union movement. The question members asked is why the levy imposed on financial institutions continues to be collected after the four-year collection period has elapsed. The hole in the credit union movement's finances was overstated at the time because only €30 million has been paid out to credit unions. It also appears that they have paid €35 million into the credit institutions resolution fund, which is now in its fifth year. When will these payments cease given that the credit unions were asked to pay for four rather than five years? Have the other financial institutions paid into the fund?
Is it correct that the credit institutions resolution fund, which was supposed to have €100 million in it, now has €250 million in it?
Mr. Des Carville
There is €250 million in the fund. Given that the other financial institutions are contributing, it was not a specific credit union fund but a much more general fund.
Have all the credit institutions met their obligation in respect of the fund?
Mr. Des Carville
Yes. They are now contributing to the European fund because they are regulated by the single supervisory mechanism, which is part of the European Central Bank. As such, they are now in a separate regulatory world.
Every other financial institution that was expected to pay into the credit institutions resolution fund has done so. Do they continue to make payments into the fund in its fifth year or do they have a legal right to refuse to continue to pay into a fund that was established for a four-year period?
Ms Deirdre Aherne
To clarify, all of these funds and the levies collected in respect of them are done under state aid schemes. We have to adhere to the rules and regulations of these schemes, which is the reason we recoup the money in the form of a levy.
The fund was for established for four years.
Ms Deirdre Aherne
The resolution fund has received €30 million and approximately €30 million has been paid out under the fund. If another credit union needed to receive money from the resolution fund, the €30 million provided will have been used already.
The Department imposed on the credit unions an annual levy of €7 million for four years. They now have a right to stop paying into this fund because it is now in its fifth year. They are asking when the annual payment of €7 million will cease, which is a fair question.
Ms Deirdre Aherne
The idea was to build up a fund of €100 million and it was-----
No, the Department asked for €7 million per annum for four years. On what legal basis is it asking the credit unions to pay this sum for a fifth year?
Ms Deirdre Aherne
We will have to revert to the Chairman on that question.
Is it provided for in legislation?
Ms Deirdre Aherne
There is legislation around the fund.
If there is legislation around the fund and it refers to specific timeframes and so forth, the Department is illegally taking money from the credit unions in the fund's fifth year. They should be repaid with interest and penalties if we were to adopt the position taken by the Revenue Commissioners on money due to them.
Mr. Des Carville
I am not sure about that. I would like to examine this issue and write back to the committee on the matter. The Chairman has raised a specific legal point and made an accusation of illegality so we want to be very careful.
I am simply stating that if the Department did a deal for four years and it is effected for a fifth year, there is something highly illegal taking place.
Mr. Des Carville
We will have a look at the matter and revert to the committee.
Credit unions have experienced bad publicity over the years. My understanding from the information provided by the officials is that credit unions paid €30 million into the stabilisation fund, of which €20 million or €30 million has been used. This means the credit unions have not cost anything. Is that the case?
Mr. Des Carville
In broad brush terms, that is a fair assessment. It is a credit to the credit union sector and the regulator.
I do not see how it is a credit to the regulator.
Mr. Carville should not try to stretch his credibility on this issue.
The credit unions did not cost the State one cent in the crash.
Mr. Des Carville
In aggregate terms, yes. The banks cost the State €64 billion.
The credit unions were on their hands and knees. They work with their arms behind their back, but we will not facilitate them, either through legislation, regulation or an investment of money. It is crazy.
Mr. Des Carville
We are trying to facilitate them.
I appreciate that, but if a bank was in the same position, everything would be turned over for it.
Mr. Des Carville
I am not sure that is correct.
Deputy Sean Sherlock made a fair assessment when he said-----
They took the money.
-----they took the money.
Mr. Des Carville
The implementation group will look at tiered regulation, section 35, consultation and engagement with the Central Bank and the restructuring of the business model; there is, therefore, quite a bit of work to be undertaken this year.
May we have an update in the next quarter on the work of the implementation group? I suggest we send a message to the Department of Finance and the Central Bank that the committee will monitor the work of the bank very closely on behalf of the people we represent. We need clear, identifiable timelines and deadlines because progress has slipped. Contrary to what Mr. Carville said, tiered regulation was defined in the original commission's report. There were to be three processes for tiered regulation.
Ms Deirdre Aherne
There were three tiers.
I do not understand why we have not moved from that point to having tiered regulation under way at this stage in the first quarter of 2017. Many credit unions have done the necessary hard graft and paid thousands of euro in consultancy fees to go through the process. The hub and spoke model was developed in which the bigger entities took on the smaller ones. We have a lot of work to do to ensure there will be a proper throughput in a clearly defined timeline.
Mr. Des Carville
We are quite happy to appear before the committee at any stage to discuss the implementation group and the progress it is making.
Will Mr. Carville tell us something if he comes back? The merry-go-round does not suit anybody and we are all getting sick of it.
I thank both delegates for coming. I would like them to look at the transcript of the meeting to help them to determine the questions on which they have to come back to us. They can then write to the clerk with the answers. Both of them said they had to check on a number of things first.
Mr. Des Carville
There are two things on which we have to come back to the committee.
I ask them to come back to us as quickly as possible.
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. However, 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 directed that only evidence connected with the subject matter of these 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 any person or an entity by name or in such a way as to make him, her or it identifiable.
I welcome Ms Kiernan and her colleagues. I invite her to make her opening statement.
Ms Anne Marie McKiernan
I thank the joint committee for the invitation to appear before it. As members know, our statutory mandate is to ensure the protection by each credit union of the funds of its members and to maintain the financial stability and well-being of the sector generally. I start by acknowledging the very important role credit unions play in Irish society and the financial system and the strong voluntary and community ethos of the sector. In my statement I will focus on three main areas - the current position of and main challenges facing the sector; the standards the Central Bank requires of credit unions in order that members’ funds are protected; and the need for transformation in the sector, drawing on priorities raised in the credit union advisory committee's review of 2016.
With regard to the profile of and challenges facing the sector, in the past decade credit unions have dealt with the effects of the financial crisis, increased competition, major business model challenges, significant restructuring and increased regulation. From 428 credit unions a decade ago, there are 281 active today and a further 27 mergers in progress. The sector has assets of €16.1 billion. The unprecedented level of restructuring was made possible by a huge effort across the sector to safely conduct so many transfers, while ensuring a continuation of services and the safety of members’ funds. We thank the sector for its involvement in that process. As a result, it has changed significantly. There are now more large and fewer small credit unions, although levels of resilience vary widely across the sector. At the registry we have prioritised regulation and supervisory changes to improve credit union safety and better position the sector for the future. Some of the decisions we have taken include strengthening the regulatory framework, as recommended by the commission on credit unions in 2012; restrictions on lending to contain losses and their later removal, where appropriate; broader on-site engagement with credit unions; restructuring to support the needed transformation; and resolution of the weakest credit unions, all without loss of members’ funds.
The combined effect of these measures and appropriate actions by many credit unions over a number of years has better placed the sector to deal with its challenges. However, significant challenges remain. The biggest challenge is how to grow lending responsibly, following falls of over 40% in both loan income and volume in the last decade. Net lending is still only marginally recovering, even after seven years of decline. This core lending weakness reflects market factors such as prolonged de-leveraging by households and small businesses; increased competitiveness in the short-term unsecured lending market, where credit unions tend to predominate; and some credit union-specific structural factors such as an ageing and, therefore, more likely saving membership base and difficulties in changing business offerings to attract younger borrowers, which often require investment. The investment income of credit unions helped to offset some of the decline in loan income for a number of years, but it is also now falling in the low yield environment. Cost-to-income ratios are increasing. All of these factors, taken together, put pressure on the long-term viability of credit unions. This highlights the urgent need to address the business model challenges the sector faces.
On our required standards, our on-site engagement with credit unions is prioritised by risk and impact, or size, and we adopt a proportionate approach. It is aimed at deriving the benefits of tiered regulation within our existing framework. We have higher standards for larger and more complex entities and simpler expectations for smaller and simpler models of credit union. We have a minimum standard for all, which is to ensure the safety of members’ funds. We also use a differentiated application of common regulatory rules as another way to achieve the benefits of tiering, while accommodating the changing shape of the sector coming from restructuring. Regrettably, standards of regulatory compliance are still well below those required to credibly safeguard members’ funds and position credit unions to tackle business model development. We are still seeing an unacceptable number of credit unions failing to display a strategic understanding and good governance. In several cases we have encountered limited financial skill sets and weak management, poor systems of control, weak risk, compliance and internal audit functioning and weaknesses in credit practices. For example, we encountered several cases of problems in meeting the most basic financial requirements, including bank reconciliations. It is the responsibility of credit union boards of directors to ensure appropriate control, direction and management of credit unions and to ensure risks are identified, monitored and mitigated. We have communicated our expectations and findings to the sector, including that credit unions must meet regulatory requirements for their current business before embarking on riskier ventures. We have also demonstrated and will continue to do so our willingness to take serious actions, including enforcement, restructuring and liquidation, to ensure credit unions adequately safeguard their members’ funds.
The third major issue is the need for transformation. Our view is of a thriving credit union sector that is financially strong, that provides choice and inclusion in the financial system and that carries out its important community role, while meeting regulatory requirements. To get from where the sector is now to where it needs to be requires four main changes: a drive for younger active borrowers to increase core lending; deriving benefits from restructuring; developing the business model in a multi-step, risk-managed way; and increasing sectoral leadership and co-operation on shared services.
The drive to attract and retain active borrowers is critical to the sector’s future. We have urged the sector to consider how it can leverage its community advantages and trusted brand to attract a new generation of borrowing members, while pricing appropriately for risks and services and meeting regulatory requirements. Some credit unions have used low cost but effective member profiling and targeted marketing to attract members which, together, are an important starting point.
On business model development, it is the responsibility of the sector to set out its vision and plans. Our responsibility is to challenge them for risk, affordability, relevance and possible regulatory change. We are concerned at the absence of a coherent future path supported by appropriate proposals, as well as at the length of time it takes for proposals to develop and mature and this is an area where we have called repeatedly for more sectoral leadership and clarity.
There has been some criticism that the Central Bank holds back development of the sector, especially with respect to long-term lending. We would disagree with that. First, the reality is we have not received any specific applications or proposals for long-term lending that are sufficiently well structured and have clear, sustainable aims. We engage extensively with the sector in many different fora to better understand long term lending aims and to ensure that any evolving proposals address reasonable issues such as the investment costs, the projected impact on return on assets over time, shared services arrangements for costs and capabilities, changed funding arrangements that will be needed for the balance sheet risks and how to manage collateral and legal aspects and to meet evolving regulations, both domestic and international, that consumer mortgages require.
As we indicated in the Credit Union Advisory Committee, CUAC, review, we are willing to consider amending the long-term lending limits but we require clarity on credit unions’ plans for prudently developing longer-term lending and addressing the issues I have mentioned above. Given the sector’s current capabilities, any increase in mortgage lending would likely require changes on funding maturity to deal with balance sheet risks and be restricted to the more capable and financially-sound credit unions before being extending further. Again, there is need for greater sectoral leadership in vision and clarity and a fuller understanding of risks involved to develop the roadmap of business model development.
For our part, the registry has provided guidance and analysis, through both the stakeholder dialogue forum and bilateral engagements. We covered the potential impacts of long-term lending changes. We have also undertaken to publish, within coming months, enhanced guidance on what we expect to see in long-term lending proposals.
In addition, we have taken a range of measures to support the sector’s efforts including, in 2016, the establishment of a new business model development unit, which is headed up by deputy registrar, Frank Brosnan. That is to drive forward better-developed proposals. We also approve suitable proposals - we approved members’ payment current account services - and we are also developing a package of guidance on our expectations in a range of areas. These measures will, we believe, be particularly beneficial for smaller credit unions, for whom it is more costly and difficult to tackle the many issues involved.
Overall, it is worrying that sectoral engagement on changing lending limits appears to have polarised to mortgages, rather than on a diverse lending portfolio. We have not yet seen any investigations of other short and medium-term lending proposals that would build on the existing capabilities and balance sheet management of the sector.
There is important additional proposed business model development in the area of funding for social housing. As we have indicated publicly previously, we will shortly consult with the sector regarding changes to investment regulations to accommodate investments in social housing and other investment classes subject to term limits.
Regarding CUAC’s 2016 review, we welcomed the establishment of and participated in the group and we look forward to contributing to the implementation group, where we are represented. Our submission to the review highlighted our view on major issues including tiered regulation and long-term lending, as I referred to earlier, and on common bond considerations. Regarding the CUAC recommendation on consultation and engagement, we welcome the focus on enhanced engagement between the registry and the sector. That is already a central part of our business model support role that I covered earlier.
Overall, it has been a challenging period for credit unions, and I want to acknowledge the constructive engagement of individual credit unions, representative bodies and other stakeholders, as we work to improve the sector’s current and future state. The most important challenges are to meet current regulatory requirements – which are there to safeguard members’ funds - and to drive forward clear development plans while retaining the sector’s important voluntary ethos and community spirit.
I welcome the registrar and her staff here today. We had very interesting meetings with the credit unions last week and with the Department of Finance this morning. The Chairman has alluded to what the credit unions said to us last week - that they seem to be getting the run-around and they are going from pillar to jack. They are going to the registrar, to the Central Bank and to the Department of Finance and are on a merry-go-round. Would Ms McKiernan have anything to say on that?
Ms Anne Marie McKiernan
We have extensive engagement with the sector regarding its view on how it wants to move forward. That would be with individual credit unions, with representative bodies, with the Department of Finance and with other stakeholders. In general we find those engagements constructive and productive but obviously we have differing views on what are the major challenges in the sector and how they need to be dealt with.
In our approach to regulation, where we are considering making changes or are looking to provide greater guidance or expectations on changes the sector might propose, we are always guided by our statutory mandate, which is to ensure that any such changes will ensure the safeguarding of members' funds and protect the future stability of the sector. We are always minded to ensure that the requirements in place for the current business of credit unions are fully met, respected and understood because they have been designed and put into regulations and legislation to safeguard members' funds. It is important for us to see that the current requirements are met before additional risks are taken on.
The Department of Finance's representatives appeared before the joint committee this morning and they said something similar to the registrar. There are very few places where the credit unions can put the €10 billion or €11 billion that they have on deposit other than in the banks. The registrar would seem to be saying the same, that she is very worried as to where it might be put. It would seem she is suggesting that the money is safer in the bank than any other place.
Ms Anne Marie McKiernan
One of the issues there relates to the opportunities for a credit union to invest its surplus investment assets. As I mentioned in my opening statement and as we have previously stated publicly, the registry intends to consult with the sector regarding changes in the available asset classes in which credit unions can invest. That will include reference to investments in projects relating to social housing, but it will not be restricted only to that. It will also cover potential additional investment classes. It will be mindful of the requirements of the Credit Union Act 1997, which states that their primary business is lending other peoples' money and that they need to exercise prudence in how they invest their surplus funds to ensure they do not unduly endanger those funds. It will be proposing or facilitating changes in the investment framework but within the appropriate overall context.
Does the registrar think the 1997 Act should be changed to give more flexibility to the credit unions with regard to their investments?
Ms Anne Marie McKiernan
Changes in investment classes can be accommodated via changes in regulations. This is provided for in the regulations signed into effect at the end of 2016. When it comes to the use of our regulation-making powers, the regulations provide that we will consult with the sector, the Department of Finance and the Minister's advisory group before implementing any changes and we have undertaken these consultations.
Are those ministerial regulations or are they regulations from the Central Bank?
Ms Anne Marie McKiernan
They are regulations that can be implemented by the Central Bank, but we do not intend to implement changes in regulations without consultation with the sector.
The regulations were formulated as a result of legislation passed by the Houses of the Oireachtas. The Minister makes regulations, but in this case the regulations were made by the Central Bank.
Ms Anne Marie McKiernan
In line with the regulations introduced on 31 December 2016, as registrar, I have regulation-making powers. Certain aspects which were formerly in legislation can now be dealt with via regulations. The purpose of this was to be more efficient and flexible in the changing environment in the credit union sector, but safeguards are in place such that for any prospective changes in regulations we would, of course, consult with the sector and the Minister's advisory group in advance.
The Central Bank consults on making the regulations.
Ms Anne Marie McKiernan
The upcoming consultation to which I referred is on the investment classes, which will include reference to investment in social housing.
The Central Bank has reservations about long-term lending by credit unions. What are these reservations and what is meant by long-term lending? Is it 20 to 30 year mortgages? If so, where are the problems envisaged? Is it in recovering money or tying down assets? The Central Bank obviously had problems with it.
Ms Anne Marie McKiernan
On the point of long-term lending, including mortgages, many credit unions can now do mortgage lending but with limits. These limits allow credit unions to lend potentially up to 15% of their loan book beyond ten years and up to 40% of the loan book for between five and ten years. What we found was that a very small number of credit unions use the available headroom relating to the existing limits. Even though they could lend up to 15% of the loan book for beyond ten years, current usage is just over 2%. If credit unions were to use the available headroom, we estimate it could give rise to an additional €500 million in lending beyond ten years to reach the current allowable limit of 15%. A very important point to note is while 11 credit unions have applied to us for discretion to apply the higher limit of 15% in long-term lending, only three of them use it. This suggests many credit unions are already adapting their risk appetite. Long-term lending, in particular mortgages, is a more complex business to get into and they are considering to a greater degree whether they are willing to do so. We have not received a structured proposal from the sector for a new higher limit than that currently in place and on how the sector would adapt its current business models to meet such a higher limit. We have engaged extensively with the sector regarding the issues that would need to be addressed in any proposal and we give guidance on this. We will shortly publish additional guidance in this area.
Regarding our view on greater long-term lending in mortgages, it is quite a different business to that in which credit unions specialise and it tends to be a more complex business model. Therefore, we certainly have highlighted to the sector that there is a need to greatly understand the impact on its business of the changes, for example, with regard to the its intentions regarding loan durations, the impact on credit unions' balance sheets, particularly in the context of funding, and how credit unions would deal with the additional capabilities required in this business, which has legal and collateral aspects. The mortgage market tends to be a high volume low margin business with experienced players. How would the credit unions propose to deal with these market environment issues? It is an area where shared services or collaboration on services would help to reduce costs for individual credit unions getting into it, so sector-wide solutions on shared services would be helpful.
Overall, the capability to do a significant amount of mortgage lending or long-term lending is quite different and it is not just related to larger asset size. We have made that it clear that if the sector wishes to make a proposal in this area we have given it a good grounding on our expectations as to what such proposals would need to address, and we are open to changes in limits when we see where the sector wishes to take it forward. Given all the complexities involved, we favour doing this in a multi-step and appropriately risk-managed way, because we want to ensure it does not unduly endanger members' funds or the financial security of the sector.
In her opening comments Ms McKiernan stated:
Regrettably, standards of regulatory compliance are still well below those required to credibly safeguard members’ funds and to position credit unions to tackle business model development. We are still seeing an unacceptable number of credit unions failing to display strategic understanding and good governance.
Despite all of this, we established from the Department of Finance this morning that throughout the crash there was no net loss to the Exchequer by the credit unions. The payout was approximately €30 million but €35 million has been paid into a resolution fund. Despite what Ms McKiernan has said about governance, and despite all of the bad publicity given to the credit unions and at one stage it was reported they would lose €1 billion, there was no net loss to the Exchequer.
Ms Anne Marie McKiernan
The Senator has raised a number of issues. As I said in my statement, the majority of credit unions undertook appropriately conservative actions in response to the financial crisis to position them better to deal with the challenges ahead. Some of the actions they took include increased provisioning, reduced dividends, building up reserves, and adapting to our regulatory requirements which are proportionate to the nature, scale and complexity of the Irish credit union sector. In doing this, they increased their resilience. There was also a range of matters overseen by the Central Bank and others. For example, we imposed a series of lending restrictions at the height of the crisis, the purpose of which was to contain excess losses. In 2015 and 2016 we undertook a programme to remove these restrictions where it was appropriate to do so. This helped to underpin the amount of losses that could potentially be taken.
There has been significant restructuring throughout the sector. Much of it has been voluntary and reflects the success of the restructuring board in working directly with the credit unions to ensure successful mergers. We welcome that so many of these were successfully undertaken and no members have lost any funds. There has also been a series of resolution or involuntary restructures undertaken, which have had the purpose of removing the most serious failings in the sector. Of these, five were resolution cases under legislation, directed transfers and two liquidations. We also had a series of resolutions without the usual legislation and court process where we drew on the funds of the saving protection scheme of the Irish League of Credit Unions and saved taxpayers' money to the extent of €25.5 million while ensuring those entities were safely merged with other more financially resilient credit unions. The fact there has not been a major bailout cost for the sector reflects significant actions by the sector itself and a number of authorities. They have set up the sector appropriately with better financial and operational resilience to deal with the challenges ahead. This does not take away the need now for regulatory standards to be met, which would best demonstrate that members' funds are adequately protected.
When we consider the credit unions in the context of what happened with the banks and financial institutions, the language used by Ms McKiernan when speaking about them was very strong, which is very unfair. We have discovered that there was no net loss to the Exchequer overall on behalf of credit unions. The credit institutions resolution fund has been established. Where does Ms McKiernan see it finishing? How much will be paid into it? Will it be there while the credit unions are there?
What is the purpose of the credit union resolution fund going forward?
Ms Anne Marie McKiernan
The fund was set up as an opportunity to fund involuntary resolutions or cases where credit unions in excessive difficulty and posing a threat to their members' safety could be resolved under the appropriate legislation. Five cases have been taken to date. While the net cost to the fund is at the lower end of expectations, that also reflects the fact that we have been able to use the private funds of the sector to save some of that taxpayers' money. We have used €25.5 million from that savings protection scheme, SPS, fund.
The amount that could potentially be used from what is in the resolution fund will depend on a number of factors, including the risks which credit unions take on at present and could potentially take on in the future, how they manage those risks, what losses could arise and how they would impact on the financial resilience of credit unions. We are not going to pre-empt what might happen in the future to make an estimate of how many cases there might be or what funds might ultimately be drawn down. Allowing appropriate resolution in the sector to protect members' funds by having a fund available is an important backstop.
On deposits, Ms McKiernan says in her statement that she wants to see the credit unions attract younger borrowers. One has to have savings to be a borrower in a credit union. We have recently seen that some credit unions cannot afford to take in savings because all of their deposits have to be backed up. Does Ms McKiernan not think that there must be something wrong when the credit union cannot take in savings from new borrowers or new savers?
Ms Anne Marie McKiernan
Credit unions have had self-imposed limits on the inflow of deposits over a number of years. While they have received increased media attention in recent months, it is not a new phenomenon. Credit unions have tended to impose those limits on the inflow of deposits if that is in line with their risk appetite and where the credit union feels it is better for its financial resilience going forward. Credit unions are bound to protect the interests of their members and if that means having to turn away new deposits because they want to be able to give a greater return to existing depositors, then that is a financial decision for individual credit unions, and we do not intervene with that granularity in how they run their businesses. A broadening of opportunities for credit unions for where they invest their surplus funds will be coming in the form of our consultation with the sector on allowing a broader class of investments.
I thank Ms McKiernan for her opening statement and her interaction thus far. I will develop Senator Paddy Burke's point on deposits. Ms McKiernan refers to self-imposed limits. At the moment, even if they were not imposing limits, the question is what they do with money that they take in that they are effectively being charged by the bank a cost to mind. That is what we were told on Tuesday. I do not know if Ms McKiernan had a chance to look at the interaction that we had with the various stakeholders on Tuesday. They did not just have the 10% reserve requirement. It is a significant handicap as far as they are concerned. Credit unions are treated differently from banks because their capital requirements are based on total funds rather than being risk-weighted.
The 10% reserve they require to back up their deposits is different from the way that banks are treated. What is Ms McKiernan's take on that? Does she regard that as necessary or important? It seems that they find it very difficult. We would all acknowledge that it is a very unusual situation for a financial institution to turn away deposits, which is what they appear to be having to do because they have no home for them, and nowhere to put them where they can justifiably get any kind of return. We acknowledged with the Department of Finance this morning that, unlike many of the banks during the last ten years, despite all the various individual cases where things happened, people like and trust their credit unions in the same way that many people trust the post office. It is a brand that people like and respect and feel is a safe place to put their funds. Now there is a situation where they are effectively being turned away.
Ms Anne Marie McKiernan
I share Senator Horkan's view that the credit union sector is a valuable part of our communities and society. We want to see it thrive and continue to be an important part of our financial system going forward. We do that within the context of my statutory remit, which is to ensure the protection by credit unions of their members' funds, and also the financial stability of the sector more broadly. We orient all of our supervisory and regulatory activities around working towards having the sector be financially viable in the future.
I will address the 10% reserve ratio and how that came about. It is generally considered to be a minimum capital adequacy ratio as recommended by the World Council of Credit Unions. That World Council of Credit Unions also advocates that, for credit union sectors that might consider moving to a risk-weighted approach for the capital ratio, it should really only apply where credit unions are competing directly with banks that adopt the Basel III rules and where they and their supervisors thoroughly understand how to calculate capital under pillar 1 of the Basel III rules. We are not in anything like that kind of credit union sector and because of the generally homogeneous and less complex business model of Irish credit unions, we believe that a non-risk-weighted approach is fully reasonable in the circumstances.
The 10% ratio was introduced in 2009 and there was an opportunity for consultation on that. Significant support came from sector respondents at the time for the concept of maintaining strong reserves. There were some concerns on implementation timelines etc., but overall, moving to having a strong financial resilience layer like that was supported. It is a loss-absorbing layer. It is there to give credit unions a backstop to ensure that they are still able to protect their members' funds. We should always come back to what its purpose is and make sure that it can do that. My view is that it remains appropriate for the sector and that we would want to see reasonable financial resilience in a sector which is contemplating taking on riskier forms of business model and development into the future. The majority of credit unions are well above that level. The average across the sector is currently 16%. Credit unions themselves recognise that they need to have a strong loss-absorbing layer for both their current activities and prospective future ones.
In the UK, credit unions with assets over £10 million sterling must also hold capital of 10% or greater. They have a situation where they can use a buffer of potentially 2%. In other words, they can eat into the 10% as long as they go back up towards it again within a specific period of time. The average sector ratio in the UK is well above the required minimum.
Ms McKiernan is the regulator, not the credit unions' adviser, but has she any advice or suggestions for a credit union that is effectively turning away deposits on how they can resolve that quandary in which they find themselves? I take the point that there are things they can do, including finding younger people and developing the business model. Is there anything else?
Ms Anne Marie McKiernan
The really big challenge for credit unions is that they will want to pay a dividend to their existing members for all the deposits they take in. They need to grow their loanbook to do that. The critical issue is how to grow the loanbook appropriately-----
Responsibly.
Ms Anne Marie McKiernan
-----and responsibly. I have a great understanding of and a certain sympathy with the sector. That is a big challenge. I should point out that we are seeing a number of credit unions which have responded very well to that challenge. In our public statements, we are often more likely pointing out what needs to be done among the weaker ones. This is an opportunity to highlight where we are seeing good developments. Both large and small credit unions have been able to work within the existing framework and environment to be financially and operationally strong.
Credit unions have been able to work within the existing framework and environment to be financially and operationally strong. They are meeting all of our regulatory requirements generally and delivering a range of services to their communities, paying a dividend and being viable into the future. As such, there is a great deal to build on there. In fact, it is that sort of basis we want to see more of across the sector as the platform on which business model development should be built.
What are the factors in the success of those credit unions from which others can learn? It tends to be strong governance and management, plus strong systems and controls which are needed to demonstrate protections as well as to actually protect members' funds. It is also a matter of pricing appropriately for risk. We often see credit unions where the interest rate charged on loans is unusually low. While that might be in line with the community and social objective, it may conflict with the financial objective of safeguarding the resilience of the credit union. We are also seeing some proactive if low-key work by a number of credit unions large and small on how to turn their members from savers to borrowers or how to attract members from a younger demographic which is likely to borrow. As I said in my statement, that includes more proactive demographic profiling, social media campaigns, promotion and marketing. I refer to these issues because they are lower cost for credit unions to undertake and they are a reasonable starting point from which to tackle the issue of growing a loan book while developing broader and potentially much more risky or different capability-based business models.
For most people to borrow they must have saved in the first place. To save means putting in deposits but to do that brings us back to the issue we are in. Part of that is the investment capability in terms of what the credit unions are allowed to invest in, which is quite restricted. I am sure there are reasons it is as restrictive as it is. On Tuesday, we got issues on the very strict liquidity requirements and the very restrictive class of investments. It means they do not have anywhere for these deposits to go. Is there scope in terms of where they can invest these deposits in the shorter term at least? It is a chicken-and-egg situation if one cannot bring people in to make a deposit. One is usually not going to lend to people before they have established a track record of savings and can see that these are people who are able to put away money so that they can borrow and then repay the borrowing. Ms McKiernan alluded to the fact the profile is getting older and people's mortgages and outgoings are getting smaller as their incomes improve. As such, they are saving. However, credit unions are trying to attract people to come in. If they have surplus funds, they are not able to give them to the credit unions because they are already in the situation where they have too much cash. Where do we go in terms of the investments? Is there scope to allow a wider range of relatively risk-free investments? Has that been looked at?
Ms Anne Marie McKiernan
As I said earlier, we are shortly to consult with the sector on broadening the classes of investments into which credit unions can invest. I do not want to pre-empt the content of that consultation.
However, the Central Bank is open to the idea of broadening it.
Ms Anne Marie McKiernan
Not only open to it but will propose broadening it in a suitable way. We are constrained as are credit unions by the terms of the Credit Union Act 1997. As the primary business of credit unions is lending, their investments ought to be dealt with in an appropriately prudent way.
Is there scope to amend the Act or to introduce new legislation to broaden the scope or eliminate some legislative restrictions appropriately and prudently?
Ms Anne Marie McKiernan
The form in which we can do this will be via regulation. We have regulation-making powers and can use them after consultation with the sector, the Minister's advisory group, the Department of Finance and other parties. We will take account of the feedback and then make the changes. Within the coming months, we propose to expand the available investment classes for credit unions to directly address the Senator's point. As I have said publicly and here, we will be providing specifically for investment in projects relating to social housing. We are going as far as is prudent in the sector although we must take account of the realities of the environment we are in. It is a very low interest rate and yield environment. As the committee will expect me to say as regulator, we will want to see that credit unions do not get unduly into investments which could sow the seeds for future losses or risks. It will be prudent but broader than exists today.
Did Ms McKiernan get a chance to look at our interaction on Tuesday?
Ms Anne Marie McKiernan
Yes.
There was a palpable sense of frustration from most of the speakers who contributed. Ms McKiernan will acknowledge that. Yet, we are getting quite a different position from the Central Bank and the Department of Finance this morning. The previous speakers argued that there was an absolute deficit of meaningful engagement with the Department and the Central Bank. The CUAC report highlighted itself that the sector's concerns needed to be taken on board and said that serious engagement needed to take place. How does Ms McKiernan respond? She saw what was said to us. They did not pull their punches too much. There is a clear sense of frustration. Ms McKiernan may have been frustrated at how they were dealing with us and she may have responses. We would like to hear her side of that story. We asked them for points to put to her which we have been putting. Equally, we would like to hear if there are things the credit unions think they should be doing which the regulator considers they should not. Is there an expectations gap between what they want to do and what the regulator thinks they should be doing? Do the credit unions get what the regulator is thinking? Are there things we need to know from Ms McKiernan's side?
Ms Anne Marie McKiernan
I thank the Senator for that. As I have said in public and private engagements with sector-----
We looked at Ms McKiernan's "Mind the Gap" speech. I have read that.
Ms Anne Marie McKiernan
Absolutely. As I said in other fora before that and in bilateral contacts with the central bodies who were here on Tuesday as well as with individual credit unions and other stakeholders, we have made it clear that one of the issues we would like to see addressed most proactively is the need for more of what I have called "sectoral leadership". By that I mean clarity from the sector regarding the vision for the business model moving forward. That is not necessarily from any one individual or body but it is for the sector to more clearly set out what it believes is the best way to take the model forward. We have also made clear our expectations. In each of the areas which is on the table for discussion right now, including long-term lending and mortgages, I have set out our reservations, expectations and a stance of openness to change although we need to see how it is going to be used. Other areas relate to social housing, which I will come back to in a minute. There are issues in relation to payments, current accounts and debit cards also. Clarity of direction and in proposals and faster action on proposals are required.
It might be illustrative to take an example. We received what I would describe as an "emergent proposal" which I will not name for reasons of confidentiality, and had constructive engagement on it in early 2014. We set out our views and what needed to be addressed to take it forward. We were delivering on our expectations and guidance and engaging proactively. That would have taken the form of many bilateral engagements as well as multilateral ones. In 2017, it is still, however, at an early stage of development. That is not in any way because we are blocking it or making anything unclear. It is actually because the issues to be dealt with are pretty complex. Other matters may have got in the way or become higher priorities for the particular owner of the proposals. However, it is disingenuous to portray us as being blockers in any way in relation to that. As such, the first thing I want from the sector is greater clarity of future vision and direction and the taking forward of proposals.
Let us point to areas of success on the business model. One of them is in the area of current accounts which has become more complex due to evolving EU legislation, higher expectations, digitisation in financial technology, etc. With extensive engagement last year, a group of progressively minded and developmental credit unions came together with a design and we worked extensively with them to turn that from the design phase to the application phase to the approval phase. That became known as the members' payment current account service, or MPCAS.
We would point to that as the model we would like to see taken forward regarding other proposals. It was very clear what they wished to do. It was clear who were the owners of it. They understood that shared services gave it the best chance of success and we engaged proactively to ensure it happened and published our application processes and risk management framework. It is not to say that this is the only winning proposal, but to say that the way in which it was dealt with shows, for one, that we are open for business, two, that we will help the sector where the sector is clear on where it can help itself, and three, that these things can be done far quicker when there is effort behind it.
I will wrap up with a final couple of small points. Does Ms McKiernan wish to refute any of the issues that were alluded to on Tuesday? Does she wish to say that any of them were not correct and are not what her office wanted?
My final point, separate to that, is on an argument that was being put forward, which I was trying to tease out. Nobody was saying that the regulation was excessive but some were complaining about its cost. They were saying it was excessive without saying that it was excessive. I know that there is an aspect of tiered regulation that can be developed over time. Does the Registrar feel that the regulation currently in place is appropriate for all sizes of credit union or are excessive regulations being put on some of the smaller credit unions that will ultimately, over time, have to deal with it? Proportionality is mentioned in her speech, but we certainly got the feeling on Tuesday that there were complaints about all this extra regulation, not so much that it was there, but that it was costly. As we move forward, is that just the way it has to be?
Ms Anne Marie McKiernan
Can I address two points there? One relates to the regulatory burden, either the cost or the practice of it. On the second point, I will not attempt to refute all of the matters raised during a very long hearing on Tuesday but perhaps I will raise a few for clarification purposes.
On regulation and regulatory burden, we have one framework but we do not apply it with a one-size-fits-all approach. We do so in a proportionate way. We do that through several different approaches. One is that we have higher expectations and requirements for the largest credit unions and those that aspire to do more complex business. We have much simpler expectations and engagements with the smaller credit unions whose model remains simple.
In terms of our engagements with credit unions, we differentiate significantly on that basis too. We have larger, longer and more frequent supervisory engagements with the biggest and most risky credit unions, as would be expected. We have scaled-back and less frequent engagements with the smallest, lower risk, credit unions. We focus significantly on viability and credit risk there. We are operating within our existing framework in a tiered way to the greatest degree that we can. We are trying to adhere to the spirit of the Commission on Credit Unions' recommendation in respect of tiering, but within one framework. It would be erroneous for it to be presented as a one-size-fits-all framework. It is not.
We have also started to introduce an element of tiering in the way in which we apply certain rules. For example, with regard to payment service and MPCAS approval, which means taking on a more complex and expensive future business line and which involves particular costs, we are, at least initially, making that opportunity only available to credit unions over €75 million. It can cascade down to smaller credit unions in time. That is very much in the spirit of letting more complex business be taken forward by more progressive credit unions who are better able to handle any downside risks from it. That is in respect of the cost or burden of supervision and regulation.
One issue which I believe is important to get on the table arising from Tuesday is the sense that we are blocking the making available of sector-significant funds towards social housing. That is absolutely not the case. To be clear, one of the main reasons the large excess funds of the sector cannot be made available for social housing directly through lending is the common bond. Under the common bond, credit unions can only lend to members within their common-bond area. If a credit union wished to lend to approved housing bodies, unless the approved housing body was within the individual space, it could not do so. They would not be able to marshal the funds at the level of the sector in that way.
While recognising that the common bond is a core part of the Irish sector, which is very valued and which the sector would not want to change or meddle with in any simple way, we nonetheless highlighted that it was an important issue in our submission to the CUAC review in 2016. We pointed out situations where the common bond, in its current legislative framework, restricts certain progress, both on social housing and on restructuring. We put it on the table as an important issue that could be addressed. It is up to the credit union sector to decide how far it is willing to change that. Progressive credit unions in other jurisdictions have tended to move away from the type of common bond approach we have now.
Is the Registrar saying that it is the sector's problem? I am only able to conclude that the sector needs to do it.
Ms Anne Marie McKiernan
It was raised by one of the representative bodies on Tuesday as well. My point is that we raised it, at the time of the CUAC review, as an opportunity for social housing that could be unblocked if the common bond issues were addressed.
I thank Ms McKiernan.
Is the Senator's question whether it is for the sector?
The question is, is it that the sector has to bring forward issues to deal with the common bond in order for the funds to be available for social housing?
Ms Anne Marie McKiernan
Funds for social housing are now being channelled through an investment proposal. We will allow investments in social housing investment types, or certainly we will be consulting with the sector regarding their possible exception within our investment regulations. That is number one. The second thing is that they can only do it to a restricted degree under the current common bond. The common bond, and any possible changes therein, is an issue for the CUAC implementation group.
On which the credit unions have the majority.
Ms Anne Marie McKiernan
All of the main stakeholders are represented.
How many staff does Ms McKiernan have in her office?
Ms Anne Marie McKiernan
We have a full complement of 70 staff. We are somewhat below that at the moment due to internal turnover.
Some 70 staff. How many people interface with the individual credit unions on a daily basis?
Ms Anne Marie McKiernan
We currently have 35 supervisory staff. Their job is to be out engaging on-site and to carry out off-site follow-up with credit unions on an ongoing basis.
That is 35 staff dealing with 281 credit unions.
Ms Anne Marie McKiernan
That is in relation to our probability risk and impact system, PRISM. If I could just make clear that we also have a significant team who have been involved in both voluntary and involuntary restructuring cases. They are, of course, interacting with credit unions every day, more specifically, in respect of making sure that mergers succeed. We also have a policy team, who are working to develop the policy priorities in order to understand, and then deal with, any changes that may be required. The front-facing engagements-----
I thank Ms McKiernan. That is fine.
Ms Anne Marie McKiernan
-----probably underestimate the number.
How would Ms McKiernan describe the nature of the relationship between her staff and individual credit unions on a day-to-day basis? Would she describe it as professional and courteous?
Ms Anne Marie McKiernan
Yes, I would describe it as professional and courteous.
Are there times when voices are raised between her staff and individual staff members of credit unions?
Ms Anne Marie McKiernan
I cannot speak for-----
Have there been occasions?
Ms Anne Marie McKiernan
-----anyone other than our staff. I am not aware of any occasions where the professionalism of our supervisory staff was in any way below what we would expect and want from them.
Going back to the regulation-making powers, Ms McKiernan spoke about the broad class of investments and the upcoming consultation. She also referred to expectations in respect of developing new business models. During our engagements on Tuesday, we heard from credit unions that they are undertaking digital and social media based marketing on a shared basis and that they are generating new business successfully.
We have heard about a shared approach to the mortgage support framework, notwithstanding the views articulated today. My understanding is the bodies do this without necessarily engaging with the Central Bank. How prescriptive does Ms McKiernan see the bank's role in the development of new business models? She indicated that the bank had a vision of a particular business model started in 2014 but which did not progress in 2017. I am trying to gain an understanding of the culture within the bank's organisation; it is quite difficult to understand it. She should correct me if I am wrong, but it seems that if I was to come to the bank with something I deem to be progressive for a credit union, it would state it would fly or it would not. It is a case of "Yes" or "No". Am I right in discerning that the bank will not come up with a business model or ideas for how something should progress? What is the process involved? Is it iterative or interactive? Does the bank engage positively? It seems that if an idea does not fly, that is it and a credit union must go back to the drawing board. I want to understand the Central Bank's powers in developing new business models and how deep is the engagement. How prescriptive is the bank in developing new business models?
Ms Anne Marie McKiernan
We are very clear that it is the role and responsibility of the sector to develop its business model proposals. We have identified issues that we may have with proposals as they are being developed such as a lack of clarity or specificity, or the lack of a full demonstration of an understanding of risks and rewards. There may be the lack of a demonstration of the capabilities or competence that may be required to manage the risks involved in a new business model into the future or how to deal with the financial impact on a credit union, etc. Our role is to carry out our statutory remit which is to protect, through credit unions, the stability of members' funds and the financial stability of the sector in general. With business models, we translate it as challenging proposals in order that they become better and fit for purpose, giving guidelines and guidance, with extensive engagement both on a bilateral and a multilateral and sector-wide basis and making it clear what our expectations are. It is not our job to design. When stakeholders come to us with design outlines, we make ourselves available to help them to turn them into something that can be successful. That falls well below telling them what to do.
As I have a short amount of time, can we keep the answers short, if that is okay?
If I were to come to the Central Bank with a proposal, it would kick the tyres, but it might not necessarily come back to me saying it could be tinkered with here or there. Its role, remit and power are very clear when it comes to new proposals.
Ms Anne Marie McKiernan
Yes. There are legislative requirements that we ensure are met in that process.
I appreciate that. The delegates have indicated that standards of regulatory compliance are still well below those required to credibly safeguard members' funds and position credit unions to tackle business model development. They are still seeing an unacceptable number of credit unions failing to display a strategic understanding and good governance. In several cases we have encountered limited financial skill sets and weak management. There are 281 credit unions within the Central Bank's remit, but how many are still weak in terms of having limited financial skills and weak management. I would like a specific number.
Ms Anne Marie McKiernan
As we operate a proportionate and an implicit tiering approach with credit unions, we have scaled back expectations for smaller credit unions, while having stronger and higher expectations for larger credit unions.
That was said in an earlier intervention, but I need numbers. Are there "several" outliers? Do they amount to a very small minority, less than 10 or 20 of the 281 credit unions? One could easily create the impression that this refers to the majority rather than being the exception. I need to have an understanding of how many are still behind the door in getting their governance procedures correct. We all understand credit unions went through a very difficult restructuring process. The hub and spoke model was developed and it is probably an iterative and ongoing process. They spent thousands of euro on consultant fees. Would Ms McKiernan agree that many credit unions have come through that process?
Ms Anne Marie McKiernan
Absolutely. I have called it as a success.
Indeed, but I am trying to understand how many still have a way to go in ensuring risk management, compliance and internal audit functions are robust.
Ms Anne Marie McKiernan
We do not have on-site engagement with the 281 credit unions on an annual basis. Our picture of standards across a range of areas in which we supervise is evolving. There are both quantitative and qualitative pictures. I will not give a particular figure as it changes with all of the engagements that are undertaken every day. The number is at the higher end of what we would expect to see in the sector relative to where it should be, given that the regulations were adopted from 2012 and standards of governance and risk management should be well embedded by now.
If the number is at the "higher end", Ms McKiernan should have a figure in her mind.
Ms Anne Marie McKiernan
It will change, depending on the results of engagements with credit unions.
What is the number today, 23 March?
Ms Anne Marie McKiernan
I can point the Deputy to our last sector-wide commentary from 2014 which, as a result of engagements in the years before that date, highlighted the scale of these failings across the sector. In 2017 we plan to publish something similar. We have different expectations between large and small credit unions. The scale of shortcomings-----
Ms McKiernan has already said that three times and does not need to repeat the point. I want to come to the issue of tiered regulation. We are being told that there is no tiered regulation, but if I understand the language used by Ms McKiernan today, she is telling us in couched terms - she can correct me if I am wrong - that there is tiered regulation in everything but name. Is that correct?
Ms Anne Marie McKiernan
We certainly undertake the operation of our framework to achieve the benefits of tiering without having two or three regulatory frameworks.
Let us not couch our language. As politicians, we are used to couched language. Is Ms McKiernan saying there is de facto tiering?
Ms Anne Marie McKiernan
I am saying we apply a proportionate approach to achieve the benefits of tiering, as they were called in the review of the Commission on Credit Unions and the CUAC. We have found a way to do this to the greatest degree possible within our existing regulatory framework. We do not adopt a one-size-fits-all approach.
Ms McKiernan has indicated that the bank has seen "no investigations of short-term or medium-term lending proposals." When did it become necessary for a credit union to obtain the registrar's permission for such proposals?
Ms Anne Marie McKiernan
If credit unions are applying to undertake a new service under the additional services framework, they must apply to the Central Bank for approval to do so in line with legislative requirements. Credit unions generally come to us when that is their expectation and we make clear the requirements to be met under the legislation.
Ms McKiernan has also stated the Central Bank has undertaken to publish enhanced guidance on what it expects to see in terms of long-term proposals. Are the guidelines inadequate or fit for purpose?
Ms Anne Marie McKiernan
There is available scope within the approved long-term lending limits in place. Credit unions have indicated to us that they would appreciate greater written guidance on the discretionary higher limits allowed with respect to long-term lending, both longer than five years and ten years. We will publish our guidance in that respect shortly. There has been intense engagement with the sector which is coming to us on mortgage lending and the potential for it and its desire to make proposals in this area.
We have given more thought to what the issues to address are so we intend to publish guidance in the form of a considerations note. The issues to be addressed are similar to what I mentioned in the opening statement. They are quite obvious issues relating to the regulatory requirements, the risk management requirements, the capability requirements and the financial impacts.
In respect of sectoral leadership, if I was reading that as a CUDA, CUMA or ILCU member and if Ms McKiernan was telling me that there is a need, in her own words, for greater sectoral leadership and a fuller understanding of risks involved to develop a roadmap of business model development, I might take issue with that. In respect of our interactions with the sector on Tuesday, there was consistency in its approach with no outliers. CUMA, CUDA and ILCU were represented. They would argue that they are showing leadership and that they are more than willing to engage. The Chairman has used the merry-go-round analogy. They have been on the merry-go-round with the Department of Finance and they contend with the Central Bank as well to show the type of leadership and develop the innovation and business models Ms McKiernan is speaking about here, but there still seems to be a resistance to that. It would be my contention that by any objective analysis, they have shown leadership because they have gone through the rigours of restructuring and, with some outliers, have adhered to the restructuring process as regulated by the Registrar of Credit Unions.
To use Ms McKiernan's language, they now want to move into that multi-step of developing the sector again, growing the business model and encouraging new lending with a younger demographic of borrowers. It seems that neither they nor Ms McKiernan are a million miles apart but there is something within the chasm and vacuum that needs to be unblocked. I do not know if it is an issue of perception regarding how the Central Bank perceives the sector and how the sector perceives the Central Bank. Somebody needs to do a bit of mediation because if I listen to Ms McKiernan and the intervention of the representative bodies, I can see that they all want to go in the same direction but there is some blockage in the way that needs to be worked through because they have already gone through the rigours of the regulatory process.
I know Ms McKiernan is not paying lip service to the idea of recognising the importance of the sector, but there is some responsibility on the part of the Central Bank to ensure the sector progresses back into productive lending sooner rather than later because this has been going on too long. The Credit Union Advisory Committee report has been in existence for a while and the implementation group only met in the first quarter of this year so we need to see progress by the second or third quarter because we have already told the Department of Finance that we want it to appear again before this committee. I hope the Central Bank would appear before the committee as soon as possible to see what progress is being made on these issues.
Ms Anne Marie McKiernan
When we call for sectoral leadership, what we are really keen to see from the sector, be it from individual groups, their representative bodies or others, is a sense of the vision for taking the business model forward. That will then be aligned with business model proposals, be they on long-term lending, mortgages or other matters, and taken to us. That will address the sort of considerations we raise every day and which in our view are reasonable and to be expected. In respect of mortgages and long-term lending, an argument that is regularly raised is that long-term lending limits are impeding credit unions from developing their lending again. We would say there is significant available headroom, and I gave some of those figures earlier, and that represents an opportunity for credit unions, few or many, as decided according to their own risk appetite, to get into greater long-term lending and-or mortgages and understand all the risks and complexities in that process on which they can build. That would be a reasonable approach. Those limits have been in place for a period because it is recognised that this is a more complex business and that it will take time to build the capability and financial understanding to do that. That is an important clarification.
The second issue relating to long-term lending is that we are very keen to hear from the sector about what it thinks would be some reasonable upper limit. If the current upper limit is 15% over ten years, should it be 20%, 25% or 40%? Those higher limits represent a vastly different type of business model to manage compared with credit unions that specialise in smaller-scale personal and small business unsecured lending. Obviously, a roadmap of how to get to a different type and scale of transformed business model would need to be worked through. With our mandate to protect members' funds, one would not expect and we would not intend to lift limits and see what happens. We would prefer to and currently do engage extensively with the sector to understand its aims, what limits it feels are the appropriate future limits in the sector and how many credit unions are aligned behind that kind of aim. Is it to be for a very small number or for a much larger number? There are huge issues to deal with. I fully accept that this is a complex area but we want to ensure that as it is taken forward, it is done in an appropriately risk managed way. Nobody in this room wants to see credit unions make major losses on foot of proposals.
Not all 281 common bond credit unions will come to the Registrar of Credit Unions with a set of proposals. They will work their way up through their representative organisations. I presume the articulation of development of new business will be done primarily through the representative bodies, with which Ms McKiernan engages regularly. If I understand it correctly, in a nutshell, Ms McKiernan is telling me that more work needs to be done on the business model development piece.
Ms Anne Marie McKiernan
Yes, and that is what we have publicly stated. We have been and continue to be available with our analysis, clarity of expectation and our engagement to assist that process.
I will pick up on a question from Deputy Sherlock about the number of credit unions about which Ms McKiernan is concerned. Her answer to Deputy Sherlock was that an analysis was done in 2014 and that an analysis will be published some time this year. What figures did Ms McKiernan have in mind when she gave that speech on 8 March?
Ms Anne Marie McKiernan
We are constantly assessing the state of compliance of the sector with a myriad of regulatory requirements.
I understand that but on 8 March, Ms McKiernan made this statement so she must have made it with certain figures available to her. What figures were available to her on 8 March?
Ms Anne Marie McKiernan
I can point in particular to two thematic reviews we carried out in 2016 in two areas.
I just want to know the figures to simplify it.
Ms Anne Marie McKiernan
I am not going to give a figure for a particular number of credit unions that are failing to meet particular requirements because there are credit unions that meet and exceed and others that fail to meet some but not all of differing requirements. There is no one number that fails to meet either a large or small number. This is a constantly evolving picture. As the Chairman can imagine, it is quite complex because there are different expectations and we require different standards of small versus large. We prioritise our risk assessment in certain areas so with the large ones, it is multi-varied while with the smaller ones, it tends to be around governance and-----
Let us consider the speech given on 8 March. Would Ms McKiernan not accept that, on the basis of the speech, anyone listening would run a mile from the credit unions? Without an explanation for the numbers involved, we do not know the scale of the issues she is describing to us. I would have far preferred if she had answered in numbers by saying that the Central Bank has concerns about a given number of credit unions relative to a particular aspect of regulation, and concerns about another number of credit unions in terms of another aspect in order that we can get a picture of what is going on. I think the members of credit unions throughout the country deserve at least that much from the Central Bank. It would put the minds of those involved at ease. They could rest assured that it is not a basket case scenario. Ms McKiernan's speech gave the impression that there is a huge gap between Central Bank expectations and where the credit unions are at. If the Central Bank outlines where they are at, the question moves on to the number that are at that point. How many have to get over the line before the Central Bank would be satisfied with credit union acceptance of the new regime of regulation?
Ms Anne Marie McKiernan
There are several points that I am keen to address. First, we have published a thematic review - we will shortly publish a second - of our findings in respect of two specific risk areas. One relates to the application of governance requirements on fitness and probity. The second relates to outsourcing. The aim is to call out the types of failings as well as the good practice that we have seen. We want to show the good examples for other credit unions to learn from as well as the types of standards we expect of well-managed financial institutions. These institutions are managing other people's money. This process is in line with our statutory mandate to protect members' funds and the stability of the sector.
I wish to point to one particular financial indicator. It is symptomatic of the overall improved financial resilience of the sector – not to speak of other regulatory requirements. There are now three credit unions that do not meet the 10% regulatory requirement. Obviously, we work extensively with these to mitigate their issues because the 10% regulatory reserve ratio is the loss-absorbing layer and it is an important indicator of the financial resilience of a credit union. The number is down from 52 in 2011, which was a time when crisis conditions were far worse.
We are able to give confidence to the vast majority of credit union members in this regard. In respect of that financial indicator and others credit unions are in a vastly improved position than several years ago. This reflects the significant efforts made within credit unions whereby the majority have taken conservative financial decisions to improve their financial positions as well as their attempts to adopt the regulatory framework. In many cases, these attempts have been successful and in some further work remains to be done. This framework has been peer reviewed and deemed appropriate for the nature, scale and complexity of the Irish credit union sector.
I still have concerns. I am going to work quickly through what Ms McKiernan said to try to restore some structure in terms of the position of the Central Bank versus the credit unions. Earlier, officials from the Department of Finance appeared before the committee. The representatives clearly said that everything was the fault of the Central Bank, basically, and that everything was under the remit of the regulator. They were asked several questions and the answer was that the Central Bank was the regulator.
Ms McKiernan said that, regrettably, we are seeing too many cases of non-compliance with many regulatory requirements and some cases of unacceptable poor systems and controls. She went on to say that such breaches will not be tolerated by the Central Bank and that the bank would take enforcement cases against credit unions. For her to believe it to be necessary to say that, I take it the Central Bank is having considerable difficulty with the credit union sector in terms of compliance with regulation. Otherwise, why would she state it so baldly and generally?
Ms Anne Marie McKiernan
We carried out prism or on-site engagements throughout the credit union sector. These were appropriately steered and proportionate, depending on the size and scale of the credit unions. The nature of the risk mitigation programmes identified indicates a need in more credit unions to work on their systems and controls. Some of the failures that we have seen in the sector have been characterised by weak systems and controls, weak financial management and weak operation of the financial environment of the credit union. These have been factors in the failures of those credit unions. We work particularly hard to ensure that they do not give rise to the loss of any members' funds. We look closely to see whether such failings exist in other credit unions and, where they do, we work to ensure they are remediated.
The point is the Central Bank will not quantify them in numbers. That is my concern. I think it is necessary for the Central Bank to spell out the numbers we are talking about. Credit union representatives put it to us that they cannot develop their businesses because of the extent and nature of the regulation that they fail to understand. Ms McKiernan referred to the business model transformation. We have emphasised that credit unions own their own business model. There comes a point in regulation where it is simply too much.
This takes me back to the question Deputy Sherlock asked. We are told there is no tiered system, but Ms McKiernan is telling us that there is a tiered system. The credit unions are saying that they want a tiered system because the smaller credit unions cannot handle the financial burden of red tape and bureaucracy bearing down on top of them. That is their complaint. Again, I am keen for Ms McKiernan to focus on the numbers that she is talking about in order that we might understand it. As I said, she made these remarks in her speech. I would like her to answer the point about too much regulation. It is simply preventing the credit unions from doing business. Moreover, she keeps referring to the need to safeguard funds. That is the entire purpose of localised credit unions. They know their members and they are protecting the funds of their members. It is as if she repeated the point so many times in that speech, Ms McKiernan believes credit unions do not understand it.
Ms Anne Marie McKiernan
The Chairman made a point regarding regulation scale or the assertion that there is over-regulation. We operate what we believe to be a proportionate and appropriate system of regulation and supervision. It is attuned to the carrying out of our statutory remit of ensuring stability in the sector and the safety of members' funds. However, we have higher requirements, as I have said before, for the larger credit unions and scaled-back requirements for smaller credit unions. We are not raising significant risk issues for the smaller credit unions where such risks are not material to their business.
We had an external peer review carried out by the International Credit Union Regulators Network in 2014. The review judged that our system of regulation and supervision was proportionate to the nature, scale and complexity of the Irish credit union sector. Moreover, the regulations we have in place now were built on the recommendations of the Commission on Credit Unions in 2012. We believe these have been implemented fairly and proportionately. We believe it is not a question of over-regulation and that the regime is appropriate. Where we find instances of failures or where we believe the position of credit unions endanger members' funds, then we take the appropriate action. That action may involve restructuring - this has been the case in several instances - and, in rare cases, liquidation.
That is fine. It takes me back to my question. How many basket cases does the Central Bank have? How many credit unions is the Central Bank concerned about? Ms McKiernan did not give us figures. She says it generally in terms of the credit unions. She says that some require more attention than others and that some are not observing regulation. It is only fair to those doing their business properly that she indicate the number about which she is concerned.
I think the members need to know. I heard the witness's answers before. Unless she has the figures, I do not think there is any point in pressing her on those.
Mr. Frank Brosnan
Would it be possible for me to address some of that?
Yes.
Mr. Frank Brosnan
First, I will refer to the operation of our prism engagement. What that means is that our supervisory teams go onsite within the credit unions. We have discussed it as a proportionate engagement. Arising from that engagement, we assess the credit unions under the key headings, whether that is credit risk, governance risk, strategic risk, business model risk, investment risk, etc. We give a report card to the credit unions. It is a very interactive and constructive engagement. We are not there to find fault. However, we do identify the risks and grade them in terms of their significance. It is a very well articulated framework. The credit unions understand it in advance of our going onsite. Arising from this, we develop what is called a risk mitigation programme. We show the risks we have identified. A credit union might have so many red risks and so many amber risks. Those are the ones they need to focus on. We give them a suggested remediation that should be put in place to address these weaknesses. We send that to the credit union in draft form. Our expectation is that they either accept it, come back with contrary evidence if they have it, or they suggest an alternative remediation which achieves the same objective that may be more palatable or more feasible from their perspective. That is the nature of our engagement. It is evidence-based engagement. Arising from that, we have an element of profile within the sector. The remediations are time-bound.
As the registrar said, it is not fair to quote a number because some credit unions meet the remediation actions and address the weakness. Therefore, that number shifts. We know where there are risks. If a heat map is done of the sector, we know areas in which weaknesses are emerging that are evidenced. We can also see other potential areas where we are beginning to see weaknesses develop further. We are calling those out. If we mentioned a number, the discussion would become about the number and would not be about the remediation. Our focus is on remediation and moving it on. Our aim is for everybody to be in the green zone, to use the traffic light analogy.
I thank the witness for the explanation. I will finish on that particular point. The witness said that mentioning the number would make it the focus. However, when the number is not mentioned, they all become the focus. I think that is unfair to those credit unions that are performing. I believe most of them perform reasonably well as of now because of the corrections that were made by the sector and with the help of the Central Bank and the regulator and so on. When statements like this are made, they need to be tested. In testing it, the numbers need to be given.
Mr. Frank Brosnan
In seeking to provide clarity, we have actually undertaken to provide a report to the sector in 2017, which will identify the key issues and good practices that we see in the sector. That is the gap. We set out our exemplars on that, but we cannot give a league table because that would clearly be destabilising. It is very difficult-----
I understand that. General commentary like that is also destabilising because it sucks the confidence out of a sector. That is the problem that I see in it.
Mr. Frank Brosnan
When we are addressing a meeting of the sector and we are calling out areas of concern for the credit unions to focus on, should we not be calling out these weaknesses? We believe that they are the appropriate forums for those to be raised in.
That is fine, once the witnesses tell us how many there are. This forum here is trying to drill down into the issues around credit unions, why they are not allowed to do one thing or the other and the regulation around them. I accept the witness's point, but I want to know how many credit unions we are talking about. We are not going to get the figure, so I am not going to labour it. However, I believe that if a statement like that is made, facts should be presented in support and we should not be referring backwards to 2014. If, on 8 March, there were 20 credit unions concerned, that should be said.
Mr. Frank Brosnan
I fully appreciate the Chairman's point. We are just conscious that the focus of attention would then be whether each specific credit union is one of those 20.
Yes, but I am wondering now if my credit union is one of them.
Mr. Frank Brosnan
We are required to publish the information. Prism is a process of remediation. That is why we want to call it out in that framework.
Okay. The other question-----
Ms Anne Marie McKiernan
If I can, I will give information on where we publish data that helps to highlight where there has been progress by a large number of credit unions and where there are actions outstanding by others, which is in the area of lending restrictions. Lending restrictions were initially imposed at the height of the crisis to stop excess dangerous lending and the potential for larger losses. They largely achieved that aim. They were calibrated so that they did not impede the normal business and personal lending of credit unions. In general, they were not biting, but they prevented excess. They then stayed in place for quite a period of time and credit unions did not seek to have them removed. However, we felt that it was important to better understand whether all credit unions should remain under a lending restriction or could meet the appropriate and proportionate requirements regarding their credit management.
In 2015, we started a significant review. At the start, there were 197 lending restrictions in place. There are now 62. That is less that one third of what it was. It demonstrates two things. First, the credit unions that can meet the requirements, which are not onerous, can have a lending restriction review. The Central Bank is proportionate and open to change with regard to any of its rules if credit unions can meet the required standards. Second, the restrictions that remain in place do so because those credit unions have decided that either they would rather live under a restriction imposed externally than come up with their own rules and risk appetite and lending, or they have not been able to demonstrate that they can meet the basic requirements to show that they best safeguard members' funds in the way they lend those funds. Lending restrictions now carry an information content of where the credit union sits with regard to it.
I thank the speakers for their time. I wish to briefly move away from the loan book and the challenge of growing loans in the sector and talk about the regulatory reserve ratio and the blunt instrument that is there that all assets from credit unions have to have a 10% reserve in respect of them. The need for risk-weighted calculation was highlighted in the hearings. Is the witness suggesting that the skill set is not in the credit union sector to work out that calculation?
Ms Anne Marie McKiernan
No, that is not what I said. What I said about the current approach that is in place, which is non-risk-weighted, as is generally advocated, is in line with the World Council of Credit Unions advice on this matter. I quoted what the World Council of Credit Unions advocates in terms of applying a risk-weighted rather than flat rate approach. It referred to situations in which credit unions were operating significantly like banks and applying the Basel approach, which would require the calculation of capital in the same way as it is done under the pillar 1 approach. Credit unions in Ireland still have a less complex business model than one tends to find in other jurisdictions. We believe that it still remains appropriate to have a flat rate 10% required reserve ratio in that light. If the model is to change significantly, that can be revisited. Of course, we are open to doing that, but we do not think that now is the time.
Considering that credit unions may have invested in Government guaranteed bonds for some of their portfolio, does it not seem extreme to have a reserve requirement of that nature, given that they are underpinned by the Government for a part of their investment? Does that not still seem a bit harsh?
Ms Anne Marie McKiernan
The purpose of the reserve ratio is to have a level of financial resilience in the credit union so that it can withstand losses. As I have said previously, we want to see that the level of resilience is there. It is the minimum level required on which they can build to both meet all of our current expectations and potentially take on greater risks with regard to their future business models. Most credit unions are adapting the conservative approach of seeing that it is not just our reserve ratio that they feel is right for them. They are applying a higher reserve ratio. That is appropriately conservative of them. As I mentioned, the sectoral average is 16%.
Some credit unions have raised concerns in the media of taking deposits, etc., and being hampered by the 10% rule.
Some of them have stated this in their evidence to the committee over the course of our hearings.
I will move on. The change from the need to revert to legislation through the Oireachtas to the need to revert to regulation in regulating the sector through the Central Bank was deemed to be more effective in making minor changes within the sector. However, from listening to the sector, I understand it believes that this has not worked out as envisaged from the point of view not only of oversight, but also of the key objectives in making minor changes. It seems to be very difficult to facilitate this. Does Ms McKiernan have a view on this?
Ms Anne Marie McKiernan
The regulation-making powers for the registrar came into effect on 31 December 2016. We will shortly undertake our first consultation in line with this position. I refer to the consultation I have already mentioned on broadening the available investment asset classes for credit unions to invest in. To be clear, it is in the requirements for setting the regulations and was also our intention in any case that we would consult with the sector on any proposed changes. This is an appropriate belt-and-braces approach in the case that we, as registrar, however unlikely it might be, might make changes that the sector thinks inappropriate. We have a consultation protocol which we will use in the forthcoming consultation, as we do in all others. The regulation-making powers are a more efficient and flexible instrument than legislation tends to be, but we will operate the use of them in an appropriately prudent and engaged way.
Does Ms McKiernan think there is any merit behind the suggestion that making minor changes through regulation vis-à-vis the Central Bank is proving difficult? The sector has suggested this.
Ms Anne Marie McKiernan
Our sectoral engagements are extensive and are undertaken in many different forums, not only within the registry. We also sit on the CUAC implementation group and meet in many different forums. It is unusual that in all these engagements this has not been raised as an issue to move up my agenda at all since the regulations were passed.
It has been raised here.
Ms Anne Marie McKiernan
I appreciate that, but it has not been a matter of dialogue on a bilateral basis with anybody since the regulations were signed at the end of 2016.
That is fair enough.
I welcome Ms McKiernan and her colleagues. I think all the detailed questions have been covered. Overall, based on present trends, what does Ms McKiernan think the credit union sector will look like in, say, ten years' time? We have already seen much consolidation. She has outlined this overall and the relevant figures. Her full written statement states that "if current loan, investment income and cost trends continue, an increasing number of credit unions could face serious viability issues in three years' time - highlighting the urgent need to now address the business model challenges the sector faces". However, as it stands, and based on current trends, what will the sector look like in ten years' time, in her view?
Ms Anne Marie McKiernan
There is a series of issues to address in the Deputy's question. Let us first take restructuring. The sector has greatly embraced the need for restructuring, as set out in the report of the Commission on Credit Unions in 2012. The sector adapted and availed of the restructuring board, ReBo, facilities and funding, and we congratulate and have welcomed the sector's efforts in this regard. However, taking on mergers is the first step, and the second step is to derive benefits from the larger scale that merged entities should enjoy. The type of benefits that should be focused on are cost efficiencies and the use of the additional scale to drive out business model development in a prudent and risk-managed way. This will give the opportunity to-----
Ms McKiernan has gone into detail and is saying what she would like to see happen to change the direction in which the sector is going, but what I am asking her is her honest assessment based on current trends. What will the sector look like in a decade?
Ms Anne Marie McKiernan
It will very much depend on the type of business model change that credit unions-----
I said "based on current trends".
Ms Anne Marie McKiernan
We have a number of-----
I know I am asking her to gaze into a crystal ball and look into the future, but we must be honest about the sector's position.
Ms Anne Marie McKiernan
As I mentioned earlier in my remarks, despite all the environmental factors, such as a low yield environment and the former contraction in the consumer lending market, and despite some of the credit unions' structural characteristics, such as an ageing membership base and a narrow product offering, we see that a number of them have managed to build financial and operational resilience, be viable on a forward basis, build their membership bases to be more borrowing-oriented and broaden their products in a more viable way. That is a strength to build on and demonstrates that many other credit unions, notwithstanding some of the difficulties they must deal with, have the opportunity to follow that route. I referred to restructuring because it provides an additional opportunity to realise benefits that have not yet come through. I think there are trends under way in this regard. The first one was undertaking the mergers; the second will be to realise the benefits for them. When that comes to pass, it will put the sector on a much sounder footing to deal with its requirements.
Again, I do not think Ms McKiernan is answering the question, to be straight with her. I think she is giving a view as to what she would like to see happen. That is not what I asked her.
She does not have the crystal ball in front of her.
Ms Anne Marie McKiernan
I do not have a crystal ball.
The registrar is best placed to give an assessment based on current trends. Let us be specific. She is saying an increasing number of credit unions could face serious viability issues in three years. Again, to echo the Chairman's sentiment, how many? What are we looking at, again based on present trends?
Ms Anne Marie McKiernan
Are we talking about worst-case outcome in terms of returns on investment, falling loan books or saving rather than borrowing members? We could extrapolate many negative trends. That is a stress-test-type scenario. It is not a central forecast of what the future of the sector might be. Obviously, regulators in general do consider stress outcomes because they highlight what risks lie ahead if pre-emptive actions are not taken. We have carried out stress-testing in the past which provided the opportunity to make significant changes to arrest the worst outcomes. I will not give a particular number of credit unions that could become unviable on the basis of the numerical extrapolation of numbers in respect of which the Deputy and I could differ as to the basis on which they were arrived at. However, what we are highlighting is that there are certain matters and current trends that show it is important to make changes now to build on the financial and operational resilience that has grown since the crisis due to measures by credit unions, the registry and others, and use this better resilience now and rising regulatory compliance as the opportunity to deal with the structural factors.
What is the current loan-to-asset ratio across the sector?
Ms Anne Marie McKiernan
It is on average between 26% and 27%-----
Where does it need to be?
Ms Anne Marie McKiernan
-----and we see huge variation in credit unions' positions on that spectrum.
What would Ms McKiernan regard as a viable loan-to-asset ratio for a typical credit union? I know there is wide variety-----
Ms Anne Marie McKiernan
Yes. In the past we have pointed to international figures that tend to get used that have no specific predictability or validity, but figures in the range closer to 40% or 50% tend to be considered more viable on a long-term basis. A number of credit unions are operating above that range and, in some cases, well above it. However, obviously, other credit unions are operating below it and, in some cases, well below it.
Is it the Central Bank's view that around 40% is the tipping point for viability?
Ms Anne Marie McKiernan
We do not have a view on a particular quantitative indicator being the specific tipping point. Many factors need to be borne in mind to make sure that credit unions can stay viable into the future and that they can best protect members' funds. Meeting regulatory requirements, which is more a qualitative than a quantitative indicator, is equally important in that vein.
Yes, but ultimately, it does come down to a question of viability, and if the credit unions are not lending enough money, which is their bread and butter-----
Ms Anne Marie McKiernan
Yes, and we have called out the need for that to change.
-----they are in deep difficulty.
Where does Ms McKiernan believe that the ratio needs to be as a sector average? Currently it is 27%. Last year the CUAC report raised serious concerns about it and again raised the viability issues that Ms McKiernan has also raised today. Where does it need to be? Should it be more like 40%?
Ms Anne Marie McKiernan
For credit unions to be demonstrating their long-term sustainability and viability, it certainly needs to be moving in that direction and above it.
So 27% is the-----
Ms Anne Marie McKiernan
May I just say that there are credit unions which are operating within the current environment that are demonstrating clearly their viability and sustainability into the future.
What proportion of credit unions would have a lower loan to asset ratio, that is, below the average?
Ms Anne Marie McKiernan
We can pull out those figures for the Deputy. Eighty would be below 40%.
Eighty-----
Ms Anne Marie McKiernan
Eighty credit unions would currently be below the 40% ratio.
How many would be below 30%?
Ms Elaine Byrne
We have a table. It might be helpful if we sent it to the committee.
That would be great but it would also be helpful if the witnesses could just call out the highlights.
Ms Elaine Byrne
We have done a bit of analysis on it, including by three sizes of credit union. We can, therefore, send a table which would probably be clearer.
Perhaps the witnesses could tell us how many are less than 30%, say, or the average of 27%.
Ms Anne Marie McKiernan
We have that broken down also by smaller, medium and larger credit unions. Interestingly, the smaller credit unions, defined as those at less than €25 million, have a slightly higher average loan to asset ratio than the sectoral average because the sectoral average is currently approximately 27%. There is also significant variability. The maximum loan to asset ratio is in the lower category credit unions. That can sometimes be anomalous but it is worth pointing out.
There are 281 active credit unions. How many of them have a lower loan to asset ratio than the average of 27%?
Ms Anne Marie McKiernan
Two hundred odd-----
Ms Elaine Byrne
If we use the level of 20% as a cut-off point, 23% of credit unions are in that category.
Therefore, almost a quarter of credit unions have a loan to asset ratio of less than 20%.
Ms Elaine Byrne
Yes.
Ms Anne Marie McKiernan
A significant number of credit unions - some number of credit unions in that cohort - are often subject to a transfer of engagements or considering a transfer of engagements approach. It is not a direct correlation, but we have noted that 27 mergers are in progress. They would tend to be, although not exclusively, concentrated in the lower loan to asset category.
What is the Central Bank's view of a loan to asset ratio of less than 20%?
Ms Anne Marie McKiernan
It is an important indicator for us when examining how a credit union intends to demonstrate its viability and ability to safeguard its members funds.
The Minister for Finance, Deputy Noonan, gave an estimate to the Seanad in October 2011 that the cost of rescuing credit unions could be up to €1 billion. What was that based on?
Ms Anne Marie McKiernan
That was a stress case and, if one likes, the worst of a series of stress case assumptions. It is important to always highlight that when one uses a stress test or a stress case assumption one is pointing out what could potentially happen in unlikely events. Regulators do that to prompt corrective action which then stops that worse outcome from being realised.
It was based on stress test analysis by the Central Bank.
Ms Anne Marie McKiernan
Exactly, and loan book reviews which were carried out in consultation with consultants in the sector. That figure, which gained a certain-----
Net of the levies they have paid, what has the cost to date been to the State of supporting credit unions?
Ms Anne Marie McKiernan
The five resolution actions undertaken on the Central Bank and Credit Institutions (Resolutions) Act have cost €4.3 million in terms of two directed transfers. The work out of the cost of the liquidations have yet to be finalised, but that comes out of the estate of liquidation. I think I pointed this out earlier, but we have also undertaken a number of non-court based involuntary restructurings or quasi-resolutions using the sector's private fund - the SPS fund. That has saved the taxpayer €25.5 million.
That was funded through the sector's own fund.
Ms Anne Marie McKiernan
Exactly.
In terms of public money and not the sector's own money, the cost has been €4.3 million. Is that correct?
Ms Anne Marie McKiernan
That relates to the cost of the two directed transfer cases specifically.
Is it fair to say that the estimate of €1 billion was, to say the least, very wide of the mark?
Ms Anne Marie McKiernan
First, it was not an estimate of €1 billion-----
It was put on the record.
Ms Anne Marie McKiernan
-----as a potential cost. It was a figure arising from a particular stress scenario or potential outcome which prompted the taking of myriad corrective actions both by authorities and within credit unions and stopped that worse outcome from being realised.
Would it be fair to say the assumptions-----
Ms Anne Marie McKiernan
I think that is an important reflection of the commitment of individual credit unions to take the best actions.
It gave the public message that the credit union sector was a basket case. In October 2011, the Minister went into the Seanad and said the cost of rescuing the credit union sector could be up to €1 billion. It has ended up being €4 million. What message did it send? The assumptions that were made in that stress analysis came nowhere near being met in reality.
Ms Anne Marie McKiernan
We can keep coming back to the point but it was not a prediction. It was a worse case of several stress based scenario outcomes which did not materialise because of all of the actions that were undertaken since. It is important to note that, if one likes, it was based on a particular loss potentially arising in the gross lending of the sector and that it might grow and eventually incur losses. However, gross loans, as the Deputy is aware, contracted dramatically in the following period by up to 30%. That reflects a number of other environmental factors, including the fall off in member demand in the particular environment that existed and the high level of indebtedness across the sector. That was unanticipated but turned out in hindsight to be a fortunate way in which the opportunities for making losses on lending can be realised. Of course, lending restrictions were imposed in such a way as to constrain the potential for high losses. We cannot know the counter-factual because so many issues were undertaken.
I do not seek to diminish the serious issues that arose in a small number of credit unions. Those had to be dealt with and more may emerge and will need to be dealt with under the registrar's powers. All that I would ask of her, however, is that she would work in a spirit of co-operation with the sector which is seriously frustrated. I am sure Ms McKiernan monitored the proceedings on Tuesday and the hearing we had with its representatives. Many committed people are working in the credit union movement and many of them in a voluntary capacity. The issues that have emerged have been quite modest and dealt with and any further ones that emerge will need to be dealt with. However, we can contrast it with the issues that we had in our banking system, where the gross cost was €64 billion. The viability of credit unions is under serious threat. All I ask of Ms McKiernan is that she would work them in a spirit of co-operation, try to assist them, trust them and give them the opportunity to develop the business model. She can afford to take some risks, allow them to do things and enter new streams of activity.
I believe that the long-term lending area, which was discussed at length, is one area of potential. The credit unions also need to do more themselves. I would be the first person to say that, and I have said it to them publicly and privately, but there is a deep frustration there. As someone who is independent and looking at the overall figures, I am very concerned at the direction in which this is going. The witness may not want to call it as she sees it right now, but looking at those key metrics there are serious viability issues overall. We are witnessing the decline of a great national movement. I do not want that to happen on our watch and I do not think the registrar should want that either. She is in a pivotal position now to do something positive about it and to stop the trend that is very evident to us.
Ms Anne Marie McKiernan
I thank Deputy McGrath. I share his view on the criticality of the credit union sector as we see it. We aim, in all of our engagements and work, to support a thriving credit union sector in Ireland for the future so that it can continue to do what it has done over the past 50 years in serving communities and members so positively. I thank the Deputy for acknowledging that there is more the sector can do around business model development and that we are working as proactively as we can while also recognising that it is the sector's responsibility to devise its own business model. They can count on the Central Bank to give all the support that is appropriate on how they do that, while we also review all of those aims to ensure that they are best able to protect members' funds and the future viability of the sector. It behoves all of us to ensure that whatever development comes does not destabilise either individual credit unions or members' funds. Obviously, we will stay tuned to how we can best do that in multivaried ways.
I ask Ms McKiernan to be very specific with them. Much of the language she has used here has been very general and broad about seeing proposals for long-term lending that are not sufficiently well structured and with sustainable aims. The registrar needs to be very clear and specific with the credit unions. If they make proposals that she believes do not meet the required standards, the Central Bank must tell them exactly why they do not meet requirements and help them by saying, explicitly, what it is they need to do to meet the standards that would allow the Central Bank to give approval. Much of what we have heard here has been very general.
Ms Anne Marie McKiernan
I can say that in our bilateral engagements with the originators of all proposals we are very clear. They certainly can be in no doubt regarding our view of what needs to be addressed in proposals, and how much commitment and understanding of risks and capabilities needs to be put in to driving those proposals forward. We are giving the best of our resources around analysis, expectations and considerations to ensure that happens. Our dialogue with the credit unions is direct and clear on this basis.
I wish to take up a point made by Deputy McGrath. Something is clearly not right here and it must be said. I am sure that all of what Ms McKiernan has just said would be accepted by the credit union movement as being what they want to hear. Deputy McGrath went back to the €1 billion figure. That was around October 2011. It was disgraceful and damaging to the credit union movement that this was stated as baldly as it was when in fact the hearings today and on Tuesday have established that €25 million was paid from that fund. Some €25 million was also paid from the credit unions' own funds from within the credit union movement. Then there was the €4.3 million mentioned by Ms McKiernan this morning. That brings it to a total of €54 million. By any measurement, the difference between €1 billion and €54 million is substantial. I believe that whoever got this wrong needs to explain it.
We also have Ms McKiernan's speech from early March. I believe the same point applies. General statements like that are being made about credit unions and not enough information, context or explanation around the comments are being given. I believe, quite frankly, that some of the comments were unwarranted.
At today's hearing, in comparison to what happened on Tuesday, Ms McKiernan said there is a proportionate or tiered approach to the credit unions, yet the Credit Union Managers' Association has said that tiered regulation, proportionate to the scale and risk in each credit union, has not been delivered. That is a pretty bald statement being made by those who are at the coalface. It does not add up with regard to what is happening within the credit union movement that it would say one thing and the Department of Finance tells the committee that this area of decision-making belongs to the Central Bank. According to the Department officials this morning, the Central Bank can introduce a three-tiered system if it wants. Ms McKiernan referred to consultation and engagement and, again, the Credit Union Managers' Association told this committee that consultation and engagement have been less consistent and transparent than was originally envisaged. Ms McKiernan has painted a different picture this morning. If we look at the regulatory directives, the Credit Union Managers' Association told the committee that a one size fits all approach to regulatory directives can have very significant adverse impacts on the credit union sector, both in the short and long term.
On the housing issue, the credit union representatives met with the Minister for Housing, Planning, Community and Local Government, Deputy Coveney, and they had conversations with the Minister for Finance. The credit unions cannot get out of that merry-go-round to reach a point where they can deal directly with the registrar in the Central Bank or to the point where someone could introduce legislation on the common bond issue. If the credit union representatives are telling us this, they either do not understand the matter and are being misled somewhere or their conversations are being parked and not acted upon.
They have asked that the development proposals of credit unions would be dealt with in a more structured, timely and appropriate manner. They say that SI 1 of 2016, which the Minister has the capacity to develop, puts them at a significant disadvantage in relation to banks. The credit union representatives are telling a completely different story from the story presented to this committee this morning by the Department of Finance, or indeed by the Central Bank as the regulator. There is a breakdown somewhere and the people who are suffering from these negative and general comments are credit union members because they are wondering what is going on here. There are others who suffer. Let me return to the housing issue. Some Members in the House feel that €11.5 billion was put into the banks by credit unions, and credit unions have shown a willingness to participate in some saving mechanism for those looking for housing, but all of this is being frustrated by regulation, bureaucracy and a lack of legislation.
I am trying to sum up what has happened here. I will leave here today confused about who is doing what to assist or not to assist the credit unions. Ms McKiernan gives an account and sticks to that account - I am not saying she is wrong and the credit unions are right - but the accounts vary so considerably that it is difficult to understand what is needed to get out of what appears to be the mess we are in at present. Simple measures were pointed out to us regarding regulation and the sanction for annual general meetings, for example. There are significant delays and backlogs preventing AGMs from taking place. This is what the credit union movement has told us under the headings of investment rules, changed rules around lending, regulatory reserve ratios and the attitude of the Central Bank in the context of the speech. The credit union representatives told the committee that many of the issues arise from a lack of Oireachtas oversight.
The proposal today was that we would have regular oversight of whatever happened in the previous quarter and that we would try to bring focus to this. That should not need to be the case. Does Ms McKiernan want to comment on what I have said? I know there is a lot in it. I have to say I am deeply unhappy about the exchanges we have had.
Ms Anne Marie McKiernan
I thank the Chair for the opportunity to respond. I would like to pick up on three points. I imagine that in every regulated sector, there is healthy tension and disagreement in the relationship between the regulator and those who are being regulated about how to take matters forward. We are absolutely clear that we want the same outcome as the sector and its representative bodies. I will not repeat myself by saying we want to see and support a thriving credit union sector that continues to provide valuable services to members in communities and across the financial system. We may differ in how we should get there. The picture we have gives us the advantage of seeing sector-wide practices and levels of regulatory compliance. We have called out the successes we have seen. However, we also have to call out the areas where further work needs to be done to best protect members' funds. Any business model proposals that are ambitious or otherwise should be built on solid foundations and should meet the requirements that apply to the current business approach, which is much less complex.
I know tiered regulation has been a central issue here. When we consulted the sector in 2014 on a form of tiering, it did not agree on a form to take forward at that stage. There were differences between the views of small and large credit unions. In our proposed model, we advocated that the smaller credit unions should be able to do more than those in the lowest category set out by the Commission on Credit Unions - type 1 - are currently able to do. Even though we expanded the range of services and opportunities available to credit unions in that category, the response from the sector at that stage was that smaller credit unions did not wish to be so confined. When we looked at this retrospectively, we found that if the form of tiering outlined in an example by the Commission on Credit Unions had been adopted, there would now be 30 credit unions in the type 1 system. One third of the credit unions in question are now in a transfer process. We would have built a system that would have eventually covered a very small proportion of the sector and we would have constrained it in what it could do. With the benefit of hindsight, it is probably just as well that we did not push ahead with the implementation of that kind of framework because it would eventually have become somewhat irrelevant. As we have said previously, we are not against any form of tiered regulation. We have sought to achieve the benefits of tiering within our existing framework. We do not assume that one size fits all. We have proportionality in our approach. We are very happy for anyone in the sector to challenge us on how alternative models could drive out more benefits than those we feel we can deliver within our approach.
As a result of our focused attention on reducing the number of outstanding AGMs, just 12 organisations in this sector, ten of which are currently in a transfer process, have outstanding AGMs at present. We are very keen to ensure AGMs happen as scheduled because they give members an opportunity to get the information they require to understand the strategic direction and financial position of their credit unions. Credit unions sometimes cannot hold AGMs because their financial accounts are not finalised due to factors within the credit union. I referred earlier to failings in basic financial management, including bank reconciliation. Such practices in a credit union will hold up the finalisation of its financial accounts. We sometimes require supervisory matters to be remediated. Due diligence in relation to a transfer of engagement sometimes needs to be finalised. I acknowledge that such matters can cause delays. The number of outstanding AGMs is significantly smaller than the numbers that were noted when practices in the sector were different in previous years. For example, 35 AGMs were outstanding at the beginning of 2015 and 29 AGMs were outstanding at the beginning of 2016. As I have said, just 12 AGMs are outstanding now.
I will respond to Ms McKiernan after Senator Burke asks some more questions.
Have any members' funds been lost over the years since the crash?
Ms Anne Marie McKiernan
No member has lost any funds in all the restructuring and resolution actions that have been undertaken. Exhaustive work has been undertaken, generally within the registry, to ensure we can protect members' funds in the event of a resolution situation. That is a core part of how we seek to execute our mandate to protect and respond.
I take it that no members' funds were lost in the basket case in Newbridge.
Ms Anne Marie McKiernan
No members' funds were lost in any credit union resolution case.
What was the total loss in Newbridge?
Ms Anne Marie McKiernan
As the liquidation of the remaining part of Newbridge Credit Union, following the transfer of its loan book and assets to Permanent TSB, is still being finalised, we do not have a final figure. This matter is being managed by the liquidator for Newbridge.
The liquidation in the Newbridge case is not finished.
Ms Anne Marie McKiernan
It can take some time for the executing of all the requirements under a liquidation. That is not a matter for the registry.
Does Ms McKiernan have any proposals for us as legislators? Does she require any additional legislation to help her to bring about some of the changes that might be needed in response to the outcry from the credit unions, which are frustrated at the moment? We are similarly frustrated.
Ms Anne Marie McKiernan
I thank the Senator for the offer to take forward any legislative proposals we might have. We seek to use the regulation-making powers available to us when it is appropriate to do so. We already have specific plans in regard to the forthcoming investment regulations. I referred earlier to one area of prospective legislative change. As the issue and principle of the common bond is very important to the sector, I am not proposing any specific changes therein but I am acknowledging that the common bond in its current form has limited the sector's opportunities to engage in lending for social housing. If the sector wishes to take a different approach to lending for social housing, a change in the common bond will be required. It has gone down the investment route because the lending route is not available.
The regulatory reserve ratio seems to be a particular problem for credit unions because they are treated differently from the other institutions. It has been suggested that a change from a simple blunt calculation of the percentage of assets to a risk-weighted calculation, as pertains in other institutions, would avoid the crazy situation whereby credit unions have to reserve 10% of all of their assets, including funds invested in Government bonds. The credit unions have a particular problem with that. The suggestion is that if they were treated in the same way as the other institutions, it would have a more beneficial effect for them.
Ms Anne Marie McKiernan
All financial sectors have different risks, issues, challenges and future objectives and are regulated accordingly. Just as a one-size-fits-all approach is not taken within the credit union sector, a one-size-fits-all approach is not taken across the financial system. While risk weighting might be appropriate in some sectors - I acknowledge that the Senator has mentioned it in relation to banking - we look instead at the practices in relation to reserves in other credit union jurisdictions, particularly those where the type and size of credit union and the business model are similar to what we have in Ireland.
As I said earlier, the practice internationally in credit union sectors with the relatively simple or more homogenous business model we have in Ireland has been to have a flat rate reserve ratio rather than a risk-weighted rate. We can provide further information on this if needed.
That might be a problem for some. Some credit unions might not be as big a risk as others but there does not seem to be any flexibility - it is one size fits all.
Ms Anne Marie McKiernan
I acknowledge that. However, at the moment there is not sufficiently differentiated activity across the business model to justify introducing a whole risk rating approach. The key issue is how credit unions can increase their lending in a responsible way, turn their excess of savings into responsible lending opportunities and grow their income and loan book accordingly, and to have a loss-absorbing layer through the reserve ratio to deal with that.
How long will the consultation process take?
Ms Anne Marie McKiernan
We can decide whether it would be a number of months or shorter. We will liaise and continue our engagement with all of the sector. Once our proposed approach has been published we would usually open the consultation process for two to three months. We have had extensive engagement with the sector, including representative bodies, individual credit unions and proposal originators, regarding issues that should be included in this proposal so I do not think there will be any surprises by the time it gets to the sector.
If a new regulation is to be introduced or a regulation changed, does that process require the Central Bank to engage with all parties or can it introduce a regulation without doing so?
Ms Anne Marie McKiernan
We would use the consultation process. It is provided for in the powers given to us in terms of making regulations that we would consult with the sector------
Could it be done without consultation?
Ms Anne Marie McKiernan
No. It is in the regulations and it is an important safeguard in terms of the powers of a regulator.
It is an obligation. Are quarterly reports prepared? Would it be possible to go get some sort of regular report for this committee?
Ms Anne Marie McKiernan
We are open to providing whatever information is needed or consulting as the committee requires.
Would the witness mind giving us what she considers reasonable reports?
Ms Anne Marie McKiernan
Yes, absolutely. We will have to consider that.
For example, a report to highlight the information the witness gave to Deputy Michael McGrath this morning and any changes to that. It would inform the members.
The credit union movement in their different guises have told us that they have made many proposals. There was reference today to proposals not having been made. That has to be clarified between the Central Bank and the credit union movement. I would like to know how many proposals were made.
Ms Anne Marie McKiernan
We will certainly have that.
Perhaps they were proposals that could not be acted upon.
Ms Anne Marie McKiernan
I mentioned that no proposals regarding long term lending limits were sufficiently structured to allow us to take them forward.
Were there other proposals?
Ms Anne Marie McKiernan
We have not received a broad proposal in that area. We have received requests to lift the limits but they have not been accompanied by a demonstration of an understanding of the kind of issues I have mentioned. Those issues are obvious for any groups that intend to get into the mortgage lending or long term lending area.
I agree there should be a healthy tension between the regulated and the regulator. However, coming from my business background, I would hate to be regulated by this regulator. I understand an awful lot of the frustration expressed by the credit union movement.
I agree with Deputy Michael McGrath and other members that there is a clear need for the credit union movement in this country. They have been around since the 1940s and they have cost the State €25 million or €50 million, whichever figure one wants to take.
It is €4 million.
I think that it is a fair account of their sound foundations in spite of some of the drawbacks there-----
And no members lost.
And no members lost. If only the banks had the same degree of regulation we might not be in the space we are in.
The shareholders would be happier.
We will review what we have heard over the past few days. I thank the witness for attending.