Credit Union Sector: Discussion

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.

To clarify, the Minister said that in February of this year, he invited a number of credit union stakeholders to an engagement session. Was that session about the funding levy or was it just general engagement?

It was just general engagement.

I think there is another page to the Minister's statement, if he wishes to read it.

The version of it that I have left out a concluding page. I might just go on to my concluding page.

Once the deadline for submissions has closed, the Department, in collaboration with the Central Bank, will consider the feedback received as part of the consultation process. It is worth noting that as Minister for Finance, I have reduced the stabilisation scheme levy as a percentage of assets materially; that since 2017 no further levies have been charged; and that from 2019 the Financial Services Ombudsman levy will be reduced materially for credit unions, in some cases by 81%. I recognise strongly the role of our credit unions. I recognise, for example, the €2 billion of new lending they have made available every year. In the work that we are doing with the credit union movement and the general work I am doing in respect of levies that the sector is dealing with, I am conscious of the issues they face and will look to respond to different issues that they have raised with me over time.

I thank the Minister for agreeing to take this issue today. I raised it at the committee last week and suggested that he be given notice that we intended to use this opportunity to raise the issue. I also acknowledge the agreement of the Senators, who are not members of the select committee, to allow us as Deputies to raise this issue today. If I could have an exchange with the Minister for a few moments, on the question of consultation, he said the CUAC implementation group report published in January 2019 made specific reference to this increase in the levy. Did the Minister directly seek the advice of CUAC on this issue before signing off on the Central Bank's proposal?

No, I did not; nor am I required to seek its input. I consulted my officials and looked at the recommendation that was made to me from the Central Bank.

In the Dáil on 20 June when this was raised with the Tánaiste, he referred to the changes as having "been outlined following a consultation with the credit union movement, which was more than aware of the proposed changes and was involved in seeking them in most cases." That strikes me as being wholly inaccurate. There was not any direct consultation with the sector and it certainly did not seek this change.

No. I am glad to have the opportunity to clear that matter up. What the Tánaiste was referring to was the changes I am looking to make in respect of the interest rate cap for lending from the credit union movement. When the issue was raised with him, he assumed it was a reference to the interest rate change while in fact the Deputy who was raising the issue with him was referring to the levy.

He may wish to correct the record of the Dáil on that because the question he was asked was very directly about the annual industry funding levy. It seems pretty clear from reading the Official Report. As the Minister well knows, credit unions are under a lot of pressure because of the very low investment returns and loan to deposit ratios in the region of 27% which, I think the Minister will agree, is not sustainable in the long term. The representative bodies, including the league which is represented here today, have pointed out to us and, I am sure, to the Minister, that they really should not be treated like banks. They are not banks; they are not-for-profit organisations. They believe and I agree that the Minister has not placed sufficient value on the social capital, the work of their volunteers, their community base or their democratic structure.

It is evident from the Central Bank paper, "Funding the Cost of Financial Regulation", that it is its intention to move to 100% beyond 2022. The paper states that 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. The Central Bank is very clear that this is its intention. Why did the Minister not push back against the Central Bank and say this is completely the wrong time to impose these extra costs on credit unions? Other levies are winding down but the big one, the credit institutions resolution fund levy, is still at a very elevated level at about €7.5 million a year. Why did the Minister not make these points to the Central Bank and seek at least to defer or, ideally, to make an actual separation in structural terms between the treatment of credit unions and for-profit financial institutions?

The treatment of for-profit financial institutions and the credit unions is different as a result of these changes. Our banks, correctly, will have to cover the full 100% cost. For credit unions, at the highest point the cost will move up to 50%. It will be a matter for the Minister for Finance of the day to decide when this period comes to an end and to decide the appropriate threshold for the next phase of the levy. I have a clear sense that the appropriate threshold should be and is lower than what our banks are paying at the moment - they pay 100%. I urge the committee to see this change in light of what will be happening with total levies in 2020. Our judgment and analysis indicate that in 2020 there will be a reduction in the levies due to be paid compared to where we are in 2019. While it is correct to say that the industry funding levy will be going up, it will take place at a point when the resolution levy will be coming down significantly. As I mentioned earlier, there will be an open opportunity for the Minister for Finance in 2021 to review the future of the stabilisation levy. My argument and contention to the committee is that, in the round and in light of all the levies that the credit union movement is paying or is due to pay, there is an appreciation of the challenges and pressures the movement faces and of the value the movement has for our economy and society.

The resolution fund currently holds €268 million. As the Minister is aware, this is €18 million in excess of the amount he contributed in 2017. The fund is currently costing credit unions €7.5 million per annum. The Minister is stating that, taking into account the changes that are likely with the resolution fund levy, the net position for 2020 will amount to a reduction in the overall burden of levies that credit unions are carrying. Will the Minister clarify that this is what he is saying? He reiterated the point on the consultation phase for the review of the resolution fund levy. Submissions can be made up to a date in August. Is that the direction of the Minister's thinking? It is questionable whether credit unions should be required to pay into the fund at all given the level of funding already built up. The rescues that had to be carried out across the sector were essentially funded by the movement to date.

I am seeking to place the change in the funding levy in the context of what will be happening to other levies that the credit union movement is due to pay. My key point on the industry funding levy is that I believe I have given recognition of the particular needs of the credit union movement by ensuring that it pays 50% of the cost as opposed to all of it. That is a proportionate recognition by the Government of the value of the credit union movement and some of the particular challenges that it is facing.

Will the Minister clarify what he said about the net position next year? Is he stating that it will be a net reduction in terms of the liability of levies?

Our analysis indicates that for next year there will be a reduction in the total levies that the credit union movement will be paying.

What about the following year, when the industry funding levy will increase further?

It will. However, when we move into 2021 the stabilisation levy will be open for review.

It will continue to be a net reduction. Is that accurate?

That depends on the outcome of the review of the stabilisation levy.

Like other Deputies, I have received a great deal of information from credit unions on their concerns about the changes in the levy. Significantly, the credit union movement is operated by volunteers. Admittedly, there are professional staff in credit union offices, but the overall management structure is on a voluntary basis. Credit unions offer banking facilities on a community basis not only for individuals in local communities but also for voluntary and sports organisations. Will the Minister re-examine this until such time as there is a clearer pathway as to the impact? The material I received from the credit unions indicates that they could be severely affected. The Minister is now stating that the impact may not be as negative as feared. If that is correct, then it is welcome. Is my understanding of what the Minister said correct?

Comparing credit unions to banks is rather unfair, particularly in light of the credit unions' voluntary and community nature. Moreover, they are heavily constrained, as the Minister is aware, in where they can invest because of their particular community and voluntary nature. On the other hand, they represent vital financial infrastructure especially to the many communities where there are no longer banks or where, in future, there may well be far fewer ATMs.

The Minister should bear in mind the role credit unions play and the significance and importance of that role. Is he stating that on account of other payments the credit unions are making for stabilisation, the levy will be mitigated? Is he stating that he believes credit unions will pay less overall? What if credit unions end up paying far more or, as the note before us indicates, are compared like for like with commercial banks? I do not believe that is an entirely appropriate comparison.

The Minister needs to provide more information. I am not sure whether the Department has carried out an impact assessment of the likely changes in the levy. If the Minister has the details set out, can he supply the impact assessment to the committee? That would be helpful.

I reiterate the key point. We have approached this by putting in place a 50% recovery rate. This means that credit unions are treated strikingly differently, as should be the case, from the other bodies to which Deputy Burton has referred. This is precisely in recognition of the point the Deputy made about the capital or funding needs that credit unions have and the nature of the organisations. That is why they are subject to a 50% recovery rate compared to the banks, which are subject to a 100%. Those involved in insurance are subject to a 100% rate while moneylenders and bureaux de change will be levied at 75% in 2020. We are looking to treat the credit union movement in a different way to other bodies regulated in recognition of the points Deputy Burton has made.

A point was made regarding the impact of the industry funding levy. It would be fair and accurate to say that the increase in the funding levy is of course going to have an impact on credit unions - I acknowledge that. Our analysis indicates that over a three-year period when the rate moves up to 50%, the figure will be a little under 3% of the current overheads that a credit union may be dealing with. It will have an impact and I have no wish to create an impression otherwise, but I call on the committee to evaluate the decision I have made in the light of recognising the reduction in the resolution levy. Notwithstanding the point Deputy Michael McGrath made, there is still a reduction in that levy and the stabilisation levy will be up for review in 2021.

The Minister is aware that I have already raised the issue of the credit union levy in parliamentary questions. He is also aware that for several years, I have argued that there should be 100% recovery in the banking industry. I am glad that this is now taking place.

In his opening statement, the Minister said he recognised the unique nature of the credit unions. It is important to define that unique nature. The stand-out difference between a credit union and a bank, a moneylender or a fund, is that the credit union is not-for-profit, community-run and volunteer-led with no big bonuses for board members. Rightly so, the cost of regulating banks, funds, major insurance companies and moneylenders should be paid by the industry itself as opposed to from the public purse.

However, as a society, we have recognised there are important sectors whose regulation should be paid from the public purse. We do not ask charities to pay for their regulation. Accordingly, the State pays for the Charities Regulator. Likewise, Sport Ireland regulates sporting bodies and organisations. This is all paid for from the public purse because it would be wrong to ask local sports teams to pay for it.

While they are involved in lending money, the fact is that credit unions are not-for-profit, community-run and volunteer-led, which distinguishes them from the rest of the sector. Outside of talking about rates and so forth, there is a question as to why we are applying this additional burden on them and putting a figure on their worth for society, as opposed to accepting they are unique in that they are not banks, moneylenders, funds or insurance companies. Instead, they are credit unions which are locally run, responding to local needs and, key of all, are not for profit.

I agree. This is why I am not sitting in front of the committee with a proposal for a 100% industry funding of the levy. I agree with the Deputy’s point. All Deputies share his view that this sector is uniquely different to other parts of the broad financial sector in our economy. That is why we have a target of the credit unions being levied at half the rate of some of the sectors to which the Deputy compared them. I know there is a difference and that is a reason for the difference in how the levy will be funded. I have recognised that in what I have done. The impending arrival of this change has been well flagged. If it would be helpful, I can go through how this has been flagged again. This change was well flagged to the sector. In recognition of their nature, it is why they are moving to a 50% model and not a 100% model.

First, it is not 50% full stop. It is 50% and then there will be a consultation to see what happens after the 50% levy is raised. There is no guarantee, unless the Minister wants to give one here, that it will be only 50%. Will the Minister give that guarantee first, as it would clear up some of the other issues I have?

The Deputy knows I cannot because this is guided by recommendations made by the Central Bank. It is a fair horizon within which to plan one’s affairs. The credit union movement will now know where it stands across 2021 and 2022. This is after the significant work done to flag that this change was due.

The Minister said he agrees with me but really he does not. I am arguing a different point. The Minister has stated he agrees with me and that is why he has asked the Central Bank to phase in the increase. All that is happening is that it is being done at a slower rate. The levy will go to 50% and then there will be a consultation with, as the Minister just outlined, no guarantee that it will not go up to 100% just like the levy for the main street banks.

Outside all of that, if this is a sector which stands on its own and is regulated like the rest of the other industries by the Central Bank, why are we raising the levy to 50% in the first place? From the figures we have been given, the impact on a large credit union would mean that in a four-year period, the levy would be an extra €115,000. We have already placed many additional responsibilities and burdens on credit union boards through legislation on skills bases, qualifications and so forth. If we really value the work done by these credit unions, their not-for-profit nature where they lend money, as opposed to banks which are trying to suck the blood out of people, and their response to community needs, why would we even put them in the same category as the other banks? Why can we not adopt the same principle that we did with charities? Charities do good work for society but they need to be regulated. However, we do not ask them to pay for their regulation.

That is completely different. There is a significant difference between the charity sector and any sector involved in the lending of money. That is the reason the regulatory needs we have for organisations involved in providing billions of euro worth of credit into our economy every year are completely different to the needs we have to regulate the charity sector.

The Deputy made the point that the credit unions are in the same category or group as our banks. That is not the case. The contribution they will have to make to the funding of their regulation is half of what the banks must give. It is a well-established principle across all of our economy that sectors which need regulation make a contribution, mostly in full, to the cost of it, whether it is the energy regulator or the Pensions Ombudsman. They are all fully funded by their respective industries. In this case, we are recognising the difference of the credit union movement with this lower rate of contribution.

Prior to 2012, what did the high street banks pay for regulation costs?

I do not have that information.

It was 50%. The banks paid 50% towards the cost of regulation. The Government phased in a process over time to recover 100% of these costs. Seven years ago, Bank of Ireland, AIB, Ulster Bank and the rest, some of which crashed the economy, paid 50% towards the costs of regulation. Now, we will ask the local credit union, which is volunteer-led, responds to the needs of the community and is a not-for-profit entity, to pay the same percentage as the Bank of Ireland.

Seven years ago, Bank of Ireland paid 50% towards regulation costs.

That bit is correct, after the Deputy qualified the line.

The Minister cannot give a guarantee that in seven years’ time, the credit unions will not be paying the full 100%. Even after the crash, the banks were paying 50%. I always argued that was wrong and they should have paid 100%.

The point is that the Minister is now putting credit unions on such a trajectory. He is not recognising their unique value and nature. He can argue that he is by slowing the introduction and having consultation. The credit unions will tell him that the Central Bank did not listen to the feedback from the consultation, however. The Central Bank said it was going up to a 50% industry levy. It asked what were the credit unions’ views on that but that it was still doing it. That is not proper consultation.

We have run over time.

I have one further question.

I take a very different view from the Deputy on the matter. He said I was refusing to give him a guarantee. He knows that is because I cannot do so. That is the difference.

Can we not introduce it in the Finance Bill?

He knows I cannot do that.

Can the Minister not introduce it in the Finance Bill?

No. He knows it is the role of the Central Bank-----

-----under the legislation that I referred to earlier on-----

-----to make a decision on the appropriate rate and I accepted its recommendation.

Can the Minister-----

I ask the Deputy to allow me to finish. He was well able to make his point; I will make mine in response. He is asking me to give a guarantee as to what I or a future Minister for Finance might do in a few years, while not acknowledging that the rate of industry funding in place now is significantly lower than that for the banks the Deputy just quoted to me. He should be giving me recognition for the decision I have made as opposed to a decision that is not due to be made for a number of years.

I am supposed to give him recognition for a decision he has made, which was to cap the recovery of regulation costs at 50% at the moment, but to understand and not to blame him for not being able to give a guarantee for a decision he cannot make. On the one hand, he can cap the recovery rate at 50% but, on the other hand, he has no role in this because of the Central Bank. The reality is that the Minister has a role and can take a role if he wants. We can introduce a provision in the Finance Bill placing a cap on the amount the Central Bank can apply in terms of regulation of credit unions. I know that, as does the Minister, the Chairman and every other member of the committee. Of course, the Minister could give a guarantee if he so wished. However, I want to move on to my final two questions and the Minister can respond to that. I recognised that there is a difference between 50% and 100%. He should not try to suggest I did not.

The Minister mentioned that we are likely to see reductions in the credit institutions resolution fund levy. However, as consultation is ongoing we have not seen the outcome of that. Would it not be more appropriate to wait until that consultation has ended, unless the Minister knows the outcome of the consultation? Perhaps he could inform the committee what that reduction will be. The credit unions might be able to sleep easier tonight if they knew that levy was to be significantly reduced. I understand they have been engaging with the Minister and wrote to him in April, but he has not responded to them.

In his opening statement, the Minister mentioned he proposed to introduce a credit unions and loans Bill in 2019. He will be mindful of the moneylenders Bill that I introduced to reduce the APR that moneylenders can charge. Some of them are licensed to charge up to 180% at the moment. That Bill has passed Second Stage and is before the committee. It was also signalled, because it is part of the same report, that it should be accompanied by an increase in the levy from 1% to 2%. As I signalled on Second Stage, would it not be appropriate for that to be included as a Committee Stage amendment as opposed to introducing a different Bill to address it?

I did not say that the Deputy did not make recognition of the fact that the industry rate is half of that which the banks are paying. I am contending that he did not give sufficient recognition of it, which I am as entitled to assess as he is allowed to assess what I am doing in this issue.

On the consultation that is due to take place on the future of the stabilisation levy, these matters are best dealt with separately. We need to make a decision on the future of each levy based on the right thing for each of them individually. However, if they are assessed in the round, the levy contribution for next year is lower than it is this year.

Before answering the Deputy's final point, I seek clarification. Is he suggesting that the change he is seeking be a Committee Stage amendment to the legislation I am due to introduce?

No. I introduced a Bill which has passed Second Stage and has gone through scrutiny here. I believe the committee secretariat will write to the Minister about it. During Second Stage, it was signalled that the levy would be increased from 1% to 2%. This would be the appropriate thing to do. On the one hand, the Minister is trying to reduce the APR on moneylenders but, on the other hand, he wants to make sure that credit unions are the avenue for people who want access to that type of finance. I presume the Minister introduced his own legislation because he is opposed to my moneylender Bill and that he will not table a very simple amendment, as I signalled on Second Stage, to that Bill, which is now progressing.

I am still unclear.

There is a piece of legislation-----

I am aware of all of that, but I wish to double-check. Is the Deputy proposing to amend the legislation I am introducing regarding the higher interest rate cap?

No, I already signalled on Second Stage that we would bring an amendment to my legislation to increase the credit union cap from 1% to 2%. The report by University College Cork, which supports reducing the APR for moneylenders, suggested that this be done hand in hand with an increase in the cap for credit unions. My concern is that the Government has introduced its own Bill that only deals with one aspect of this, namely, the increase from 1% to 2% for credit unions. Obviously, it is using up Oireachtas time because now we have two Bills that could do the same thing. I also read into it that this may be because of the Government's reluctance to deal with the extortionate APRs being charged by moneylenders.

The Bill we are introducing with the cap is a better way of dealing with the issue in the credit union movement. I will consider the Deputy's question and give a considered answer back-----

I thank the Minister.

----- now that I fully understand the point he is making. Rather than responding now, I will revert to the Deputy with a response.

That is fair enough.

I thank the Minister and his officials.

The select committee adjourned at 3.37 p.m. until 10 a.m. on Thursday, 11 July 2019.