The first item on the agenda is a discussion with representatives of the Department of Finance about the impact of regulation on credit unions and developments in this area. On behalf of the joint committee, I welcome from the financial services division of the Department Mr. Eamon Kearns, director, Ms Brid Kemple, assistant principal officer, and Mr. Antoine MacDonncha, legal adviser. I draw their attention to the fact that members of the committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I invite Mr. Kearns to proceed with the presentation.
Financial Regulation of Credit Unions: Discussion with Department of Finance
Mr. Eamon Kearns
I thank the joint committee for giving us the opportunity to appear before it to discuss the regulation of credit unions and current developments in this area. I am accompanied by my colleagues, Ms Brid Kemple and Mr. Antoine MacDonncha, from the financial services division. I will address four themes: first, the regulation of credit unions; second, the strategic review initiated by the Minister for Finance; third, the deposit guarantee scheme and, fourth, proposals to facilitate rescheduling of loans.
I will outline the role of the Minister for Finance with regard to credit unions. The Minister is responsible for ensuring the legal framework for credit unions is appropriate for their effective operation and supervision. On behalf of the Minister, the Department of Finance consults bodies representing the credit union sector and advises and supports the Minister on all matters relating to the business of credit unions. The Department also liaises with the Registrar of Credit Unions on issues arising that require a Government policy response. The Registrar of Credit Unions briefs the Department on a regular basis on the general position within the credit union movement as a whole.
Historically, credit unions were regulated by the Registrar of Friendly Societies who also has responsibilities for friendly societies, industrial and provident societies and trade unions. The Registrar of Friendly Society comes under the aegis of the Minister for Enterprise, Trade and Employment.
The optimal location of the regulatory structure for credit unions was addressed in the McDowell report in 1999. Mr. McDowell recognised the valuable contribution and unique role of credit unions in Irish society. The report noted that while the credit union movement was then typically characterised by a large number of very small community based credit unions providing fairly limited services for their members, some had grown, even by the late 1990s, into large operations which were already significant providers of services of a financial nature. The Credit Union Act 1997 also allowed credit unions to offer a wider range of services to their members than was previously the case.
In considering the position of credit unions Mr. McDowell met representatives of the credit union movement and the Registrar of Friendly Societies. In the course of these meetings the all-Ireland nature of the movement, the fact that it was then and still is community based, as well as the historical and unique role credit unions have played in Ireland's development were highlighted. On this basis, Mr. McDowell recommended that the approach which would best address these considerations would be to have the existing functions of the Registrar of Friendly Societies regarding credit unions brought into what was then the new structure for a single regulator. The report recommended that this be done in a manner that would recognise and be supportive of the uniqueness of credit unions and give comfort that their voluntary character would not be threatened by the establishment of the new regulatory structures while still addressing the appropriate regulatory and consumer protection requirements that arose. The report recommended that these concerns be addressed by the establishment of a statutory position of registrar of credit unions within the structure of the single regulatory authority.
Subsequently, in May 2003, following the establishment of the Central Bank and Financial Services Authority of Ireland, the Registrar of Credit Unions replaced the Registrar of Friendly Societies as the regulator of credit unions. The registrar carries out his regulatory functions in accordance with the provisions of the Credit Union Act 1997, as amended. There are 414 credit unions registered in the Republic of Ireland, with a membership of 2.9 million and total assets of €14.47 billion. It is a very substantial credit area. The registrar is responsible for administering the system of regulation and supervision of credit unions provided under the Credit Union Act 1997 with a view to two core areas: protection by each credit union of the funds of its members and the maintenance of the financial stability of credit unions generally.
The legislation provides extensive powers of direction for the registrar to ensure the financial soundness and safety of credit unions and protect credit union savers. The registrar can also issue regulatory direction and prohibition orders to a credit union in relation to a broad range of issues, including investments, the raising of funds, loans, assets and liabilities ratios and the composition of assets and liabilities. The registrar has extensive powers of inspection and investigation of credit unions, as well as broad supervisory powers, for example, to appoint, suspend or remove a person as a director of a credit union and he may appoint or remove auditors.
Much has changed since the McDowell report in 1999. The size and scale of operations of many credit unions have grown even further. The range and diversity of financial products credit unions now make available to customers have expanded. The complexity and competitiveness of the market in consumer orientated financial products have increased. In all of these circumstances the case for the location of the regulatory structure for credit unions within the domain of the Financial Regulator has strengthened considerably. Recognising these factors, the Government decision of June 2009 on the reform of financial regulatory structures determined that there would be no change in the positioning of the Registrar of Credit Unions within the framework of the new integrated structure for the Central Bank and the Financial Regulator.
I will now turn to the strategic review. The credit union sector is a diverse one in terms of the size of individual credit unions and the range of financial products they provide for members. The sector is dynamic, with significant change and innovation. It is important that the full range of activities of the credit unions is appropriately reflected in the underlying legislation and regulatory framework. The more diverse financial services and products being made available by large credit unions will necessitate consideration of the scope and nature of regulatory oversight. Responses to developments must be appropriately calibrated to ensure that in the case of smaller credit unions, changes in regulatory requirements do not engender a disproportionate administrative burden. Savers with credit unions recognise that appropriate prudential standards enable sustainable growth and maintain the deserved reputation of credit unions for reliability and security of savings. The quality of the regulatory framework, together with a high level of compliance, can be a source of competitive advantage and consumer confidence in the credit union sector.
There is no doubt that the existing business model and regulatory arrangements in the credit union sector have enabled the sector to maintain stability and the capacity to meet the credit needs of its members through the current period of financial difficulty. However, it is apparent that the sector needs to reflect on how progress and further development can be generated. Is the existing framework of regulation for credit unions fit for purpose and capable of supporting the movement through this period of change and development? Credit unions have been seeking change in the legislative framework for some time. As the committee will be aware, the Minister for Finance has requested the Financial Regulator to arrange for a strategic review of the sector, the arrangements for which have commenced. The review will include an examination of the structure, operation, regulation and legislation of credit unions. It will also incorporate a risk assessment. The terms of reference being finalised will be comprehensive and balanced.
The Minister requires that the review will advise, inform and provide him with an assessment of the future strategic direction of credit unions.
It is envisaged that the review will include conclusions and recommendations on the operational model, legislative framework and regulatory controls appropriate for credit unions in the future. A successful review will require wide consultation with stakeholders in the sector.
I will now turn briefly to the deposit guarantee scheme. In June 2009, the Government gave legal effect to the announcement of 20 September 2008 to increase the limit of the deposit guarantee to €100,000 and to extend the scheme to credit union savers. This was done by enacting the Financial Services (Deposit Guarantee Scheme) Act 2009. This measure has had a significant effect in providing reassurance to credit union members that their savings are secure. The €100,000 limit per depositor covers the vast majority of accounts in credit unions. It also, therefore, represents significant progress on savings protection for credit unions.
The strengthening of deposit guarantee arrangements demonstrated the Government's intention to protect the whole financial system, secure its stability and ensure that all deposits in all Irish financial institutions are safe. The extension of the scheme to credit union savers safeguards their competitive position vis-à-vis mainstream financial institutions, given the important role played by credit unions in encouraging savings by all in our community.
The Minister for Finance has stated that his preferred option is to have approved stabilisation arrangements in place for all credit unions, in addition to having the deposit guarantee scheme in place. The stabilisation fund would act as the first port of call in the event of a credit union getting into difficulty. It is only in circumstances where stabilisation arrangements prove insufficient that the deposit guarantee scheme will be called into action. Discussions with the credit union representative bodies on this matter will proceed in the coming months.
I will turn to proposals to facilitate the re-scheduling of loans. A core objective of the legislative and regulatory framework for credit unions in Ireland is to ensure the safety and soundness of credit unions. This requires prudent lending and investment decisions by boards of credit unions to safeguard members' savings. The restrictions contained in section 35 of the Credit Union Act 1997, as amended, are an important asset and liability tool for credit unions. This is because the funding of credit unions is predominantly provided on a short-term basis in the form of on-demand savings and, consequently, the limits on longer-term lending are necessary.
Credit unions are seeking to facilitate revised repayment instalments for credit union members currently experiencing difficulty in meeting loan repayments due to unfavourable changes in their financial circumstances. However, in certain circumstances these endeavours run up against the current section 35 limits on longer term lending for some credit unions.
The Minister for Finance was anxious that credit unions should be supported in working with their members who are experiencing financial stress and need to reschedule their loans. The Minister asked that the section 35 arrangements be re-examined. He has stated that any solution must be achieved in a manner consistent with the requirement to maintain adequate liquidity levels and the application of honest and prudent accounting practice, which would not obscure or disguise problems in the loan books of credit unions.
The Department of Finance, at the request of the Minister, reactivated the group, representative of stakeholders, the regulatory authority and the Department of Finance, which reviewed the section 35 lending limits back in 2006. The aim was to find a solution to this issue. We have consulted with the relevant stakeholders and received proposals from them on how best to proceed. Progress has been made on the issue and the Minister expects to bring proposals to Government for legislative change within the next few weeks.
I thank the Chairman and other members of the committee for their attention. We will be happy to take questions on any of the issues involved.
I wish thank the officials for appearing before the committee. On a first reading of the submission, it appears that Mr. Kearns is talking common sense in terms of the approach to prudential supervision, the stabilisation fund and the need for some degree of flexibility in section 35. While the Minister seems to be sympathetic to people who find themselves constrained by the fact that their loans have finite term limits, and one needs to reflect the reality of people's lives by extending the lifetime of a loan, the question now arises as to the effect that will have on liquidity ratios and so forth. I would like to hear a view from the officials to flesh that out and explain in practical terms what the Minister or the Department might propose on section 35 for allowing people to have more flexibility, but without affecting a credit union's own liquidity ratios. How will they get around that particular issue?
I acknowledge that things have moved on significantly since the McDowell report. In his statement, Mr. Kearns said that "recognising these factors, the Government decision of June 2009 on the reform of financial regulatory structures determined that there would be no change in the positioning of the Registrar of Credit Unions within the framework of the new, integrated structure for the Central Bank and the Financial Regulator". To be clear, does that mean that the regulation of credit unions will remain within the ambit or under the umbrella of the Central Bank? If that is the case, will the reporting procedure be changed in any way? For instance, will the registrar report directly to the head of financial regulation, or is it proposed that the registrar will report directly to the assistant director general? Given the nature of credit unions, and the differentiation that we make between banks and not-for-profit friendly societies whose surplus is redistributed, could we make a case that the reporting procedure would be such that they would report directly to the Financial Regulator? That covers section 35 and the reporting mechanism.
Is it now proposed that the review will examine the stabilisation fund with a view to bringing all credit unions, no matter what their size, into that remit? How will that play out in practical terms? Mr. Kearns said the Minister for Finance has stated that his preferred option is to have a proofed stabilisation arrangement in place for all credit unions in addition to having the deposit guarantee scheme in place. There is a double effect then with the stabilisation fund, so how is it envisaged that the stabilisation fund will work for smaller credit unions which would not be operating on the same economies of scale as larger ones? I would be glad if Mr. Kearns could tease out those points.
Mr. Eamon Kearns
I will take the last question on the stabilisation fund first, if I may. When the deposit guarantee was announced, the Minister for Finance indicated his preference that the scheme would act as a backstop to stabilisation arrangements. Back in May 2009, the Department of Finance put forward a proposal to amend section 46 of the Credit Union Act, which would have provided for arrangements in respect of stabilisation. These were discussed with representatives of the credit union movement generally. The Deputy will be aware that stabilisation and savings protection are issues of some contention within the credit union movement itself. We were not in a position to report a consensus position to the Minister on this issue. However, the Minister has said that his preference would be for a single stabilisation arrangement which would embrace all credit unions and would be sufficiently flexible to recognise and differentiate between larger and smaller credit unions.
The strategic review of the sector will examine the current arrangements for savings protection. We will look for specific recommendations in respect of how those stabilisation arrangements will operate.
Mr. Kearns stated they will look for specific recommendations. Will they come from the sector itself or will he make recommendations?
Mr. Eamon Kearns
We will listen very closely to what the sector says because these are the people who will, after all, have to work in this environment. We will also note what the Financial Regulator says in its report to the Minister, who will form a view as to the appropriate arrangements for stabilisation.
It is necessary that we probe, as far as possible, how the individual credit unions and the credit union representative bodies feel about the issues that arise in respect of stabilisation. It is very important for the movement that this is properly operational and functions well.
We will listen carefully to the views the movement expresses in the context of the strategic review and we would welcome its engagement with the review process, in particular in this area. This is an opportunity to settle this issue and get it right.
What about the reporting mechanism and section 35?
Mr. Eamon Kearns
Could I ask my colleague to speak on the reporting mechanism?
Yes.
Mr. Antoine MacDonncha
As the Deputy is aware, the Minister proposes to bring forward primary legislation shortly to integrate the Central Bank and to integrate the financial regulation side of the bank with the core functions on the central banking side. It is proposed to bring that legislation to the Oireachtas at an early stage.
I refer to the unified structure under the Commission and the internal reporting requirements. The registrar's responsibility will be to the bank. We are going to have a unified bank under one board where all the strands of the reporting feed back up to the board. The internal day-to-day reporting requirements will primarily be a matter for the management structure in that bank which will have as one of its functions integrating the whole regulation side and central banking side into one cohesive unit.
It is not clear at this point to whom the registrar will report but, ultimately, the responsibility of the registrar will be to the bank and to the Commission, which will unify that bank. It will be a matter for the Commission primarily to determine where his day-to-day reporting lines will lie.
The reporting procedure could be a matter for the discretion of the Commission itself.
Mr. Antoine MacDonncha
Ultimately, the registrar will be responsible to the Commission and it will be for the Commission and the bank to determine to whom he reports in their internal management structure. I do not know if it is something on which we will seek to intervene indirectly.
Mr. Eamon Kearns
The section 35 issue comes down to the necessary limits which are provided in the Act in respect of loans of a duration exceeding five years. Currently, it stands at 20% of the loan book. What has been happening is that people, who run into financial difficulties because they have lost overtime, their disposable income has been squeezed or they or members of their families have become unemployed, are still able to repay their credit union loans but find they cannot make the monthly payments at the same level. They go to their credit unions to ask if they can extend the period of the loan and make smaller monthly repayments. Some credit unions have said they cannot do that because to do so would extend the loans over the five-year period and they would run up against the limits of the 20%. The Minister asked us to engage with the Financial Regulator and the registrar of credit unions to explore ways we could address this problem.
In looking at any amendment or change to the 20% limit, we, and certainly the Minister, felt it had to be balanced in two ways. It had to be balanced in respect of the liquidity provisions credit unions would put in place. That makes sense because when one reschedules a loan, by definition, one is changing the risk profile of one's loan book. Therefore, there must be a recognition in respect of liquidity which is commensurate with that change.
There must be transparency in the way in which that is presented in the accounts of the credit union. They would be the two concerns we would need to balance in making recommendations to the Minister in respect of the proposals.
Since this change, or adjustment, will require primary legislation, the Minister will bring a proposal, based on the consultations we have had with the sector, to the Government shortly. The proposal will be considered by the Government and we expect it would be brought before the Dáil potentially in the legislation dealing with the reform of the structures of financial regulation.
I take it there is ongoing engagement in regard to this stabilisation fund and the section 35 provisions. Is it an open-ended process? I presume a sunset has been put on it. When is it proposed to wrap up that process?
Mr. Eamon Kearns
The process in respect of section 35 has effectively been wrapped up from the official perspective. The Minister has a proposal and he will bring it to the Cabinet as part of a legislative proposal.
I welcome the delegation from the Department of Finance and thank the members for their overview. I am concerned about responsibility. Who retains responsibility for policy issues concerning credit unions? I might be wrong but has the Department delegated it to the financial regulatory authorities which, in turn, may have delegated it to a consultancy firm? If so, does Mr. Kearns accept that sends out very bad signals to the credit union movement?
Arising out of the meeting we had with the movement, in particular, with the Irish League of Credit Unions, there was a fear that the movement has moved very far down on the list of priorities of the Department which, of course, has far bigger fish to fry with the banks, recapitalisation, NAMA, public finances and so on. There was a suggestion from the movement that perhaps the Department of Enterprise, Trade and Employment should assume responsibility for policy matters concerning credit unions. What steps will the Department take to allay the movement's fears and concerns in that regard which have been expressed to us?
I am sure Mr. Kearns will accept the strength of the credit union movement lies in its members and volunteers who assist with management. There is a fear among members that if a new regulatory model, designed to address the regulatory failures that have applied to banks, was to operate for them, it would create an oppressive and disproportionate regulatory burden on them given their make up of members and volunteers who assist.
What is the Department's strategic vision for the regulation and development of the credit union movement? As I must go, I ask the delegation to forgive me. I will return.
Perhaps the delegation could respond to the points Senator Coghlan made and when he returns, we might return to it.
Mr. Eamon Kearns
We were a little surprised when we heard at this committee the Irish League of Credit Unions requesting a change in the locus of responsibility of the Registrar of Credit Unions. I confess we did not anticipate it. There is no indication at all that there is any diminution in the priority which is given to credit union policy within the Department of Finance.
On the Minister's request to the Financial Regulator to undertake the strategic review, that reflects the Minister's preference for an independent review. The Department feels that the regulator engaging consultants to undertake the groundwork is the right approach. The terms of reference will be sufficiently robust and will focus on the core strategic issues in a way that gives guidance to the consultants to carry out the examination of the issues in a structured way, and that the report, when it comes to the Minister, will deal comprehensively with the kind of issues the Department needs to address.
I suppose it is true that there are many issues which have had to be dealt with in respect of credit unions over the past year and a half. There has been the issue of liquidity and the importance of ensuring that there is sufficient liquidity within the movement as a whole. There has been the issue of the protection of savers' deposits. There has been the issue of stability of individual credit unions and the credit union movement. There has been the issue of section 35 and the need to look at how we can examine that matter to ensure that there is sufficient flexibility to provide assistance to savers who need rescheduling. In other words, there is quite a range of issues that have arisen. The Department sees the strategic review as being a timely means of addressing the broad context within which all of these individual issues have arisen so that there can be a holistic and consistent response to how they are addressed. The Department of Finance will assist the Minister in examining the report and in making recommendations on the basis of the report. There is no diminution in the priorities the Department is giving to that issue.
I thank the Department for its presentation. The questions I really want to ask were touched on by Deputy Sherlock. I refer, in particular, to the stabilisation arrangements. I wonder if there is a type in mind, whether it be a funded type of system, a captive insurance type of system or that each individual credit union would have to set aside a certain percentage. What models of stabilisation arrangements are available that might be appropriate in the Irish context?
On financial services products, I think I am alone among all of the members here today in not being a member of a credit union. The witnesses can tease me by outlining what financial products are available in the credit unions because the Department stated that they have become far more sophisticated than they were in the past.
The presentation mentions the requirement to maintain adequate liquidity levels and the application of honest and prudent accounting practice. When was it dishonest and why did the Department use that word?
Mr. Eamon Kearns
There was no underlying theme in my choice of the word "honest" and perhaps it was not the most appropriate term. I simply meant no more than that the reporting arrangements should be of the highest standards and meet the highest accounting standards. It was not in any sense meant to be pejorative towards any practices the Department sees at present in respect of reporting. I might ask my colleague to address the question of financial products now available.
Ms Bríd Kemple
The services generally would include telephone, Internet and fax access to the credit union by a member, standing orders, direct debits, money transfers, third party payments, bill payment services, budget account schemes, provision of ATM services, insurance services, group health insurance schemes, provision of euro drafts and bureau de change services, providing gift cheques, money advice and budgeting services, service centre including photocopying, fax and computer facilities for members, undertaking draws, providing financial counselling, making wills, providing budget meter cards or tokens, running saving stamps schemes, and recently facilitating in PRSA.
As we go on, we get ever more requests for additional services to be provided. In those cases, we would always run it by the Financial Regulator for an opinion on how this affects the workings of the credit union, what is the extra workload and what the credit union itself and its members have to gain from providing these services.
On the money advice and budgeting service, is there any connection in that regard with MABS which is sponsored by the Department of Social and Family Affairs and the Society of St. Vincent de Paul?
Ms Bríd Kemple
I cannot say for sure. MABS makes recommendations to credit union members in trouble to go to credit unions to attempt to consolidate their debt. This, while it may be good advice, obviously poses some difficulties as well for credit unions in having to deal with those type of requests because they must look at two sides of the situation. There is this community-based facility where, as we stated on the section 35 question, one is attempting to facilitate the person who is in difficulty. At the same time it is important that the credit union protects the interests of the saver. The first priority, the Department would have thought, is for the credit union to protect the savings of its members. The second is to consider what loans the credit union can hand out.
Mr. Eamon Kearns
On the issue of stabilisation arrangements, as Deputy Ardagh will be aware, when the Credit Union Act 1997 came into force, the Irish League of Credit Unions savings protection scheme, SPS, was already in place. That is a private scheme and it operates on an all-island basis. It is one model of a possible scheme. For example, stabilisation could come in the form of a scheme such as the SPS — an agreement between a number of credit unions along the existing lines of the SPS model to create a fund that could provide grants, loans or financial guarantees or otherwise for the purposes of securing and maintaining the financial stability of the members of the credit unions. That is one model.
We are of the view that the stabilisation arrangements will have to allow financial intervention on behalf of members in the event that a credit union were to encounter difficulties. The intention is that the mechanism would be sufficient to allow the credit union in question to get back on track over a period. In effect, it would tide that credit union over during a period of turbulence or stress. In the unlikely event of the worst coming to pass, members' deposits or savings would still be secure under the deposit guarantee scheme. We do not have a final model in mind in respect of the stabilisation arrangement. However, we are of the view that it should be both flexible and fit for purpose in order that credit unions might be granted the opportunity to work through their difficulties.
I do not believe the Department is aware of the urgency that is required in respect of the review of section 35. Mr. Kearns indicated that the legislation is ready. However, we are not in a position to discuss it today. I find that difficult to accept. The select committee dealt with Committee Stage of the Finance Bill last week and could easily have taken on board any necessary amendments in respect of the matter before us. I do not understand why this issue was not dealt with in the context of the Finance Bill. I do not know if it could be dealt with when Report Stage of the Bill is taken. I doubt that the relevant changes are close to being ready. If they are not ready, I ask that a message be communicated to the Minister to the effect that it is urgent that work on them be completed in order that they might be put in place.
Mr. Eamon Kearns
I agree with the Deputy. We have been moving as fast as possible to reach a position whereby we might provide the Minister with advice on a mechanism that would address the issue. The nub of that issue is how to assist borrowers who are encountering difficulties and who might be facilitated in repaying their loans by means of rescheduling. There is a matter we felt we had to probe in as thorough a manner possible.
I accept that. However, Mr. Kearns stated that it is ready. Would it have been possible to introduce amendments on Committee Stage of the Finance Bill in order to deal with this matter?
Mr. Eamon Kearns
Once we reached agreement on the shape of the mechanism——
Which appears to be the case.
Mr. Eamon Kearns
——it had to go to the Parliamentary Counsel for drafting.
That is fine. I am convinced, however, that if people really wanted to take action, the matter could have been dealt with on Committee Stage of the Finance Bill. I will discuss this matter with the Minister because it is probably one on which our guests cannot comment. It seems that the necessary adjustment was ready and could have been introduced. I am concerned that it will become stuck in cyberspace or somewhere else and that we might not see it for a number of months. The credit unions have made it clear that a new mechanism is needed as soon as possible, particularly in view of the fact that the current mechanism is restrictive. It is not just that credit union members will be assisted in rescheduling their loans. The review of section 35 also relates to the provision of services in general to credit union members and to dividends, profits, etc. Those with loans will benefit from the change but so will all other members of credit unions. However, we will park the matter for now.
Mr. Kearns stated that we cannot discuss the potential changes at this meeting. There is a concern, particularly on the part of the Credit Union Managers Association, CUMA, with regard to what the registrar seems to want. A system whereby credit unions will be obliged to have 100% provision in place in respect of people who fall into arrears will not work. People may fall into arrears in respect of one payment but in general they catch up. There is a concern that while adjustments might be made to section 35, restrictions will be introduced elsewhere. That will not work. There is no point in the Minister introducing some small changes which may appear to be great but which will not prove to be of assistance.
The registrar's suggestion that there be an increase from 20% to 30% will not provide a solution. I am of the view that tinkering around with the system will not prove sufficient. The credit unions made it clear that it is overly restrictive. Some of them have plenty of assets but we are taking a percentage of the loans. In the context of the 20% or 30%, will consideration be given to taking a percentage of their assets rather than their loans? Increasing it to 30% will not provide a solution either.
Allowing a credit union member to reschedule only on one occasion during the lifetime of a particular loan is lunacy. I am not stating that such a provision will be included. However, Mr. Kearns is not in a position to indicate what is included. It is frustrating for members who wish to contribute properly to the debate on this matter that they are not in a position to do so, particularly in the context that the necessary adjustment has already been prepared and submitted to the Minister. It is a matter of some annoyance that we will not have another opportunity to discuss the matter.
I understand that some changes were introduced to section 35 by means of the Markets in Financial Instruments and Miscellaneous Provisions Act 2007. None of the credit union managers who came before the committee mentioned that fact. Is it the case that changes such as those to which I refer were introduced in the 2007 Act?
Mr. Eamon Kearns
That is the case.
In such circumstances, what is the current position? If I understand it correctly, this means that the percentages that are being enforced are wrong and that there is scope to allow for up to 40% in some cases and also to make provision for ten-year loans. If I have it wrong, that is fair enough. Is it the case that the registrar is not paying any heed to the amendments that were introduced in 2007? As stated at our previous meeting, perhaps clarity, rather than a change to the legislation, is what is required.
When will the review be published? I presume that amending legislation will appear before it. Is it envisaged that a one-size-fits-all approach will not necessarily be taken? There is a major difference with regard to the size of the various credit unions and such an approach might not prove acceptable. Will a decision in that regard be taken as part of the review?
Will the review examine the position with regard to the possible introduction of enabling legislation to allow credit unions that wish to do so to go further? Will it merely deal with the issues that have arisen in the past ten years or will it try to ensure that the legislation will be drafted in such a way as to negate the need for us to revisit and amend it in two or three years' time? Will scope be given to those credit unions that are operating at a different level to their counterparts? I accept that the credit unions are not banks. However, some of them are in a position to provide additional services and they want to do so.
I accept Mr. Kearns's comment to the effect that not every credit union possesses the expertise to this. However, some of them do have such expertise. If the latter is the case or if a credit union can afford to pay for such expertise to be provided, it should be allowed to provide additional services. Will the review allow for this matter to be examined? I accept that Mr. Kearns cannot indicate to the committee what might be his preference in this regard.
I am concerned that if we do not amend section 35, people will be refused the opportunity to reschedule their repayments and they will go elsewhere. If they cannot obtain assistance from the banks or the credit unions, they will seek solace in a market which is not regulated and which we do not want them to become involved. There is a duty on us to act quickly in respect of this matter. Problems are arising in respect of this matter, which is evidenced by the number of telephone calls members are receiving in respect of it.
Some of the arrangements that are in place are preventing certain credit unions from paying dividends. That is not helpful. Part of the work of the credit union movement is to educate its members and encourage them to do things properly, to save and so on. Where possible, members are provided with dividends. If the provision in respect of bad debts is going to be too high, credit unions will be overly restricted in the context of being able to pay dividends.
The measures the Minister is supposedly ready to bring forward appear to deal only with section 35. Will any attempt be made to deal with section 32, particularly in the context of the number of shares one must own before one can obtain a loan? In some instances, one's shares must amount to 25% of the amount of the loan being sought. I accept that there is some flexibility in that regard at present. Is this matter being examined as part of the overall review or will it be dealt with in the context of the short-term changes that are to be introduced? Will section 48, which relates specifically to new products, be contemplated as part of the review or will it also be dealt with in the context of the short-term changes?
Will Mr. Kearns clarify the position with regard to the amendments introduced in 2007? Will he indicate if these can be used at present? It has been strongly indicated to members that the registrar is becoming too involved and is being overly strict. That is unfair on the credit unions which have done a great job, both on foot of the regulations that have been introduced and as a result of local practices. It seems the credit unions are being micro-managed and severely restricted currently as a result of interference by the registrar. Does the Department of Finance feel the same way? It would be useful to hear comment on this.
Mr. Eamon Kearns
I will take the last question first. I listened carefully to the presentations from the Irish League of Credit Unions, ILCU, and the Credit League Development Association, CUDA, when they appeared before the committee and heard the concerns in respect of the perception of the form of regulation. That would not be a view we would share. We think quality regulation can give a competitive advantage to credit unions in attracting deposits, reassuring their members that their deposits are safe and in reinforcing the well-deserved reputation the credit union brand has as a safe place to keep one's money. Therefore, quality regulation is hugely important.
The regulatory environment and the way the regulator operates will form part of the strategic review and we would expect a critique to point towards any legislative changes that may be required or any changes in the format of regulation.
Will it form part of the changes the Minister will make in the short term? There is an issue of clarity. Perhaps the adjustment of section 35 will be enough, but there is a feeling currently that some of the requirements already coming from the registrar are very restrictive. I accept that the Department cannot deal with all the necessary changes in the short term, but is the Minister going to issue any new guidelines or provide clarity?
Mr. Eamon Kearns
In respect of the proposals the Minister wants to bring to Government relating to section 35, I am constrained from going into any further detail than I have. I am sorry about that, but the Minister will bring the proposals as part of legislation to Dáil Éireann. At that stage, all of the issues will be set out in the legislative proposals.
Is that in respect of section 35?
Mr. Eamon Kearns
Yes, section 35. I will ask my colleague to deal with the question on the review of section 35 that was undertaken in 2006, with the changes made in 2007.
Ms Bríd Kemple
As we said, the industry sought changes as far back as 1996. As a result, the Minister for Finance established the review group on longer-term lending limits under section 35 of the Act. The review group had representatives from the ILCU, CUDA, the Department of Finance and the Registrar of Credit Unions. These met over several months and came up with findings and recommendations. The group recommended that extra lending limits would be increased for those credit unions that submitted a board statement to the Registrar of Credit Unions confirming that the credit union had the necessary controls and safeguards in place to deal appropriately with increased longer-term lending and that financial criteria had been met. Where the board statement is approved by the registrar, individual credit unions would be authorised to lend up to a new increased section 35 lending limit, as follows: the 20% limit could be increased to 40% and for over ten years the 10% limit could be increased to 15%. Certain criteria linked to the 40% and 15% limits were agreed by the review group.
Since that time many credit unions have applied and some have received permission to lend up to those limits. I understand, but may not be correct on this, that approximately 33 credit unions are involved currently. I will check that with the registrar and if I am wrong, I will inform the committee again.
Is it the case that 33 have applied or that 33 have received permission?
Ms Bríd Kemple
I am unsure but I will check it. I think 33 have received permission, but I will verify that for the committee. I am told now it is 35.
In order to receive permission, credit unions must comply with the criteria. However, as matters stand, it appears that several credit unions cannot meet the criteria and are not in a position to apply. This is where the issue lies at the moment. If one were to look at section 35 again, one would not be looking at those criteria, but at other issues that are on the table.
I appreciate that because it did not arise in our discussion previously that this provision was available. I am surprised by that. Are the criteria very black and white or is there a grey area or is it down to the registrar to form an opinion based on the criteria? I presume we can discuss that today.
Ms Bríd Kemple
As far as I am aware, the criteria are agreed and have been set out in regulations by the registrar.
They are fairly clear so.
Ms Bríd Kemple
The registrar decides. He is the one who is close to the credit unions and knows what is going on.
I feel that there is an interpretation issue with regard to some of the legislation regarding credit unions. I appreciate Ms Kemple may not have the criteria with her, but could they be sent to us. It seems still that the issue is open to interpretation and that the criteria are not black and white. The feeling we have is that there is a perception that the registrar has taken a very tough interpretation of the regulations. This option, if put into practice properly, should have solved the problem in the first place. Perhaps the criteria to avail of the provision are too stringent. I do not know, because I was not aware until now that the provision existed.
Ms Bríd Kemple
My understanding is that some of the criteria are quite black and white and some are not. Some of the criteria relate to providing assurances to the individual board of the credit union. The word "appropriate" also comes into play rather than, say, specific limits. Decisions are left to the Financial Regulator. He receives prudential assurances every quarter and deals on an ongoing basis with the credit unions. He would know best how to regulate, as he is the regulator.
I accept that, but the new legislation must set out the details very clearly. Most of those who have made presentations to us so far have given the impression they feel there is an interpretation issue and that because of what has happened over the past two years, the registrar is being very tough. That is fair and he should be. That is the perception. However, if the matter is set out in black and white, it will be the same regulation all of the time and will not be interpreted differently just because someone is trying to be extra careful in the current climate.
Ms Bríd Kemple
I am aware that CUDA would have asked for a total overhaul of section 35, which would require a strategic review. The sort of issue raised by the Deputy would have to be left for such a review.
I seek clarity on two points. When will we have the strategic review?
Mr. Eamon Kearns
We expect to have a report for the Minister by the end of the year.
I presume that when the Department invites stakeholders to take part, it means that everybody can get involved. Some managers raised the issue with us that they are not on the review group of section 35. However, I presume they can be part of the review of this. Is it open to everybody?
Mr. Eamon Kearns
That is correct. The Minister's direction was to reactivate the existing group, but we did not expand that group to take in any new people. I see no difficulty in that regard and we would like to see as many of the stakeholders as possible engage with the review. We want to listen to what the industry is saying. The Deputy made the point about whether one size should fit all and the existing legislation. It is true some credit unions are very large organisations that are very professional in the way in which they manage their business. They are focused on the new range of products they can offer to members with a very sound governance and professional approach to the market. Other more traditional credit unions are almost entirely voluntary in the way they work and focused on a much narrower common bond, which is fine. There is certainly a need for variation across the spectrum and I was asked whether the strategic review would try to recognise this. We do not want to lose the strengths and traditions of the credit union movement, the concept of voluntarism, the not-for-profit approach and the common bond which is unique to the movement. At the same time, we need to recognise that financial services have become more complex. We also need to recognise that these are turbulent times and that there is a need for reassurance and protection for those who trust credit unions to manage their savings.
Most of us share that view. However, it is important that we enable credit unions to continue to operate with the same ethos, while offering the modern services people want in order that we keep them involved in credit unions. We do not want them to leave credit unions because they cannot receive modern services.
I presume the review will be completed this year. Section 32 is being dealt with outside the review. The advice to the Minister is that he should deal with section 35 only.
Mr. Eamon Kearns
Yes.
I welcome the officials from the Department of Finance. In recent weeks we have listened carefully to the views of the ILCU, the CUDA and CUMA which clearly see their role as being in need of change. They certainly seem to be of the view that they need to be more innovative and progressive and adapt their rules to modern complexities in the marketplace, which is perfectly understandable.
When discussing the issue of regulation, it should be borne in mind that a saver's deposit is safe in a credit union. This is in no small way due to quality regulation, a serious contributory factor. Quality regulation is even more important now because the situation has been complemented or augmented by the taxpayers' guarantee of deposits. In these circumstances the regulator and those framing the law for the regulator must be ever more vigilant because the responsibility is not just to the individual saver, the credit union, the credit union movement or its ethos, but also to the taxpayer, the ultimate paymaster in the event of a catastrophe occurring. Therefore, everything that can be done must be done to ensure there is no such catastrophe.
There were conflicting views between the Irish League of Credit Unions and the CUDA as to where the regulator should sit or who should have power, if one likes, over the regulator or, to put it another way, in what seat of power he or she should sit. The Irish League of Credit Unions seemed to be of the view that, in view of the need for greater progressiveness and innovation and to adapt to more modern conditions and address modern complexity, it should be under the umbrella of the Department of Enterprise, Trade and Employment. The CUDA took an entirely different view that it should come under the auspices of the Department of Finance. Do the departmental officials have an introspective view as to which would be preferable and why they consider — as I presume they do — the Department of Finance should continue to have the regulator within its remit? I know they will be sufficiently broad-minded not to become involved in a turf war, as the issue is far too complex and important for that to happen.
The section 35 issue has become enormously important not just for individual credit unions, but also for individual borrowers. There is no doubt that thousands of people are seeking to have revised payment instalments, including people experiencing difficulty in meeting loan repayments. Any change to section 35, as the Minister rightly points out, must be in a manner consistent with the requirement to maintain adequate liquidity levels. That is absolutely essential because to do otherwise would be to throw the baby out with the bathwater and destroy not just the ethos of the movement, but also the movement itself. In this context, we must recall that this perception is extremely important. How does the Department envisage credit unions dealing with individuals who are experiencing the financial stress I have described and who are very often in a frantic state in wondering how they will meet future repayments in the current economic conditions?
Mr. Eamon Kearns
The purpose of the proposal the Minister will bring to the Cabinet is to address precisely the issues the Deputy raised. It is a recognition that savers with credit unions took out loans in the expectation that they would be able to repay them in the agreed period. However, owing to a change in their financial circumstances, it has become clear that a number of such persons — perhaps many in some credit unions — have run into difficulties. They are still willing and able to make a repayment and will discharge their responsibilities to repay their loans but they need assistance and flexibility. It has come to our attention that a number of credit unions have found that the 20% limit restricts their flexibility in agreeing a new arrangement with those borrowers who want to extend the loan period. However, the Deputy is absolutely right in that any change in that regard would need to be adequately reflected in the liquidity provision. After all, the rescheduling of a loan is an explicit recognition of a change in the risk profile of the totality of the loan book. Therefore, there needs to be a balance in how that is provided for and how the credit union ensures it has adequate liquidity. In accounting for that change in the risk profile, there is a need for greater transparency in how it would be recognised in the accounts. This will form part of the proposal the Minister will bring to Dáil Éireann in the form of a legislative proposal.
The Deputy asked whether responsibility should lie with the Department of Finance or the Department of Enterprise, Trade and Employment. I know the McDowell report was published in 1999, but the fundamental points made in it in respect of credit unions remains the same. Up until 2003 credit unions were under the aegis of the Department of Enterprise, Trade and Employment. It was probably a satisfactory arrangement for most of that period. However, there were substantial changes in the financial services market. In the Credit Union Act 1997 credit unions were given increased powers to provide different savings products for their members, on which many of them acted. It meant credit unions, particularly bigger ones, were looking to a different regulatory environment. When it was decided to create a single Financial Regulator, a distinction was drawn in the case of credit unions in recognition of their status as not-for-profit organisations. Credit unions have a common bond which is based on community or vocation. Voluntarism is part of the fundamental structure of the credit union movement, particularly in respect of the boards. The McDowell report recommendations were reflected in the final arrangements by the creation of a registrar within a single financial regulatory environment.
The Government decision of 16 June 2009 to integrate the separate spheres of the Financial Regulator and the Central Bank within a single Central Bank structure led to a fundamental change in the structure of financial regulation. It was decided that the new structure would be responsible for the prudential regulation of individual financial institutions; the conduct of business, including protection of consumer issues; and the stability of the financial system overall. Such issues apply equally to the credit union sector. It is important to continue to differentiate those characteristics of the credit union movement unique to it. If we are to allow the sector to expand and grasp the opportunities presented to it by the manner in which the financial services market is developing, we need to ensure the quality of financial regulation is appropriate. There is a view that such needs can best be met under the existing arrangements.
I thank the officials from the Department for coming. I would like to ask about the amended section 35 of the 1997 Act which was introduced by the Markets in Financial Instruments and Miscellaneous Provisions Act 2007. If I remember correctly, a provision in that legislation would allow the Minister to introduce an order to change the particular percentages that apply to specific credit unions. The effect of section 35 on credit unions which might wish to extend loan timeframes is an enormous issue with the credit union movement. Credit unions are constrained in their dealings with persons who have lost their jobs and are temporarily unable to make repayments on their loans. Such a person might be able to repay his or her loan over time if the relevant period was extended. That is still a good loan.
The problem with the current system is that each credit union has to meet various requirements within the union as a whole. If 20% of the balance of its overall loan book relates to periods of more than five years, or if 10% relates to periods of more than ten years, a credit union cannot facilitate individuals in these circumstances. Is it open to the Minister of Finance to bring an order before the Dáil to deal with this matter, specifically to change section 35 in so far as it pertains to this issue, about which we are hearing from mainstream credit unions?
If the banks were run on the same principles as credit unions, we would not have a banking crisis. I accept that there are problems with certain investments made by credit unions, but that is a separate issue. In many cases, the credit union movement, unlike the banking sector, has been able to absorb its losses on such products. The question I am asking is a simple one. Legally, does the Minister have the wherewithal to bring an order before the Dáil to amend the section 35 provisions? I refer specifically to the need to extend loan periods in order that repayments can be rescheduled.
Mr. Eamon Kearns
I ask my colleague, Mr. MacDonncha, to respond.
Mr. Antoine MacDonncha
As Deputy O'Donnell said, a provision was introduced in that legislation to enable the Minister to change the limits set by order.
Would that be a general order, or would it relate specifically to credit unions?
Mr. Antoine MacDonncha
It is limited. It is in respect of section 35 which is limited to credit unions. It would apply to all credit unions across the sector. This provision is set out in legislation. There is also the issue of the limitation. The primary legislation sets fixed limits. As members are aware, certain difficulties have been particularly apparent since the Mulcreevy case of 2003. It is not constitutionally possible to make an order that might be seen to amend primary legislation. That is not to say, however, it would not be possible to invoke this order in that way. If such a route is chosen, this aspect of the issue will certainly be a factor.
Is Mr. MacDonncha referring to the case in which somebody defaulted on a credit union loan?
Mr. Antoine MacDonncha
No. The Mulcreevy case was related to the use of secondary legislation to amend primary legislation.
It is a principle.
Mr. Antoine MacDonncha
Yes. That is one element that feeds into it. If an amendment were made to section 35 to balance the relaxing of the limits with the liquidity provisions and the other protections necessary — if a decision were made to invoke the provision whereby the limits could be changed by order — it would not be possible to impose balancing protections on the other side at the same time. On that basis, it was deemed appropriate to approach this matter by means of primary legislation, rather than by making an order under the provision introduced in 2007.
Can the Minister take action in this regard? This is a major issue with the credit union movement. There is a concern that we are using a sledgehammer to crack a nut. Overall, the credit union movement has been good in terms of compliance. The model used has been a good one. Traditionally, people saved to take out loans. That has changed slightly over time. The basic principle of the credit union movement is prudent. The problem or worry is that people will not be able to service loans — good loans, in effect — in the short term because they cannot be rescheduled. Is there a mechanism whereby the Minister can give leverage to the credit union movement without compromising its overall financial soundness? Perhaps he could relax the limits in some way, to a degree that would accommodate mainstream credit unions which are having difficulty with section 35. The matter could then be examined in more depth in the context of the Central Bank legislation which is about to be brought before the Oireachtas. There is a major problem with section 35. Does Mr. MacDonncha understand the point I am making?
Mr. Antoine MacDonncha
I do. The Deputy has pointed out that there is a provision. In the light of the potential difficulties that might arise — the order could be challenged subsequently — it has been determined that it would be safer from a legal point of view to adopt a different approach. While I do not suggest it has been determined that it would not be possible to take such action, there is no doubt that it would present a risk that does not present in the context of primary legislation. The extent to which one can amend primary legislation is a matter of degree, in effect.
When the legislation was drafted, I would have assumed that this amendment was being made on the basis of case law. I assume it was legally reviewed by the Office of the Attorney General, etc.
Mr. Antoine MacDonncha
Primary legislation is considered the safer option for two reasons, namely, from a legal point of view and, more important, from the point of view of being able to introduce safeguards at the same time. It must be borne in mind that the section 35 limits were introduced in the first instance to protect the credit unions and their members. The difficulty lies in relaxing these protections without being in a position to introduce balancing protections. For this reason, it has been determined that the matter should be done by primary legislation rather than by seeking to invoke the order provision. The reason is that the former option allows the relaxation to be balanced with enhanced protection.
If a revised section 35 is introduced, when will it be operational?
Mr. Eamon Kearns
The Minister proposes to bring a legislative framework to Government for decision within the next couple of weeks. Assuming the Government approves the framework, we expect the legislation to be before the House quickly. The timing is, however, a matter for the Government to determine.
On the process, must primary legislation go through all stages before it can be applied or can it be enforced as soon as it is published?
Mr. Antoine MacDonncha
No, it must be passed.
It has to be passed first.
The Irish League of Credit Unions led the joint committee to believe that this measure could be introduced by way of ministerial order. That, at least, is my interpretation of the league's submission. My question is subjective and, as such, I understand if the witnesses are unable to answer it. Could the league have been misled, albeit advertently, in terms of its interpretation of its consultations on the matter with departmental officials?
Mr. Eamon Kearns
I do not believe the league was misled. However, at the point at which we engaged with the Irish League of Credit Unions, we did not have a full legal determination in respect of the options available to the Department. As it had previously been possible to use a statutory instrument, this matter was one of the issues on the table during our discussions. The Irish League of Credit Unions was not misled. I heard what its representatives said before the committee. Ultimately, it is for the Minister to make a determination on how the issue is addressed.
On behalf of the joint committee, I thank Mr. Kearns, Ms Kemple and Mr. MacDonncha for appearing before us. This has been a useful meeting in respect of the joint committee's deliberations on the credit unions. I also thank members for their contributions.