I thank the committee for inviting me to discuss this important matter. It is important to recognise that credit unions, as volunteer-run financial co-operatives, provide an invaluable service to both rural and urban areas in Ireland. As Minister for Finance, I am keen to continue to support the sector, and this is reflected in the regular engagement I have had with it. In February, I invited a number of credit union stakeholders to an engagement session in the Department and it is my intention to continue this active engagement with credit union representatives. I hope to hold more of these sessions in future.
In terms of regulation, the committee is aware that credit unions are regulated and supervised by the registrar of credit unions at the Central Bank. Within his independent regulatory discretion, the registrar acts to support the prudential soundness of individual credit unions to maintain sector stability and protect the savings of credit union members.
Section 32(d) of the Central Bank Act of 1942, as amended, provides that the Central Bank of Ireland may, with the approval of the Minister for Finance, make regulations prescribing an annual industry funding levy to be paid by regulated financial service providers to the Central Bank of Ireland. The industry funding levy is not specific to credit unions and there is no statutory requirement under the legislation for the Central Bank to consult the credit union advisory committee, CUAC, or any third party other than the Minister for Finance. However, it is worth noting that the final report of the CUAC implementation group, published in January 2019, makes specific reference to the Central Bank's intention to increase the industry funding levy for credit unions to 50% on a phased basis.
Since 2004, the amount of the industry funding levy payable by each credit union has been capped at a rate of 0.01%. Consultation paper No. 95, a joint paper of the Department of Finance and the Central Bank of Ireland entitled "Funding the Cost of Financial Regulation", was published in 2015. It set out proposals to move from partial to full industry funding, noting a proposal set out in an earlier consultation conducted by the Central Bank, which was entitled "Consultation on Impact Based Levies and Other Levy Related Matters", or CP61. This proposal was to move credit unions to fund 50% of the cost of regulating the credit union sector. Importantly, the Central Bank’s feedback statement on the consultation process for CP61 noted the feedback received from the credit union representative bodies. In its "Funding Strategy and 2018 Guide to the Industry Funding Levy", the Central Bank set out its intention to increase the proportion of financial regulation costs for industry, to increase the overall recovery rate and address funding gaps in specific areas of the Central Bank’s regulatory activities, with a view to achieving full industry funding in the medium term. In terms of credit unions, the Central Bank set out an initial target of 50% to be implemented on a phased basis by 2021 to 2022.
Having taken into consideration the unique and important role that credit unions play, I recommended to the Central Bank that credit unions be provided with a specific exemption from the 100% target - the only part of the financial services sector to have such an exemption. Instead, credit unions will be set a target of 50% by 2021 to 2022. It is projected that this will be recovered from credit unions on a phased basis, with recovery rates to increase to 20% of the costs of regulating the credit union sector for the 2019 levy, moving to 35% for 2020 and to 50% for 2021. Credit union recovery rates from 2022 onwards will be subject to review and a public consultation to guide strategy once 50% recovery rates have been achieved. In contrast, the banks have been subject to 100% of financial regulation costs since 2012.
The committee members may also be interested to note that the Department of Finance, in collaboration with the Central Bank, has now issued a public consultation paper on potential changes to the credit institutions resolution fund levy, which is expected to reduce materially from 2020. This paper is open for consultation. The deadline for submissions is Friday, 9 August 2019. I am grateful for the opportunity to address the committee and look forward to responding to any points.