The purpose of this Bill is threefold: first it will preclude industrial and provident societies in the main from accepting deposits and will introduce a regime of controls for certain existing deposit-taking societies of a specified size to be operated by the Registrar of Friendly Societies; secondly it will provide the basis for a system for the inspection and supervision of credit unions; and thirdly it will make some fundamental and badly needed changes in industrial and provident law generally.
Industrial and provident societies are bodies corporate which may be formed for carrying on any industry, trade or business, including "the business of banking". The Principal Act is the Industrial and Provident Societies Act, 1893 and its section 19 lays down the conditions which must be met by societies which carry on "the business of banking". These conditions do not, however, involve regulatory control or supervision. In short, they are unacceptable in terms of modern banking controls.
When the Central Bank Act was enacted in 1971, industrial and provident societies were, as a general class, exempted from its scope for reasons that were perfectly valid at the time. Unfortunately, however, it has transpired since, that the exemption was exploited in a fashion which has given rise to a new type of financial institution, namely, the "banking" industrial and provident society. This type of society is easily recognisable by its almost exclusive concentration on the business of accepting deposits from the public.
Over 20 such societies have been registered since 1971. Some have gone out of existence, others have already been cancelled on various grounds by the Registrar of Friendly Societies. There are still, however, 14 societies on the register and, for as long as they continue to operate, these societies constitute a "fringe" banking sector which conducts its business in direct daily competition with the conventional banking sector. In contrast with the latter group, the societies concerned enjoy complete freedom from the extensive framework of controls which are applied to licensed banks by the Central Bank. This means that investors in them are bereft of the safeguards which characterise a licensed banking institution.
Part II of this Bill is, quite bluntly, aimed at this category of society. It has been formulated primarily to correct the serious anomaly that exists as regards the regulation of banking activity as between companies and societies. In addition, however, it will fill the "control vacuum" which existing deposit-taking societies have enjoyed in the years following the Central Bank Act, 1971.
Before discussing some details of Part II, I would like to explain to the House why the problem which these societies now pose cannot be resolved by a simple amendment to the Central Bank Act, 1971 to bring the societies within the ambit of that Act. The fact is that the societies concerned have operated for so long outside the control of the Central Bank that if they were brought immediately within the bank's domain, they could not live up to its technical licensing requirements. While the apparently satisfactory consequence would be that they would have to stop straight away taking in new deposits, the reality is that such a final development could lead to early difficulties, of a very serious nature, for some societies. And the bigger the society, the greater these difficulties could be.
This then is the background to the formulation of the elaborate provisions now contained in Part II. They were framed to avoid the danger of exacerbating, right away, an already difficult problem. Their effect will be to give some breathing space to the larger societies within which they can formulate a definite plan as to their future in the light of the firm prohibition now being placed on the future acceptance and holding by them of deposits.
Section 5 represents the starting point in so far as the cessation of deposit-taking by societies is concerned. It prevents the acceptance of deposits by any future societies and by existing ones which have not yet accepted deposits or have accepted some on a limited basis. It also imposes a definite time limit of five years on both the acceptance and holding deposits by the larger existing ones. Excluded from these provisions, of course, are those classes of society listed in section 4, namely, agricultural co-operatives, fishing co-operatives, credit unions and a small number of credit societies whose operations are largely analogous to credit unions. With the exception of the aforementioned categories, section 5 will apply to all other forms of society which are engaged in deposit-taking. In the preparation of the section, full cognisance was taken of the expert advice of the Central Bank itself.
The effect of section 5 will be to leave an existing deposit-taking society with three main options on enactment of the Bill.
(a) First, to gear itself towards applying for a banking licence from the Central Bank,
(b) Secondly, to arrange alternative sources of finance, for example, bank loans, to enable it to continue with its lending business, or
(c) Thirdly, to arrange for an orderly running down of its business.
To ensure, however, that the interests of investors are, as far as possible, borne in mind by any such society, whatever the option chosen by it, the registrar is being given sufficient powers in subsequent sections to monitor its affairs effectively and on a continuing basis.
By and large, the controls contained in sections 6 to 18 correspond with the powers already enjoyed by the registrar in the context of his supervision of the building society sector. Sections 6 and 15 are, however, exceptions in this regard.
Section 6 enables the registrar to regulate the raising of funds, apart from deposits, by societies to which Part II applies. It will assign to him the function of determining whether or not a proposed method of raising funds by a society is contrary to either the interests of members or of the public. Because the existing Industrial and Provident Societies code is silent in that no protection is provided for members of the public from approaches made to them by societies for funds, there would always be the possibility that existing deposit-taking societies could switch to a method of fund raising other than the acceptance of deposits. They could, for example, invite lump investments on promises of attractive interest or dividends. Rather than providing for an elaborate system of control to cover every conceivable form of fund raising, section 6 constitutes a flexible mechanism of control in this area which, we can be sure, will be administered by the registrar, particularly in so far as bona fide operations are concerned, according to the dictates of common sense and the common good.
Section 15 enables the registrar to appoint a person to the management committee of a society. Underlying this section too is a paramount concern for investors. For, if in the face of the prohibitions now being placed on deposit-taking by societies, a particular society were to decide on a future course of action which did not seem to serve the best interests of its investors, the facility to appoint a person to the committee of management of that society might serve to enable the registrar to intervene decisively on behalf of the collective body of investors. Such a person would, on one hand, be privy to the society's plans in full and, on the other hand, be in a position to steer the society back on a course most consistent with the cause of investors. In particular cases, this type of power for the registrar may prove to be a much more simple and effective device than if he were to invoke, instead, the formal and prolonged procedures of investigation or suspension. However, should any such society eventually prove recalcitrant, notwithstanding the presence of the registrar's appointee on the committee of management, the registrar could always employ the more direct powers available to him otherwise.
Part III of the Bill contains a scheme for the inspection and supervision of credit unions. It will be seen that the scheme compares very closely with many of the controls which have been included in Part II, but, in so far as the supervision and control of the operations of credit unions are concerned, I can say that the scheme has the entirely progressive objective of ensuring, as far as possible, that future growth in the movement is matched with stability.
Since the time of its infancy in the late sixties, the credit union movement has asserted itself as an important source of national savings. Recent figures alone indicate this. In 1969, the total amount due to shareholders and depositors by credit unions was just over £6½ million while the same figure in 1977 comes close to £60 million. Growth of these dimensions speaks loudly of the effort and hard work of those several people who form the backbone of the movement but it is true also that growth on such a scale unavoidably brings problems. As was mentioned in the Dáil when this Bill was presented there, the bigger the volume of money being handled by part-time people who, by and large, run the affairs of credit unions, the greater is the element of risk.
The purpose of Part III of the Bill is, therefore, to try to minimise any such risks. It vests the registrar with sufficient powers not only to monitor trends in the businesses of credit unions but to foresee any problem situations developing and to take any early corrective action that may be necessary. Already, the movement itself has gone on record as welcoming the initiatives contained in Part III.
Part IV is designed to introduce some few, but important, general amendments to existing industrial and provident society law. It does not, perhaps, amend enough of the many outdated provisions governing the activities of industrial and provident societies in the context of modern business conditions. A complete overhaul, however, of the relevant code would be a substantial exercise and would take some considerable time to complete. On the other hand, the prime purpose of this Bill is to protect, as quickly as possible, and so far as it is possible, the savings of ordinary people in a particular type of industrial and provident society. This urgent objective alone has justifiably led to the preparation specifically of this Bill but I would like to assure the House that, as soon as other priorities permit, a complete and full overhaul of the outdated industrial and provident societies code will be undertaken. The opportunity has, nevertheless, been taken to include in this Bill some basic amendments to general legal requirements affecting societies.
Of these, I would consider sections 29 and 30 to be the most important. They will update present accounting requirements for co-operatives to coincide with basic company requirements. The direct beneficiaries from this change will be the members of co-operatives themselves. They can now expect some acceptable level of disclosure and accountability. Agricultural co-operatives in particular are now major powers in the economy and the present turnover of the larger societies is in many instances greater than that of most of our larger manufacturing companies. It is, to say the least, anomalous that the requirements on these societies under current law in the matter of disclosure and accountability is much less demanding that what is required of even the most insignificant of limited companies. I accept, on the other hand, that the changes proposed are not as complete as they could be, nor, indeed as I would like them to have been.
There is undoubtedly a justifiable case for covering other important matters, such as consolidated accounts and the powers, duties and functions of auditors. The fact is, however, that the urgency attached to the pressing matter of protecting people's savings has meant that examination of these other complex and serious items has had to be deferred until the future consolidation exercise gets underway. The introduction of the new basic accounting requirements in sections 29 and 30 will, however, improve the current situation where the need for such improvement is most urgently required. My understanding is that, few as they are, the changes concerned have nevertheless been welcomed by the co-operative movement itself.
I recommend the Bill to the Seanad. The urgency and sensitivity of its prime objective was recognised in the Dáil during its passage through that House. I am confident that Senators too, will give the Bill their support so that the Registrar of Friendly Societies can, in consultation with the Central Bank, proceed without delay to monitor the affairs of the deposit-taking societies in the light of the new restrictions being imposed by this Bill on their operations.