Seán Sherlock (Cork East, Labour)

I wish to specifically address the issue of credit unions and their ability to reschedule loans and pay dividends at the same time.

Part 7 refers to section 15(7) of the Bill, which seeks to amend section 35 of the Credit Union Act will make it impossible for credit unions to undertake rescheduling and pay a dividend to members. This is because the cost to credit unions of additional reserves arising from the rescheduling would leave nothing to be paid out by way of a dividend. This could cause members to withdraw savings from credit unions, resulting in them having less money to loan out and forcing members into the hands of loan sharks or moneylenders.

The Minister for Finance undertook in April 2009 to review section 35 of the Credit Union Act 1997 to make it easier for credit unions to accommodate members desiring to reschedule their loans, due to the recession. The Acting Chairman, Deputy Noel O'Flynn, will be aware that the Joint Committee on Economic Regulatory Affairs has undertaken extensive consultations with all the representative bodies on this and other regulatory provisions. The economic and regulatory affairs committee's consultations, under the chairmanship of Deputy Moynihan, in my opinion, have surpassed those of the Department of Finance in that the latter's consultation process has been more limited and technical difficulties are now manifesting on the eve of this legislation being passed into law.

I understand that the expert committee established by the Minister's Department was limited originally in its membership and met infrequently. The proposed regulatory requirements underpinning this legislation will result, to my mind, in the opposite to what was intended by the Minister unless amendments are made on Committee Stage. If not amended, it will mean a more restrictive regime around credit unions, denying them the ability to meet the needs of some members impacted by unemployment, wage cuts and even public service levies. I am sure this is not what the Minister had intended when the legislation was first drafted.

It is impossible and unwise to look at the Central Bank Bill as it relates to an easing of restrictions on credit union loan duration limits, without looking at what the registrar proposes as the underlying requirements and operational guidelines. The Registrar of Credit Unions viewed the proposed legislative change as an opportunity to impose yet more stringent reserve and liquidity requirements upon credit unions, it could be argued. This has to be seen in the context that credit unions are the most reserve rich financial institutions in the State. The registrar introduced a regulatory or non-distributable minimum capital reserve requirement of 10% for credit unions in 2009 – a very stringent reserve requirement, given that the banks at present are baulking at their new standard of 8%. It should also be measured against the fact that the vast majority of credit unions benefit from an additional layer of protection in the form of a self-funded mutual stabilisation fund, the savings protection scheme, under the auspices of the Irish League of Credit Unions.

There is a very real danger of over-egging the cake in this particular instance. The registrar proposes to apply his section 35 requirements to all credit unions regardless of whether a credit union wishes to avail of the extension to the section 35 limits. This is something that must be addressed on Committee Stage. The registrar is proposing a liquidity requirement of 25% to 30% where the section 35 exemption is availed of. Even the current 20% liquidity requirement is very onerous when measured against the standards the regulator currently applies against banking.

There is every danger here that the combination of the registrar's and Minister's proposals will have the impact of rendering it impossible for credit unions to pay a dividend to their members. If all surplus funds must be ploughed into additional reserves, credit union dividends will suffer, driving funds out of responsible credit unions and into irresponsible banks.

It must be stated, and the Minister must accept, that no credit union has needed to be bailed out by the State. No taxpayers' money has been poured into a single credit union, to my knowledge, and the vast majority of credit unions are part of a voluntary mutual stabilisation fund which acts as a backstop to the State deposit guarantee scheme. There are ongoing calls for this stabilisation scheme to be regulated by the Registry of Credit Unions and extended to all credit unions in the State.

The registrar seems to be taking the view that every rescheduled loan is an at-risk loan. This is a false assumption. Many credit union members are taking the responsible route when confronted by a drop in income and approaching their credit unions immediately, before arrears occur, to renegotiate their payments. This must also be considered on Committee Stage. The proposals before the House today, if unaltered, will tie the hands of credit unions behind their backs. It is inconsistent of the regulator to encourage banks to reschedule loans for their borrowers while, at the same time, financially penalising credit unions that seek to accommodate their members. Practical amendments need to be agreed on Committee Stage. A balance must be struck between the needs of borrowers and savers and the requirement to supplement already strong reserves.

I understand the credit union representative associations, including the Credit Union Development Association, the Credit Union Managers' Association, the Irish League of Credit Unions, the National Supervisors' Forum and the credit unions themselves, have been in negotiation with the regulator and the Department of Finance on these issues. I look forward to the introduction of positive amendments that will add strength to the credit union movement, which is one of the few bright lights on the financial horizon.

The Minister for Finance set out, in April 2009, to make it easier for credit unions to respond to the needs of members experiencing unemployment and reduced incomes by affording greater flexibility to credit unions to extend loan terms, where necessary, beyond five years. His Department entered into limited consultation on this matter and it was the registrar of credit unions and not the Department that became the driver in this reform. The result is legislation that makes it more difficult - that is, more expensive - for credit unions to respond to member requests for rescheduled loans.

I am not saying credit unions should not have strong reserves. Nobody is arguing that. I fully support the registrar's introduction of the regulatory reserve requirement in 2009 and commend credit unions for building up their capital reserves to 10% as a result of this requirement. This compares favourably with the equivalent figure for banks, which is 8%. However, this House should pause for thought when we see yet another reserve-driven initiative from the registrar that has not been the subject of a regulatory impact analysis. Credit union representative associations are responsible bodies and are warning against the financial impact of this latest - dare I say it - hurried imposition by the registrar. It is unwise for this House to consider such an imposition when the registrar and the Department have clearly not undertaken an impact analysis. Impact models produced by credit union bodies show many credit unions facing nil dividend returns to members as a result of the Minister's proposals.

The proposed change will not address the needs of unemployed credit union members but will make it impossibly expensive for credit unions to respond to the needs of their members. In addition, and equally importantly, the measure will jeopardise the ability of many credit unions to pay dividends to their members, which will drive money out of credit unions over time and ultimately damage this great not-for-profit resource. Ultimately, the only bodies that will gain from the weakening of the credit union movement will be banks and moneylenders.

It could be argued that this is a hurried and ill-conceived measure. It merits careful scrutiny before damage is inflicted on the credit union sector. This sector has not demanded any bailout at taxpayers' expense and it has acted with probity at all times, although there are some notable exceptions. Looking at the credit union movement, one must be convinced that it has acted for the common good at all times. It is a responsible sector with its own stabilisation fund. When we hear warnings from the credit union representative associations of the damage that this so-called reform will bring, we must take cognisance of this and act cautiously.

The registrar of credit unions has extensive powers of regulation and is currently overseeing a review of the credit union sector on behalf of the Department of Finance. Radical proposals to heap additional reserve requirements on an already reserve-rich credit union sector need careful consideration. I urge that this take place and that there be plenty of dialogue with the representative associations. I hope their concerns will be reflected in the Minister's response and in amendments introduced to the Bill on Committee Stage.

I ask the Acting Chairman how much time I have left.

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