Oireachtas Joint and Select Committees
Thursday, 5 May 2016
Committee on Housing and Homelessness
Irish League of Credit Unions
I am pleased to welcome from the Irish League of Credit Unions Mr. Ed Farrell and Mr. John Knox. The committee has received their documentation which has been circulated to members. I invite Mr. Farrell to make his opening statement.
Mr. Ed Farrell:
I am grateful to the Chairman and committee members for inviting the Irish League of Credit Unions to make a presentation on its social housing funding proposal. I am joined by Mr. John Knox from our research and development department.
As members will be aware, the Irish League of Credit Unions represents 423 credit unions across the island of Ireland which have 3.4 million members, member savings of almost €13 billion and approximately €15 billion in assets. They are a voluntary, visionary movement. The members own and run credit unions. Being grassroots, not-for-profit organisations founded and run for a social purpose, credit unions are unique financial institutions. They are democratically run, volunteer led and based on helping members rather than on profiting from customers. This ethos sets us apart. The economic crash has put enormous pressure on families, but credit unions have been there for them and now we want to do more.
Focusing on the future, in a national and global financial environment which, technologically and structurally, will be radically different from what went before, our purpose is to demonstrate how credit unions can better serve communities. To that end, the Irish League of Credit Unions has in its policy platform set out six strategic steps for how, in partnership with the Government and the Central Bank, we can deliver on a range of critical issues, including social housing. One such step - micro-lending for the most vulnerable, in partnership with the Department of Social Protection - is being operated very successfully as a pilot scheme. I mention this to underline the readiness and willingness of the credit union movement to respond and take action.
On 15 October last, on International Credit Union Day, the the Irish League of Credit Unions published the detailed document before the committee on its social housing strategy. The proposal was published specifically in response to the publication in November 2014 by the Government of its social housing strategy 2020 which included the following key theme - that the State adopt a central role in the direct provision of social housing through the resumption of building on "a significant scale" and that the funding of this programme will require the development of innovative funding mechanisms that do not increase general Government debt. It is to be financial sustainable.
Our proposition is broadly as follows: that the credit union movement form a special purpose vehicle to invest in a State-owned financial vehicle which would on-lend to approved housing bodies to fund the development of social housing or to invest and on-lend directly to approved housing bodies to fund the development of social housing. The key benefit for the credit union movement from this proposition would be that it would enable the movement to put a significant portion of members’ funds of €8.5 billion, currently held in short-term investments, to a more productive and economically rewarding purpose, while at the same time addressing a key social issue that deeply affects the communities credit unions serve. This would represent an initiative that would be very closely aligned with the core values of the credit union movement - economic democracy, inclusiveness, human and social development and community focus. etc.
For the State, the key benefit of this proposition is that it would enable the Government strategy of off-balance sheet sustainability to be fulfilled over short, medium and long-term horizons. The credit union sector could become a significant funder of the social housing strategy via the approved housing bodies, AHBs, and could reduce the financial commitments of the State to the social housing agenda while enabling the Government to retain complete control over social housing policy.
The mechanism developed in the league’s proposal sets out a structure by which the Irish credit union movement could fund AHBs to provide social housing. The approved housing bodies provide and manage social rented housing. They are private, not-for-profit organisations formed for the purpose of relieving housing need. There are approximately 520 of them in Ireland with a stock size of over 27,000 units. Approximately 10% of AHBs provide 80% of the housing supply. There is therefore a small number of well-established and financially sound AHBs which provide the vast majority of the social housing needs.
This would also have a wider economic impact. The initiation of social housing projects would create employment, generate taxes, provide stimulus to the construction sector and so on. The key benefit for the population as a whole is obvious, namely, the creation of a sustainable supply of social housing opportunities for those in need.
I want to emphasise in the context of our discussion today that credit unions responded to a call from the Government. The league’s proposal has been the subject of detailed discussion between us and the Departments of Finance and the Environment, Community and Local Government as well as the Central Bank. Indeed, there have been a number of meetings at official level in the past weeks. I acknowledge the consideration given by officials and the interest and support given by all sides politically. Regrettably, however, today we are no further on; innovative funding models have not been delivered. Credit unions are willing and ready. There is a lot of genuine interest both within Government Departments and politically. There has been a lot of in-depth consideration. The next step is to bring this proposal forward, together with the Government. We remain willing partners.
Thank you, Mr. Farrell. A number of people have indicated that they have questions. On one technical point, you mentioned that the funding is off balance sheet in respect of the housing bodies. I presume that if the funding were made available to local government, it would not be off balance sheet. Is that the key point?
Mr. Ed Farrell:
We were following through from the social housing strategy document, where the approved housing bodies were the favoured entities being empowered. I would assume that lending to an arm of the State, if it was done directly - there are indirect ways of doing it. The State financial vehicle, which was the first option in the social housing strategy paper, was to be created if it could be kept off the State balance sheet. Our understanding of late from the Department of the Environment, Community and Local Government is that they are not going to be able, or have not yet been able to construct a vehicle in such a way that it would be off balance sheet.
Regarding the possibility of the credit unions getting into this area, my understanding is that the Central Bank as their regulator is a problem. When this matter was raised with the Minister for Finance earlier, he certainly referred to the Central Bank as being some form of barrier. Could Mr. Farrell tell us what discussions the league has had with the sector's regulator and what his response to that might be?
I am sorry to hear again of the approved housing bodies. I regard them as the essential cause of the housing crisis, in the sense that reliance on the approved housing bodies is what has left local authority social housing as it is. I cannot for the life of me understand why some effort is not being made. Although I welcome the submission from the Irish League of Credit Unions, it means nothing. We are proceeding down the same course we have been on for the last ten years and it is not solving anything.
I have a question. That should be obvious at this stage. This applies to all the wise people as well. To what extent has the ILCU examined the prospect of entering into a public private partnership with the local authorities which have direct responsibility for providing local authority housing? Has the ILCU thought of the possibility of reintroducing what used to be funded by the local loan fund through the local authorities, whereby first-time buyers, such as junior civil servants, local authority workers or anybody in the public sector or private sector, was able to get a local authority loan directly and provide himself or herself with a house through his or her own means, with the help of the local authority and the ILCU? For God's sake, could we get away from this reliance on approved housing bodies? They have a speciality or a niche at which they are best. As I have often said, that is in the special housing requirement areas.
I thank Mr. Farrell and Mr. Knox for the presentation. I wish to express some frustration, which I am sure the ILCU feels, at its having made what I thought was a really important proposal last year but we are still waiting for formal Government response. I acknowledge that and share the frustration. I have a couple of specific questions in the context of strongly welcoming the proposal that the ILCU has made.
While the ILCU has been engaged in discussions with the Department of the Environment, Community and Local Government, I wonder if it has considered or pursued the possibility of pursuing parallel discussions with local authorities and approved housing bodies to pilot the kind of scheme it is talking about. Notwithstanding Deputy Durkan's comments about approved housing bodies, there are local authorities, such as Dublin City Council and South Dublin County Council, which have very significant tracts of land but do not have the cash to build because central Government will not give it to them or will not allow them to borrow. They could bring the land to the table. The ILCU could bring the finance and an approved housing body, in conjunction with the local authority, could provide the vehicle for the ILCU to fund. We could get a significant output of houses from that. It might be a way of demonstrating to the Department of the Environment, Community and Local Government and to the Central Bank that it is a viable project. If the witnesses want a couple of suggestions of land and local authorities, I am happy to provide them after the meeting.
I know the witnesses will not be able to tell us their real thoughts on this but I am interested to know what they think the barriers are, either for the Department of the Environment, Community and Local Government officials or for the Central Bank, as to why this proposal has not gone anywhere as yet. The social housing strategy was launched the October before last. The type of proposal the ILCU is making is exactly in line with what the Government told us it was going to do. I am at a loss as to why it has not progressed but maybe the witnesses can shed some light on that.
There is a possible way of providing funding to local authorities that would be off the balance sheet. It would require the local authorities to set up housing trusts of their own. They would not be approved housing bodies. They would be municipal building corporations but they would have to be at arm's length from the local authority, such as the way local authorities run leisure centres. I believe that is another avenue worth exploring and if the ILCU has not done so yet, there are some local authorities which are interested in that and we could point the witnesses in their direction.
Like previous speakers, I welcome Mr. Farrell and Mr. Knox to today's meeting. I agree with the previous speaker that one simple solution would be the setting up of housing associations, whether it is by local authorities or local communities. That would get around the problem.
I do not have a question as such but I have a statement to make. It is of great disappointment and annoyance to me that having responded positively to a call by Government when it launched its strategy almost two years ago, the ILCU proposed a means by which it could release a lot of much-needed capital into the marketplace in order to solve a social issue and yet no progress has been made by the parties that the ILCU has been in discussion and negotiation with. This is the kind of social issue for which the ILCU was set up in the first instance. It has done great work and been of great assistance when many others have not. We have been talking about a crisis that exists but it is now an emergency. In the famed documents associated with the arrangement Fianna Fáil has entered into with the lead Government party, which expects to lead a Government in the coming weeks, we have made it plain and clear that we expect and want to see a role for the credit unions in this area.
We have made it clear that we expect and want to see a role for the credit unions in this area. I hope this committee reinforces that wish on behalf of those we represent. The areas on which we have relied in the past for dealing with such crises are not capable of meeting the demands that exist. Outside help and assistance are appreciated and I would hope that any barrier that exists will be taken down as soon as is humanly possible in order to allow this intervention to have the desired effect.
The questions are all similar. In his opening statement Mr. Farrell indicated he had these discussions but that they were no further forward. Can he identify, in as much detail as possible, what the obstacles were and whether they were originated with the Department, the Central Bank-----
Mr. Ed Farrell:
There is a bit of history to it. Deputy Ryan asked about the Central Bank. The Central Bank lays down the rules and regulations individual credit unions must follow in the course of their business. Typically, credit unions take in money from their local membership and loan it out in small, unsecured loans for personal reasons while the other moneys would be put into investments and deposit accounts. They can only invest those moneys in government bonds and deposit accounts with the banks. In recent years, loan demand has declined so we have had a build-up of funds and a surplus above what we would wish. That is part of the story of how between €8 billion and €9 billion has not been loaned out. There is €13 billion in member savings and €4 billion has been loaned out. The other €9 billion has not been not loaned out and is largely lying idle and earning very little in bank deposit accounts.
Our paper put forward two options. Option 1 was to feed into the State-owned financial vehicle envisaged under the social housing strategy of 2014. If that State-owned vehicle was a runner, in the context of the on- or off-balance sheet debate we heard earlier, our money in that vehicle would have had a State guarantee and would have been compliant with the rules and regulations. It would have been almost like a government bond but now that it has become obvious that the State-owned vehicle will not get the blessing of being declared off-balance sheet our option 2, the indirect model, has become the focus of discussion with the two Departments and the Central Bank. The fact that it is not being explicitly guaranteed by the State means it does not fulfil the current rules and regulations laid down by the Central Bank. It is not a government bond or a deposit account, although the repayment of the loan by the approved housing body to the credit unions is quasi-guaranteed because there is a lease agreement between the housing body and the local authority, which is an arm of the State. The repayment is guaranteed even if the loan is not, so we are trying to work with the Central Bank to get it to tweak the rules and regulations on our investments - which are not really investments but money parked in deposit accounts - to allow us to move some of the money. We are not looking to move all of our members' money from current providers to a local approved housing body, we are seeking to move perhaps €1 billion of the €9 billion or €10 billion.
We have been in discussions with the Central Bank on the indirect model since the need to do so became obvious either late last year or earlier this year. To be fair to the Central Bank, it included references to social housing in its CP88 draft of the rules and regulations which did the rounds last year. After a six-month delay and a lot of toing and froing between the Central Bank and Members of the Oireachtas, it became law on 1 January last. The Central Bank suggested social housing might become part of the package of credit unions' investments but we still have to get it across the line and, like many such things, it is taking longer than we might like.
In answer to Deputy Durkan's question, we have been focused on approved housing bodies because that is where the Government strategy is focusing.
It not that we picked them because we know them or like them better. This was the call from Government. There is a history of meetings and engagements between ourselves and various people in the Department, and some of that dates back to before my tenure as chief executive officer. There has been a desire on our part to try to propose something that fits in with the Government strategy. That is the page we are on, as it were. If that one works and we get it moving, we can then look at something like the public private partnership mentioned. If this one does not get across the line we can look at that one anyway. We are not ruling anyone in or out. We are just trying to dovetail in with what was the stated aim in November 2014 of how social housing would be delivered for the period up to 2020.
Mr. Ed Farrell:
We have speculated an interest rate of 3.5% in our proposal. I refer to the short-term deposits our credit unions are invested in. The banks are earning a rate of 1% and less, and that is getting lower by the week and month as the European Central Bank goes to zero and then goes negative. We believe the banks will be charging more than that. We are confident that we will be able to come to a middle-of-the-road position which would be better than what we are earning but which would not have to be as commercial as a profit-making bank. We are not profit-making, as it were.
Regarding the terms and conditions, we have not got there yet because we have not got the door sufficiently ajar to even go to the question of terms and conditions. This is being done for the social return and investment in the communities and parishes where the credit unions are located as much as earning a slightly better return.
Mr. Ed Farrell:
Deputy Ó Broin spoke about the local authorities piloting a scheme. We would be shy about doing anything unless we had the regulatory permission. It would be a big step for us, an individual credit union or a group of credit unions if they provided the money, even on a pilot basis, against the rules. Even if the rules are changed, it would be a big step. If, however, we could get an indication of the change coming from the Central Bank, we could start discussions and be ready to go.
In terms of the barriers, if it had been feasible, the State-owned financial vehicle would have been the quickest route to market, to use that term, for us. The other one is a slightly more roundabout model but because, ultimately, the repayment of the loans is coming from arms of the State, we do not see it as being much more risky. It is slightly riskier because there are more parties involved in the equation but it is not high-risk and we would not be here if that was the case. The Government's policy was the approved housing bodies. That is our first preferred route. We will see how that goes and we can certainly move to a second one in terms of the local authority, a public private partnership or, as the Deputy said, in the way the leisure centres are leased back. That is not off the agenda. It is just that our first cut at it is to try to dovetail in with the current policy.
On the pilot, local authorities would not be willing to do something without departmental approval either. It is often the case, as much with the Central Bank as with the Department of the Environment, Community and Local Government, that the reluctance is when they are presented with a big, new initiative. Convincing them of the merits of that bigger initiative through the development of a pilot might be one approach to try to ease their concerns.
We all had questions about approved housing bodies and I spoke to the credit unions earlier. I certainly do not see the approved housing bodies as being the solution to, or ending, the housing crisis in that they are too small-scale and the resources would be better given to local authorities but it would be a stretch to blame the approved housing bodies for causing the housing crisis. The latter is not the case at all. That was said. I give that preamble to my question because I do not want to sound like I am defending the housing bodies. To be honest, the cause of the housing crisis is quite clear. It is two successive Governments, if one wants to put it that way, rather than housing bodies. It was an ideological decision taken to pass over house building to housing bodies which I do not agree with that. The housing bodies have a minority role rather than the majority role.
I would not be opposed to the proposal in the sense that if the housing bodies will borrow from a bank, they may as well do it at a cheaper rate from the credit unions which have a better ethos in the sense of being not for profit and for the common good, and they give cheap loans to workers. I would not oppose this proposal but I would make the point that the Government has the ability to borrow at 1% and what is being proposed here is for between 3% and 4%. I have made this point to the league. We must borrow cheaply and build housing on a major scale rather than such small scales but I certainly would not stand in the way of this going ahead.
The Minister, Deputy Noonan, suggested that there was potential to use section 44 of the 1997 Credit Union Act to develop social housing. I wonder has Mr. Farrell thought of that provision. My second question relates to the credit unions' relationship with dormant accounts. I understand the credit unions are excluded from the Dormant Accounts Fund. Given that there could be seed capital there for social housing, does Mr. Farrell see any merit in being included in it?
On the issue of PPPs, the credit union interest rate of 3.5% would be attractive by comparison with 15%, which is often the rate of the PPPs. This morning, the Minister for Finance, Deputy Michael Noonan, stated that we cannot have credit unions engaging in risky lending. Whether he believes that the banks can and does not like the credit unions doing it, I wonder what the ILCU think of that. The league is facing barriers in the area of lending. I refer to how it is restricted. Does Mr. Farrell believe the credit unions are more restricted by the Central Bank regulator or Government thinking?
I think both delegates for the presentation. As a newly elected Deputy, I find it unbelievable that we have been having this conversation since 2014 on a group who have offered funding to help us out with a housing crisis. A year and a half later, we have not squared that circle at all. It is hard to believe. Is it correct that the league is offering €8 billion towards housing? If the Chairman does not mind, I need to engage in a conversation here. Is the league offering €8 billion towards housing?
Mr. Ed Farrell:
Not all of the €8 billion. We have €8 billion or €9 billion in surplus funds that are not loaned out. We have shown scenarios. The strategy refers to 35,000 new housing units being built with the preferred provider being the approved housing bodies. We have shown that if the approved housing bodies build one quarter, half or three quarters of them, that would mean €1 billion, €2 billion or €3 billion from us.
That brings me straight to my next question. I believe Mr. Farrell is hitting too many roadblocks. There has been a Government roadblock, a Central Bank roadblock, etc. In his opening statement, Mr. Farrell said the credit unions have €13 billion in savings and €15 million in assets. Is that correct? Why not grow the assets? Why not let the credit unions build the houses themselves? Can that be done?
Mr. Ed Farrell:
Certainly not under current rules if we cannot lend to an approved housing body. When a man, woman or child walked in off the street to join a credit union and lodge his or her hard-earned earnings as savings, the union traditionally loaned out 70% or 80% of that money to meet the needs of the local people. That is why credit unions were set up in the 1950s, at which time credit was not available. Fifty years later-----
Mr. Ed Farrell:
If the credit unions could not lend to the people in the parish, community or factory, depending on the common bond, surplus funds had to be put into the bank. When credit unions were well lent, at 60% and 70% of their balance sheets, the money was just put in current accounts or on deposit. The rules were tweaked and they made sure in the good times that credit unions could not take part in house-building or such activities. I am not saying we would have done so but I am just outlining where the very tight rules on other moneys come from.
When the credit unions had a large build-up of savings and went to a local bank to invest them, be it for three months, six months, 12 months or otherwise, they were allowed to invest. Was that just a cash investment or could there have been different investments, such as bond investments? A bond could have been associated with property or equities. Was the movement tied up in terms of how it was allowed to invest that money?
Mr. Ed Farrell:
Deposits are the preference of the Central Bank but the unions are allowed to put some of the money in a bond if the bond is fully guaranteed by the bank. It is almost the same as a deposit. The unions would not have been allowed to buy the types of bonds that might not get repaid. In theory, if the banks went under, as happened, and were not guaranteed - thankfully they were - there would have been a problem. All the credit union money that was typically in the Irish banks was safe because of the guarantee. We cannot buy equities or shares in the banks. It is a question of deposits or guaranteed bonds, which are almost like deposits. They would have a fixed maturity and one is guaranteed to get one’s money back. Credit unions are not designed or set up to engage in risky lending or investment decisions. We are comfortable about the fact we do not do the risky stuff but we do not count this scenario as any way risky because of the Government repayment.
Mr. Ed Farrell:
The difference in those figures is attributable to our having built up reserves of €2 billion. We have €2 billion in retained surpluses built up as our capital so we have 15% or 16% in overall capital. It needs to be 10% under Central Bank rules but we actually have 15% or 16%. We have plenty of cushioning or buffering. Even if one of the loans did go wrong, there would be plenty of cushioning, although we do not see it as something that could go wrong given the current design determining how the social housing model works.
My last question - the real question - is what this committee can do to help the ILCU spend its money. What is the roadblock? What does Mr. Farrell recommend to this committee so the cash can be accessed and put back into the communities that have invested in the credit unions? Representatives of the Irish Banking Federation were present earlier and they did not offer us any money. Mr. Farrell, by contrast, is telling us there is a way of gaining access to funds.
Mr. Ed Farrell:
We would like to see the two relevant Departments, namely, the Department of Finance and the Department of the Environment, Community and Local Government, and the Central Bank try to figure out quickly how this can be facilitated.
We are responding to an official proposal or strategy where credit unions were mentioned on page 33. Mr. Knox would have been at more of the meetings in the Department. We were engaging with the Department of the Environment, Community and Local Government before that report came out and have had much engagement since. We were told credit unions were mentioned on page 33 to further the process and get some speed behind it and we were asked to draw up our own proper written formal proposals. There are the two options and we are surprised, or disappointed, with the approach taken by the arms of the State, including the two Departments and the Central Bank.
This is a huge problem. Maybe we were naive but we felt it would happen quicker. To be fair, we have had meetings with the Departments in the last two weeks and two months, even during the election, and we had a Central Bank meeting earlier in the year, following which we went back to it with further information. We believe they are going to get together to try to map out a roadmap for us.
Mr. John Knox:
With regard to the issue of the engagement with the Departments, we had a very constructive engagement with the Department of the Environment, Community and Local Government which has confirmed that our proposal slots into an existing model that it uses. We have debated the merits of the model it uses but in terms of funding the housing bodies and private finance, the Department has confirmed that our model ticks all the boxes and fits in with its proposal.
Deputy Wallace raised the issue of risky lending, which Mr. Farrell has already touched on. We do not see this as risky lending. We would not be making this proposal if we thought it was going to put credit union funds and, more importantly, credit union members' funds at risk. The ultimate counter-party to these loans is the State. The way the housing bodies repay these loans is via a rental income stream they receive which is underwritten by the Department of the Environment, Community and Local Government. So, in terms of risky lending, we see the counter-party being the State as removing that risk.
In terms of the issue of barriers and the role of the Central Bank, its question centres on the risk and that is where the toing and froing with the Central Bank has been. In the first instance, we met with the Department of the Environment, Community and Local Government, to ensure that our proposal was accurate and fitted the policy. Once we had completed our interaction with the Department, we met with the Central Bank in January 2016. It is in the intervening months, as one would expect, that the Central Bank has stated its role as registrar of credit unions is to protect the savings of credit union members. It is focused very much on the risk. What we are trying to do is endeavour to allay any concerns it might have. Thankfully, as Mr. Farrell has outlined, the Departments have in recent meetings offered to try to meet with the Centra Bank to give it any further information on how this model would work and allay any fears or concerns it may have about risk which would finally enable it to make the regulatory changes so that we can progress this once and for all.
Mr. Ed Farrell:
Section 44 of the Act, which Deputy Maureen O'Sullivan raised, is on a fund an individual credit union can create out of its own money. It would not be a loan. It is a small fund and it can sponsor the local team or local school. It would not be a loan one would be getting back, it would be helping-the-community initiatives. It would be more like a charitable activity. On the scale of it, one is only allowed to put 2% into it. Even if one could lend it, the fund would not in any way be big enough. In any event, it is more to do with credit unions sponsoring local initiatives and bursaries.
The same aspects apply to dormant accounts which are kept for the people whose names are on those accounts or their next of kin. Again, it would not be meant to be used for something else. Somebody lodged that money and credit unions would make every effort to find the rightful owner or next of kin. Money in credit unions is insured. If one lodges €100 to a credit union and, God forbid, something happens, that money is generally insured with another arm of the leagues. If one had a loan and passed away, one's loan is repaid out of that insurance. Again, families and credit unions go a long way to make sure that whoever is entitled to that money, even after a death, gets it as to do otherwise would be very difficult, no matter who might be the recipient in those circumstances.
I have a practical suggestion. There is much sympathy for the ILCU's position. The witnesses said the key problem is the Central Bank, as the regulator, and the rules it imposes on credit unions. If the witnesses have specific recommendations of changes to the investment regulations or any other aspect which they would like to submit to the committee by e-mail, it could be very helpful for us. I invite them to think about it and send us something directly.
Mr. Ed Farrell:
We think we know the exact wording. We appreciate the committee's attention on the matter and the invitation to us. Credit unions feel strongly about it. There is a need in almost every parish and community. Credit union staff know the people who are coming in the doors every week who are challenged with paying for their homes. While we do not agree on all things, this is one initiative in which practically every credit union is happy to engage. I thank members and wish them the best of luck. They have a tough job to address an ever-increasing and complex problem.
I thank Mr. Farrell and Mr. Knox for their attendance. If they could forward information on the technical issues that are causing the roadblock to the committee, it would be useful for us to consider that with future witnesses.