The Credit Union Bill 2012 is an important step towards placing the Irish credit union movement on a sustainable path for the longer term.
From the outset, I want to clearly set out that the Bill implements the Commission on Credit Unions Report, which was agreed and co-authored by key stakeholders, including credit union representatives. The Commission worked intensively over a nine-month period to address and deliver on ambitious terms of reference. The process was a participative one, with wide representation from the credit union movement. The Commission was reconvened to examine the General Scheme of the Bill and ensure its fidelity to the Commission Report.
The agreed Commission Report sets out the blueprint for the viability of credit unions in Ireland into the future. Its constituent elements are interrelated and mutually reinforcing. It is a package, not a menu.
The Report is tailored to the Irish credit union system and does not apply 'banking' thinking, nor does it slavishly import models from other international credit union movements.
Implementing the agreed reforms will require steadfastness, commitment and leadership from all concerned: the Government, the Central Bank and, importantly, the credit union movement itself. The Irish taxpayer has committed to €500 million for credit unions at a time when the country's resources are stretched. This significant financial commitment during a period of austerity must bring about a stable, well-governed credit union movement that can sustain itself into the future.
It is important that we acknowledge the difficulties in the sector in a transparent way, while at the same time explaining how we will address them.
The Commission highlights a number of vulnerabilities in the sector. Concerns remain in terms of the high level of arrears and the need to ensure that loan losses are recognised and provided for. The low dividend rates across the sector are not sustainable in the longer term. The cost-to-income ratio for credit unions has increased considerably in recent years, going from about 50% in 2006 to almost 90% in 2011. The loan-to-asset ratio was at only 40% at the end of 2011 - which was an historic low.
The Bill is an important part of the Government's response to these challenges and implements over 60 of the Commission's recommendations. It provides the platform for restructuring, improved systems, the provision of additional services and for the governance structures that are sound and forward-looking.
The first element deals with the prudential requirements that apply to credit unions across a range of areas, including reserves, liquidity, investments, lending and borrowing. In general, the Bill sets out the policies and principles, with provision for Central Bank regulations setting out standards and procedures. This will facilitate the development of a prudential rulebook which will provide clarity to credit unions on the requirements that apply across their business.
The second main element relates to governance. The core focus of this part of the Bill is to bring clarity to, and distinguish between, the role of the Board on the one hand and the role of the executive on the other. Boards will be the key decision-making organ of credit unions, focussed on strategy and policy, with the management team handling the day-to-day operation of the credit union, subject to board oversight. Importantly, the Bill preserves and respects the volunteer ethos of credit unions and provides better opportunities for training and development of credit union volunteers.
The next element is the restructuring of credit unions on a voluntary, incentivised and time-bound basis, overseen by the Credit Union Restructuring Board, or 'ReBo'. The ReBo has already been established on an administrative basis ahead of the legislation, with Mr Bobby McVeigh as Chair - a hugely experienced and respected figure in the international credit union movement. The ReBo is working to the timetable in the Commission Report, which envisages the process being completed by the end of 2015.
The Bill also provides for statutory stabilisation of credit unions, which is to be fully-funded by the credit union movement itself, via a levy, as recommended by the Commission Report. Stabilisation will operate on a more limited basis during the restructuring period.
Turning now to the Bill, I would like to highlight some of its main provisions.
Part 1 of the Bill includes the preliminary and general provisions, including the short title, interpretation and the commencement provisions.
An issue has been raised about the application of the Central Bank Acts or other financial services legislation to credit unions. The Bill does not break significant new ground in this area, beyond the extent that such legislation already applies to credit unions or has to apply in order to deliver the Commission Report. The perception is that there is a bulging corpus of banking law which the Bill unlocks and applies to credit unions. This is not so. The provisions of the Bill in several places refer - and correctly so - to the fact that credit unions are already subject to requirements beyond the Credit Union Acts and therefore have broader obligations, for example in the areas of insurance mediation, payment services and the deposit guarantee scheme.
Part 2 of the Bill deals with two main areas: regulatory requirements and governance.
In terms of regulatory requirements, regulations must be effective proportionate having regard to the nature, scale and complexity of the credit unions they apply to. This will facilitate the development of a tiered regulatory approach as recommended by the Commission.
Section 29 of the Bill provides that before introducing regulations the Central Bank will be required to consult the Minister for Finance, the Credit Union Advisory Committee and other credit union bodies.
Though not specifically required in legislation, this consultation is to be done in accordance with a consultation protocol being developed by the Central Bank in consultation with credit union stakeholders. Regulations will also be subject to regulatory impact analysis requirements.
Section 7 of the Bill amends section 6 of the Credit Union Act 1997 to provide that the Central Bank may impose conditions on the registration of a credit union. These are appealable to the Irish Financial Services Appeals Tribunal.
Section 11 of the Bill amends section 35 of the Credit Union Act 1997 regarding lending. It provides that the ability of the loan applicant to repay shall be the primary consideration in the underwriting process. There is also provision for Central Bank regulations on:
·classes of lending which a credit union may engage in;
·large exposures; and
Section 12 of the Bill amends section 43 of the Credit Union Act 1997 on the investments that credit unions can undertake. Detailed matters on classes and quality of investments, maturities and limits are to be provided for in Central Bank regulations.
Sections 13 amends section 45 of the Credit Union Act 1997 on the regulatory reserve requirement and operational risk reserves, with a further role for Central Bank regulations in setting out the minimum levels to apply.
Section 30 sets out the liquidity requirements that apply, with provision for Central Bank regulations on minimum liquidity requirements, including maturity mismatches and stress testing.
Section 14 of the Bill sets out the provisions which may be appealed to the Irish Financial Services Appeals Tribunal, including regulatory directions. I have asked my Department to look at any consequential changes needed to the Central Bank (Supervision and Enforcement) Bill to ensure that the principle avenue of appeal for regulatory directions issued to credit unions under that Bill is to IFSAT rather than the High Court.
The Governance provisions in the Bill clarify the roles and responsibilities of the chair, board and management of credit unions.
In accordance with the agreed recommendations of the Commission on Credit Unions, section 15 provides that the number of Board members is to be between 7 and 11, and term limits allow a director to serve 9 years on a credit union board in any 15 year period. Exclusions from board membership are provided for in accordance with the Commission’s recommendations, including employees, voluntary assistants, directors of other credit unions and professional advisors. The section is also developmental in that it makes specific provision for the training of volunteer directors.
Section 17 amends section 55 of the Credit Union Act 1997 and sets out the functions of the Board including setting the strategy of the credit union, operating a comprehensive decision-making process and ensuring that there is an effective management team in place. The board is also responsible for approving, reviewing and updating all plans, policies and procedures of a credit union.
The governance provisions in sections 18 to 26 also deal with matters such as:
·the role of the Chair of the Board,
·committees – including the nomination committee
·conflicts of interest,
·risk management – including the risk management officers,
·business continuity planning
·the role of the manager.
Section 26 also includes provision for the internal audit functions within a credit union to provide for independent internal oversight and to evaluate and improve the effectiveness of the credit union’s risk management, internal controls and governance processes.
Section 27 of the Bill provides for the Board Oversight Committees, which are a crucial pillar of the new governance arrangements in that they provide members with an independent assessment of the Board’s performance. The Board Oversight Committee is the next evolution of the Supervisory Committees which have been operating in credit unions for many years. As the role of the Board changes towards a more strategic focus, it is important that the role of the Supervisory Committee changes with it. The Bill sets out a number of important provisions regarding the Board Oversight Committee:
·It shall have access at all times to the books and documents of a credit union;
·Its members have the right to attend Board meetings;
·It may notify the Central Bank of any issues or concerns about non-compliance by the Board with applicable requirements; and
·It shall report to the members at the AGM or SGM on whether the Board has complied with its requirements.
Part 3 of the Bill deals with restructuring, which will be carried out on a voluntary, time-bound and incentivised basis and which will be overseen by the Credit Union Restructuring Board (ReBo). Restructuring will involve a process of amalgamations or transfers of engagement under Part 9 of the Credit Union Act 1997.
The guiding aims of restructuring are:
·the protection of credit union members’ savings;
·the stability and viability of credit unions and the sector at large; and
·the preservation of the credit union identity and ethos.
This Part provides for the establishment of ReBo on a time-bound basis. ReBo comprises a Chair and Board, supported by a CEO and an operational side.
The Board of ReBo was established on an administrative basis on 31 August 2012 and has already met twice to make progress on laying the groundwork for restructuring.
ReBo’s role is:
·To engage with credit unions on the ground to facilitate agreement on restructuring proposals;
·To assist credit unions in the preparation of restructuring plans, and
·To consider restructuring plans submitted to it, including any funding requirements, and approve or reject those plans.
ReBo will also oversee the implementation of restructuring plans, including the provision of post-restructuring support.
ReBo may also make a recommendation to the Bank that an individual credit union should be considered for stabilisation.
ReBo will be funded up-front and a levy on the sector by ReBo will recover 50% of its operational costs.
The Bill establishes a Credit Union Fund to fund restructuring and stabilisation.
Once the Bill is enacted, it is intended that €250m would be contributed to the Credit Union Fund from the Exchequer to cover restructuring costs.
The costs of stabilisation will be met entirely by a levy on the credit union sector itself, as agreed by the Commission on Credit Unions.
Restructuring and stabilisation funding is recoupable from the benefitting credit unions, with provision for any shortfall in the recoupment of restructuring costs to be met by a levy on the sector.
Part 4 of the Bill provides for the possibility of stabilising of credit unions on a stand-alone basis where they are viable and hold reserves above 7.5%.
The Central Bank must have regard to a number of key factors before approving the provision of stabilisation, including the extent of the credit union’s compliance with regulatory requirements and its ability to maintain reserves and fund the business for up to 3 years after the support has been provided.
To avoid any disconnect during the period of restructuring, a credit union will need a ReBo recommendation before it can be considered by the Central Bank for stabilisation during the restructuring period. This requirement will no longer apply once ReBo has been dissolved.
This Part also provides for the establishment of a Stabilisation Committee to examine the implementation by the Central Bank of its own requirements and procedures under stabilisation.
The Schedule to the Bill deals with a range of miscellaneous amendments recommended by the Commission on Credit Unions and those which arise as a consequence of amendments made in other parts of this Bill.
Before I conclude I would like to clarify some of the points raised by the Irish League of Credit Unions as part of its campaign on the Bill and to point out that the Bill’s provisions in relation to term limits, exclusions from Board membership and on treasurers reflect very specific recommendations in the Commission report, which were agreed with credit union stakeholders.
I look forward to a constructive debate on the Bill. The Bill delivers on the agreed Commission on Credit Unions report and provides the platform for credit unions to build a sustainable future for themselves and their communities. I am always happy to engage in a healthy debate on a Bill and if there are good ideas they should be listened to and supported. However, the agreed Commission Report represents a once-in-a-generation opportunity to place the movement on a sounder footing. Those arguing for a dilution of the Commission package need to reflect on the risks of undermining its coherence and the hard-won consensus behind it.