Tom Parlon (Laois-Offaly, Progressive Democrats)

I am pleased to have this opportunity to respond, on behalf of the Minister for Finance, Deputy Cowen, to this Private Members' Bill, sponsored by Senator O'Toole. Its purpose is to establish a company regulated by the Financial Regulator to maintain a fund, built up through a levy on credit unions, to provide compensation to credit unions savers where a credit union becomes insolvent or financial assistance to a credit union in financial difficulty.

Senator O'Toole is a strong supporter of the credit union movement and a founder of a credit union. His objective in introducing this Bill is to ensure that credit union savers have trust and confidence in credit unions and the savings protection they offer. The Government shares this objective. It is therefore a matter of determining the best way of securing this objective in a manner that builds on the existing legal and regulatory framework for credit unions, supports the ethos and philosophy of self-help of credit unions and underpins the all-island nature of the credit union movement.

The starting point in considering this issue is the intention of the Oireachtas, as expressed through the Credit Union Act 1997, that there should be appropriate savings protection arrangements to protect credit union savers. In particular, section 46 of the Act provides statutory authority for the appropriate regulatory body, now the regulatory authority, to approve savings protection schemes, SPSs, for credit unions. The statutory framework provided for approval of savings protection arrangements in credit unions under the Credit Union Act and was put in place as part of the broader framework for deposit protection arising from the 1994 EU directive on deposit-guarantee schemes. This directive, which recognised the role of deposit protection schemes under the responsibility of professional organisations, was transposed into Irish law as the European Communities (Deposit Guarantee Schemes) Regulations 1995 for credit institutions other than credit unions. It is important to note that the deposit guarantee scheme does not provide a State savings guarantee for savers with Irish credit institutions generally.

In the case of credit unions, the Irish League of Credit Unions, ILCU, has, since 1989, operated a SPS for credit unions. The SPS aims to protect the individual savings of members by ensuring that credit unions are financially and administratively sound and by providing remedial help to any participating credit union that shows signs of weakness in these areas. Savings of individual credit union members are also protected. Since 1989, the SPS has been called upon in a very limited number of cases to provide some assistance to credit unions in financial difficulty. However, it is important to note that no member of a credit union has experienced any loss of shares and deposits and no credit union has become insolvent.

The design and operation of the SPS on a mutual basis for credit unions is consistent with the specific regulatory approach adopted for credit unions under the Credit Union Act 1997 on account of their co-operative and not-for-profit status. Members of credit unions are co-owners of credit unions and on that basis credit unions under the auspices of the league devised and developed the SPS for their mutual benefit and protection of savings. In line with changes in the regulatory environment for financial services generally, the need for modernisation of the organisational structure and governance arrangements for the credit union SPS became evident over time. Changes in the movement, structure and scale of the credit union system suggested a need for some reform to enhance the protection afforded to credit union savers and improve the openness, transparency and accountability of the scheme.

Following its establishment in 2003, the Financial Regulator drew attention to the need for reform of a number of key aspects of existing arrangements. The evidence presented in the course of the 2004 High Court action on the SPS also highlighted a number of areas where action was required to bolster the safeguards afforded under the scheme. In response to these issues, a detailed set of proposals to reform the SPS was submitted to the Minister by the ILCU in January 2006. Under these proposals, the ILCU SPS fund, which now amounts to approximately €95 million, would be transferred into a separate legal entity established exclusively for the purpose of managing the operation of the SPS. The savings protection company would be incorporated under company law, thus ensuring legal certainty regarding the rules of the scheme and full transparency and accountability regarding the legal roles, duties and responsibilities of directors with regard to savings protection.

The company would be operated to best-practice standards of corporate governance, including in regard to the appointment of independent directors, and its activities would be overseen by the Financial Regulator. This would be an important element in ensuring that monitoring and assessment of the sufficiency of the fund would be carried out on a regular basis. The fund would be ring-fenced for guarantee and stabilisation purposes and would not be available for any other purposes under the company's memorandum of association. In addition, compensation to savers under the new scheme in circumstances where a credit union became insolvent would no longer be discretionary. The proposal also confirmed that the scheme would be open to all credit unions in line with the High Court Order made in October 2004.

The Minister's assessment was that the league had developed a substantive outline proposal for strengthening and enhancing the current SPS and the next step was for the Financial Regulator to assess this proposal against the objectives set for savings protection with a view to resolving the SPS issue over a short timeframe. The reform proposals furnished by the Department of Finance to the Financial Regulator in early March 2006 highlighted significant innovations designed to meet the objectives set for savings protection by the credit union advisory committee and the annual reports of the registrar of credit unions. The Minister has publicly highlighted the importance of SPS reform to the modernisation and change process for credit unions. He has also emphasised the need to fully examine the potential for SPS approval under the Credit Union Act, in view of the importance of having approved SPS arrangements in place which work to the benefit of all credit unions and their members.

In May 2006 the Financial Regulator confirmed that he would identify, examine and explore specific changes to the proposals which could allow the reformed SPS to be approved and, assuming a satisfactory outcome to these discussions, it is the Financial Regulator's intention to put the proposals which emerge to the regulatory authority for consideration. The second half of 2006 saw the successful resolution of issues pertaining to an individual credit union which required support from the SPS and resulted in good progress being made by the Financial Regulator in confirming the legal enforceability of guarantees provided by the credit union SPS, which is a key requirement of a legally robust savings protection scheme. The Financial Regulator's strategic plan published last November reiterates the commitment to evaluate and respond to the league's proposals. The Minister has made it clear to all parties that action is required on this issue and that the issues pertaining to the entire credit union system, including credit unions which are members of either, both or neither representative group, would be addressed.

Since the start of the year, the Registrar of Credit Unions has been holding a structured series of regular meetings with the ILCU to examine the SPS reform proposal. The registrar is currently reviewing the following key modules of the proposed reform. These include the structure and governance of the SPS company, operational matters, financial structure and Northern Ireland issues. The discussions are aimed at identifying common ground with regard to how savings protections based on the ILCU's proposal should work. I understand the process is being conducted in a constructive and positive manner by both parties. The league is committed to pursuing its discussions with the registrar with the aim of achieving agreement on any revised scheme that may be approved under section 46. It is hoped that discussions will be finalised by the end of March.

The fact that the issue is being addressed initially with the ILCU reflects the genesis of the proposal and the current ownership of SPS funds but I again stress that any outcome must be inclusive. In the interim, consideration of new legislative initiatives which represent a significant departure from the existing regulatory framework, which is the case with the proposals set out in this Bill, should await the outcome and recommendations of the current review. It does not make sense to seek to move two proposals at once. Moreover, as Senators will probably be aware, significant progress has been made over the past year on coming to a consensus with the credit union movement on developing the legislative framework for credit unions.

The initiatives taken in the important areas of investment guidelines, increased share and deposit levels and the review of longer term limits for credit unions have been taken after consultation and dialogue with all stakeholders. This demonstrates the partnership approach has been the right method of resolving important issues for the credit union movement. In that context, while the Minister will of course examine any recommendations arising from the joint review of the SPS which may require a policy or legislative response, we should not pre-empt the outcome of these discussions. Furthermore, it is essential that any solution fully acknowledges the all-island dimension of the credit union movement because it is important to maintain the Thirty-two County basis on which the current SPS operates.

For these reasons, while fully acknowledging Senator O'Toole's commitment to safeguarding the interests of credit union savers, the Minister believes the current examination of ILCU's reform proposal should be concluded in advance of any consideration of further legislative initiatives in this area. The Government does not support the Bill on that basis. I thank Senator O'Toole for introducing this Private Member's Bill for consideration by the House. The Minister expects all stakeholders to play their part over the coming weeks in contributing to the delivery of the important public policy objective of ensuring the continuation of legal certainty regarding the protection of savers in credit unions.