Dáil debates

Wednesday, 18 January 2012

Topical Issue Debate

Financial Services Regulation

3:00 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I thank the Ceann Comhairle for selecting this matter. I am sure we can all agree on the crucial role credit unions play throughout the island and we are all anxious to protect that unique role in whatever way we can. Following the recent appointment of a special manager by the Central Bank to Newbridge Credit Union, a number of issues arise that need to be addressed.

It is to be welcomed that the members of that credit union and of others around the country reacted in a calm and measured way. We should take this opportunity to again reassure credit union members and depositors that their deposits are secure in every credit union under the deposit guarantee scheme up to the value of €100,000. It is important that we reiterate that at every opportunity.

However, it must be acknowledged that there are issues in credit unions that need to be dealt with and that is why the Commission on Credit Unions was established. Certain mistakes were made in terms of the management of credit unions, the investment policy and the extension of loans, some of which ended up in the property and development sector even though many of them were not intended for that sector at the time they were extended.

Credit unions around the country also acknowledge the need for appropriate regulation, although I believe that many of the lending restrictions that the Regulator has imposed on credit unions are excessively onerous and run contrary to the spirit of community-driven credit unions whereby local discretion is retained. The credit union manager and staff would know their customers personally and are best placed to make lending decisions rather than to work to diktat handed down by the Regulator.

We all will be aware of the contents of the interim report on credit unions, which was published in October last. It painted a fairly bleak picture of the number of credit unions that are seriously under capitalised - 27 of the total of 408 in the country. It showed that €1 billion of loans were in arrears of nine weeks or more at the end of June 2011. Almost one-in-five loans were in arrears to that extent, and that is a serious matter.

I participated in the Committee Stage debate on what became the Central Bank and Credit Institutions (Resolution) Act 2011 last year and I want to raise a number of questions in regard to that and the resolution fund. The Minister for Finance, Deputy Noonan, outlined to the Seanad in October that his estimate of the amount of money that would have to be put into credit unions was between €0.5 billion and €1 billion. I want to ask the Minister of State, Deputy Brian Hayes, whether the Government has revised that estimate based on all the information now available. Some €250 million has been made available in 2012 with provision for a further €250 million in 2013. Will that be sufficient to meet the capital needs of those credit unions that are in difficulty?

I also want to raise the issue of the level of fees being charged by the special manager at Newbridge. Given that this could be the first of a number of such special managers, there is considerable concern at the hourly rate of €432 which is being charged. Perhaps the Minister of State can clarify today who will bear that cost. Will the credit union itself pay for it or will it be paid for by the Central Bank? What are the Minister's plans in regard to invoking the special resolution fund, which is provided for under the Central Bank and Credit Institutions (Resolution) Act 2011 and when does he intend to sign regulations into law under section 15 which require financial institutions to make contributions to that fund?

I hope we will get clarity on some of these issues today because many credit unions around the country and their members want to be reassured on those points.

Photo of Brian HayesBrian Hayes (Dublin South West, Fine Gael)
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I thank Deputy Michael McGrath for raising this matter and also for addressing it in a measured and common sense way, which I believe will reassure the public and those who have savings in credit unions about the sturdiness of those credit unions as a crucial aspect of lending within society. While difficulty has emerged in respect of some credit unions and some poor lending policy by them, it is in probable marked contrast to the worse lending policy of many of the commercial banks in this country.

The Government recognises the important role of credit unions as a volunteer co-operative movement. As the Minister has highlighted continuously, there is a need for restructuring in the credit union sector. We have made it clear that the Government would provide resources to deal with the problems in credit unions if necessary and that the Government will ensure all necessary measures are taken to ensure a stable credit union sector.

I reassure all savers in credit unions that their savings are secure. The Government's deposit guarantee scheme insures savings in all financial institutions, including credit unions, up to €100,000 per saver per financial institution.

The Government believes that credit unions can continue to play an important role in the Irish financial sector and has established a Commission on Credit Unions to bring forward recommendations by the end of March on the future structure of the credit union sector. The Central Bank strategy on credit unions is designed to be ready to take pre-emptive remedial action to maintain member confidence and protect the financial stability of the sector should issues arise. Where a credit union has specific issues the Central Bank will work closely with it taking the necessary and appropriate regulatory actions. In all cases the Central Bank will engage fully with those credit unions to seek an agreed solution where possible. The priority is to protect members of credit unions and their savings, the financial stability of credit unions and the sector overall.

The Commission on Credit Unions' interim report identified 56 credit unions as under capitalised, 27 of which are considered seriously under capitalised. Of course, Central Bank intervention will not be necessary in all of these cases. In many instances a credit union will trade out of its difficulties and in some instances it will move to restructure or join forces with other credit unions.

The Credit Institutions Resolution Fund is now established under the Act. The purpose of the fund is to provide a source of funding for the resolution of financial instability in, or an imminent serious threat to the financial stability of, an authorised credit institution. This Act applies to credit unions as well as other credit institutions such as banks and building societies. The Government has already provided €250 million in funding to the Credit Institutions Resolution Fund to support resolution where necessary.

Resolution payments will only be made following as assessment on a case-by-case basis undertaken by the Central Bank under the Act. The Central Bank is responsible for managing and administering the resolution fund. All authorised credit institutions, including credit unions, will be required to contribute to this fund.

Provision for the resolution of credit unions, where necessary, is included in the EU-IMF programme of support. The Government has already provided €250 million in funding in 2011 to the Credit Institutions Resolution Fund to support resolution where necessary. We have also committed to making available further resources to deal with any resolution or restructuring of credit unions should it be required.

The Deputy also asks about consolidation and restructuring. This issue is currently under consideration by the Commission on Credit Unions and the Government. The Commission is expected to submit its recommendations at the end of March on how restructuring should best be applied in the Irish credit union sector. Legislation to support restructuring of credit unions will be included in a credit union Bill to be published later this year. The Bill will also provide for a strengthened regulatory framework for credit unions.

I would refer Deputies to the comments by the Minister for Finance, Deputy Noonan on credit unions yesterday where he made it clear that if difficulties arise in a particular credit union the Central Bank stands ready to intervene and give all the assistance necessary to keep it going and to ensure that credit union savings and loans are secure.

Photo of Michael KittMichael Kitt (Galway East, Fianna Fail)
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Deputy Michael McGrath has two minutes for a supplementary statement.

4:00 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I thank the Minister of State for his reply. If I may, I will put some direct questions that I hope he will be able to answer.

Is there any update on the outline last October by the Minister for Finance, Deputy Noonan, of the likely cost to the State of recapitalising the credit unions in Ireland? The estimate at the time was between €0.5 billion and €1 billion. The Government has provided €500 million between this year and next. Given that the stress tests have been done and the capital adequacy of the credit unions has been assessed, surely the Minister can give a more precise estimate than one with a broad range of €0.5 billion.

Is there any indication of the scale of consolidation that we are likely to see? That is a cause of concern in communities across the country.

When will credit unions and other financial institutions be required to pay into this resolution fund and are there any concerns that the capacity to pay may not exist in many cases? Clarity on that issue would be welcome.

I raised the issue of the fees for the special manager, which are exorbitant. Presumably he will also be working with a team of people for whom separate charges will apply. This is a matter of concern given the likelihood that a number of special managers will be appointed to credit unions. Where will the burden of that cost ultimately fall?

Photo of Brian HayesBrian Hayes (Dublin South West, Fine Gael)
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I will take the Deputy's questions in reverse order. On the question of fees, the application to the High Court was made by the Central Bank, which appointed the special manager to look after the credit union and set his fees. I acknowledge the Deputy's concerns, however, and the Minister and I take the view that, even though this is the first special manager to be appointed, the fees appear excessive. Ultimately, it is for the Central Bank to work out a fair arrangement and pay a rate for the scale of work involved. This case involves a substantial credit union. These fees will have to be reviewed but that will have to be done in the first instance by the Central Bank and the special manager.

On the resolution fund, when the legislation passed through both Houses it became clear that not only credit unions but also other financial institutions would have to contribute. I understand that will happen in 2012. The initial €250 million was provided by the Government but the objective is to increase the fund in 2012. I will revert to the Deputy regarding when that will happen.

It would not be useful for me to comment on the scale of consolidation before we see the final report. It is inevitable that some form of consolidation will occur. At the least, back office staff from a number of credit unions could be merged centrally or regionally to allow for greater consolidation in certain areas.

On the estimate of €500 million to €1 billion which the Minister outlined in the Seanad, these are still the ballpark figures. We will be in a stronger position when the full report of the Credit Union Commission has been published late in March. This will be a busy year for the credit union sector from a legislative perspective because we have given a guarantee that legislation will be in place by the end of the year and we are working with the commission to ensure that happens. The comments and observations from Deputies will be very useful in that context.