JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS díospóireacht -
Tuesday, 16 Feb 2010

Financial Regulation: Discussion with Credit Union Development Association.

Chairman

The next item on the agenda is a discussion with the Credit Union Development Association, CUDA, regarding the new structure for financial services and its impact on credit unions. On behalf of the committee I welcome the following: Mr. Kevin Johnson, chief executive officer of CUDA; Ms Jacqueline McCormack, chairperson of the CUDA national council and treasurer of Navan Credit Union; Mr. Ben Donnelly, secretary of the CUDA national council and chairman of Newbridge Credit Union; Mr. Dennis Daly, chairman of the CUDA management committee and general manager of Tullamore Credit Union; and Mr. Billy Doyle, a member of the CUDA management committee and general manager of Dundalk Credit Union.

I draw attention to the fact that while members of the committee have absolute privilege this privilege does not apply to witnesses appearing before the committee. Members are also reminded of long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official, by name or in such a way as to make him or her identifiable.

I invite Mr. Johnson to begin his presentation on behalf of CUDA.

Mr. Kevin Johnson

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.

Chairman

Thank you, Mr. Johnson.

Senator Paul Coghlan

I welcome CUDA and thank its representatives for their overview of the situation. Mr. Johnson said the organisation represented 11 credit unions and he seems happy that the Department of Finance appears to have delegated the formation of policy on credit unions to the Financial Regulator. Is he concerned that, in a new regulatory environment, the Financial Regulator might be so focused on securing compliance by the banks that he may exercise excessive regulatory control over credit unions and undermine the volunteer ethos behind credit unions?

Does CUDA operate a stabilisation fund for members similar to the savings protection scheme, SPS, operated by ILCU? Does the absence of such a fund for the CUDA membership give rise to a potential exposure?

Mr. Kevin Johnson

I thank the Senator for his two questions. We are not concerned that the regulation of credit unions will be lost in the greater banking commission. We welcome the fact that the role of the Registrar of Credit Unions and the relevant section in the Registry of Credit Unions have been maintained to protect the uniqueness of credit unions. We are satisfied that the ethos of credit unions and their volunteer tradition will be encouraged to flourish and grow.

The deposit guarantee scheme is regulated within the broader structure and that scheme is a fundamental component of the confidence members have in their credit unions. The fact that credit unions must deposit a minimum reserve requirement with the Central Bank is another key element because it allows credit unions access to domestic and ECB liquidity facilities. Even though credit unions do not avail of them at the moment, they are available if they need them so it is important that we continue to be part of the framework.

The Senator also asked about the SPS, which the Irish League of Credit Unions operates. We have a strong objection to any private unregulated schemes and their lack of transparency is a concern. It is not regulated and the rules are unclear as to how funds are accessed and replenished. Our belief is that a prudential framework will produce a far more stable situation for credit unions and we have outlined our views in various documents. The deposit guarantee scheme is a genuine guarantee, with members covered up to €100,000, rather than a discretionary scheme with unspecified amounts. It needs to be front-stocked or protected in some way because we do not want to ever have to call on it. A central liquidity mechanism is therefore required. The overall liquidity within the movement is 30% while for CUDA members it is 38% so there is excessive liquidity. However, we need an appropriate mechanism to ensure it is recycled appropriately.

Capital management structures and policies must be in place and we welcomed the work of the registrar last year and this year. We were happy to make a positive contribution in the form of the design for the regulatory reserve ratio which bolsters the balance sheet of each credit union. There needs to be a statutory mechanism which can apply appropriate rules in an open and transparent way in the event of a credit union finding itself insolvent.

Deputy Ciarán Cuffe

I welcome the delegation and applaud the credit union movement for reaching out to so many people over the past 50 years. The credit unions have played an important and powerful role. As a former architect, I applaud the credit unions for fostering good design in the construction of their buildings and the efforts they have made to improve their building stock in the past ten or 15 years. I note the fact that CUDA supports the principles of the World Council of Credit Unions, which can be summarised by a desire to operate free of Government interference. I note the world council's view of the role of Government as legislator, regulator and prudential supervisor and believe it is perfectly appropriate.

I wish to home in on the issue of dormant accounts. As we know, over the past ten years within the wider banking sector we have seen the great success of the dormant accounts board taking inactive funds and using them for the public good. Has there been any movement towards a similar device in the credit union movement, as it has been around for nearly 50 years? What is the current mechanism used by the credit unions to deal with dormant accounts?

Section 44 of the Credit Union Act 1997 allows credit unions to establish a fund for social and cultural or charitable purposes including community development. It seems the credit unions have been fairly reluctant, with some honourable exceptions, to make use of this clause. Could there be a little more enthusiastic use of it?

Mr. Denis Daly

As credit unions are locally based with good detailed knowledge of their members and their families, the actual incidence of long-term dormant accounts is much less. I say this with experience as a general manager in a credit union and also in commercial banking. Every two years our credit union's directors spend some time examining accounts in which there have been no transactions for six months to a year in a genuine attempt to ensure whatever funds they contain do not remain dormant but go back to an appropriate party. Credit unions do much work in ensuring their dormant funds are dealt with properly and, as a result, it would not be as large an issue as it would have been for the banks when it arose initially.

Deputy Ciarán Cuffe

What is the percentage of dormant accounts against total assets held?

Mr. Denis Daly

I would not like to guess on that. However, with my credit union it would be less than 0.5%.

Mr. Kevin Johnson

Funds are less likely to be left lying there because credit unions operate a loan protection and life savings plan, LPLS. Where a member dies, his or her family is entitled to a multiple of the savings. It is less likely to be left lying there then which means overall the amounts involved are low.

Mr. Billy Boyle

By virtue that there are life assurance benefits attached to savings in a credit union, credit unions are very reluctant to terminate accounts.

Regarding section 44 of the Credit Union Act, credit unions by their nature provide significant funds out of their operating surpluses to support initiatives which may also be provided for by the proceeds of the dormant accounts fund. My credit union's AGM approved the creation of a fund under section 44 to support the development of an enterprise centre in Dundalk in association with the County Louth Enterprise Board. I know from the Credit Union Development Association, CUDA, that many other credit unions have gone down a similar road. We would share the Deputy's support of section 44 as it reinforces the centrality of credit unions being at the heart of their communities, not just from a member's financial perspective but from a local economic one. Deputy Cuffe's comments would be well received in the credit union sector.

Deputy Seán Sherlock

I welcome the delegation to the committee meeting. At the last meeting the credit unions' role in society was acknowledged.

Is there a gulf in the positions on the regulatory framework between the Irish League of Credit Unions, ILCU, and the CUDA? I remain to be convinced about the ILCU's position. The only way one can guarantee that individual members have maximum security for their deposits is through the auspices of the Central Bank commission.

The opening statement stated:

"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."

Will the delegation clarify exactly what this means?

The CUDA obviously recognises the role of the Registrar of Credit Unions but it is also seeking to differentiate between its role and that of the banks while keeping under the umbrella of the Central Bank. Are the credit unions happy reporting to the assistant director general under the Financial Regulator's office? Would it suggest any modifications to this system?

Mr. Mark Bailey of the ILCU told me at the last meeting that it had been in negotiations with the Department concerning the provisions governing the percentage and periods for loans in section 35 of the Credit Union Act 1997. He said the Minister will shortly sign an order which will increase the percentage provision to 30%. Some people I have spoken to informally about this have reservations about it from a liquidity perspective. It is important the committee fleshes this out if it is going to take a rational long-term view on it. How would such a proposal impact on the CUDA? It represents 275,000 credit union members through 11 credit unions.

Credit unions offer mainstream financial services including savings, loans, various insurance, foreign exchange, ATM cards, electronic funds transfer payments, child benefit and social welfare payments, mortgages in limited cases and other mainstream financial services. It is impossible to see how anyone can justify a different regime of regulation for one set of industry operatives such as banks and building societies and argue for a lesser form of protection to apply to credit unions when they are dealing in the exact same products. Ultimately, the committee is left with the ILCU, representative of the majority of credit unions, and the CUDA. The committee wants a system that both bodies will buy into and that will stand up to scrutiny.

Mr. Kevin Johnson

Regarding the regulatory framework, the essential matter is what is best and right for credit union members. That has to be the kernel of the issue. In our view it does lie within the existing Financial Regulator framework. It is about maintaining confidence, security and safety for the members of the credit unions. A founding objective of the CUDA was to seek an extension of the deposit guarantee scheme for the members of credit unions. We lobbied long, hard and successfully so that it was extended in September 2008. That is regulated by the Central Bank. That is one critical reason we would want to be part of that regulatory framework. The other reason was because the credit unions have a deposit with the Central Bank of a minimum reserve requirement. That is a facility that could allow credit unions access to European Central Bank liquidity.

We need to be careful about the one-size-fits-all approach. We do not want to get caught up in a one-size-fits-all across banks, building societies and credit unions. Obviously, there is work to be done in regulating the banks and building societies. Our belief is, however, that we do not fit into that work. We believe that having the separate entity of the Registrar of Credit Unions within the Financial Regulator framework will mean the uniqueness of credit unions will remain observed. With an overhaul of the legislation, their job would be made easier and more appropriate.

Mr. Billy Doyle

While the CUDA and its credit unions would be supportive of a comprehensive system of statutory regulation and it remaining under the aegis of the Central Bank and Financial Regulator, that does not mean we are totally satisfied with the existing regulatory approach. The main reason, as Mr. Johnson alluded to, is that the credit union organisation is the custodian of €15 billion worth of savings of ordinary people. The notion of being outside the auspices of the Central Bank or the Financial Regulator strikes us as being inimical to the growth of the credit union sector. First and foremost we would want it to remain within the Central Bank structure to ensure public confidence is continued and engendered.

Similarly, by virtue of being part of the regulatory structure, which the CUDA supported in 2003, we have been able to participate in the deposit guarantee scheme and potential liquidity supports via the Central Bank and the European Central Bank. This would not be easily or readily available if we were not under that structure.

The ambition of credit unions, and more importantly of their members, is for a greater, broader and deeper service. The platform for such growth lies in having a demonstrable and evident system of statutory regulation.

Moving on to the differentiation of the credit unions' position in this framework, we want a continuation of the differentiated and separate process and approach to regulation for credit unions that would be distinct from banks. The structure, business model and ethos of credit unions are evidently different from the banking sector. Around the world it has attracted a differentiated and separate form of legislation and regulation albeit within the overarching prudential financial management framework.

On the consumer protection side, financial regulation embraces two sides of the one coin — prudential supervision and consumer protection. While we have set our credentials and support for a differentiated approach to prudential supervision, we would also encourage a separate approach to consumer protection. The strong emphasis on consumer protection that has emerged at regulatory and European level as a result of addressing shortcomings that arose in the banking and financial sector has not arisen with credit unions. We need to be careful the special relationship between credit unions and their members is not diluted or interfered with in a negative sense by applying a one-size-fits-all consumer protection approach.

As to our attitude to savings protection and stabilisation or why we might not wish the regulation of credit unions to pass over to another Department or outside the Central Bank-Financial Regulator, the evidence and experience of the regulation of credit unions in the 1980s and 1990s, when it was somewhat located outside the established Department of Finance-Central Bank structure, was one in which a culture of self-regulation began to emerge. The reference to an unregulated savings protection scheme and references to moving the regulation of credit unions from the overarching prudential framework would give us concern that it could, knowingly or unknowingly, become in the public's mind a self-regulated sector. That would not be in the interests of credit unions and their members who want them to grow and prosper. We do not see proper statutory differentiated regulation as being contrary to the growth of credit unions. In fact, we see it as an essential support.

The committee will be aware that section 35 provides strong restrictions on the ability of a credit union to lend over five years, some 20% of the loan book which is a small amount. Both the CUDA and the ILCU made representations to the Minister regarding the bottleneck this was causing on the ground at credit union level. At a time when credit availability is topical, credit unions have significant surplus funds available for lending. They were finding however the outdated restrictions in section 35 were preventing them from doing so. It was also interfering with credit unions' ability to reach acceptable repayment solutions for members who exhibited some difficulty in maintaining their repayments. We made proposals to the Department and the Financial Regulator regarding a restructuring of section 35. This included a re-orientation of that section to allow those credit unions with the necessary capital and liquidity to be able to avail of significantly increased lending limits. We regard the return proposal from the Department and the Financial Regulator, however, as a minor one-size-fits-all adjustment in that the percentage has increased by 10% but it is still unfortunately tied to the loan book. We have voiced our concern about this. We have also voiced our surprise that our colleagues in the ILCU do not share this view. From working in a credit union on the ground and being in contact with other credit unions, I know there is general dissatisfaction at the existing section 35 provision and the proposed amendment to it.

Deputy Seán Sherlock

Increasing the loan percentage allowed from 20% to 30% would allow a credit union a greater degree of flexibility in individual loans. For instance, if I had a car loan with my credit union but was put to the pin of my collar financially, I could extend the loan's lifetime. What are the permutations for individual credit unions? If there are still difficulties with extending it by 10%, what is the optimal solution?

Mr. Billy Doyle

Aside from what we would regard as a minimalist approach to addressing the percentage constraint, the proposal also had some additional across-the-board requirements regarding liquidity ratios that credit unions were to maintain which would see an increase in the current arrangements and provisions that credit unions have to hold in their balance sheets for rescheduled loans.

To give a practical example of the implications of moving from 20% to 30%, because it is linked to the loan book as distinct from the assets of the credit union it is particularly restrictive. Dundalk Credit Union would have an asset base in excess of €150 million with a loan book approaching €80 million. Extending that by 10% would allow the credit union to lend an extra €8 million over five years. That has to be set aside. The significant surplus funds that a credit union like ourselves would have would be available for lending over the €70 million threshold.

For a variety of reasons, the CUDA has actively participated in the working group on section 35. The matter has not been finalised and is still at proposal stage. For the reasons we have outlined, the CUDA is not in a position to endorse the current drafted proposal. We feel it will meet significant resistance at credit union level on the ground.

Ms Jacqueline McCormack

This proposal could lead to a credit union being curtailed in lending to its members. A credit union's core business is savings and loans. If the credit unions are curtailed through this proposal, it will go right down to affecting their members. It will also have knock-on effects in posting an AGM, as an adequate dividend cannot be provided in regard to it. Some of these exercises are just accounting-book exercises but they have severe effects on individual members.

Mr. Denis Daly

In the current economic climate most political and economic commentators encourage consumers to go to their financial institution as soon as possible to come to some arrangement on borrowings when they have financial pressures. Credit unions have been doing this for the past 50 years. Most credit unions have programmes in place to help their members who may be under financial pressure. It is ironic a section put in place to prevent credit unions participating directly too much in the mortgage market is now in danger of acting against them being in a position to do what they have done best for the past 50 years.

If a member, who is under financial pressure and has borrowings in other institutions, goes to his or her credit union for help it would be difficult to meet their obligations in the current five-year constraint. That puts additional pressure on the member. The proposal is assuming that because a person goes to the credit union to discuss his or her financial situation and look for assistance, that there is an automatic and significant increase in the likelihood of default. We would argue it is actually lessening the risk of default. For a credit union's hands to be tied in helping their members is causing us serious concerns. We also have funds to lend which could help in the current economic climate. There is a twin-tracked approach to our concern. One is to help members under pressure; the other is to show we do have funds to lend.

Deputy Seán Sherlock

Section 35 needs to be clarified then. The extension from 20% to 30% is not providing the panacea. The committee may need further clarification on this matter from departmental officials or the Minister about this proposal.

Deputy Seán Ardagh

I note the four CUDA members before the committee come from the perimeter of the Pale. From what areas are the other seven members?

Mr. Kevin Johnson

The seven other members consist of Greystones and District Credit Union, Blanchardstown and District Credit Union, Coolock-Artane Credit Union, the Prison Service Credit Union, Newbridge Credit Union, St. Mary's, Navan, Credit Union, Tullamore Credit Union. St. Anthony's and Claddagh Credit Union, Galway, is an associate member. There are some inside the Pale.

Deputy Seán Ardagh

It is still very much based in the east. Kerry does not seem to be represented as much as it was with the ILCU.

The total membership of the CUDA comes to 275,000, which would average at 25,000 per union. Are the credit unions all the same size?

Mr. Kevin Johnson

There is a bit of a mix in membership figures.

Deputy Seán Ardagh

Which are the larger ones?

Ms Jacqueline McCormack

Navan has more than 30,000 members.

Mr. Billy Doyle

Dundalk has 25,000 members. The Coolock and Bray unions would have a similar sized membership.

Mr. Denis Daly

We have 35,000 members.

Deputy Seán Ardagh

The assets of each individual union on average would come to €140 million.

Mr. Denis Daly

The CUDA's combined assets come to €1.4 billion.

Deputy Seán Ardagh

Mr. Doyle said he had an asset base of €70 million. What are the figures for overall and individual liquidity?

Mr. Billy Doyle

Liquidity in the credit union sector is measured as a percentage of available, withdrawable shares. It is on the high side of the 30% to 40% bracket.

Deputy Seán Ardagh

This is a time when businesses are short of funds and are being turned down by banks. Are businesspeople such as those involved in Bula Mines, Navan Carpets and various furniture manufacturers, members of the Navan credit union?

Ms Jacqueline McCormack

Absolutely. Our credit union has existed for almost 40 years in which time there has been a huge cultural and economic change. Tara Mines, Bula Mines and a huge furniture trade were based in the town but they were wiped out in recent years. Small entrepreneurs are ready to step into those shoes and would be supported by their credit unions if we were in the business of supporting small enterprises.

Deputy Seán Ardagh

Mr. Johnson said one of the movement's aims was "to contribute to the prudent flow of credit that will support local economic recovery at a time when banks are effectively closed for business." He added:

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.

How is the credit union in Navan doing that and what prevents it from doing it better?

Ms Jacqueline McCormack

At the moment we are taking applications from unemployed local members who have entrepreneurial ideas. We are looking at the character of the applicant and the business potential of the model and are working on the positive applications. A large number of businesses are operational and we also have links to the public service. We have a multicultural approach to cater for the huge number of ethnic people coming to us, whom we must support and whose skills we must develop.

Deputy Seán Ardagh

I want Ms McCormack to concentrate on the economy, developing jobs and supporting industry and entrepreneurs.

Ms Jacqueline McCormack

We are developing the cross-enterprise forum, which is a large-scale model, but we also deal on a one-to-one basis with members. People made redundant from the building trade may want to change their skills. They plan to go to FÁS and come back to our credit committee with a business proposal. One person built up a relationship with us based on trust, demonstrating the ability to repay loans over a long period of time. This is a changing environment for such people and we hope to support them by providing the necessary funds going forward.

Deputy Seán Ardagh

CUDA only represents 11 of our 416 credit unions but it has greater assets than many others. If the liquidity of just 11 credit unions stands at over €70 million then the total in the movement must be at least €500 million. Why are things not moving faster when businesses are starved of loan finance?

Mr. Billy Doyle

Many credit unions, within and outside CUDA, have delivered and continue to deliver a certain amount of financial support to small, local and predominantly owner-run businesses, often in the form of a personal loan. A number of credit unions, ourselves included, have set up a student innovation fund for student entrepreneurs in partnership with Dundalk IT. We have held discussions with county enterprise boards and other agencies and told them that, while we had the funds, we did not necessarily have the expertise to assess particular applications.

It has been suggested that guarantee funds for the SME sector might emerge and microfinance funds may be available at EU level. Those funds sometimes carry partial guarantees but we would like to enter into arrangements with Departments or Enterprise Ireland whereby the contribution of credit unions would be matched and assisted in a prudent way. We do not suggest we become the funder of all small businesses in the economy but we feel we could make a very tangible contribution at this time. There could be a more structured, supportive role for credit unions in that area, linking back to some of the restrictions on lending in the Credit Union Act.

Mr. Kevin Johnson

That type of lending does not have the support of the regulator. We have raised the matter and continue to do so. We acknowledge that there is a need for specific risk management in that area and we are open to taking in such skills or availing of them from whoever can provide them. There is a significant opportunity to unlock the potential for such an approach but it will require the support of the regulator for credit unions to lend to small businesses.

Deputy Kieran O’Donnell

I welcome the members of CUDA and have a couple of questions on the short-term and long-term issues for the movement. How do they feel the potential bad debts within the movement can be managed in the short term? I assume investments fall under the area of appropriate capital management policy but did many members become involved in the high-risk investments such as the tier 1 products bought by Davy Stockbrokers and others, which were highly risky? What was the interaction of credit unions with members in that area?

My understanding is that, in accordance with section 35, only up to 20% of a credit union's loan book can be greater than five years. The proposal is for that to be extended to 30% but that would mean an increase in provisions for losses because of arrears in loans. Is that correct? The witnesses spoke of how that would affect liquidity but can they flesh out the details a bit more? An ordinary person might say that, if given the facility to restructure loans over a period greater than five years, it would be of assistance. Where are the problems in such a facility?

The witnesses spoke of community bank facilities but do they refer to the use of cheque books and other such things? Is the credit union movement talking about moving towards a model akin to a banking system or a central liquidity mechanism whereas at present credit unions are standalone entities? How does the credit union movement retain its ethos? It has done fantastic things, particularly in the 1990s, when many small businesses were going under because banks would not provide them with credit. Many went to their local credit union on a Monday morning where they got a draft and lodged it into their current account in the bank and at the end of that week or month repaid the credit union. The credit union movement provided the overdraft facility for many small businesses. I would be highly critical of the banking system in that period. On the issue of a mechanism for moving forward how does the credit union movement maintain a balance between providing a range of facilities while retaining its ethos with ordinary people who want to repay the credit union and feel part of the credit union movement? Will the witnesses address the issue in the context of the short-term and long-term initiatives in regard to proper regulation and retaining the ethos? I ask them to flesh out section 35, given that it is very much an issue at present.

Mr. Kevin Johnson

Perhaps I can clarify section 35. It is probably an excellent example of what we mean by outdated legislation because it is used for so many things. Currently it is being used as a proxy for asset and liability management, whereas our approach is to stop using outdated legislation as proxies for anything. Let us have proper asset and liability management.

We need to be clear about the context in which the section 35 proposal is being dealt with. As Mr. Billy Doyle mentioned earlier there are two elements to it, one is around the flow of credit. Our view is that the basis on which the calculations were made are actually wrong — instead of having it as a percentage of the loan book, it should be a percentage of the assets and that would enable the flow. However, the second part is around assisting members who find themselves in difficulties. It was in that context that the Minister asked for a short-term initiative. While it was a commendable and well-intended initiative, the proposal as it stands does not match up to that. Because of the criteria being attached to the minimum liquidity figures — the additional provisions required for every rescheduled loan — that in time will handcuff the credit union and stop it helping other members. To be clear, the issue is that the more strategic review of section 35 is not taking place and the review that is taking place is overly restrictive and punitive.

Deputy Kieran O’Donnell

Is it correct to say that in principle the witnesses would like the core element of section 35, that is, the ratio of long term loans to the overall loan book, increased? As a standalone item that is reasonable. For credit unions that have a large asset base the witnesses consider that the overall section 35 is restrictive in terms of long-term loans and the 20% liquidity ratio. There are a few key ratios for credit unions. The problem here is that we could get bogged down in an abstract discussion whereas I would like it to be based on fact. I would like to understand exactly what the credit union movement wants? If we break it down to nuts and bolts, increasing the rate from 20% to 30% would be okay by most people. In regard to increasing the level of provisions, I understand the credit union movement books a provision for arrears when a payment is made on the particular loan rather than basing it on the amount of arrears at a balance sheet date. Is that correct?

Mr. Kevin Johnson

Yes.

Deputy Kieran O’Donnell

If the credit union is forced to book a provision based on a period of time, not only will it have to do it currently but it will have to do it for major arrears as well which will have an enormous impact on reserves and its ability to pay out dividends. Is that analysis correct?

Mr. Kevin Johnson

Yes.

Deputy Kieran O’Donnell

The final issue is the effect on the liquidity ratio. Will the witnesses' explain the overall impact of the liquidity ratio, given that it is too abstract for me? We understand that certain credit unions have got into trouble in terms of liquidity insolvency but for the great majority of credit unions that has not arisen.It has arisen in areas where very risky investments were indulged in, in regard to products the credit union movement should not have got involved in. The overall credit union body is in a relatively healthy state. Will the witnesses please flesh out section 35 in terms of liquidity?

Mr. Kevin Johnson

What I was trying to explain was that the short-term fix that is being proposed is to help a member who may be experiencing some difficulty and goes into his or her credit union. The solution is to reschedule the loan. That means it will take longer to repay the loan — it is as simple as that. It does not automatically attach a higher risk to the loan, it just means it will take longer to repay the loan.

Deputy Seán Ardagh

Is that on the rescheduling?

Deputy Kieran O’Donnell

The rescheduling of an existing loan?

Mr. Kevin Johnson

That is correct. This is about the rescheduling of an existing loan.

Deputy Seán Ardagh

Is it turned into a new loan?

Mr. Kevin Johnson

No. There are some confusing parts of the loan.

Deputy Kieran O’Donnell

A loan could go from being a five-year loan and the credit union would reschedule it to, say, seven years.

Mr. Kevin Johnson

Exactly.

Deputy Damien English

I apologise for cutting across the Deputy. Is the rescheduling of loans done by a committee or at managerial level?

Mr. Kevin Johnson

That depends on the credit union, the size of the loan and the values involved.

Deputy Kieran O’Donnell

Will Mr. Johnson take us on a walk through the process?

Mr. Kevin Johnson

The real concern is that there are a number of credit unions who have reached those limits. The Minister said he does not want a situation whereby, when a member walks into the credit union the only reason he or she cannot be helped is that the loan is now going outside the five-year term to the seven-year term. The broader strategic review is fine if done properly. What happened with the proposal was that for all credit unions — this comes back to the weakness of the one-size-fits-all approach — there is a need for a minimum liquidity rate of 20%, the basis of which is unclear.

Deputy Kieran O’Donnell

In practice, is that not in operation?

Mr. Kevin Johnson

By and large it is. I am just explaining how this approach was taken. An arbitrary figure was chosen and used. Should it be 15% or should it be 25%? The proposal as it stands is that every loan that would be rescheduled would automatically have a 20% provision made for it.

Deputy Kieran O’Donnell

Is that not a short-term key impediment to what is being proposed?

Mr. Denis Daly

It is part of the problem. Perhaps I can extend it out by giving an example of a member who comes into the credit union — a person who has been a member of our credit union for 40 years has never missed a loan repayment. The person is married with a couple of children and both parents are working. Due to the current economic crisis perhaps one loses a job and is on social welfare or on a three-day week. I preface my comments by saying that provisioning is supposed to be a measure of risk. We can qualify the risk and set aside funds to ensure the credit union and its members are not put at risk. The particular member who has never missed a repayment does the prudent thing, as advised by all and sundry at present, and goes to the credit union. We do what we are probably best at, we sit down and discuss the position and mutually accept a rescheduling of the loan that is in the member's best interests and in the credit union's best interest in terms of this member repaying the loan. That automatically now attracts a 20% provision. We would argue that this does not reflect any additional risk on the loan.

Deputy Kieran O’Donnell

Up until now, would any provision have been made on that loan?

Mr. Denis Daly

The member is not in arrears. He has not missed a payment.

Deputy Damien English

Has the ability to judge a loan application locally been taken away?

Mr. Denis Daly

One could also argue that this arrangement undermines the basis of making provision. Instead of having an accurate measurement of risk, an arbitrary figure has been plucked from the air.

Deputy Kieran O’Donnell

If a loan is rescheduled above the existing terms, under the new regulations, the credit union will be obliged to provide for a figure of 20% in terms of bad debts for that loan.

Mr. Denis Daly

Exactly. The difficulty is compounded by the fact that if the member who has never missed a repayment in 40 years were to miss a repayment, we would be obliged to provide for a figure of 100%.

Deputy Kieran O’Donnell

That would have major implications for the credit union's reserves and its capacity to pay dividends to members and restrict its ability to lend.

Mr. Denis Daly

It would. It could cause serious concern for credit unions in terms of having an annual surplus in any one year.

Deputy Kieran O’Donnell

What is the concern about the liquidity ratio? Most credit unions are required to maintain a 20% liquidity ratio. If the model used by credit unions had been used in the standard banking system, we would be in a far different place from where we are today.

Mr. Kevin Johnson

I completely agree with the Deputy's comment. Section 35 is not the place in which to set appropriate liquidity levels. We are not arguing with the level of 20% but with how the level was arrived at and how it is implemented.

Deputy Kieran O’Donnell

The bad debts and arrears provisions would be very severe for credit unions.

Mr. Kevin Johnson

Within the proposal there are very good suggestions for the process of handling the rescheduling of loans, which we completely support. Proper regulation will look after these issues but they must be set out as proper standards to be adhered to, not retrofitted to an outdated Act. That is the issue.

Deputy Kieran O’Donnell

How do the credit unions view the investment strategy and community banking? Are they becoming banks or are they remaining as credit unions? How would the delegates explain the ethos of the movement?

Mr. Billy Doyle

The Deputy raised the issue of liquidity. One of our philosophical issues in using liquidity as the benchmark for longer term lending is that the level of capital is more important than liquidity. This has proved to be the experience with other credit union movements and in various banking sectors. Using liquidity is not best regulatory practice. We also considered the increase of 10% was not meaningful.

Deputy Kieran O’Donnell

I would always like to have cash in the bank. It is the best form of capital.

Mr. Billy Doyle

I will deal with community banking and the question of short-term versus long-term lending. The mission and core values of credit unions should and will remain the same. Their purpose is to provide a better deal on financial services, including savings and loans, for ordinary people than they can get at a bank. That purpose will remain, to which two key core values are attached. First, the customers who are served by credit unions are, in fact, their owners. That co-operative element is intrinsic in the short and long term and removes the tension between making a profit for shareholders and providing a service for customers. In a credit union they are one and the same. The important word in "community banking" is "community". We do not want credit unions to become banks.

Deputy Kieran O’Donnell

Does Mr. Doyle see credit unions providing cheque book accounts?

Mr. Billy Doyle

In the long term and looking at credit union development internationally we see credit unions in Ireland moving into one of two areas. One is providing a full savings and loan service for ordinary people which could include mortgages at some stage, while the other is providing the broader and fuller service, including current accounts, cards and payment services. These are our longer term options, based on the experience of other sectors and international credit unions and hearing our members say they want a brand they can trust. Whether we stay as a traditional credit union, as many of us are, move towards offering more comprehensive and sophisticated savings and loan services or embrace the broader payment service, the purpose and core values of credit unions will remain. The key word is "community". We do not see ourselves becoming banks. In America credit unions provide a range of services but are still known as credit unions. They provide a meaningful and ethical alternative for ordinary people.

The issues raised in the paper we have presented today support credit unions in the delivery of these services, both in the short and long terms. Some such as section 35 are legislation based. Others such as the central liquidity mechanism are not. We see them as supportive instruments of the development of credit unions and their members. A central liquidity mechanism takes advantage of the co-operative notion that credit unions have considerable liquidity. Let us look at a statutory mechanism, as has been put in place in other jurisdictions, by which credit unions could pool liquidity in order that shortages could be met by the movement. In the last year much work was done on the development of a central liquidity mechanism. A working group was set up under the auspices of the Department, from which a very satisfactory set of recommendations emerged. We are somewhat disappointed that that facility has not been introduced. It is one of the short-term requirements identified in the proposal presented today. We ask for support in having this recommendation of the working group acted upon as soon as possible.

When it comes to credit union matters, we believe the only important interest is that of the member and the credit union on the ground. Any other interest should not enter the equation.

Deputy Kieran O’Donnell

The credit union movement is proposing a move from the current system which is based on liquidity, largely in the form of cash, to one in which liquidity ratios would not simply be determined by loan to loan or loan to investment ratios but would also bring reserves into being. Would this not take the movement into one of the areas where the banking system faces problems with liquidity?

Mr. Kevin Johnson

The Deputy made an interesting comment about the preservation of the ethos of the movement as it develops. That is at the heart of the matter. Credit unions do not want to become banks. When one speaks about providing banking facilities, one cannot avoid using the word "bank". We want to be the provider of financial services in a way that will foster the mutual trust between credit unions and their members. The key is the word in that regard is "trust".

Deputy Ardagh asked about the provision of credit for small business now that the banks have effectively withdrawn from that market. There is a fantastic opportunity for the one financial institution which is trusted to step up to the plate and deliver it. We realise there is a need for balance to ensure there is appropriate risk management.

Deputy Kieran O’Donnell

Is the credit union movement restricted in making business loans available?

Mr. Kevin Johnson

Yes.

Deputy Kieran O’Donnell

Any form of loans.

Mr. Kevin Johnson

It is not encouraged. That was the point we were making to Deputy Ardagh.

Deputy Kieran O’Donnell

Does the Credit Union Development Association have a view on investment management in credit unions?

Mr. Kevin Johnson

A view on——

Deputy Kieran O’Donnell

Did many members of the CUDA have investments in Davy-type products?

Chairman

As some of these issues are before the courts, we must be very careful.

Deputy Kieran O’Donnell

In terms of the investments in which members of the CUDA would have been involved, what view did the association take in advising its members? What is its view of members making investments in the future?

Mr. Kevin Johnson

Before my colleague, Mr. Daly, answers that question, I stress that the CUDA is not actively involved in advising its members.

Mr. Denis Daly

As credit unions, our first objective is to be in a position to lend funds to members. The issue of managing surplus funds is driven by the fact that we are not in a position to do so. Financial markets were turbulent in the past few years and credit unions had a range of investment products on offer. As it turned out, prices in all markets and for all products fell. One could say generally that when equities are going up, bonds are going down. To be fair, credit unions were not immune to the fluctuating market and a number of them suffered losses but to the credit of the movement, almost in one year, credit unions have weathered these difficulties within their liquidity structures without a call on members and without Government assistance. The credit union movement has gone through a particularly turbulent time in terms of investment, but its strength has been that in a very short period it has been able to weather it. The CUDA perspective is that it underpins the need for an adequate capital and liquidity structure. That is the message we have been sending to all credit unions. They have to build a very strong balance sheet to ensure they will continue to thrive and prosper.

Deputy Kieran O’Donnell

Will CUDA comment on the restrictions placed on credit union lending?

Mr. Denis Daly

Credit unions were set up to provide credit for their members.

Deputy Peter Kelly

I welcome the members of the CUDA. I am a member of Longford Credit Union. I am a depositor, borrower and guarantor. However, I will not be pursuing my third role further.

Longford Credit Union is well run. I can say without fear of contradiction that it is run by the best people in the county. They are solid citizens who are part of the community and providing it with a great service. I send best wishes to Mr. Charlie O'Rourke, the chairperson, Ms Helen Whitney, the manager, all the staff and members. I congratulate them on providing a great service. I will not comment on the banks, as the topic makes me unwell.

What ratio of loans to deposits does the CUDA recommend? Should credit unions be allowed to lend on a higher liquidity percentage? I understand only 11 credit unions are members of the CUDA. Does Mr. Johnson expect this number to increase?

Mr. Billy Doyle

On the percentage of loans to deposits and the link with the discussion on section 35, the broad percentage of savings or deposits on loan to members would be somewhere around 50% on average. Some credit unions would be at a higher figure; others would be at a lower one. The calculation of the relevant percentage of how much one can loan to members is not linked with deposits, which is one of the difficulties we have with section 35 and the proposal made. It is linked with the loan book. Section 35 states a credit union may lend no more than 20% of its loan book over five years. The largest loan a credit union can give to a member is linked with the credit union asset base. One may not give a loan to an individual member greater than 1% of the credit union's assets. It would make much more sense to link the percentage of loans in terms of time with the assets. Therefore, we are suggesting a figure no greater than 40% of assets over five years, with further significant restrictions on loans that could be granted for a period of greater than ten years. The key issue for credit unions in addressing borrower issues and meeting new loan opportunities or demand concerns the period between five and ten years. At this time there is no wholesale requirement for long-term lending. Linking the percentage of loans that could be given over five years with the asset base would be preferable. We are of the view that some of the provisions and the rescheduling conditions attached to the current proposal should be dealt with in another manner, rather than strictly linking it with the rescheduling of a loan.

My colleague, Mr. Johnson, will respond to the question on whether the CUDA wishes to grow and have more members.

Mr. Kevin Johnson

The short answer to Deputy Kelly's question is "Yes". The CUDA has developed its own business model, where we provide representation for credit unions in respect of the Financial Regulator, but also we assist them with their strategic development, as one can see in the model we have set out. One can see from what we are saying that we believe there is a need for flexibility in the legislation and regulation to allow for a spectrum from traditional credit unions to those which may wish to evolve to something akin to a community bank. That is a new service we provide. We provide a significant amount of training to help in the development of competencies and skills in the member credit unions but also to meet other legislative requirements. There is a significant amount of mandatory training which both volunteers and staff must undergo and we ensure this takes place. We have also changed our membership model. Not only do we have a situation where we can have full members, we can also have associate members to allow credit unions which for various reasons may be unable to leave one representative body and move to another. We have provided these services for more than 50 credit unions in the last year. I have brought a leaflet for members to take away with them if they please.

Deputy Damien English

Two weeks ago we heaped praise on the representatives of the credit unions who were before us but CUDA is missing out because it is the second group to attend. However, the excellent work done by credit unions is recognised. They have had no bailouts and have not been the subject of any run on their deposits. It proves that their ethos and regulatory mechanisms work. Fine Gael often speaks of a "good bank" but the credit unions are the equivalent of a good bank.

Mr. Kevin Johnson

We are not a bank.

Deputy Damien English

I support what the credit unions are looking for. This committee will do more work on the matter and hopefully will make recommendations. My fear is that some of the changes needed in the short term will not happen soon enough. This is a year in which people will try to sort out their debts and survive. How close do the representatives feel we are to a change in section 35? Negotiations are under way but do they expect an agreement this year? It is important there is some movement.

The review will take a long time and may bring about the necessary changes but it may be too late for a lot of members who need help from their credit unions. It is the members who are asking for these changes — not some official body. The credit union in my area works well by responding to members' needs and there is a duty on Members of the Oireachtas to change the legislation to suit those needs. Some of the rules may reflect a shortage of skill sets in some credit unions in the past but there has to be flexibility and a recognition that credit unions have modernised in terms of the skills they have and the people who run them.

Mr. Johnson said he was not sure why only 20% of the loan book could be for five years but does anybody know why such a limit was set? A five-year loan is very tight for most people and a ten-year loan is generally needed. It seems stupid that, when it is needed most, we do not allow such loans. Does the legislation definitely have to be changed to allow longer loans or is it a question of interpretation? The Taoiseach agrees that credit unions need change so hopefully the Tánaiste will add her support.

Is CUDA involved in the review procedure? Does it have a say in the review and is it happy with its contribution to shaping the outcome? Is a recommendation from this committee necessary to ensure CUDA gets a greater say? The review concerns the organisation and its members and there is no point in something being imposed with which they cannot agree. I agree that we should keep in place the current system and the people who operate it, even if we change the rules and regulations. We do not need a new body or a new ombudsman for that purpose as it would be a waste of money.

If a person asks for a loan to be rescheduled and a credit union is forced to refuse the application, what happens to that person? Do they go into arrears? Will it give rise to a 100% provision for bad debts? Will their credit rating be affected with the credit union or other institutions? If we do not change the regulation soon we will put people into that position.

Mr. Doyle said a central mechanism was required. Does he envisage a group of credit unions coming together to share liquidity? Should credit unions be allowed to make their own individual case to a regulator for different liquidity ratios? Would that be going too far? There was also a suggestion that asset valuation be taken into account, rather than just the loan book, but is asset valuation dealt with properly at every level? Asset valuation would take into account not just loans but buildings owned by credit unions. It is important that we push for assets to be valued properly and revalued each year, as is the case in other companies.

Can anything else be done with the legislation in the short term to facilitate what the movement is seeking to achieve? The credit union is a not-for-profit organisation and wants to help people. The Joint Committee on Social and Family Affairs has today published a report on helping people in debt by suggesting ways in which banks could allow them some leeway. Was CUDA involved in that report?

I believe CUDA was instrumental in ensuring that the deposit protection scheme applied to credit unions. I applaud the organisation for that because without it there would have been a serious run on deposits. I have to question the approach of other bodies that were opposed to it.

Mr. Billy Doyle

The Deputy asked if CUDA would support the idea of individual credit unions making their own representations or being authorised to act in light of their own financial circumstances. We would fully support such an idea. One of the problems with the current regulatory approach, the current legislation and the section 35 proposal is that they propose a one-size-fits-all approach. We strongly believe that one of the key changes required in the legislation is to reflect the capabilities and ambitions of individual credit unions. We would also support an increase in resources for the credit union regulator, if he or she needed it to police a more differentiated approach. The legislation and lack of resources at regulatory level contributes to the one-size-fits-all approach currently taken.

As our document makes clear, we have been calling for a strategic review for some time. If there is to be a new legislative or regulatory framework for credit unions for the next ten, 15 or 20 years, the review should be underpinned by questions of where members and credit unions want to go. We welcome the fact that the review is about to begin but have concerns over the terms of reference. Under the present structure it is to be carried out under the aegis of the Financial Regulator. The terms of reference are very much oriented towards regulatory concepts, such as safety and soundness, prudential strength and the solvency of the sector. We support a focus on such issues but submit that a review should start with an attempt to craft a strategic vision for credit unions. If credit unions arrive at a view of where they can and want to go, the next question should be what legislative and regulatory foundation needs to be put in place to facilitate them. We are concerned that the correct balance is not evident in the terms of reference and we would like to have more input into finalising them. As has been the case heretofore, CUDA would play a fully constructive and positive role in that context.

Deputy Damien English

I also asked what happened when a person asked for a loan to be rescheduled but was refused. Can a credit union pick up the telephone to ask for the permission of the registrar to provide a loan? It is very serious if people are blocked from obtaining loans in this way. I accept that not every credit union has reached the 20% level but I wondered about those which had.

Mr. Denis Daly

Effectively, one has to tell the borrower that the loan cannot be rescheduled because of the regulation in question. That means the repayment requirements stay as they are, even though both parties know they are unmanageable. Arrears will continue to clock up and the credit rating of the member is impacted because most credit unions are now in the Irish Credit Bureau. The psychological aspects are also important. If a person has gone to the credit union for help but is refused it puts him or her under psychological as well as financial pressure. We are usually the first and last places members in such a position visit but because we cannot help them they feel there is no light at the end of the tunnel and, in many cases, they give up. This is the worst thing to happen both from the perspective of the member and the credit union because it increases the probability that the loan will become a bad debt and have to be written off. The unintended consequences of the proposal before us may be to increase the level of bad debts in credit unions. It hamstrings us in doing what we are there to do, which is to look after members.

Deputy Damien English

How close are we to that eventuality? A credit union is not allowed to make a local judgment as to a person's ability to pay but that is what credit unions are good at and they should not be told from on high that they cannot make that call.

CUDA represents 11 credit unions but it is in contact with many more. How close are credit unions to having to refuse to reschedule people's loans? Is it a problem now or will it be a problem in a month's time? I see this year as being very bad for people with debts.

Chairman

We might take a question from Deputy O'Donoghue because a vote has been called in the Dáil.

Deputy John O’Donoghue

I welcome the members of CUDA. It is no surprise that their arguments are largely in line with those of the Irish League of Credit Unions which we heard last week. Both organisations have the interests of the credit union movement at heart and both are very clear about the need for a separated and differentiated system of statutory regulation for credit unions. Both believe there should not be a one-size-fits-all approach and that credit unions should have a greater entrepreneurial role with greater innovation and progression.

The two organisations seem to differ on where the regulator should be based. The Irish League of Credit Unions appears to take the view that the logical step is to transfer the regulator to the Department of Enterprise, Trade and Employment. Interestingly, CUDA does not follow that philosophy and seems to believe it should remain within the Department of Finance. Why do the organisations differ on that point?

Chairman

I thank Deputy O'Donoghue and ask the delegates to respond briefly.

Mr. Billy Doyle

We certainly argue for a separate and differentiated approach to the regulation of credit unions but the location of the regulator is a point on which we disagree with ILCU. We see the need for the regulation of credit unions to remain in the Central Bank-Department of Finance base to underpin the confidence of members. They are attracted to the ethos and relationship bases provided by credit unions but need to feel that their unions are no less regulated and that their money is no less safe. Confidence is the life blood of financial organisations and credit unions are no different in that regard, despite the strong relationship we have with our members. The Government deposit guarantee scheme in September 2008 was very important to us. By remaining under the auspices of the Central Bank and the Department of Finance we will ensure the continuation of the deposit guarantee arrangements and will ensure the potential access to Central Bank and-or ECB facilities, if required. Our understanding is that to do so would be problematic without being regulated by the Central Bank.

One of the concerns about the regulation of credit unions moving to, for example, the Department of Enterprise, Trade and Employment relates to the platform for future growth. It could evolve into the re-emergence of a quasi-self-regulatory partnership between a stand-alone regulator and representative bodies of credit unions, which was the model that characterised the 1980s and 1990s when responsibility for the regulation of credit unions rested with the Registrar of Friendly Societies. It is a model that has been discontinued internationally for not reflecting best practice, particularly in those credit union sectors which have grown and prospered. Such an outcome, whether intended or not, would not be in the interests of credit unions or their members.

Chairman

Deputy English made a few points which were not answered. I would appreciate it if the representatives responded in writing as we must go to the Dáil for a vote.

Deputy Damien English

How close are we to the 20% limit becoming a problem? I would welcome a full written answer but can Mr. Doyle say if it will become a problem in the next couple of months?

Mr. Billy Doyle

It will.

Deputy Damien English

In other words, it is already a problem.

Mr. Billy Doyle

Yes.

Chairman

I thank the delegates.

The joint committee adjourned at 5.05 p.m. until 3 p.m. on Tuesday, 23 February 2010.