Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I am pleased to have an opportunity to contribute to the Second Stage debate on the Credit Union Bill, which we all agree is important legislation. There is broad acceptance within the credit union movement of the need for change in the area and of the need for the regulatory regime to be improved, and that should be the starting point of our debate on the Bill.

We have been advised by the Whips that there is some time pressure in respect of the passage of the Bill, which is regrettable. The reason given is that the budget for 2012 provides for a contribution of €250 million to the credit union fund and that needs to be established on a statutory basis in order for that contribution to proceed. However, I hope the debate will not be curtailed. It is important that all Members of the House are given an opportunity to contribute on Second Stage on the broad principles of the Bill. We should also give adequate time to Committee and Report Stages, when we will get down to the nitty gritty of the detail of the Bill and deal with the amendments that need to be considered.

Credit unions, like all other financial institutions in this State, have been affected by the recession and downturn in our economy since 2008. It must acknowledged, however, that the scale of the problems in credit unions, while significant, is in no way comparable to those which have emerged in our banking system. The Minister has provided for €500 million in support for the credit union sector, all of which may or may not be required. More funding may be required but we will not know that until after all the detailed analysis of individual credit unions has been completed.

It is important during this debate that we put into perspective the level of regulation required for credit unions. Credit unions in this country are, by and large, well run. They operate on a model of volunteerism and have a community-based ethos. The last thing any of us want is for that model which has been so successful in Ireland for many years to be in any way undermined. Having met management of credit unions, the League of Credit Unions and other interested parties, I am aware that they accept the broad thrust of this Bill and that regulation will change. However, they want that regulation to be appropriate. The Minister stated in his speech that the perception is that there is a bulging corpus of banking law which the Bill unlocks and applies to credit unions. That is the perception of credit unions. They are concerned that they could be over-regulated.

While we need a response to the failure of the regulatory regime to deal in recent years with financial services, that response needs to be appropriate. That is the benchmark which I use in assessing all of this. The credit union movement has concerns in relation to this Bill which, it is hoped, we will have an opportunity to debate in more detail during the Committee Stage debate.

We recognise that credit unions fulfil a valuable function in Ireland. They have more than €15 billion in customer deposits and remain open for business. It is important this message is conveyed. It is important also to convey the message that deposits of individual credit union customers are secure in that the €100,000 deposit guarantee scheme applies also to credit unions. People need to be reassured that, despite some of the media coverage of difficulties in the sector, their savings are protected. Despite their difficulties, credit unions have shown a determination to retain the character and identity of the sector, taking account of its unique not-for-profit volunteer ethos. This must be preserved in the legislation.

There is no doubt that mistakes were made by some credit unions, in particular in terms of the advancement of loans which ultimately supported property development. What we have witnessed is the pervasive contamination of many parts of the economy as a result of an over-reliance on property and its impact when the market collapsed a number of years ago. The credit union sector is in pretty good shape. There are issues to be addressed in regard to a number of credit unions, some of which are in need of stabilisation, restructuring or amalgamation. It must be acknowledged that the merger of some credit unions is inevitable. I do not detect a fear of that type of change in the sector. Credit unions are of the view that if it is in the long-term interests of the movement and its customers that some of them be amalgamated or restructured, then that should be done. I believe there is a general acceptance in this regard. The credit union movement should not fear this change.

We believe the Central Bank should develop a protocol around what constitutes a viable credit union and should apply this in a manner that respects the community-based nature of the credit union movement. Professor Donal McKillop, chairman of the commission to which the Minister referred, has acknowledged this, saying that there is always a place for a credit union lending institution based on a co-operative ideal. It should be acknowledged that the credit union movement has and continues to meet the financial needs of many people with whom the banks will not deal. That is the reality. Virtually every family in this country has at some point relied on the services of their local credit union. People are grateful for the services provided by their local credit unions. The real success of the credit union model has been that it is community-based and its volunteers and staff know their customers personally, which allows them make judgment calls based on their knowledge of the local community and their customers. I want to see this protected.

Some 51 credit unions have reserves of less than the required 10%, and 25 are classified as being seriously under-capitalised. The Central Bank projects a further deterioration in credit union solvency. There are a number of reasons underpinning these financial problems. Many credit unions invested assets in bonds and financial products which are now deeply under water. The economic climate has directly contributed to the level of impairment of which the credit union movement must now take account. Key financial indicators for the sector suggest far more challenging conditions in the future than in 2008. This is borne out in figures for loan arrears, which have increased from a little lower than 10% in 2009 to more than 15% in 2010 and 19% at the end of 2011. Provisions against bad debts increased from €204 million in 2006 to €738 million in 2011. The movement has been trying to get its financial house in order for some time. This Bill will broadly support the process in which credit unions are engaged.

Credit unions make their money from lending. In my view, they are currently not lending enough. There is scope for greater use of the sector. I believe it can make a greater contribution to economic activity in Ireland. If, through the provisions and restructuring provided for in this Bill, we get it right, the role of credit unions will be greatly enhanced, which I would welcome. The movement currently has an average loan to asset ratio of 40%. The average loan to asset ratio of most international credit unions is closer to 70%. This means they are not generating enough revenues to cover their bad debt provisions.

The Commission on Credit Unions noted that the declining fortunes of the economy have not only put an additional brake on credit union development, but have, arguably, contributed to a regression in some credit unions. The tradition of volunteerism, which has been a hallmark of the sector, needs to be preserved in any new regulatory environment. The Irish League of Credit Unions has concerns, some of which the Minister referred to in his speech, about the term limits that will apply to those who serve as directors. It is important to bear in mind that a number of small credit unions, in particular in rural areas, have only a limited pool of people from which to draw. There may not be many people in a particular area who are willing to commit to serving on a credit union board. The term limits will present a particular difficulty for such credit unions. While I welcome the general objective of trying to secure some level of turnover of people who serve at board level, account will have to be taken of the acute difficulties this provision will cause particular credit unions. I hope to tease this issue out further on Committee Stage.

While the credit union movement is long established in Ireland, it is relatively under-developed in terms of its international peers. The sector should aim to be in the premier league of international credit union movements and should proactively push that development with the Government and its agencies. The League of Credit Unions is concerned about the increasing funding burden associated with the proposed legislative changes. An issue that will need to be addressed in an upfront manner is the additional levies to be imposed on the sector, which will place a heavy financial burden on it.

We need to bear in mind the impact of this on the services they are in a position to provide to their members.

The regulator argues the deposit guarantee scheme levy is good value for money, as without it there would be a flight of deposits from the sector. There will be ongoing costs for stricter internal audit and risk controls, upskilling, strategic planning and fitness and probity, which are all new requirements for credit unions under the legislation. I acknowledge there is a need for credit unions to enhance their internal governance arrangements to implement a strict internal audit regime which would greatly assist them to face up to the challenges they have. Many credit unions are stepping up to the plate themselves and putting in place new procedures. Many of them have brought in external consultants to review their affairs and make recommendations, and these recommendations are being implemented. This should be borne in mind also.

The elements of the legislation criticised by the Irish League of Credit Unions, ILCU, are not only with regard to term limits, to which I have already referred, but also to membership restrictions, and it referred to these as anti-democratic and an attack on volunteerism. The Bill places certain prohibitions on membership of a board of directors on groups including employees, voluntary staff, employees in other credit unions and professional advisors. We need to go through the entire list of those proposed to be prohibited from membership of a board to assess whether it is overly onerous on credit unions. This would be important.

The ILCU has also conveyed its concerns regarding the creation of classes, types or tiers of credit unions based on asset size alone. It believes a model based on risk and complexity of business model would be considerably more appropriate. There is some merit in this argument and it should be reflected upon during the passage of the Bill. It has also raised issues concerning the abolition of the role of treasurer in credit unions and has sought a memorandum of understanding to be put in place between the regulator and individual credit unions.

The ILCU has highlighted certain issues featured in the final report of the Commission on Credit Unions but which were not specifically mentioned in the Bill, in particular the fact that credit unions should be leaders in assisting the Government to implement its financial inclusion agenda and the need for credit unions to be in a position to share services and offer electronically enabled payment accounts. The concern expressed to me is that credit unions feel they are being lumbered with the entire regulatory regime which applies to banks but are not being put on a level playing field in that they are not being allowed share services or administer electronic payment accounts. We would like to have a situation whereby a person can avail of credit union services in one credit union although he or she is a member of a different credit union. I would like to see credit unions being given the opportunity to offer electronic payment accounts and systems for their customers. This would be a very good step forward.

We strongly support amending the Credit Union Act 1997 so credit unions can provide funding to Government backed or guaranteed schemes or projects which have a social benefit. This would be very much consistent with the role that has been played by credit unions in the economy so far. The ILCU is engaged in two major projects, an ICT strategy and a payments credit union services organisation. Significant progress has been made in implementing the ICT strategy, which aims to enhance the movement's operational efficiency and effectiveness and expand the products and services available to credit unions and their members.

I acknowledge that the Bill generally seeks to implement the recommendations of the Commission on Credit Unions and I acknowledge the work of all of the members of the commission. The report should certainly form the basis of the Bill we are considering. However other issues, which are not in the commission's report, should also be considered. Certain issues raised in the commission's report have not been brought forward in the Bill. We need to go through all of these in considerable detail to try to get the Bill in as effective a form as possible and to form the basis for the development of the credit union sector for decades to come.

The Minister outlined what the Bill provides for in terms of prudential regulation, improvements in the governance regime, the oversight committee, the role of the restructuring board and the stabilisation provisions which are set out. It is important to reassure credit unions that what will be required in terms of restructuring will be done on a voluntary basis. The Minister reaffirmed this in his opening statement on Second Stage. It is important to reassure credit unions they will not be forced by the regulator to undertake amalgamation if it is clearly not in the best interests of their members or of a credit union itself.

The first half of next year will feature widespread due diligence by the restructuring board to estimate the costs and benefits of merging credit unions operationally and geographically, with final proposals due in the second half of the year. We acknowledge the need for amalgamation and restructuring to take place. I do not believe there will be unnecessary resistance to this provided credit unions are dealt with on a partnership basis and that it is not a case of the regulator dictating what must happen to each credit union. They must be allowed have input into the development of a plan for their future.

The Minister has allocated €250 million this year and the same amount again next year. Some estimates have put potential losses on bad loans in the credit union sector at up to €1 billion, which suggests the final figure could well be twice the initial estimates, although officials have insisted the process will be tightly run and cost efficient. There is an international precedent for rationalisation. The number of credit unions in Britain fell by 70% when new regulations were introduced. There were previously 700 credit unions in Australia but after regulation, the number fell to a little over 100. A small number in both countries failed, but the majority were successfully absorbed into larger bodies. This is the lesson we can learn. Even credit unions in difficulty now need not go out of existence. They can come under the umbrella of a stronger credit union by way of an amalgamation and in some cases this may be the best way of secure the future of a credit union. It is important this is done.

The report highlighted the benefits of the restructuring approach, including that credit unions will receive funding to strengthen their balance sheet, thereby mitigating the risks that could otherwise be presented by an amalgamation. If credit unions become part of a larger entity they will have a stronger balance sheet and will become part of a viable business model. The credit unions would benefit from an expanded common bond and economies of scope and scale. They would also be better placed to achieve the scale necessary to expand their range of services and this point is important.

The Credit Union Development Association, CUDA, has also made known its views on the Bill. It favours a clear distinction between the executive and non-executive roles and regards this as a driving force behind new changes. In association with the development of a prudential rule book to assist the separate roles by providing much needed clarity. As a whole, CUDA believes the prudential part of the Bill is comprehensive. While the requirements will unquestionably prove challenging for credit unions, CUDA maintains that in the long term it will provide a complete framework for credit unions to grow prudentially and have the capacity to manage their business in a sound manner. Its views also need to be taken on board.

The provisions of the Personal Insolvency Bill and the new insolvency service when it is up and running will have an impact not only on banks but also on credit unions. Understandably there is some concern in credit unions about the impact of the debt relief notice provision in particular, where unsecured debts of up to €20,000 can be written off at the discretion of the personal insolvency service. This could have an impact on the level of provisions required by credit unions in dealing with impaired assets. They are concerned about the impact of the Bill. We recognise the Bill must be enacted and the new service must be up and running as soon as possible and each case will be dealt with on an individual basis. It is important to put this on the record.

I welcome the Bill.

I will be engaging actively on Committee Stage and will be tabling amendments to determine whether we can improve the Bill. I would like to see as much buy-in from the movement as possible. It seems to accept the need for regulation and the principles in the Bill. While it accepts much of the detail of the Bill, it has issues with certain parts of it. We certainly do not want to have a regime that strangles the potential of credit unions. It would certainly be possible to overreact to the financial crisis by over-regulating a movement such as the credit union movement. We do not want this to happen. I want to see regulation that is proportionate, appropriate and not heavy-handed. If we enter this process in good faith, we can improve the Bill, make it fit for purpose and provide a proper basis on which the movement can develop in the coming years.

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