JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht

Credit Union Regulatory Environment: Presentations.

Chairman

The next item is a discussion on the credit union movement regulatory movement with the Irish League of Credit Unions and the Registrar of Credit Unions. The committee is joined by Mr. Liam O'Dwyer, chief executive, and other representatives of the Irish League of Credit Unions. On behalf of the joint committee, I welcome and thank him for attending.

Before the discussion commences, I advise witnesses that while the comments of members are protected by parliamentary privilege, those of visitors are not so protected. I remind members that they should not comment on, criticise or make charges against any person outside the committee or the Houses. We will commence with a short presentation by Mr. O'Dwyer which will be followed by an open discussion with members of the committee.

Mr. Liam O’Dwyer

I thank the Chairman and members for giving me the opportunity to address the joint committee. I also thank the Chairman for deferring the presentation because the original date was during the world conference of credit unions. We greatly appreciate the committee's understanding in this regard.

The Irish League of Credit Unions representatives present are Ms Anne O'Byrne, president; Mr. Mark Bailey, director; Ms Carmel Dowling, director; and Mr. David Florida James, supervisory committee. The ILCU is the leading trade and representative association for credit unions in Ireland. It is an all-Ireland body and has operated as such since its establishment in 1960. It represents the interests of more than 500 credit unions on the island, of which 104 are in Northern Ireland and 426 in the Republic. Total assets exceed €14 billion with total membership at approximately 3 million. The ILCU provides a range of trade and representative services for member credit unions, for example, public affairs activities, training, legal advice, marketing support, savings protection, monitoring, insurance services, human resource advice and treasury management support.

Credit unions occupy a unique place in the social and economic fabric of the country as not-for-profit co-operative financial service providers. The first credit union in Ireland was established in 1958 at a time when access to credit was extremely difficult. Credit unions have flourished since and continue to provide vital — and often the only — access to credit in many rural and disadvantaged communities. They have a unique ethos and modus operandi which distinguish them from commercial financial service providers.

A number of key differences set credit unions apart in the financial services sector: volunteers are ultimately responsible for the general control, direction and management of the affairs, funds and records of every credit union. Approximately 9,200 volunteers are actively involved in the credit union movement, making it one of the largest volunteer-led organisations in the State. Credit unions operate on a not-for-profit basis. Any surplus is returned to the members or used to provide additional services for members and their communities. This ethos is also evident in the ILCU — an example being our subsidiary company, ECCU Life Assurance, which this year generated a surplus of €10 million, all of which was redistributed to credit unions for use in their communities. Credit unions are principally community-based financial co-operatives, established by the communities they serve. They are owned by their members who are the consumers of the financial service which is crucially important. They participate in the operation and governance of their credit union, approving the dividend to be paid and the services offered. They are eligible to be elected democratically to their credit union board.

Credit unions in Ireland are unique in their offering of social finance to their members and the communities within which they operate. Social finance is different from ordinary finance in that it is the offering of a loan to a group or individual with the twin objectives of a financial return and a social gain, this is reflected in the operating principles of credit unions. Recent credit union surveys indicate that such finance comprises at least 10% of the credit union loan book. Many members would argue that it is much more. Our figures are clear. It is at least 10% of the book, which is an enormous amount of money, amounting to approximately €700 million. Credit unions do not engage in this type of finance as an added extra. It is part of their normal business. It is integrated into the structure of the credit union. It can involve credit unions in Ireland lending money to assist people already in debt or in poor financial circumstances to plan their way out of debt.

It can also assist people attempting to start a business and move from welfare to work or community development projects such as the joint Youthreach project in Mallow which saw the development of an educational facility in the town for young people, community enterprise projects such as the Ballybane Social and Enterprise Centre in Galway, the IT park in Tipperary and the community creche in Avonmore, County Wicklow. This lending is based on the credit union's knowledge of the individuals and communities within which they operate and is supported by the Money Advice and Budgeting Service, the local partnership and Leader companies and, recently, First Step in respect of business lending. To engage in this type of social finance, the credit union needs to operate flexibly, offering interest rates on a par with the normal credit union average interest rate of approximately 9%, ironically, given the higher risk in such lending, often at a considerably lower interest rate.

Credit unions are governed by and operate in accordance with the Credit Union Act 1997. This is one of our concerns. It is a highly restrictive and prescriptive piece of legislation. The financial services sector within which credit unions operate is the most dynamic sector in the economy. However, the process to have new credit union services approved is slow and cumbersome in what is a highly innovative marketplace. This places credit unions at a competitive disadvantage, which is not an acceptable situation.

One of the most restrictive provisions in the Credit Union Act is section 35 which deals with lending. Section 35 restricts the percentage of a credit union's loan book, not its assets, that may be loaned out for periods in excess of five years and ten years. Only 20% of a credit union's loan book may be loaned out over five years and only 10% may be loaned out over ten years, the 10% being part of the 20% over five years. Many credit unions are already at this limit and, as such, are in a perplexing position whereby they cannot legally provide loans to their members for periods in excess of five years. This is having a seriously negative effect on the level and breadth of lending services that credit unions can offer their members. The liquidity to lend is readily available — credit unions now have a loan to assets rate of less than 50% — but they are restricted because of the provisions of section 35.

Credit unions currently at these limits have to refuse access to longer-term loans often to long-standing members because to grant such loans would breach the legislation. As a result of this, members who would choose to borrow from their credit union often find themselves having to source credit from other financial service providers because of the restrictions placed on the credit union by section 35. This is compounded by the current practices of some other financial institutions which involve the consolidation of short-term loans for cars, holidays, etc., into long-term mortgages at a lower rate of interest which may seem attractive but ultimately involves the consumer paying more in the long term. The Minister for Finance has established a forum to review section 35 and the ILCU is participating with the Credit Union Development Association and the regulator as stakeholders in that forum. We look forward to a positive outcome from this review.

In recent months credit unions have been the subject of some comment by the regulator in terms of loan delinquency and investment policies. The ILCU is concerned that the Financial Regulator would engage with the media in respect of its views on these matters. To do so undermines a voluntary movement which is grounded in the trust and confidence of the Irish people. Credit unions operate to strong prudential norms while seeking to operate in a flexible manner with their members, many of whom are less well-off. While some credit unions have delinquency ratios which are higher than those set by the ILCU, they are often high not because the loans in question will not be repaid, but because the loans will not be repaid in strict accordance with the loan agreement — the loan term or repayment amount may vary. Part of this is due to the fact that the current legislation for credit union lending is overly prescriptive, which makes it very difficult for credit unions to service their members' borrowing needs within the timeframes required by the legislation and in the context of how Irish society has developed.

The level of bad debt in the Irish movement which is the real indicator of a difficulty stood at 0.54% in 2005. That is approximately €28 million out of a €5.5 billion loan book in the Republic of Ireland which is consistent with comparative figures over the past ten years and within other credit union movements. Other financial institutions would not operate to these figures since their motive is profit, not service. Accordingly, they may treat some credit union members as higher risk clients owing to low income, poverty or debt, and if they decided to provide them with access to finance they would no doubt charge them higher interest rates. As the Combat Poverty Agency has indicated in its reports, the poor pay more for finance except when they borrow from credit unions.

The regulator also expressed some concern with regard to credit union investments again, in our view, inappropriately to the media. It is not that we have any difficulty with the regulator expressing concerns regarding any of these matters to ourselves and CUDA. We do not. However, it is inappropriate to do so to the media. Credit unions currently have assets of more than €14 billion. Of that figure approximately €7 billion is invested. The greatest irony of all may be that instead of being lent out to credit union members, large portions of that currently lie in banks which take the benefit of those funds.

Of these moneys 98% are invested in capital guaranteed funds. Interestingly, one of the concerns of the regulator has been the level of return credit unions receive on funds and the length of time for which these funds are invested. Admittedly, the return is lower than that which the for-profit industry standards might dictate. This is due to a collective and conservative approach by the ILCU and its advisers, Davy Stockbrokers. Our guiding principles in this matter are security, liquidity and yield, in that order. After much consultation on this matter it seems that the regulator and credit unions now have a shared vision and a framework in mind.

None of this, however, means that the ILCU does not envisage change happening in the Irish credit union movement, quite the contrary. The strategic plan for the coming five to ten-year period is entering its final design stages. It will recommend developments which will reinforce the governance and business structures of credit unions. Irish society has changed. The financial services sector has dramatically changed, as have credit unions. The governance of credit unions is reliant on a democratically elected and voluntary board of directors. A democratically elected and voluntary supervisory committee to monitor these directors, a professional staffing now numbering more than 3,500 to provide expertise and effective operations, the ILCU's monitoring and internal examination function on behalf of the savings protection scheme, the statutory auditors, and the Financial Regulator support this effective structure. Very few organisations have such an internal structure. Credit union boards meet monthly throughout the financial year and hold an annual general meeting to announce their results, thus being directly accountable to their members. It is a strong governance structure for such a large voluntary organisation, one that is supported by the training department of the ILCU, which trained more than 7,400 staff and volunteers in 2005, and which will, between the regulator and the ILCU, be further strengthened in the coming years. While this governance structure will be further developed, it has served the movement well to date, as it has our country during the first 50 years of credit union existence.

Credit unions are regulated by the Registrar of Credit Unions. He is responsible for administering the system of regulation and supervision of credit unions under the Act, and in doing so exercises the functions and powers of the Financial Regulator in this regard. Credit unions recognise and fully accept that appropriate regulation is needed for the further development and growth of the movement in a safe and prudent manner. However, regulation must be fair and proportionate and must recognise the unique structure and nature of the credit union movement as well as its voluntary ethos. The Financial Regulator has committed, in its strategic plan, to develop an appropriate regulatory system for credit unions and a properly differentiated supervisory approach. This means that the regulation as practised would enable credit unions to develop; it would not stifle their development as would currently appear to be the case in respect of lending and of the time delays experienced by credit unions which apply to the registrar for permission to provide additional services. To be fair, the registrar has improved his consultation processes with the ILCU in recent times, as evidenced by his supportive approach to the minimum competency requirements and the consumer protection code. We look forward to continuing this level of consultation.

When initially published, the Central Bank and Financial Services Authority of Ireland Bill 2002 contained a provision which stipulated that the Registrar of Credit Unions would not be subject to the control or direction of the regulatory authority, namely, the board of the Financial Regulator, in carrying out or exercising his responsibilities or powers in respect of the registration of credit unions or the supervision of their affairs or activities. This section was removed prior to the enactment of the Bill. Instead, it is now provided that the registrar, through the chief executive, is subject to the control of the regulatory authority and is required to comply with directions given by the authority with respect to the carrying out of his responsibilities and the exercise of his powers.

The ILCU expressed concern about this in late 2002 and early 2003 when the Bill was going through the Houses. However, it was assured that the only concern of the interim authority was with regard to the accountability of the registrar to the CEO of the authority and that if the ILCU had a problem with what the registrar might be doing, the authority would not act. This is clearly not the case in practice.

While the ILCU has developed a reasonably efficient working relationship with the registrar, it has serious concerns about the reporting relationship between the registrar, the chief executive of the regulatory authority and the board of the regulatory authority, which now clearly goes beyond the promise of "accountability" only.

The 2003 Act requires that when issuing directions to the registrar, the regulatory authority will have regard to the "voluntary ethos of credit unions". However, it appears to the ILCU that the board of the authority does not fully understand the unique, voluntary, not-for-profit and consumer owned nature and comprehensive governance structure of credit unions. Indeed, members of this joint committee raised the same concerns about the nature of the reporting relationship, as outlined, during Dáil debates on the issue while the Bill was being considered by the House. The Registrar of Credit Unions now attends authority board meetings and has been mandated by the board of the authority to take specific actions which in our view have undermined both the Irish League of Credit Unions and one of our member credit unions in particular.

It recently decided to regard a guarantee offered by the savings protection scheme of the league of credit unions to a credit union as unenforceable, when previous guarantees had not only been accepted but had worked effectively for the credit union and its members. This very public action created a dangerous situation for the credit union involved. To be fair, it was later withdrawn, but it has done considerable damage to the credit union movement. The decision was taken on the basis of legal advice to the board of the regulatory authority which indicated inappropriately that the credit union in question could not rely on a guarantee from the fund of the savings protection scheme via the league of credit unions.

It should be noted that credit unions in Ireland, of their own volition, put together this savings protection fund to protect against financial calamity or negligent governance. The fund now stands at nearly €92 million and is backed by a team of internal auditors and analysts. The fund protects credit unions in the Republic of Ireland and Northern Ireland. The ILCU and the Registrar of Credit Unions are engaged in important discussions to ensure that the current scheme will continue into the future in a way that serves the needs of members and the best standards of prudential regulation.

Change is desirable and necessary and will happen, but overnight inappropriate change could undermine this extraordinarily successful development resource for Ireland — one which provides access to financial services for all. It could drive out the very volunteers who ensure that the not-for-profit service remains in place for all communities urban, rural, well-off and disadvantaged. Credit unions are not afraid of regulation, but are concerned at what a well meaning Financial Regulator might do to a voluntary, not-for-profit credit union movement.

Deputy Burton

I welcome the opportunity to meet again the officers and officials of the Irish League of Credit Unions. I participated in the Dáil debates and raised the issue of the governance of credit unions, which was originally very much designed by the former Minister for Finance, Mr. McCreevy, who appeared to have an ongoing hostility towards the movement. Today's debate is important. We have all been listening this week to what has been going on in Limerick. Deputy Cregan, who is here, would know that in some of the parts of Limerick most affected by the kind of disturbances and horrible events we have heard about, the credit unions are functioning agencies which provide good services. It is important people remember that.

As the Chairman read out earlier, the Minister, possibly in anticipation of the credit union presence here today, issued an order on 14 August which decreased limits and enlarged the section with respect to section 27 of the Credit Union Act. This has been part of the ongoing dialogue with officials of the league who came in and met various Members, including me. What is the league's response to the order? I presume it is helpful in the sense that it takes the right direction. However, is it sufficient in the context of the situation outlined today?

I will put my second question to the league now and later to the Registrar of the Credit Unions. The league referred in its presentation to the fact that a number of institutions are entering the market here for what is called subprime lending — a matter I have raised at this committee on previous occasions — where, for example, people buying a local authority or affordable house are offered the opportunity to roll up all their financial debts into a mortgage package. This opportunity has been heavily advertised in the media, particularly on afternoon television and on various satellite channels. Based on the current value of the property, people's car loan will be included and they may get the money to provide a new kitchen or holiday. I am very concerned by this. Has the credit union an insight into this? Some people who traditionally went to credit unions for services, particularly those in local authority housing, are now moving to those providers. Many of those providers, most of which are from outside the country, are not registered with the Financial Regulator. Can the league expand on this issue from the community and social point of view? While these providers are competitors, the implications of some of their lending may have a sad outcome for some people.

On pages 7 and 8 of its submission the ILCU has some very tough things to say about the registrar and, in particular, the financial services authority. It states the board of the authority which was appointed by the Minister "does not fully understand the unique, voluntary, not-for-profit and consumer owned nature and comprehensive governance structure of credit unions". It is stating that, despite the debates on this matter in the Dáil and at this committee, it still does not believe it is being fully heard by the regulatory authorities when it highlights its unique position in the Irish finance sector.

Many members of credit unions are awash with money, if I may use that term, because they have SSIAs. The ILCU has estimated that credit unions have resources of €14 billion. The regulator referred in 2005 to a figure of €11.8 billion. I presume the figure of €14 billion includes a 25% top-up. We know there are large organisations such as St. Raphael's Garda Credit Union, as well as smaller community organisations. Is the ILCU serious in its suggestion that the regulator does not seem to appreciate and understand the credit union movement, even though it is such a significant holder of people's funds? I would like the delegation to expand on this.

I would like to ask a follow-up question. On page 8 of the ILCU's presentation the approach of credit unions to the savings protection fund is outlined. The ILCU has suggested in its documentation that the regulator's statement on the matter has undermined the public perception of credit unions. It claims that the statement has led people to believe credit unions are more risky or less prudential than they should be. It seems these two charges are serious. Has there been a partial breakdown in the credit union movement's relationship with the regulator? The regulator operates in accordance with legal rules and does not have the freedom to operate outside them. The charges made by the ILCU are serious. I am a strong supporter of credit unions and understand the risky nature of what they undertake. I note that the ILCU states its priorities, in respect of the placing of its deposits, are security, liquidity and yield. In his presentation the regulator will refer at all stages to security. It seems the ILCU and the regulator share some common objectives. The regulator is implying, however, that he is not happy that all credit unions focus sufficiently on ensuring the savings of members are not exposed to unacceptable risk. He makes this clear in his presentation.

This discussion is very important because the credit union sector is unique in the Irish finance sector. As someone who serves a large working-class community, I know that the credit union movement is often the only source of finance for people who are not particularly well off. The only other similar example is the Chesterfields which lend money to farmers and those who do not have access to credit through the big banks, perhaps because they had a bad deal at some stage. It is very disturbing that the Department of Finance and the Minister do not seem to be listening. They do not seem to understand the significance of credit unions, particularly for those in less well-off communities. Credit unions are also important for those in well regulated employment such as teachers who are represented by the teachers' unions, as well as gardaí. I do not understand why the Department always seems to take a negative approach, rather than a positive one, when such people decide they do not want to bank with the big banks. It does not tell the people to whom I refer that it is fantastic to have competition in the market. I would be interested to hear the delegation's comments in that regard.

Mr. O’Dwyer

I thank the Deputy for her comments. Her first question related to deposits. She rightly pointed out that the ILCU was very pleased. It has brought this issue to the attention of the regulator and the Minister for Finance. The regulator has been very supportive of our position and the matter has now been passed on, as the committee is aware. That will give credit unions an opportunity to take in more moneys in deposits, particularly in cases of maturing SSIAs. The Deputy asked whether it is sufficient. In terms of deposits, I think it is. However, it is not sufficient in respect of the other measures we were looking for. That is the key to this. We were looking for changes to be made in respect of section 35, in particular, but I will not go into that matter again because I have already discussed it. However, it is of significance. To be fair, with the Credit Union Development Association and the regulator, we are engaged in a process under the auspices of the Department of Finance. It is intended that the process will lead to a resolution to the matter which is of significance and importance if credit unions are to be able to grow.

Deputy Burton mentioned the difference between the figures given by the Registrar of Credit Unions, Mr. Brendan Logue, and the ILCU. The only difference is that Mr. Logue regulates credit unions in the Republic of Ireland, whereas the ILCU is a 32-county operation. That is why there is a difference in the figures.

Subprime lending is a particularly important aspect of this matter. There is a difference between how it operates and how credit unions operate. Individuals living in disadvantaged communities, in particular, are being targeted by certain people. There is a sizeable difference between how a credit union tends to operate and how a commercial provider tends to do so. The commercial providers to which I refer target people who are already under financial pressure by offering them substantial funds upfront. The credit union movement never does this. It is something credit unions do not do. They make loans available when people come looking for them. They do not advertise that they can have €20,000, €30,000, €40,000 or €50,000. To be fair to the regulator, he has moved to try to bring to an end the practice I have mentioned. I expect that the level growth in the subprime market will dissipate somewhat.

Money lending — the other end of the market — is increasing, which is a source of concern to credit unions. There is a sense in which that increase tells the credit unions that we have failed in our job. We were established to give people access to credit. I will outline what has genuinely happened in the credit union movement. Our members have developed as society has developed. The assets of many of our members have grown as those of the movement have grown. One can say, on the strength of this, that some credit unions have taken their eye off that ball, in particular. It is time for us to target disadvantaged communities and ensure that, with the Money Advice and Budgeting Service, we encourage people in such communities to join credit unions and become consumers of credit union products. As I said, what is important about the credit union product which is unique to Ireland is that people are charged the same interest rate. Customers of other credit union movements are charged higher interest rates because they are seen as offering a higher risk, but that has not happened in Ireland.

Deputy Burton spoke about the board and the regulator. That is a serious issue for us. We do not have an issue with Mr. Brendan Logue, the Registrar of Credit Unions. I am very careful about how I phrase my remarks in this regard. We have an issue with the board of the regulatory authority getting involved in an area in which we believe it does not have any competence. That is the source of our concern. The example I gave to highlight our worries — the savings protection scheme — was a very good one. The board of the regulatory authority dealt with this matter which caused substantial difficulties for a credit union that is well known to everyone at this meeting. The problem in question has wounded the credit union movement. That is the first issue.

The second issue relates to delinquency in the movement. As I said in my presentation, there is delinquency in the movement, naturally enough. It is important that we should have a proper understanding of that delinquency. Deputy Burton correctly stated that the regulator regulates according to legal requirements. However, the credit union movement has found that credit unions have always operated flexibly with their members. They know their members and understand them. They deal with the difficulties which arise from time to time. Some of our members are from very poor backgrounds. When some of them come to us, via the Money Advice and Budgeting Service, because they are already in debt, we lend them money. We operate flexibly with those members although, naturally, sometimes members will not be able to meet the repayment schedule set out. As soon as the schedule is reorganised, the loan is regarded as delinquent. From a technical perspective, the rate of delinquency in the credit union movement is higher than we would wish. It is important to emphasise, however, that only some credit unions have an issue. If delinquency is dealt with in a legally prescribed manner which fails to take account of the flexible and unique nature of credit unions, it will cause us a problem. If a credit union loan is delinquent, we know most if not all of it will be repaid and make provisions accordingly. Often, we write off the bad debt figure. Credit unions accept that bad debts may be written off in accordance with the requirement to do so, which is quite correct. However, that does not mean the loan will not be repaid over time. It is an important difference in the credit union movement which the Financial Regulator must acknowledge and understand when he or she speaks to the media.

The issue of investments is especially important. It is clear to us at this stage that there is a resolution of the matter in what is about to come out. We have some knowledge of it and it appears the process has been successful. The issue is that all credit unions are regulated by the Registrar of Credit Unions. Inevitably, some credit unions will experience difficulties from time to time, but it is wrong to brand all credit unions on that basis. There is a capacity issue too. Some credit unions have significant resources and wish to do more, which position is beginning to be respected.

Senator O’Toole

To declare a vested interest, I am a strong supporter of the credit union movement, which I compliment on its extraordinary work. I was a founder member of a credit union and the founder of the credit union movement was a member of my union. I go back a long way in this area. However, it is important for the credit unions to see the committee's position. It is important that Mr. O'Dwyer has made his points and I sympathise with what he has said. However, the committee is required to lean towards regulation. We must be assured that there is regulation. Mr. O'Dwyer is correct that if something negative happens in one credit union, all credit unions are blamed. Unfortunately, that is the nature of the world whether one is a teacher, doctor, lawyer or politician but it does not affect the requirement on the regulator to attend to his or her duties.

Over the years, it has been alleged that credit unions have been used for money laundering, which is why we have asked the regulator what provisions are in place to prevent it. I would like Mr. O'Dwyer to take the opportunity when responding to set out the credit unions' prudential management guidelines to ensure money laundering does not take place. Similarly, investment is an issue that has been raised with us many times. The issue would be resolved for us if we could see the capital protection, yield and liquidity requirements. It would be useful to see how these significant issues will be dealt with and mechanisms put in place. While there is no question that the problems experienced in a tiny number of credit unions should not reflect on the credit union movement, the committee should not walk away from its role of putting pressure on the regulator. If something happens and the regulator comes in here, we will say "Why didn't you know? why didn't you tell us? What were you doing and why didn't you see it?". That is the other side of the story to be fair to that person.

Deputy Burton raised the crucial question of loans. Many members have said that wrapping up car loans and overdrafts into a mortgage is criminal. At this time of the year, large lending institutions have been topping up student loans unasked, which is not something that happens in credit unions. On some occasions, they are being told what their bill for interest will be ultimately. We are trying to prevent that sort of behaviour which is why we must support the development of credit unions. However, we must also be assured that credit union activity has the trust and confidence of everybody, including the committee and the general public. I believe firmly that mutuality will disappear from the financial sector in a very short period. There are only two significant building societies left, one of which is on the way out. I do not know how long the other will last. In four or five years time, the credit union movement will take up the slack in that area to look after ordinary people. When that time comes, provisions must be in place to ensure that there are no doubts about the sector. I ask the credit union movement to bend over backwards to ensure that its relations with the regulator are such as to ensure that the committee does not have to worry.

Can Mr. O'Dwyer set out the legislative changes? He made a point about ratios with which I agree. I would like to hear what credit unions can do with their money if they cannot lend it. While the money sitting there has made a contribution to improving the architecture in many small towns, which is no bad thing, we would like to hear about the other ways in which it could be used. Mr. O'Dwyer referred to proposed changes in business structures and the preparation of a policy document. I would like to hear a couple of brief notes on those proposals. What are the changes Mr. O'Dwyer would like to see in credit union business practices? While the voluntary aspect of the credit union movement is very important for mutuality, trust and confidence, it does not alter the need to keep a very close eye on everyone who deals with ordinary people's money. While accountability is a pain for everybody, it is necessary and not about to go away. Oireachtas Members have to fill out a multitude of forms every year setting out everything we have ever done. If there is duplication and unnecessary regulation and interference in the credit union movement, however, I would like to hear about it.

Mr. O’Dwyer

Senator O'Toole mentioned money laundering, to which I did not refer. The recent European report that examined money laundering in Ireland complimented the credit union movement on the manner in which it deals with money lending. It is an important fact to note.

When I told a friend last night that I was to attend this meeting, he told me not to criticise the regulator because the regulator is king and that is the way it is. We have examined credit union movements in other countries and seen how they have changed. There is an important balance to strike. In the USA, the number of credit unions fell from 25,000 to 9,000 and the Government is now supporting community development credit unions.

Senator O’Toole

Sorry to interrupt, but there is a complete difference. All financial institutions in the USA have a rules-based operation whereas in Ireland the regulator works on a principles basis, which we would like to see continue.

Mr. O’Dwyer

It may be like that in some respects, but not in credit union legislation. While that is exactly what we are looking for in the long term, we recognise that any forthcoming principles-based legislation will reflect the future business model for credit unions. That is why we and the Credit Union Development Association are busy formulating a strategic vision for the future. The credit union movements in other countries, including Great Britain, Australia, New Zealand and the United States, have shrunk significantly in size, largely owing to competition and regulation. Our argument is that balance is necessary. We have an extraordinarily successful movement which offers access to all communities. We need regulation — the league is not trying to squirm out of that necessity — but it must be appropriate.

In England a considerable amount of work has been completed recently and the government is extremely supportive of credit unions. The Irish League of Credit Unions does not seek grants or money from the Government. In England, however, the government has provided significant funding to establish a credit union movement. The recent report of the UK Financial Services Authority states the British Government has been involved in a number of initiatives to help the movement grow and enable credit unions to offer a greater range of services to their members. This, it states, has included the implementation of deregulatory measures to enable credit unions to compete more effectively with other financial institutions. The ILCU also seeks regulation that will enable our development in a prudent manner, which is the responsibility of the regulator.

In terms of social finance, Deputy Burton mentioned what we should be doing with excess funds, most of which are on deposit in banks. Credit unions want to lend these moneys but are restricted in doing so. Lending is the function of credit unions, whose role is not to act as investment clubs. Incidentally, they are not a poor man's bank and do not want to be branded as such. We have an integrated approach to our members and deal with all of them. It does not make any difference if a person is disadvantaged or well off. Credit unions want to be able to lend excess funds to members. They already provide substantial funds for community development and community enterprise projects. It is stunning to note developments in this regard. Nobody else provides people living in poverty with the the rates offered by credit unions. We want to expand this role.

I have sent a proposal on future strategy to my board and it, not I, will decide what will be the strategy in future. Obviously, the movement must feed into this strategy, which input will be made shortly. We recognise that support infrastructure is needed to enable credit unions to develop more fully. We are engaged in this and on the training and governance side. We have a major responsibility because the credit union movement has 9,200 voluntary directors who need support and training. The league already provides this and intends to provide it in a much more comprehensive fashion.

Senator Hanafin

I welcome the members of the board of the Irish League of Credit Unions. I have met Mr. O'Dwyer on a couple of occasions and acknowledge his expertise in this area. In connection with the €7 billion invested with the banks, it seems anomalous that the credit union movement is not allowed to invest substantially in offering mortgages and business lending, areas in which the banks are permitted to invest, given that its surplus moneys are invested with the same banks which offer such services. The risk is still inherent in the marketplace but the credit union movement is not allowed to manage it. Having said that, I do not suggest the credit union movement is exactly the same as a public limited company. I also recognise that if one credit union experiences difficulties, it reflects on all credit unions because they are not public limited companies but members of a league.

Rather than enabling the regulator and Irish League of Credit Unions to engage in point-scoring by megaphone, I will ask a few specific questions. What is the average cost to income ratio in the credit union movement? In addition to the €92 million protection fund, could a further amount be off-loaded to an insurance company, either here or abroad, in order that all credit unions would be underwritten? This would mean that, in addition to the €92 million, Lloyds or an Irish company would underwrite the credit union movement and guarantee that no credit union would go under. Taking this action would address some of the matters the regulator has raised. I do not believe the opinions of the regulator and those of the Irish League of Credit Unions are significantly different. The former argues that underwriting expertise is required. How does the credit union movement intend to establish it?

The regulator states he has an open mind about how the credit union sector should develop, believes there is room for all, small, medium and large credit unions, and wishes to have a well regulated, modern, financially stable credit union sector which offers members a real alternative to other financial institutions. He also states he believes in the modernisation of the regulatory framework through the development of enabling legislation which would allow him to regulate in an open and responsive manner. The league and the regulator appear to be ad idem except with regards to details.

I recognise and commend the role of the credit union movement. In my home town those who volunteer to give of their time to the community and have developed the credit union movement into a fine financial institution have a special place in the community and are — correctly — held in high regard.

Mr. O’Dwyer

On mortgages and business lending, credit unions engage in mortgage lending to a modest degree providing a small number of mortgages. Section 35 is obviously an obstacle in this regard because if a credit union can only lend 10% of its loan book over ten years, it clearly cannot make much progress in this area. Credit unions are enabled to support business lending and do so. The issue we have recognised in our strategy, which is also an issue for the regulator, is that when one engages in longer term lending, the process becomes more complex and, as a result, carries greater risk. We are addressing these issues in the strategic plan. Credit unions already operate in these sectors but are limited by section 35. Our intention is to support them in this regard.

The Senator raised a particularly important issue regarding the savings protection scheme and how it is underwritten. This scheme has been in place for many years and operates as a stabilisation fund, which is different from a deposit protection scheme or any other type of scheme. A deposit scheme is a burial scheme. It enters the equation when an organisation is insolvent and in the process of being closed down. The scheme provides people a fixed sum, whereas the savings protection scheme stabilises credit unions, an important function. Thankfully, few such cases have arisen recently but where they did the credit unions in question were supported by the savings protection scheme and enabled to continue trading. In every single case the credit union in question traded out of its difficulties and succeeded in getting back up and running. This process is supported by the regulator who acts to ensure the board of a credit union in such a position is of a particular standard. It is also supported by the Irish League of Credit Unions. Mr. Bailey sits on such a board and provides support for credit unions which find themselves in this position by offering his expertise and knowledge. Our training and internal audit teams also provide support for the development of credit unions. This is how the savings protection scheme operates. The cost to income ratio is 43%.

Chairman

Has any credit union drawn down from the savings protection fund?

Mr. O’Dwyer

A draw-down was made on one occasion.

Chairman

What was its scale?

Mr. O’Dwyer

It was very small. The most recent case was the one I outlined. The provision required from the fund was €4.7 million. This has been made available and recognised in our accounts.

Senator Mansergh

I warmly welcome the delegation from the Irish League of Credit Unions which plays a terrific economic or, if one likes, financial as well as social and community role. It is not entirely an accident that perhaps one of the greatest statesmen Ireland has produced, Mr. John Hume, came from the credit union movement.

The whole ethos of the credit union movement is one of financial prudence and careful management of money. I am scratching head when listening to some of this discussion. I cannot remember financial scandals involving the activities of particular credit unions. However, I have a clear recollection that about 21 years ago a major commercial bank had to be bailed out by emergency legislation. A large sum was erased because of an imprudent investment outside this jurisdiction.

I had the pleasure of meeting the board of the Tipperary Credit Union, with whom I had a very interesting discussion. Among the community enterprise projects that have been supported by the Irish League of Credit Unions, the witnessess mentioned the IT park in Tipperary. I would like to mention another project which has been supported by the credit union movement, but I must first declare an interest. I am a member of the board of the non-profit making and non-remunerated Tipperary Excel Heritage Centre. When this ambitious but financially difficult project was being set up, the Tipperary Credit Union put up a €50,000 interest-free loan which has been repaid. In the past three years, it has paid €50,000 in the form of a grant. The banker for the project, the Bank of Ireland, gave an initial donation of €10,000. The Government gave a substantial grant last year and the county council has also been helpful. In the context of paying off the loan, there have been discussions with the Bank of Ireland which have not yet reached a positive conclusion. I mention the detail of this to show how helpful and positive the credit unions are from a community point of view. I want to give substance by way of an example to what was said in the presentation. I am sure that example is replicated around the country. In comparison, the banks look at projects of substantial public interest very much in the spirit of The Merchant of Venice.

I am more than a little concerned about the current regulatory system, and I am talking about the legislation under which the regulator operates rather than the regulator. I accept that the credit unions are a substantially different financial animal from the commercial banks. Of course, I take it for granted that profitable commercial banks are unique, but taking into account the proper weighting those differences should be given, do the credit unions consider that there is a level playing field between them and the commercial banks? Could it be said that there is a form of legislative protectionism for banks, particularly in regard to mortgages? The vast majority of people who work on the boards of credit unions are entirely unremunerated, whereas one is bombarded when reading a commercial bank's report with information about share schemes, option, incentives and remuneration committees. Is there a level playing field or is it unfairly skewed? If it is unfairly unskewed, over and above any differences with the regulator, could the witnesses suggest two or three priorities in changing the legislation?

Mr. O’Dwyer

There is not a level playing field. This is not deliberate or by design. Credit unions have developed well beyond what was dreamt of. When one talks to people like John Hume, one hears about people putting in their two shillings and sixpence and realises the great success that has been achieved. The difficulties lie in the fact that we are working to legislation which is dated. After much discussion and debate, the position in relation to deposits has been changed. Section 35 is prescriptive and dictates how credit unions perform. Despite the funds they hold, credit unions can lend them out. That is not happening in the banks, who are not similarly restricted. There is a differentiation which needs to be recognised.

Ms Anne O’Byrne

It is interesting to note that personal lending in the banks over five years stands at 38%, while ours is 20%, of which 10% is over ten years. As reflected in our operating principles nine and ten, we have a social responsibility to the community that we serve. I live in Blessington, County Wicklow, where in 1989 we set up an enterprise centre containing six units for people starting business. We offered very low rates and got them started with support. We expected them to move on, thereby allowing others the opportunity. It was not a major project, but at the time it seemed very big to us. In 1987 we put in about £150,000, a lot of money in a small community.

Credit unions are serving their members and their communities. We would serve our members better if we were able to do so. As our CEO has pointed out, we are very restricted by legislation.

Of course volunteers have responsibilities and are accountable. There is a governance issue when one becomes a volunteer. People going on the boards give of themselves. Many of them do the courses and see their role as being very responsible, reporting to credit unions ranging in size from 1,000 to 30,000 members. There a wide diversity in credit unions and we need to recognise that one size does not fit all.

Credit unions have no problem with being regulated by the statutory regulator. Our problem is with inappropriate regulation which does not allow credit unions to do their business.

We hosted the World Council of Credit Unions here in July, which was opened by the Taoiseach and closed by the Minister for Finance — a major achievement — and at which the ex-President, Mrs. Mary Robinson, was a keynote speaker. In chatting and networking with the various credit union movements, regulation arose as a key issue in credit unions having to rationalise, whether they are located in America, New Zealand or Australia. Mr. O'Dwyer pointed out that government-funded community credit unions are now being established in England. Credit unions in Ireland began on their own when the first credit union was established in 1958 by a woman who recognised the need for it. They grew from that and had huge success. They should be allowed to progress and should not be stifled by regulation.

The most important point is that members' money is safe and sound and that credit unions are run in a prudential way. We all know and believe that. However, there are certain regulations that do not allow us to fulfil the services our members need. For example, as a result of the 20% limit, in recent months we have had to tell members of my credit union in Blessington, who have been borrowing for 25 years and who have never missed a repayment, that we cannot provide loans because we would be in breach of section 35. We tell them that we may be able to give them the money in six weeks but there is no guarantee that this will be the case.

Why should we send our best members down the village to the banks to borrow when we have always been able to service them? This does not put credit unions on a level playing field. We are 14 ft. below all the other financial institutions.

Deputy Cregan

Having met the officials of the credit unions in Limerick, I promised them I would propose to this committee that we would invite the Irish League of Credit Unions to make a presentation to the committee. The full membership of the committee unanimously supported this proposal and the Chairman kindly acceded to it, and it gives me great pleasure to welcome the representatives of the league to the committee and to thank them for their honest and frank presentation.

I intended to examine section 35 in more depth but Ms O'Byrne hit the nail on the head and has been forthright in explaining a typical, practical example of what is happening as a result of section 35. I would be extremely worried if section 35 is affecting the lower end of the credit union business, namely, the man or woman seeking a car or refurbishment loan. I would be less concerned with regard to business loans, although that is a personal opinion. I borrowed from a credit union many years ago to buy my first second-hand car, when I could not get a loan anywhere else. I presume many people still require this type of service, despite our current affluence. We should not lose sight of that or of the credit union ethos.

I agree with Senator O'Toole with regard to our responsibility as members of the committee to the regulator, who of course has a role to play. On behalf of the Government and the taxpayer, we support that role. However, Senator Mansergh made valid points. I wonder, with the greatest of respect, whether the ethos of the credit unions and the flexibility they require to service their members is recognised by the regulator. The witnesses referred to delinquency as a fact of life and provided examples of this. We fully accept that it happens. If the credit unions lose flexibility in these matters, they will lose the very justification for their establishment, namely, helping those who cannot get help anywhere else. I have experience of the work of credit unions in my constituency, where community groups and individuals received support from credit unions when they could not access it from any other source.

Unfortunately, the success of the credit unions has led them into these difficulties — that is plain to be seen. I welcome the recent changes with regard to deposits but changes to section 35 must come hand in hand with that. This is the most important issue. I understand the league has other issues, which is fair, but to continue doing what the credit union movement set out to do from the beginning, it is necessary for it to have flexibility that at least matches that of other commercial institutions. Why should a credit union send a member out its door with the words: "Sorry, we cannot help you. Go down the road to the bank"? That should not happen. Moreover, the credit unions will be sending people who probably will not get loans from the banks, which is a more serious problem and one we cannot lose sight of.

I have been a fervent supporter of the credit unions all my life and will continue to be so. I understand the regulator has a job to do, which I support in broad, general terms. However, I call for the introduction of the necessary flexibility to allow the credit unions and their staff to continue the good work they are doing.

Ms O’Byrne

Most people we send to the banks will get a loan because they have been good members and have the capability to repay. Unfortunately, they may not come back to the credit union for other loans, which means we will have lost good members.

Deputy Cregan

I take the point.

Deputy Crowe

I welcome the representatives of the Irish League of Credit Unions to the committee. I declare an interest in that I am a member of a credit union, as are my wife and my father, and my sister worked in a credit union. It is important we reflect that the credit unions are very much a part of Irish society.

I note the important role of the credit unions in disadvantaged areas. As one who has worked with many disadvantaged communities in my area, I have encountered many people who, from desperation, have been forced to go to money lenders, legal and illegal, despite the threat of violence that exists. I was surprised that the ICLU expressed surprise at the increase in money lending given the reality of Irish society, which sees more and more people living on credit. Despite the fact there are more millionaires every day, there are also more people who find it difficult to manage.

I can hear the frustration in the witnesses' voices, particularly with regard to the legislation in place. I have listened to their suggestions on how we should change this. Reference was made to the 20% loan limit. How was this percentage arrived at? Was it simply pulled out of a hat? What percentage would the ICLU consider fair? What relationship does the league have with the registrar and financial regulator? How often does it meet them? I assume there are contacts but there seems to be a strain in the relationship. Is that a result of having to deal with outdated legislation, as the ICLU suggests? From a reading of the regulator's document, he seems sympathetic to the difficulties that exist. If the legislation is inappropriate, it is not the fault of the financial regulator.

This brings us back to what the Oireachtas and this committee can do. The witnesses referred to legislation based around the area of principles. Will they further develop that point? The ICLU presentation states that credit unions are governed by and operate according to the Credit Union Act 1997. How can we change this? The document also states that the process of having new credit union services approved is slow and cumbersome. Does this need to be addressed through legislation or could it be solved between the regulator and the Irish League of Credit Unions?

There are difficulties and I wonder about their relationship. Is it the case that people need to meet? Are such meetings happening, and are the parties able to have them?

Ms O’Byrne

I will detail the relationship with the registrar. When the new registrar was initially appointed, there was not a very good relationship or understanding. In the past 12 to 15 months, relations with the registrar have certainly got much better. The board of the Irish League of Credit Unions meets the registrar once a year, and the board's management team probably meets three to four times a year. However, the management team in the office under Mr. O'Dwyer also meets the registrar on the basis of need, which generally means every month or six weeks. That relationship has improved a great deal. We were certainly unhappy regarding the degree of consultation and so on, and that too has improved. That is not to say it is ideal, but it has certainly got better, which is good for both parties, since we understand each other better. We are currently discussing many issues with the registrar, for whom we have great respect.

It is not the registrar but IFSRA about which we are concerned. At the time of the Bill in 2002 and 2003, it was never envisaged that the Registrar of Credit Unions should report monthly to the board of IFSRA, but that is now happening. We understood that there would be a yearly report, and of course the registrar is responsible and accountable to IFSRA. We know of no one on its board with any understanding of credit unions, how they differ from banks, their ethos and philosophy, or how they work, by which I do not necessarily mean the services they provide.

However, IFSRA can issue directives to the registrar that have an impact on a credit union. That has had important consequences, not only for that union and the confidence of its members but across the country, since members of other unions queried whether their money was safe. IFSRA lacks understanding of the different nature of credit unions. However, our relationship with the regulator has improved greatly, and I am sure that the incumbent is as delighted as we.

Chairman

Where did the 20% figure originate?

Mr. O’Dwyer

Perhaps the Chairman might address that question to Mr. Martin Sisk, who will not be happy with me for saying that.

Chairman

The committee is joined by Mr. Brendan Logue, the Registrar of Credit Unions. On behalf of the committee, I welcome him and thank him for his attendance. Before discussion commences, I advise him that while comments by committee members are protected by parliamentary privilege, those of visitors are not. I remind members that they should not make charges against or criticise a person outside the committee or the Houses. We will commence with a short presentation from Mr. Logue, which will be followed by an open discussion with members. Perhaps he might begin by introducing his delegation.

Mr. Brendan Logue

I am accompanied by Mr. James O'Brien, one of my deputies, and Mr. Martin Sisk, the former Registrar of Friendly Societies and now Deputy Registrar of Credit Unions.

I thank the Chairman for the opportunity to address the committee. Our role as regulator is safeguarding the funds of the 2 million members of credit unions; obviously we have no remit in Northern Ireland. It may be useful to give some background on how we go about that job. I would also like to describe some of the challenges that lie ahead for credit unions and how we are responding to them. Perhaps in the course of the discussion I might also comment on issues raised in the previous session.

The background to regulation has already been discussed by the committee. In recognition of the unique nature of credit unions, a statutory position of Registrar of Credit Unions was created within the new Financial Regulator, in 2003, to assume responsibility for regulation of credit unions. Appointed by the authority and approved by the Minister for Finance, as registrar I report directly to the chief executive of the Financial Regulator and in turn to the authority. The authority is a public interest board also appointed by the Minister for Finance. That direct reporting relationship means that the regulation of credit unions is afforded appropriate status within the Financial Regulator and ensures that credit union supervision is carried out in a different regulatory stream from that of other financial institutions.

Since taking over day-to-day responsibility for the regulation and supervision of credit unions we have worked to develop regulatory structures and policies in consultation with them. By the end of this month, we will have visited and met the directors and staff of every credit union in the country. Such ongoing dialogue is essential to our work.

The principal legislation under which credit unions are regulated is the Credit Union Act 1997. It provides the statutory framework within which we must regulate credit unions and sets out the detailed rules within which they must manage their affairs. That legislation is more prescriptive than that found in company law or other legislation governing the finance industry.

The functions of the Registrar of Credit Unions are set out in section 84 of the Act. The registrar is required thereunder to administer the system of regulation and supervision of credit unions with a view to the protection by each credit union of the funds of its members and the maintenance of the financial stability and well-being of credit unions generally. We work closely with the Credit Union Advisory Committee, CUAC, which has a statutory role defined in the Act, in advising the Minister for Finance on credit union matters. The members of the committee have extensive expertise and experience in the credit union sector and are active in discharging their role. We consult frequently with CUAC in the course of its deliberations and seek its views on important matters of policy for credit unions.

It is the legal responsibility of the boards of individual credit unions to manage their affairs in a way which ensures the safety of their members' funds. The Act is very clear in this regard and places the responsibility for the general control, direction and management of the funds of a credit union with the board of directors.

I will now examine developments and challenges faced by the credit union movement. In recent years, credit unions have grown rapidly. The considerable growth in savings now held in credit unions and the increasing complexity of their business model demands increased oversight if members' interests are to be safeguarded. In addition, some caution needs to be exercised by credit unions in the current competitive environment where credit is widely and easily available.

We have noted a move by some credit unions into business lending. This type of lending requires greater underwriting skill because of the inherently greater risks involved and specialist skills are thus required to manage such risks. While innovations and new product offerings are welcome and important in meeting the needs of members, it is also important that members' savings are not exposed to unacceptable risk as a consequence.

It is important to stress that we do not manage credit unions. We allow the board of each credit union to set out its own strategy and determine what business it wants to be in, subject to the limitations of law. Our supervisory process depends on open dialogue between the individual credit unions and ourselves and we employ a range of complementary approaches to support this policy. We have established an off-site analysis unit which collects and analyses prudential data from credit unions on a regular basis and which enables us to identify outliers and the trends within the credit union sector generally. The new web-based prudential return has now been rolled out to almost all credit unions. We also conduct on-site inspections and hold bilateral meetings with individual credit unions where issues arise.

In doing our job, our focus is always on risk. Those credit unions that adopt strategies at the more aggressive end of the risk scale should expect increased regulation and oversight. This is in the interests not only of the individual credit unions but of the movement and its members as a whole. The potential impact on all credit unions from the failure of even one credit union should not be underestimated. The part that credit unions play in Irish life is significant and important. Safeguarding this important sector is in the interest of all.

Where credit unions enter into higher risk transactions — whether in lending or investments — and move away from the core principles on which they were founded, they increase their financial risks. Complex business models must be supported by adequate systems and controls. As in any financial institution, the move to more large-scale complex lending or investing requires additional expertise and tighter controls to manage the higher risk to members' funds. It is very important for credit unions to have at their disposal modern and reliable technology to facilitate such a higher level of control. These protections must be in place to safeguard members. This is what we expect and it is where we look for the highest standards from credit unions.

Evidence from our supervisory process shows that underwriting skills are weak in some credit unions and that arrears and bad debt provisions are rising. In recent months, we have been working closely with a number of credit unions on remedial actions in these areas. The objective is to ensure the funds in these credit unions, which represent the savings of members, are not put at risk. On the other side of the balance sheet, credit unions are also attracting larger amounts of shares and deposits. Members' savings now exceed €11.8 billion, representing a year-on-year growth of 12.5% for 2005.

These large shareholdings, which must be remunerated mostly through dividend payments, put pressure on credit unions to deliver high returns to their members and may thus be adding, in some cases, to the pressure to take on unacceptable levels of risk. The Financial Regulator is supportive of the concept of credit unions expanding within the scope of their common bond. The Financial Regulator will facilitate credit unions in creating alliances with other financial services firms to enable them to offer members new products while not putting the savings of credit union members at risk. Since last year, we have supported credit unions that wish to offer mortgages to their membership by acting as agents and in partnership with banks or building societies as a means of offering additional services to their members.

We understand what Mr. Logue is saying. The committee, having heard today's observations and in light of the next day's observations, will form its view on this matter. Mr. Logue and our guests are here to help the Parliament in that regard.

Senator O’Toole

I welcome the Registrar of Credit Unions and his team. I accept that his job is difficult, but while I defended him to the Irish League of Credit Unions, the points made by the league are important. Mr. Logue could be straighter with us and tell us that we are legislators and it is time to change an Act that is a mess. We need to get that clear message. From what Mr. Logue, the league and others have said, the Act is unwieldy, restrictive and anti-competitive in European terms, as it means credit unions cannot develop.

I will reiterate the Chairman's point about the relationship with building societies. It is turning credit unions into "go fors" for the building societies because they cannot compete in the market. I appreciate what Mr. Logue did. It was quite creative and I do not have a problem with it, if that is what needed to be done. However, does Mr. Logue not agree that the message to us should be that we should allow credit unions to move on? They are sitting on a large amount of cash, they cannot lend more than 48% or whatever the figure is and the restrictions of 10% and 20% on the five-year and ten-year terms is wrong. There is no need for it in this day and age and it creates business for the other financial institutions. Despite Mr. Logue's reticence to the Chairman regarding waiting for the review, the committee wants to take the initiative and use whatever impetus there is to move forward. How can it be done?

In recent weeks, I contacted the registrar's office a number of times in respect of a small issue. It showed the difficulties under which the credit unions are working, namely, paying out on SSIAs. According to the Department of Finance, it is imperative that SSIAs be completed on the appropriate date and money, including all dividends, is sent to the people to whom it is due. There are good reasons for this imperative, namely, financial institutions should not hold onto the money and the matter should be dealt with in a businesslike manner. However, credit unions are not entitled to do so because of section 35 of the Act. As matters stand, credit unions can only create dividends at the end of AGMs. If one's SSIA reaches maturity today, one must wait until the AGM in October, November, December or later for the dividends to be determined.

The Revenue Commissioners and the Department of Finance say they expect credit unions to pay the amounts and dividends owed on the date of the SSIAs' maturity and pay the remainder at the end of the year. Why should credit unions be at that disadvantage? I am not saying that this is terrible. Rather, I am raising it as an example of a small matter that will be gone in a few months when the SSIAs have been forgotten. Nonetheless, in every new product, credit unions are dealing with restrictions with which other financial institutions do not deal.

Will the registrar tell the committee whether other restrictions must be loosened? We are aware of the lending ratio and the restrictions on five-year and ten-year terms. Should that ratio not be softened and should the period not be extended? Mr. Logue made a valid point in his submission about the importance of the principles relating to the common bond and so on. Without changing any of those, is there a reason there cannot be a 15-year loan? Are there other issues that we are not addressing or do not know about?

Mr. Logue

There are such matters that need to be put before the committee. From our point of view and that of everyone involved, it is important to balance the rights of savers with the rights of borrowers. Outdated though the legislation may be, it is designed to do that. It must be borne in mind that the funding of credit unions is nearly 100% on demand. The restrictions contained in section 35, negative though they are, were a crude attempt to balance the asset-liability relationship for the protection of members. We have made our position on the section 35 limitations clear. We have no objection to their being relaxed provided they are matched with the safety measures necessary to balance the extension of the term of lending on the asset side of the balance sheet with the on demand issue that arises in respect of funding.

The Minister for Finance has invited the observations of the Credit Union Advisory Committee which is, roughly speaking, of the same opinion as us. We support its view, namely, that these limits should only be extended when appropriate safeguards are put in place, which is a matter for legislation. Our primary responsibility is the protection of members' savings, not their loans. While we recognise that credit unions suffer under the section 35 restrictions, we are aware of the need to ensure appropriate skills in credit unions — the committee should bear in mind that the average board of a credit union is composed of people who are not financial services experts or professionals, although some credit unions have access to such skills — and that the asset-liability relationship between funding and assets is properly balanced and protected. If this is borne in mind, we will have no problem with a relaxation of the limitations.

Deputy Boyle

I apologise, as other commitments did not give me the opportunity to respond to the league's contribution. In light of what Mr. Logue said, he may feel hidebound by current legislation because he spoke of two different types of experience, that is, the need for flexibility and the need for credit unions to remain true to the core purposes for which they were established. I am unsure about whether both can be done. The reality is that 50 years on, credit unions are in a different situation, economy and society than when they were established. In much of its contribution, the league expressed frustration about being so restricted.

While the registrar might not have a direct opinion, the change to the legislation is unlikely to take place during this Dáil session, given the legislative time available. Even if we sit until the first week of July, not even a narrow Bill amending section 35 will be available. The situation needs an indicative timetable. Perhaps it is a ministerial responsibility to know when such a Bill would be available and the extent to which it would have an effect. Does Mr. Logue have an opinion on whether a narrowly-focused Bill would relieve some of the current impediments or if there is a need for a full change of legislation, given that next year will see the tenth anniversary of the credit union legislation?

Mr. Logue

We have certain reservations about tinkering with the current legislation. A change made to one part of the financial structure of the credit union movement might have unforeseen consequences. A well thought out approach, following a consultation process, is necessary. The credit union movement has developed successfully under the current legislation despite its defects. The legislation recognises the volunteer ethos of credit unions and that we are not dealing with financial professionals. The Act is prescriptive and rule-driven, has many advantages and has protected the credit union movement from excesses arising from inexperience or lack of skill. A more comprehensive review of legislation is needed, despite the fact that this would take some time.

Senator Mansergh

Since the credit union movement was founded, has a credit union collapsed? Have savers' funds been lost over the past 50 years? Even if the answer is no, I appreciate that there may still be dangers against which one must guard. The presentation emphasised that business lending is very complex and none of us expects the credit union movement to fund public private partnerships but the mortgage market is not highly complex. If I understand Mr. Logue's reply to Senator O'Toole, he suggested that credit unions could act as agents for banks and building societies as a temporary measure within the framework of the current legislation. Is there any reason credit unions could not offer full-term mortgages within the limits of their assets? Are there issues of principle that would make this highly undesirable?

Mr. Logue

Mr. Logue

It is quite possible that the members' interests might be better served by that but only in the event that provisions are put in place to protect savers in the event of such lending going wrong. Asset liability management must be properly protected by the credit union. Unfortunately, the funding is almost 100% on demand whereas the assets of the credit union balance sheet are out for five to ten years. In a financial crisis, where interest rates change suddenly, unnecessary stress could result from an excess of longer term lending. We wish to see protection against this potential development. If protection was put in place we would be happy to see change.

Deputy Crowe

Regarding section 35 of the Credit Union Act, does Mr. Logue accept the perspective advanced by the ILCU, that these restrictions endanger the future viability of credit unions and push credit union members towards other financial institutions that are neither run on a co-operative basis nor on a not-for-profit basis? Perhaps the delegation does not want to discuss the relationship which was mentioned. If so, we will not do so. Is it possible to improve the relationship? We heard tension existed in the past.

The document put forward at this meeting states, "In recent months credit unions have been the subject of some comment by the regulator in terms of loan delinquency and investment policy. The ILCU is concerned that the Financial Regulator would engage with the media in respect of its views on these matters." Is that helpful? Is it important that people approach the media to build public confidence in the system or will it inflame the relationship which already exists?

It was stated the primary concern of credit unions is savings. The other side, and an essential part, of credit unions is loans. Earlier, we discussed the 20% of loans which may be loaned out for five years or more. Will Mr. Sisk enlighten me on how the figure of 20% was reached? In the context of future legislation, does Mr. Sisk have a view on the ILCU suggestion of a figure of40%? Has any consultation taken place on future legislation or have we just begun to consider what is coming down the track?

Mr. Logue

Regarding our relationship with the Irish League of Credit Unions, we never expected it to be easy to move from the self-regulatory system which previously existed primarily under the ILCU to the more formal regulatory system now in place. A certain amount of readjustment of the regulatory relationship was necessary. However, the impression that we are at loggerheads with the league is false. We work extremely closely with the ILCU and meet it frequently as its president stated. We operate in a most amicable fashion and make good progress on a number of contentious issues.

Regarding the media, as one can imagine the Financial Regulator is subject to questioning by the media and because of our mandate for transparency as a public interest body we have an obligation to be as open as we can about the affairs of the financial institutions we regulate. We are extremely conscious of the need to protect confidence in credit unions and other financial institutions by what we say. However, it would be wrong of us not to give a reasonably honest appraisal of the issues associated with each sector we regulate to the extent we can, subject to protecting that confidence.

The interests of savers and borrowers must be balanced in an appropriate fashion, which is fundamentally what the section 35 debate is about. Is it appropriate for lending by credit unions to be extended to new business areas in which they were previously not involved, such as business lending, while they do not have the skills or technology to minimise the risks to which savers may be exposed in some circumstances? It involves a balance between the interests of savers, borrowers and the credit union as a corporate union.

It seems contrary to common sense but apparently that is the strict legal interpretation.

Chairman

Perhaps Mr. Logan will send us a note on the overall loans with regard to the percentage of loans in the credit union movement that are for longer than five and ten years respectively and whether the loans are repayable within those periods. If the simple restriction was to be examined in a different legal context, would that solve many of the problems?

I accept Mr. Logue's argument that all savings could in theory be withdrawn on demand. Is there anything to prevent credit unions from offering savings accounts that would not be on demand? Could people voluntarily open accounts and agree to a 30 or 60 day withdrawal period?

Mr. Logue

It probably could be done voluntarily.

Chairman

Mr. Logue has highlighted a significant problem.

Mr. Logue

The issue, like the other topics being discussed, is somewhat complicated.

Chairman

I apologise for leaving the complicated questions until the end.

Mr. Logue

The stability of credit unions is protected by the fact that they do not have to remunerate their funding in advance. They can trade for the year before determining their surplus in order to declare dividends and an interest rate for the remuneration of depositors. If they move substantially into funding by deposit on a longer term basis, they will have to declare in advance the variable or fixed interest rates they will pay. They would have to inform the depositor as to the basis of remuneration. In effect, that would change the nature of the remuneration from a post-event to a pre-event and a dividend to a cost. There are certain risks in that approach. There is no easy way to answer the question, although we would certainly like to have it addressed in the course of a review of the legislation. The matter has relevance to the debate on section 35 in terms of ensuring that capital is not always potentially on demand and that there would not be a flight of capital from credit unions in an unstable situation.

Chairman

I appreciate that. On behalf of this committee I thank Mr. Logue and his colleagues for their contributions, which have been most helpful.

Before we conclude, I wish to raise an issue which has recently come to my attention. Individual home care service packages for meals on wheels and other similar facilities for elderly and disabled people in their own homes are liable to VAT if provided by commercial organisations, which seems difficult on elderly people. I ask the committee to include on our agenda an attempt to come up with proposals to exempt this service from VAT. I invite the Departments of Finance and Health and Children and the Revenue Commissioners to provide a report on the current situation and bring forward any proposals they may have and we will consider their response at our next meeting.

The joint committee adjourned at 5.40 p.m. sine die.

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht - Wednesday, 13 Sep 2006

Credit Union Regulatory Environment: Presentations.

Mr. Liam O’Dwyer

Mr. O’Dwyer

Mr. O’Dwyer

Mr. O’Dwyer

Mr. O’Dwyer

Mr. O’Dwyer

Mr. O’Dwyer

Mr. O’Dwyer

Ms Anne O’Byrne

Ms O’Byrne

Ms O’Byrne

Mr. O’Dwyer

Mr. O’Dwyer

Mr. O’Dwyer

Mr. Brendan Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Martin Sisk

Mr. Sisk

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

Mr. Logue

JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Wednesday, 13 Sep 2006