We are grateful to the committee for affording us this opportunity to present our perspective on the reform of financial regulatory structures and its impact on credit unions. CUDA is the only legally incorporated representative association for credit unions in the Republic of Ireland. Membership comprises 11 credit unions, that serve a combined membership of 275,000 people and are responsible for 11% of the assets in the credit union sector. We have successfully campaigned to have credit unions brought under the Irish Financial Services Regulatory Authority and critically for the inclusion of credit union members in a statutory deposit guarantee scheme.
I will summarise the four messages in our more detailed submission sent yesterday. These are positive and progressive and based on what is in the best interest of credit unions, their growing membership and society. The first message is that statutory regulation for credit unions should remain within the existing Central Bank and Department of Finance structure. CUDA believes the current structure is appropriate. The performance and future development of credit unions needs to be underpinned by a properly resourced, separate and differentiated system of statutory regulation for the credit union sector within the overall Central Bank and the Department of Finance structure. We reject the inclusion of credit unions in a one-size-fits-all prudential or consumer protection regulatory reaction aimed at addressing failures in the banking sector or the recognition or introduction of any self-regulatory or prudential management role for credit unions or their representative bodies. We welcome retention of the role of Registrar of Credit Unions, which will continue to acknowledge the uniqueness of the credit union model while appropriately remaining as part of a broader Central Bank commission that safeguards the statutory deposit guarantee scheme extended to credit union members' savings up to €100,000 and the Central Bank support provided pursuant to minimum reserve requirements that allow access to domestic and ECB liquidity facilities. This structure will facilitate the continuity of credit union success, which is grounded in the ability to always be on the side of the members.
Our second message is to reform credit union regulation by addressing outdated credit union legislation. The prudent and sustainable business model that underpins many credit unions, allied to the development of the statutory regulatory framework has served the sector well. Further development is seriously constrained by the totally outdated credit union legislation that governs the operation of credit unions and their subsequent regulation. The Credit Union Act 1997 has much of its origins in the 1966 Act and has not kept pace with the dynamic environment in which we live. A central problem is the one-size-fits-all approach to credit unions. When this legislation was enacted, the primary purpose was to provide credit through personal loans to ordinary people deemed unbankable at that time. Now credit unions can and should be left play a far broader role in our society, particularly in these times when they can offer a viable alternative to the banks.
The self-help, co-operative ethos at the heart of credit unions is still correct and probably more appropriate than ever. However, the model and its regulatory support and structures need to be upgraded. Legislation and regulation must serve to support this development, not actively hinder it. While high standards of governance are imperative, the country needs a fully functioning consumer and small business credit system. Most commentators believe this is unlikely to be provided by the banks so it is imperative that we enable and support credit unions that have the capacity to develop into a form of community bank to provide this. Legislation must not only clearly set out the statutory requirements to ensure the safety and soundness of the sector, it must also provide a supportive framework to allow progressive credit unions expand their relationship with members. In applying this legislation to regulation, compliant credit unions must be supported and encouraged, while adequate resources must be made available to the regulator to address any non-compliant credit unions. Several international and domestic perspectives support this role of regulation. CUDA supports the World Council of Credit Unions three core principles underlying credit union supervision which are that credit unions are private sector organisations and should operate free of Government interference with management; the appropriate role of Government vis-à-vis credit unions is that of legislator, regulator and prudential supervisor; and credit unions should be supervised by a Government agency responsible for the financial sector.
Domestically, the Financial Regulator in Ireland has the dual mandate to help consumers make informed decisions on their financial affairs in a safe and fair market and to foster sound, dynamic financial institutions in Ireland. Recently, the focus was heavily weighted on the former, with little attention to enhancing the development of the credit union sector. This imbalance is restricting activity through a one-size-fits-all approach based on the lowest common dominator and will lead to down-sizing credit unions. The Taoiseach summarised the role of effective and efficient regulation very clearly in his speech at the recent CUDA annual conference. He stated:
It is essential that we have the appropriate frameworks in place to oversee the risk profile of credit unions and support its development. The regulatory regime must have the ability and flexibility to adjust itself to cater for and support risks in the sector.
He went onto say that "the need for modernisation of legislative and regulatory framework for credit unions has become evident".
Our third message is that a strategic review must act as a catalyst for the development of the credit union sector. In welcoming the forthcoming strategic review of the sector initiated by the Minister for Finance, we believe it is essential that the terms of reference include crafting a roadmap for the future development of the sector that is stretching and ambitious. It must cater for the credit unions that wish to remain within the current traditional credit union model but critically it must enable progressive credit unions that wish to prudently grow and develop in line with the changing needs of their members and communities and those who wish to release the significant untapped potential of credit unions in Ireland. This review should be under the aegis of the legislators, the Department of Finance, the regulators and the Registrar of Credit Unions. It is critical that proper consultation protocols be adhered to with the representative bodies and other stakeholders to ensure the best interests of members of credit unions are at the heart of all developments.
CUDA has set out a vision for credit unions in Ireland with three key interlinking elements. The first is the introduction of a statutory prudential management framework that leverages the financial strength of the sector to facilitate the next growth phase of progressive credit unions in Ireland. The framework has four components: the statutory deposit guarantee scheme, a statutory central liquidity mechanism, appropriate capital management policy of credit union level and a statutory solvency mechanism. The second element requires crafting and redefining credit union business strategy and positioning, together with further modernisation and upgrading of credit union governance and operations to better mirror best practice and market requirements. The final element is the introduction of enabling legislation and a regulatory framework, as mentioned earlier.
Our fourth and final message is to remove all unnecessary legislative and regulatory roadblocks facing credit unions now. There are a number of immediate political, legislative and regulatory roadblocks that need to be addressed now to enable credit unions to better serve existing and potential members and to contribute to the prudent flow of credit that will support local economic recovery at a time when banks are effectively closed for business. Actions of the regulator now reflect the out of date legislation as it is reacting to the current environment with restrictions designed in and for a different era, forcing it to become involved in the micro-management of credit unions, which does nothing to assist the credit unions in their proactive development.
While some will argue that the most prudent course of action for credit unions would be to follow the banks and cease providing credit, the very raison d’être of credit unions is to provide credit. Credit unions have proven their ability over the past 50 years to do this and now, when the country needs them more than ever before, they should not be restricted from meeting their purpose. Rather, they should be assisted to find prudent ways to do this.
The consequence of inaction and inappropriate short-term measures will drive credit unions out of business. They will experience reduced income due to reduced core business activities, increased strain on the dividend model and higher costs relative to competition due to restrictions within the current business model. They will also no longer be able to take the time to educate their members in the same caring way.
Another consequence to consider is where people will be forced to go for credit facilities if their credit union continues to be restricted from helping them. Regulatory standards such as loan loss provisioning and assets and liability of management, need to be set out, implemented and regulated. Understandably, in the absence of defined standards weaknesses in governance will appear in some credit unions. We recommend appropriately resourcing the Registry of Credit Unions, thereby ending a one size fits all approach and the need for micro management. There should be a focus on key sections of the Credit Union Act 1997, such as sections 35, 32 and 48, the introduction of a central liquidity mechanism and the finalisation of the deposit guarantee scheme.
Credit unions should be supported in their desired business model and encouraged to have robust systems in place to engage in ongoing qualification and education. They should not be obstructed in their objectives of prudently providing credit for their members.
Credit unions are uniquely placed as local associations to contribute to the recovery of our economy. Credit unions can provide a viable and credible alternative to banks for our citizens within a not for profit model that has stood the test of time by addressing the four key areas we have set out. CUDA supports where regulation takes place and sees huge potential in how regulation occurs. We look forward to constructively contributing to develop regulation into an enabling function, acting in the best interests of members of credit unions.
I thank members for the opportunity to put forward our perspective and will be happy to answer any questions.