Brian Hayes (Dublin South West, Fine Gael) | Oireachtas source

As is well known, the Credit Union Bill 2012 is very important legislation, coming at an important time for credit unions. It is key step towards placing the credit union movement on a sustainable path for the longer term. It implements over 60 recommendations made in the report of the Commission on Credit Unions which was agreed to by key stakeholders, including credit union representatives. The commission was specifically reconvened to examine the general scheme of the Bill and ensure its fidelity to the commission's report. The agreed report sets out a roadmap for the viability of credit unions into the future and its constituent elements are interlinked and mutually reinforced. The report is focused on what is needed for the credit union system. It does not apply banking thinking; nor does it slavishly import models from other international credit union movements. The taxpayer has committed to providing funding of ¤500 million for credit unions at a time when resources are very scarce. This significant financial commitment on behalf of taxpayers during a period of austerity must bring about a stable, well governed credit union movement that can sustain itself into the future.

The commission's report makes it clear that the adverse economic conditions in Ireland have resulted in a decline in credit union performance. While the financial challenges faced by credit unions are evident, they are not insurmountable. However, they reinforce the clear need to reform how credit unions are structured, governed and regulated. The commission highlights a number of vulnerabilities in the sector. Concern remains about the high level of arrears and the need to ensure loan losses are recognised and provided for. The low dividend rates across the sector are not sustainable in the longer term.

The cost to income ratio of credit unions has increased considerably in recent years, going from approximately 50% in 2006 to almost 90% in 2011. The loan to asset ratio was at only 40% at the end of 2011, an historical low. The Bill is an important part of the Government's response to these challenges. It also provides the platform for restructuring, improving systems, the provision of additional services and governance structures that are sound and forward-looking.

The Bill covers four broad areas. The first element deals with the prudential requirements that apply to credit unions across a range of areas, including reserves, liquidity, investments, lending and borrowing. In general, the Bill sets out the policies and principles, with provision for Central Bank regulations setting out standards and procedures. This will facilitate the development of a prudential rule book which will provide clarity for credit unions on the requirements that apply to them. The second main element relates to governance. The core function and focus of this part of the Bill is on bringing clarity to and distinguishing between the role of the board, on the one hand, and the role of the executive, on the other. Boards will be the key decision-making organ of credit unions, focused on strategy and policy, with the management team handling the day-to-day operations of the credit union, subject to board oversight. Importantly, the Bill preserves and respects the volunteer ethos of credit unions and provides better opportunities for training and development of credit union volunteers.

The next element is the restructuring of credit unions on a voluntary, incentivised and time-bound basis, overseen by the credit union restructuring board, or ReBo. The ReBo has been established on an administrative basis ahead of the legislation, with Mr. Bobby McVeigh as chairman - a hugely experienced and respected figure in the international credit union movement. The ReBo is working to the timetable in the commission's report which envisages the process being completed by the end of 2015. The Bill also provides for statutory stabilisation of credit unions which is to be fully funded by the credit union movement itself, via a levy, as recommended in the commission's report. Stabilisation will operate on a more limited basis during the restructuring period.

I would like to highlight some of the main provisions of the Bill. Part 1 includes the preliminary and general provisions, including the Short Title, interpretation and the commencement provisions. Part 2 deals with two main areas, regulatory requirements and governance. In terms of regulatory requirements, regulations must be effective and proportionate, having regard to the nature, scale and complexity of the credit unions to which they apply. This will facilitate the development of a tiered regulatory approach as recommended by the commission.

Section 29 provides that before introducing regulations, the Central Bank will be required to consult the Minister for Finance, the credit union advisory committee and other credit union bodies. Though not specifically required in legislation, this consultation is to be done in accordance with a consultation protocol which has been published by the Central Bank following consultation with stakeholders. Regulations will also be subject to regulatory impact analysis requirements.

Section 7 amends section 6 of the Credit Union Act 1997 to provide that the Central Bank may impose conditions on the registration of a credit union. These are appealable to the Irish Financial Services Appeals Tribunal.

Section 11 amends section 35 of the Credit Union Act 1997 regarding lending. It provides that the ability of the loan applicant to repay shall be the primary consideration in the underwriting process. There is also provision for Central Bank regulations on classes of lending in which a credit union may engage, large exposures and concentration limits.

Section 12 amends section 43 of the Credit Union Act 1997 with regard to the investments that credit unions can undertake. Detailed matters such as classes and quality of investments, maturities and limits are to be provided for in Central Bank regulations.

Section 13 amends section 45 of the Credit Union Act 1997 on the regulatory reserve requirement and operational risk reserves, with a further role for Central Bank regulations in setting out the minimum levels to apply.

Section 30 sets out the liquidity requirements that apply, with provision for Central Bank regulations on minimum liquidity requirements, including maturity mismatches and stress testing.

Section 30 sets out the liquidity requirements that apply, with provision for Central Bank regulations on minimum liquidity requirements, including maturity mismatches and stress testing. Section 14 of the Bill sets out the provisions which may be appealed to the Irish Financial Services Appeals Tribunal, including regulatory directions. The Minister has asked his Department to look at any consequential changes needed to the Central Bank (Supervision and Enforcement) Bill 2011 to ensure the principal avenue of appeal for regulatory directions issued to credit unions under that legislation is the Irish Financial Services Appeals Tribunal rather than the High Court.

The other broad question dealt with in the Bill is governance. Obviously, the Bill provides clarity on the roles and responsibilities of the chair, board and management of credit unions. In accordance with the agreed recommendations of the Commission on Credit Unions, section 15 provides that the number of board members is to be between seven and 11 and also provides for term limits. The Minister has decided that the term limits provided for under the Bill should be extended to 12 years, in aggregate, in any given 15-year period. Exclusions from board membership are provided for in accordance with the commission's recommendations. The Minister has indicated his intention to amend the Bill in respect of certain exclusions. This section is also developmental in the sense that it makes specific provisions for the training of volunteer directors.

Section 17 of the Bill amends section 55 of the Credit Union Act 1997. It specifies that the functions of the board include setting the direction of the credit union, operating a comprehensive decision-making process and ensuring an effective management team is in place. The board is also responsible for approving, reviewing and updating all plans, policies and procedures of a credit union. The Minister has agreed to an amendment to provide for a member of the board to present the accounts at the AGM. This role was previously performed by the treasurer. The governance provisions in sections 18 to 26 of the Bill deal with matters such as: the role of the chair of the board; committees, including the nomination committee; conflicts of interest; risk management, including the risk management officers; compliance officers; business continuity planning; information systems; outsourcing; and the role of the manager. Section 26 also provides that the internal audit functions within a credit union will provide for independent internal oversight and evaluate and improve the effectiveness of the credit union's risk management, internal controls and governance processes.

Section 27 of the Bill provides for the board oversight committees, which will form a crucial pillar in the new governance assessment of the board's performance. The board oversight committee is the next evolution of the supervisory committees which have been operating in credit unions for many years. As the role of the board changes towards a more strategic focus, it is important that the role of the supervisory committee changes with it. The Bill sets out a number of important provisions regarding the board oversight committee. It will have access at all times to the books and documents of a credit union, including drafts. Its members will have the right to attend board meetings. It may notify the Central Bank of any issues or concerns about non-compliance by the board with applicable requirements. It will report to the members at the AGM or SGM on whether the board has complied with its requirements. The Minister has agreed that the changes on term limits and membership regarding the board should be mirrored with respect to the board oversight committee.

Part 3 of the Bill deals with restructuring, which will be carried out on a voluntary, time-bound and incentivised basis and will be overseen by the credit union restructuring board, to be known as ReBo. Restructuring will involve a process of amalgamations or transfers of engagement under Part 9 of the Credit Union Act 1997. The guiding aims of restructuring are the protection of credit union members' savings, the stability and viability of credit unions and the sector at large and the preservation of the credit union identity and unique ethos. This Part provides for the establishment of ReBo on a time-bound basis. It will comprise a chair and board, supported by an operational side.

The board of ReBo was established on an administrative basis on 31 August this year and has already met three times to lay the groundwork for restructuring. ReBo's role is as follows: To engage with credit unions on the ground to facilitate agreement on restructuring proposals; to assist credit unions in the preparation of restructuring plans; and to consider restructuring plans submitted to it, including any funding requirements, and approve or reject those plans. ReBo will also oversee the implementation of restructuring plans, including the provision of post-restructuring support. ReBo may also make a recommendation to the bank that an individual credit union should be considered for stabilisation.

ReBo will be funded up-front and a levy on the sector by ReBo will recover 50% of its operational costs. The Bill establishes a credit union fund to fund restructuring and stabilisation. Once the Bill is enacted, it is intended that ¤250 million will be contributed to the credit union fund from the Exchequer to cover restructuring costs. The costs of stabilisation will be met entirely by a levy on the credit union sector itself, as agreed by the Commission on Credit Unions. Restructuring and stabilisation funding is recoupable from the benefiting credit unions, with provision for any shortfall in the recoupment of restructuring costs to be met by a levy on the sector.

Part 4 of the Bill deals with the very important question of the stabilising of credit unions on a stand-alone basis where they are viable and hold reserves above 7.5%. The Central Bank must have regard to a number of key factors before approving the provision of stabilisation, including the extent of the credit union's compliance with regulatory requirements and its ability to maintain reserves and fund the business for up to three years after the support has been provided. To avoid any disconnect during the period of restructuring, a credit union will need a ReBo recommendation before it can be considered by the Central Bank for stabilisation during the restructuring period. This requirement will no longer apply once ReBo has been dissolved. Part 4 also provides for the establishment of a stabilisation committee to examine the implementation by the Central Bank of its own requirements and procedures under stabilisation.

The Schedule to the Bill deals with a range of miscellaneous amendments recommended by the Commission on Credit Unions and those which arise as a consequence of amendments made in other parts of this Bill.

A number of very important issues were raised in the context of the debate that ensued on all Stages in Dáil Éireann. Where possible, the Minister has tried to show some flexibility without compromising on the core principles of the Bill. As the Minister has explained, the intention is to bring forward a number of substantive amendments on Committee Stage of proceedings in this House. This will, of course, require that the Bill is referred back to the Dáil in due course for consideration. I was responsible for taking some of Report Stage in the other House. Quite a number of very sensible ideas were put forward in the select committee and on Report Stage by Deputies on all sides. The Minister for Finance gave an assurance to the House that, for the purposes of Committee Stage in this House, the Government will be proposing quite a number of substantive amendments to reflect those ideas that emerged on Committee Stage and Report Stage, and also to reflect a new consensus that has emerged on all sides in terms of making this Bill more effective when it is up and running.