Topical Issues Debate – Credit Union regulation


Dáil Éireann
28 May 2014
Topical Issues debate
Deputy Paul J. Connaughton: Credit Unions Regulation
Deputy Paul J. Connaughton: I thank the Office of the Ceann Comhairle for selecting this topic. I mean no disrespect to the Minister of State, Deputy Perry, in saying I would have preferred it had the Minister for Finance, Deputy Michael Noonan, been present. I understand that is simply not possible.
There is an old saying that the sins of the fathers should not be visited on the sons. This is certainly true and I am positive that the past sins of the banking system must not be visited on credit unions, yet I am being informed constantly by credit union members that this is exactly what is happening. There is no need to recount what happened in the Irish banking sector and the role that light-touch regulation had to play in that calamity. However, there is a need to highlight the fact that the strictures introduced in the banking system are having an unduly negative effect on credit unions, once again favouring large corporate banks.
I wish to highlight two aspects of the difficulties facing credit unions, the one-size-fits-all regulatory approach and section 35 restrictions on rescheduled loans. Micro-managing credit unions is not the way forward. One should remember that the beauty of credit unions is the fact that they are local, know the people they are dealing with and are aware of conditions on the ground. Too often in this country, we throw out the baby with the bath water. The approach to credit unions appears to be another example of this. After our banking calamity came a raft of restrictions aimed at ensuring it would not be repeated. However, those most affected by the new regulations are the very people least responsible for the banking crisis, namely, credit union members. The Central Bank really needs to engage with credit unions and gain a better understanding of their work. If the Central Bank had a more realistic and common sense approach to the work of credit unions, consultation papers such as CP76 would be radically different.
The Government’s achievement on the jobs front is the result of the targeted, motivated and well-organised campaign aimed at increasing job numbers. Common sense decisions are at the heart of this, yet I believe a blind spot continues to exist in respect of credit unions. Credit unions must be treated in a very different manner to banks. Their very existence has a different focus. Staff are not driven by bonus pay and incentives; rather, the movement exists thanks to the good will of thousands of volunteers. It is time for a complete rethink in regard to credit unions and their treatment by the State.
An example of why a complete rethink is necessary is the section 35 restriction on rescheduled loans. A credit union cannot grant further credit unless a rescheduled loan has performed for at least a year. Where the new terms have not been compiled for a year, a new loan cannot exceed €1,000. This is quite simply ridiculous. If a young person in a rural or urban area is fortunate enough to secure a job, he or she will need to visit his or her local credit union to seek funding for the transport necessary to go to work. Where will he or she get that money? Local people in the credit union are best placed to decide whether the advancement of €10,000 to a young person to allow him or her to obtain a car, purchase insurance and get on the road to work is a good investment. If the Central Bank does not understand the economics of such a transaction, the members of the Government do. The ethos of giving people a hand up rather than a handout must be reflected in the new regulatory framework.
Credit unions are not a luxury in our economy; they are the very essence of what our banking system should be. I refer to encouraging people to save, rewarding those with a good saving record and making sensible decisions on who to advance money to while all the time maintaining a commitment to the local community and encouraging prudent, financial habits and willingness to volunteer to help one’s local community.
This issue is worth highlighting. While we all recognise the need for restrictions on lending, a common sense approach and one that values the ethos of the credit union is what is needed most.
Minister of State at the Department of Jobs, Enterprise and Innovation (Deputy John Perry): I apologise on behalf of the Minister for Finance, Deputy Noonan, who, regrettably, cannot be here today. He would like to confirm his view that the credit unions have an important role to play in providing credit in local communities around the country. He is supportive of safe, responsible lending by credit unions. He is very much aware of the issues currently facing the sector and thanks Deputy Connaughton for raising this important issue.
Credit unions have a separate regulatory framework to that which applies to banks and are regulated and supervised under a dedicated Act, the Credit Union Act 1997. The Registry of Credit Unions at the Central Bank is responsible for the registration, regulation and supervision of credit unions. In recognition of the unique nature of credit unions, a statutory position of registrar of credit unions was explicitly created within the Central Bank of Ireland to assume responsibility for the regulation of credit unions.
The Commission on Credit Unions made a number of recommendations in its report regarding the strengthening of the regulatory framework for credit unions, including more effective governance and regulatory requirements. Many of these recommendations have been reflected in the Credit Union and Co-operation with Overseas Regulators Act 2012.
Acting as the independent regulator, the registrar of credit unions has applied lending restrictions to some credit unions. The Minister has been informed that these restrictions are viewed as short term in the majority of cases and are imposed as a means of allowing a credit union to address identified concerns as quickly as possible. Where lending restrictions are imposed, they tend to take the form of a restriction on individual loan size or on commercial lending activity and, in some cases, a limit on the total lending permitted each month.
At this time fewer than 10% of all credit unions have a restriction in place which limits the total amount of lending within the month, while close to 40% of all credit unions have a restriction on commercial lending activity. Currently, the average loan rate in the sector is just over €6,000 and about a dozen individual credit unions have lending restrictions that limit the amount loaned to less than €10,000. This ensures that the vast majority of credit unions can continue to make loans significantly greater than the average loan for the sector.
Section 35(2) of the Credit Union Act 1997 permits a credit union to have up to 30% of its loan book outstanding for more than five years and up to 10% of its loan book outstanding for more than ten years. Based on the most recent information provided by credit unions to the registrar of credit unions in the December 2013 quarterly prudential returns, average lending over five years as a percentage of gross loans was some 11%, while average lending over ten years as a percentage of gross loans was about 2%. These figures indicate that, in general, credit unions are currently well within the limits set down in the 1997 Act.
The section 35 stipulations require that a credit union must not approve further agreements for additional credit where an existing loan has been rescheduled unless a member’s ability to repay all credit owed and the proposed additional credit has been clearly established. Where such circumstances have been established, a credit union may grant additional credit to a member with a rescheduled loan where that rescheduled loan has performed in accordance with the new terms for an appropriate period, in most cases not less than one year.
An Leas-Cheann Comhairle: There will be another two minutes allocated in which the Minister of State may respond further.
Deputy John Perry: I just have to put this response on the record. I might as well do so now.
An Leas-Cheann Comhairle: There will be two minutes allowed for a further reply. First, Deputy Connaughton has two minutes.
Deputy John Perry: This is the reply of the Minister. I will be finished in just one moment.
An Leas-Cheann Comhairle: Under Standing Orders—–
Deputy John Perry: The last responder, Deputy Varadkar, benefitted from quite a lot of discretion.
An Leas-Cheann Comhairle: I am informed I must apply the Standing Order. I will call the Minister of State after Deputy Connaughton.
Deputy Paul J. Connaughton: Before the Minister of State gives the rest of the reply, I will point out that quite a number of credit unions have many people who want to borrow money from them, which, thankfully, may be a sign of confidence coming back into the economy. However, many of these credit unions find that, due to the restrictions placed on them, they are unable to lend the money.
I understand from the reply that these regulatory effects are rechecked on a continuous basis, but it needs to happen an awful lot more quickly. We cannot throw the credit unions in with the main lending banks, as was done in the past. These are the people who keep our small rural towns and villages going. As the Minister of State who represents small business will very clearly understand, we have an issue with getting money out to some of our SMEs, and these credit unions have an ability to provide loans to give people a start, whether they have work to do, want to make an investment in a house project or are looking to buy a car. I am concerned when I continually hear from credit union members that these restrictions are not allowing them to do the job they were set up to do.
Again, we must remember that the credit unions were set up and run by the community for the community. They cannot be treated as we would treat the regular lending banks. It is very important that the Central Bank gets the message that, in order to drive this economy, we must take away the regulations and restrictions on these credit unions. I am not suggesting that we take away all the structures completely, because we must have very good lending rules and regulations. However, who better to set out those concerns and to make sure this happens than the credit unions themselves? It is important that we recognise the work they have done before and the great work they can do to drive on this economy. I would like the Minister of State to bring back to the Minister, Deputy Noonan, and to the Central Bank the message that we have to give the credit unions a level playing field to allow them to continue the great work they have done.
Deputy John Perry: I would like to outline the current position of the credit union sector. The reserve position in the sector is very strong, with 95% of credit unions reporting that they meet the 10% reserve requirement. Of all individual credit unions, only 19 are below the 10% minimum, with a combined reported deficit in these credit unions of €11 million. Provisions now exceed arrears. Some 96% of credit unions are reporting a surplus and the sector is extremely liquid – in fact, excessively so. The average dividend rate of 0.9% is not sustainable, the sectoral average loan-to-asset ratio is very low, at 32%, and the sector is significantly under-lent and is sitting on a large amount of low-yielding cash.
A Central Bank PRISM review reveals its concerns about issues with regard to governance, risk management and other systems at credit union level, but these should improve over time as the new regulatory system is rolled out and beds down.
The imposition of lending restrictions is the responsibility of the Registrar of Credit Unions, who is the independent regulator of credit unions at the Central Bank. Within her independent regulatory discretion, the registrar acts to support the prudential soundness of individual credit unions to maintain sector stability and to protect the savings of credit union members.
I have been informed that it has been necessary to put lending restrictions in place in individual credit unions where there are regulatory concerns about their operation and the resultant risk to members’ savings. The criteria assessed to determine the imposition of lending restrictions include, but are not limited to, the following: prudential returns, which are unaudited returns, submitted by the Registrar of Credit Unions; financial ratios, which cover levels of arrears and provision coverage; and the governance framework within the credit union. Decisions on regulatory restrictions, which are imposed in the form of directions under the Act, are made by the registrar. Other regulatory restrictions may be imposed as part of an ongoing supervisory engagement with the credit unions.
It is very important that the role of small business be facilitated. I have met a number of credit unions and know they are supporting SMEs. However, they must meet the requirements of this independent governance.