Thursday, 1 March 2007
Seanad Eireann Debate
Ba mhaith liom fáilte a chur roimh an Aire. I appreciate the opportunity the Government has given me to debate this Bill in Government time.  I cannot remember the last time I was given such an opportunity, but I am well entitled to it after 20 years in the House, a period slightly shorter than the length of time I have been involved in the credit union movement.
I declare my interest in the credit union movement and am a founder member of one of the larger credit unions, the INTO Credit Union. I have been committed to its philosophy and the philosophy of the Irish League of Credit Unions, ILCU, for many years. Nothing I will say is aimed at undermining or in any way taking from the extraordinary work of the ILCU. I admire it and hold it in the highest regard. We have a difference of opinion with regard to the Bill, but that is all it is, a difference of opinion.
My objective in introducing the legislation is to provide that where an independent broker, auditor, adviser, accountant or some such person is asked a simple question as to whether a person’s savings in a credit union are as secure and guaranteed as in a bank or other financial institution, he or she may answer with a resounding “Yes”. Until that is the case, we have left a gap in the area. It is not the case currently and my intention is to create a situation where it will be.
There are three means by which what I propose can be done. It could be done by operating under the section of the Credit Union Act which allows a credit union to operate. Talks have been ongoing between the Department of Finance, the Financial Regulator and the ILCU on that issue for the past three or four years, but they do not seem to have come to any conclusion. Something could be done under the Act. Another way to deal with the issue would be to operate a system like that of the Central Bank for the banks, namely, to have a reserve fund. A reserve fund exists for banks and perhaps we could have one now for credit unions. It could be brought in under the aegis of the Central Bank with a support structure at that level. The third way of dealing with the issue is the way I propose today in this Bill.
I am not saying the way I propose is better than the other two ways of dealing with the issue. It is the way I choose to bring forward to deal with this crucial issue. Without raising hares or making a tabloid issue of it, people should see we, as legislators, are concerned about the issues and want to fill the gap and meet a particular need.
The question might be asked as to why I have come to this position. I have arrived at it having looked at the available literature and evidence over the period of time I have been interested in the credit union movement. I will begin with the Department of Finance. Under the terms of the Credit Union Act, the Department and the Minister at the time established a credit union advisory committee. That committee wrote to the Minister for Finance, Deputy Cowen, in March 2005 and stated that since the appointment of the credit union advisory committee the previous September, it was concerned with the lack of any properly constituted savings protection scheme within the credit union movement.
Every Member and legislator should know savings protection is not just my idea, but also the main focus of the advice the Department has received from the advisory committee. Furthermore, the committee’s letter to the Minister stated that as a result of its concern, it was now preparing a brief report on the desirability of introducing a savings protection scheme for the credit union movement. It proceeded to set out its recommendations at the end of the letter and those recommendations are in line with what I am trying to do in the Bill. The issue must be examined and it is crucial that we consider how to approach it. The advisory committee’s letter refers to the existing and other situations that must be considered in that regard.
I wish to comment on the existing situation. The ILCU has a particular fund which is purported and is represented as doing what I am trying to achieve. I say without fear of contradiction that it does not do that and was not set up to do so. I will prove this. We need to make provision for savings protection.
At the world congress of credit unions last July, Mr. Pat Neary, the chief executive of the Financial Regulator, talked about the Irish credit union movement and its experience and raised issues of concern to him, for example, increasing delinquency, inadequate technology and issues of governance. I cannot imagine three more fundamental issues that should be of concern to us in that area. Mr. Neary said the situation here was beginning to mirror the international situation and, therefore, we need a savings protection scheme.
What is the situation currently? Currently, the ILCU has a savings protection scheme which is a discretionary fund that does not confer any statutory rights and is not independent. Due to the fact it is not a statutory scheme, it cannot insist its members follow strict instructions with regard to governance and how to run their operation. It is important to note also that a significant number of credit unions — a few dozen, some of which are quite large — are not members of the ILCU and do not have access to the discretionary fund.
The current scheme, therefore, does not do the business of what I am trying to do. It is not ring-fenced from the ILCU and is not a separate stand-alone fund. It has in the past been used to finance other areas. Members may recall problems the ILCU ran into on the introduction of new IT some years back, which cost a lot of money. Money came from the fund to meet those costs. Money also came from the fund to build the headquarters of the ILCU. There was nothing wrong with that as the ILCU was quite entitled to use the money that way.
My complaint is not about that aspect or about how the fund has been used to look after credit unions in difficulty. The current scheme is not independent. It is not statutory, which is a two-way track in that it, first, does not have the statutory authority to demand certain governance procedures in the credit unions and, second, does not give a statutory right of savings protection to savers. Their savings may be protected, if somebody decides to so provide, but there is not a statutory base like that required in every other such group.
There are systemic risks and those of which I spoke are important. The regulator has been clear in raising the issues in various speeches in recent years. Those issues include an increase and worsening bad debt profile, an increased investment risk, obsolete information technology in many cases, and governance and non-compliance with legislation and regulations. These are issues which are arising and being considered.
In addition, as the Minister of State, Deputy Parlon, and I will be aware, it is commendable that the credit unions have significantly developed their services. They now give much larger loans, some of which equate to mortgages in many ways, and many have also started business lending. There is nothing wrong with such services, except they involve new and additional complexity which requires newer and differing underwriting skills which did not exist previously. That is another reason we need to ensure a guarantee on savings and that these services are covered by regulation.
The regulator demands that such a scheme, whether known as a savings guarantee scheme or a savings protection scheme, must be run independently of anybody else, must be completely transparent, which probably goes without saying, and must ensure certainty of operation. Those are not my words. These three elements — independence, transparency and certainty of operation — are being demanded from the regulator and that is simply all that I am asking we provide for on this occasion. There is no easy way out of that in terms of moving the matter forward.
In reply to the debate I will probably return to the issue of where we are headed. It is crucial that we bring a sense of trust and confidence. I want to be able to say, if some time there is a difficulty in a credit union or a run on credit union money, that people would be aware there is a guarantee scheme in place. That is a requirement. We remember when the State had to bail out a bank 20 years ago and people thought it could never happen. It is an issue for which we must provide in this case.
An issue raised with me by people who were unhappy with what have I brought forward is that it does not meet all-island requirements. That would also be an issue of great concern to me and I have taken some advice on this subject. There are over 40 credit unions in the North which are members of the ILCU and the protection of the saving protection scheme, SPS, is available to them, but there are many others in the North which are not members. In the South, there are a growing number of credit unions which are not members of the ILCU. This is why there is a need to provide for this on a statutory basis. It is also why we need to look at something that will cover all credit unions on the island, if that is possible. That can be done in a number of ways: through financial instruments, inter-Government agreement, shadow legislation as outlined by the Good Friday Agreement and three or four other ways. Suffice it to say that I have looked carefully at and taken advice on this aspect and it can be done. There is chapter and verse on where this has been done in other countries. In the United States a number of credit unions in a number of states are covered by one guarantee system which is an overarching body, and that is another approach.
The advice that the credit union advisory committee gave to the Minister in 2005 included that it would be an independent savings protection scheme approved by the financial regulator; it would be a separate legal entity under the auspices of the Department of Finance or the regulator; membership would be obligatory on all credit unions in Ireland, which is crucial because every credit union must be a member in order to ensure that people know that their savings will be protected; the rules of compensation be clearly laid out; the power to request special levies of credit unions be given to it; that, crucially, it would have powers of examination and investigation; and that the appointments to the board of the savings protection scheme be made by the Minister for Finance.
On examination and investigation, I did not refer to the worrying anecdotal tales. I discussed them with the ILCU and I agree with it that they are only anecdotal. I want them to remain so. Issues of governance and bad debt provision, which have been raised with me, are enormously worrying and I hope they are not true.
The advice to which I refer forms the beginning. I did not go into the details of the Bill and I will refer to that in reply to Second Stage. In the meantime, I merely wanted to set the scene to state why this is necessary and why every Member of the House should share my concern and support the Bill.
Mr. Quinn: I welcome the Minister of State, Deputy Parlon. I particularly welcome this Bill. I have much pleasure in supporting it, and I commend my colleague, Senator O’Toole, on the work he has done in preparing it for and bringing it before the House. It is unusual for a Senator to do this. Not many Bills have come through from the floor of the House, and he deserves commendation.
No doubt there is a need for legislation. Whether it is this legislation is open to debate. Senator O’Toole has spoken of the investment risks involved. At some time or other, there will be a failure in an organisation involved in trade, commerce, banking or credit unions. It is quite likely there will be a problem and we want to protect ourselves from that problem occurring in the case of credit unions, and the ILCU recognises that. In fact, it states that section 46 of the Credit Union Act 1997 already provides a mechanism whereby a savings protection scheme may be given approval by the Financial Regulator through the Registrar of Credit Unions, and the ILCU is currently engaged in discussions with the registrar with a view to approval of the SPS in a revised format under section 46. My difficulty is that the Act has been on the Statute Book for such a long time and this has not happened. The danger here is that it will not happen unless something pushes a development there.
There are two brief points I wish to make to add to what Senator O’Toole has said. The first is that, while many things have changed in the area of financial services, in the future we will need a successful credit union movement, just as we have needed one in the past. To declare my interest here, my father was one of the founders, in 1965, of the Dún Laoghaire Credit Union which was the third credit union established in the country. If I remember correctly, there was one in County Monaghan, one in Donore, and the Dún Laoghaire one was the third. A lady called Nora Herlihy was one of the organisers and I got to know and admire her a great deal. Those who created the credit union copied it from Canada, if I remember correctly, because there was a need for it at that stage. It has been a booming success. A wonderful job has been done in the credit union movement. The ILCU deserves much credit for it, although, as Senator O’Toole stated, not every credit union is a member of that league.
There is a tendency in some quarters to think that we do not need credit unions any more because there is a plethora of organisations offering credit, to any individual who wants it and, indeed, to many who neither need nor want it. In a few short years we have moved from a position in which many perfectly credit-worthy people found it impossible to get credit from the traditional banks, to one in which those same banks are practically forcing credit on their customers. Meanwhile, competition among lenders has meant that the costs of borrowing remain comparatively low.
Although that is the position today, it will no necessarily be so tomorrow. There is a cycle in financial affairs that is just as reliable as the tide coming in and going out, or the way that night follows day. One can be fully sure that this generous policy of the banks and other mainstream lending institutions will not continue for ever. There will come a time when they will seek to tighten credit, and that is when many ordinary people will find themselves squeezed. Listening to the radio this morning, that time may well be much closer than we think. It is vital, therefore, that we take good care to do everything in our power to preserve and conserve the credit union movement.
The day will come when the country will badly need the credit union movement, even more so than it needs it at present. In difficult times, a self-help organisation, which is essentially what the credit union is, comes into its own. It provides a mechanism for a community to meet modest financial needs within its own resources and without having to involve the not-always-welcome embrace of the financial services industry. In a country in which the main banks exercise such wide and largely unfettered power, it is necessary to defend strongly an institution that serves in many ways to counteract that very influence.
In many important respects it is legitimate to regard credit unions as quite separate and distinct from the financial services industry, but this is not how they would appear to people abroad if a major credit union were to fail and leave its depositors high and dry. It would be regarded as just one more banking failure. I am certain that untold damage would be done to our international reputation if people discovered depositors had lost their money because it was not secured properly by guarantees. Therefore, it is not only the credit unions that have an interest in this legislation but the whole financial services establishment. As long as deposits in credit unions remain unsecured, the financial service industry’s reputation will be on the line and not just that of the credit unions themselves.
Is this the right legislation? Senator O’Toole touched on some points in this regard, particularly regarding governance. I am not sure what will happen but it seems that unless the legislation we pass enforces a very strict governance regime, it is unlikely it will meet requirements. Senator O’Toole said the scheme must be independent and I have little doubt about this. There is a very strong league of Irish credit unions but some credit unions are not involved in it. I accept the point they make that the legislation will only govern the Twenty-six Counties rather than the Thirty-two Counties and we must find a way around this.
The Senator’s third point covered the certainty of operation, which is essential. I was concerned when I read that the proposed structure has not been set up in spite of there being powers to achieve this. If the introduction of this legislation will encourage the Minister to say he will address the matter, be it through this Bill or otherwise, it will serve some purpose. The Bill will achieve our purpose although it will not address a couple of exceptions to which Senator O’Toole has drawn attention.
The Minister should pay attention to this legislation. It may need some tweaking, perhaps on Committee Stage. The ideal would be to accept it and pass it as soon as possible in the knowledge that we will be protecting not only those who invest in credit unions but also the financial institutions in Ireland which would be damaged by a failure in the future. I am confident the credit union movement is doing all it can to ensure there will never be a failure but it is very hard to say there will never be one, regardless of the organisation in question or the service it provides. I therefore believe the Minister should consider seriously accepting the Bill as it stands.
Minister of State at the Department of Finance (Mr. Parlon): 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.
Mr. J. Phelan: I hope my GP is not watching because I am not supposed to be here today. I was somewhat queasy before coming to the House but I am doubly queasy to find that I agree with virtually everything said by the Minister of State at the Department of Finance, Deputy Parlon.
Mr. J. Phelan: I welcome the opportunity to discuss the credit union movement and thank Senator O’Toole for bringing forward this Bill. I am in complete agreement with the Senator on the issue of savings protection but do not agree on the mechanisms he proposes. I am thus in a quandary in that regard. I believe everybody would support the principles behind the Senator’s proposals because an enhanced savings protection scheme is clearly needed. Senator Quinn and the Minister of State referred to the discussions which are taking place between the registrar and the ILCU. These discussions seem to have dragged on for a long period of time, so if this Second Stage debate can provoke a conclusion in the shorter term, we will have achieved something.
The credit union movement has been a strong pillar in the economic development of the country over the past 25 years. Before the arrival of the Celtic tiger and at a time when other financial institutions were not offering credit, the credit union network provided loans to thousands of people. The credit union movement deserves credit for the successful efforts it has made during its history. Approximately €12 billion is held currently in credit union savings accounts by more than 2 million members. I confess that I do not have a credit union account because the movement has not had a strong history in my area. However, I am familiar with the role of credit unions in rural Ireland. We have discussed in this House and elsewhere the breakdown of rural communities over the years and the issue of bank closures in large rural towns. Credit unions are now the only financial institutions present in many towns. They should be supported and congratulated at every opportunity for the fact that they continue to provide a vital and viable service to the public.
I have raised on a number of occasions in this House the high level of indebtedness in Ireland. In the past two years, an additional €118 billion in debts was accrued by the citizens of this country. That is a startling amount of money. I would be positively disposed to any legislation, such as this Bill, which would offer protection to credit union members. I have a number of reservations, however.
Senator O’Toole referred to the all-Ireland nature of the credit union movement, which we should promote at every turn. We should ensure that whatever framework is put in place extends across the 32 counties because one of the feathers in the cap of the Irish League of Credit Unions is its Thirty-two County basis. I also concur with the Minister of State that it does not make sense to propose new legislation while the discussions are ongoing. We should await the conclusion of the discussions and hope they will bear fruit sooner rather than later.
The Bill also proposes the establishment of a credit union savings protection agency. Were such an organisation to come into being, the issue of its operation would require discussion at some length in this House.
I express my wholehearted support for the principle of protecting people’s savings in credit unions. However, I am unsure whether the Bill as proposed is the correct mechanism to so do. Members should wait for the conclusion of the discussions between the registrar and the representatives of the credit unions on the establishment of an agreed mechanism for savings protection. That route should be taken if it can be achieved in the short term.
I again commend Senator O’Toole on introducing this Bill before the House, thus facilitating the opportunity to have this debate. However, Members probably should hold fire until the conclusion of the discussions between the registrar and the credit union representatives.
Dr. Mansergh: I welcome the Minister of State to the House. I also welcome the discussion afforded by this Bill. As I noted last Wednesday, I thoroughly approve of the introduction by Members, be they Government, Opposition or Independent, of legislation or Private Members’ Bills. Such legislation can stimulate discussion and the deliberative process and can give a push towards a destination. On that basis, I congratulate Senator O’Toole on introducing this detailed Bill.
All Members recognise the invaluable social role played by credit unions in Ireland and I welcome the expanded limits that have been agreed with the Government that improve the credit unions’ lending capacity. The importance of credit unions, particularly in small or medium-sized towns, has been pointed out. It is worth noting that their role was discussed in some detail by the Oireachtas Joint Committee on Finance and the Public Service, of which both Senator O’Toole and I are members. The joint committee had the opportunity to listen to representatives of the credit unions.
It is a proud achievement that, to date, no member of a credit union has experienced loss of their shares or deposits and no credit union has become insolvent. However, particularly given the current high propensity to borrow, this is not to say there are no future dangers that must be guarded against and it is questionable whether there is sufficient protection in this regard. This is generally recognised, as is the need to improve the safety net provided by the savings protection scheme, which is really a stabilisation fund rather than a guarantee of individual savings.
However, the mechanism for so doing is open to question. A detailed consultative process involving the credit unions and the Department of Finance is under way. As the Minister of State has pointed out, the ongoing discussions are making progress in this regard. Consequently, it is open to doubt whether, in a literal sense, a parallel initiative such as this is apropos, especially one that does not command the complete consensus of the credit union movement. Although the Minister of State has outlined the reasons the Government side cannot support the Bill, this does not detract from the value of its introduction for discussion by Senator O’Toole.
Since there may not be a Committee Stage debate on this Bill, it might be worth making one of two points of detail on the Bill. Section 5(2) proposes to give the regulator ultimate power to change the memorandum and articles of association of the new company. However, there is no mention of any consultation process with credit unions or the wider movement. Section 6 mentions expenses that could be taken out of each credit union’s contribution by the company. However, it could be argued that each member’s contribution to the company should be ring-fenced and held as a liability due back to each credit union.
Section 8 proposes to give the company the power to invest according to the rules set down by its board. Arguably however, it should be subject to the same guidelines as laid down in the regulator’s investment guidelines for credit unions. Section 10 states that the new company should be exempt from capital gains tax. However, as credit unions are subject to capital gains tax on gains made on the sale of investments, there may be some inconsistency in this regard. Moreover, there is no mention of value added tax in respect of the new company.
Section 12 deals with the appointment of directors. Arguably, individual credit unions, the Irish League of Credit Unions and the wider movement should be entitled to nominate suitable candidates for the position of director in the new company. In respect of section 12, I am surprised by Senator O’Toole’s exclusion of members of local authorities. Perhaps it is because as an Independent Member, he does not face the same electorate as those who are elected on the panels. This is a sore point with most Members and was not covered in his speech. I do not understand the rationale. If someone is properly qualified and may be involved——
Dr. Mansergh: I refer to section 12(9)(e), which excludes those who have been “nominated as a candidate for election as a member of a local authority”. Unless I have misread the provision, this constitutes an exclusion of local authority members.
Mr. O’Toole: It was a mistake on my part and I guarantee it will be removed on Committee Stage. While I specified the removal of references to Deputies and Senators, I was taken at my word and the reference to local authorities was retained.
Dr. Mansergh: Section 19 states that all credit unions must abide by the new company’s rules. At the very least, such rules must be agreed by consensus with the credit unions before one begins to impose them. Moreover, there may be difficulties in respect of the Competition Authority’s views. On yesterday’s Order of Business, I was somewhat critical of the Competition Authority. If its position is to be taken too rigorously, no one can combine or associate for any purpose whatever. It seems to me that freedom of association and organisation constitutes a fundamental democratic right. Consequently, Members have not thought through the relationship between the freedom of association and the needs of competition. Most credit unions, whatever side of the fence they are on, consider the contribution of 2% of savings under section 19 to be a stiff imposition and no reference is made to whether interest will accrue on the deposit. Section 21 provides substantial powers to the company to levy additional charges.
The legislation is far from perfect, even in detail, and needs further discussion. The issue boils down to process and everybody is agreed the issue needs to be addressed, but the question is how is it best addressed. Senator O’Toole is a prime participant in the parallel social partnership process and he would perhaps be the first to acknowledge, if he thought about it, that results are best achieved by negotiation, agreement and consensus rather than by legislative imposition.
Mr. McDowell: I am pleased to contribute to the debate. The legislation provides the opportunity for a useful discussion on an issue that demands early resolution. I join others in acknowledging the important and vibrant role of credit unions in our society over many decades. However, their role has changed significantly in recent years. When most credit unions were established, they largely dealt with small savers and they provided loans to those who may have found it difficult to secure loans from commercial financial institutions. Over the years, the limits on borrowings increased dramatically and it is open to credit unions to lend substantial amounts and to take substantial deposits, which has fundamentally changed the nature of a number of them.  Nonetheless, the movement still maintains a non-profit ethos and a number of credit unisons are still run by voluntary labour.
The consensus among Members is that there is a need for a savings protection scheme but it should be acknowledged, as Senator O’Toole has, that the Irish League of Credit Unions runs such a scheme. However, it does not do all that the Senator is trying to achieve in the legislation. The scheme essentially allows the ILCU to intervene to stabilise credit unions if there is a threat to their solvency, but it does not specifically guarantee the savings of shareholders, which is a deficiency. The ILCU will say with confidence that it has discretion under the current scheme to guarantee savings and it did so in the Monaghan case, for example, to ensure there was no further call on the scheme. Nevertheless, that is discretionary and I agree with others that the deposits must be guaranteed and a legal entitlement must be enforceable regarding the guarantee.
It would be useful if the principles underpinning a new scheme were set out given. Everybody agrees a new scheme should be introduced. A compensation element, which is legally enforceable, must be included. An issue arises immediately regarding whether that right should be underpinned by statute. That does not necessarily need to happen but it must be underpinned in some fashion by the State. I have an open mind on whether that should be by way of guarantee, which would involve the Central Bank, or by contract, and I would not have a problem in principle with underpinning this by statute.
The money in any scheme or fund must be ring-fenced for the purpose of compensation and stabilisation. The ILCU or other organisations cannot have access to moneys in a fund provided for the purpose. Senator O’Toole referred to the dispute a number of years ago when moneys that were thought to be available for stabilisation were used for other purposes and that caused rancour within the credit union movement. Clearly there can be no repeat of that. Any fund set aside for the purpose of stabilisation and compensation must be used exclusively for that purpose. To avoid a suspicion or possibility of a conflict of interest, the fund must be administered separately from the ILCU.
An analogy can be drawn between this and the solicitors’ mutual defence fund, of which I am a member. It is a mutual fund which provides professional indemnity insurance for solicitors. All its members are solicitors who are also members of the Law Society, but the fund is administered on another premises by different management and is quite separate from the society. While the membership is similar, separate administrators, premises and responsibility are needed. There must be no possibility of a conflict of interest.
I very much agree with the principle that the scheme not only must be open to all credit unions but also they must be mandated to be part of it. It is conceivable that more than one scheme could be set up and, for example, the ILCU and CUDA could set up separate schemes. That is not desirable and clearly it would be better if only one scheme applied and all credit unions were mandated to be members of it.
The legislation brings up the issue of the general regulation of credit unions. When the Irish Financial Services Regulatory Authority was established, there was much discussion about whether the credit union movement should be brought under its remit. Many credit unions felt at the time that their ethos was substantially different from that of commercial banks and for-profit financial institutions and that IFSRA would be more focused on them. Concern about this remains. There is a feeling that IFSRA considers credit unions in the same light as banks and does not appreciate the difference in ethos. Perhaps that needs to be bedded down. Will the Minister of State comment on whether he is satisfied with the way in which regulation has evolved since IFSRA took responsibility for it a few years ago?
We cannot ignore the fact that the Bill is a product of a split in the credit union movement as a result of a major dispute a number of years ago. Nobody should adjudicate on the split but there is clearly merit in the case put forward by the CUDA and Senator O’Toole, so I do not propose to oppose Second Stage. However, I accept the Minister of State’s comment that it makes no sense to travel parallel roads at the same time. I hope Senator O’Toole’s proposition of the Bill will provide the incentive needed to bring the ongoing talks to a successful conclusion. The Minister of State has set out the basis on which the talks are progressing and no Member will have a difficulty with the principles he set out. Those are largely replicated in the legislation. I hope the debate will provide the incentive needed to reach a successful conclusion because we are all agreed that the ten-year lacuna that has existed since the 1997 Act, which mandated the establishment of such a scheme, is not acceptable.
Mr. Fitzgerald: I do not have gems of wisdom to add but I would like to make a number of appropriate acknowledgements. I welcome the introduction of the Bill which is timely for the reasons set out by previous speakers. The issue has dragged on for too long. I agree with the principle underpinning the legislation and it should give a kick in the transom to the ongoing discussions. This Bill has a significant contribution to make.
There is no doubt legitimate concerns have been articulated in the Bill, which is supported by the CUDA and Senator O’Toole, such as the issue of protection, to which each speaker has adverted. I listened carefully to what Senator McDowell said about whether there is a need for a statutory requirement in regard to protection. I tend to come down in favour of a statutory requirement as protection is vital. Linked to that is knowledge and information, which all branches and members should have. That brings us to transparency. It is quite clear from the little amount I know and from the anecdotal evidence available to me that there is not always transparency in the operations of credit unions.
I acknowledge the phenomenally successful role the credit union movement has played, especially in the social life of the country, as a speaker opposite said. I have been blindly loyal to a financial institution which gave me a student loan in 1967 and I confess, like Senator John Paul Phelan, that I never became a member of a credit union. I admit to blind loyalty to that financial institution, which I will not name.
The credit union movement should be commended by all sides on the manner in which it took up where for-profit organisations, such as banks and other institutions, left off. In that way, it reached out in a very inclusive, caring and supportive way to people in urban and rural Ireland. It played a significant role in ensuring loan sharks did not have the market to themselves. In the absence of credit unions, loan sharks would have had a field day in the bad old 1980s and early 1990s. Thankfully, that was not the case because of the way in which credit unions very effectively filled that vacuum.
There are serious issues, one of which is the fact the CUDA is not in the league. That, in itself, is a very significant factor which must be taken into account. Speakers talked about consensus building. I agree with my colleague that it is very important. Senator O’Toole is one of the great architects of partnership in education and of social partnership. While I acknowledge what the Minister of State said about the wisdom of enabling and facilitating the speedy progression of the talks taking place between the regulator and the league, consensus can only be built if the significant views of the minority of branches are fully taken into account. That is what real partnership is about. While I fully support what the Minister of State said, I urge him to ensure the regulator and the other parties to those talks take full account of the views of the CUDA and branches North and South.
I support the Minister of State’s line at this point. It is sensible, reasonable and logical that parallel talks do not take place. However, we must ensure the talks, as they progress from here, are all-inclusive and that minority concerns as well as the welfare of the membership of credit unions are fully encompassed by those talks.
While I warmly welcome this debate arising from the publication of Senator O’Toole’s Bill, which is a timely and worthwhile initiative, I lean on the side of the Minister of State’s and Senator Mansergh’s view that we grasp the opportunity of the discussion on this Bill to give a kick in the transom to the talks and expedite them. With the development of new products and the extension of credit guidelines in credit unions, it is important these talks are brought to a speedy, effective and all-inclusive conclusion.
Ms White: I welcome the Minister of State and commend Senator O’Toole on taking the initiative and publishing this Bill. Other speakers have probably spoken about the impact credit unions have had in Ireland. I refer, in particular, to the North of Ireland and the role the credit union in Derry played in the foundation of the SDLP. My uncle, Michael Canavan, was one of the founders of the credit union in Derry and of the SDLP. Derry in the late 1950s was a very barren, sparse and lonely city with a visceral feeling of desolation. The credit union gave the people confidence in that they could borrow money and were not isolated. I have also stated at the Joint Committee on Finance and the Public Service what the credit union movement has contributed in the South. Senators O’Toole and Quinn spoke about what it will contribute in the future.
I did not know the Minister of State would not support the Bill. However, we are here to take initiatives and to bring forward Bills. Regardless of whether there is agreement, it is good to have debate. Legislation should not be carved in stone and, as society and circumstances change, it should evolve.
I commend Senator O’Toole who makes a tremendous contribution as a Senator and representative of his organisation. Where does he see his Bill in the context of the all-island nature of the credit union movement? How would it affect members in the North?
Labhrás Ó Murchú: I join other speakers in complimenting Senator O’Toole on bringing forward this Bill. In many ways, it is timely. Its main purpose is to ensure we do not end up closing the door after the horse has bolted. I was a founder member of the credit union in Cashel many years ago. One must look back to the start of the credit union movement to realise the role it has played in the intervening years. In the early years of the credit union movement, people found it especially difficult to deal with the banks. I do not know if they have changed very much in the meantime but they were never really seen as institutions which would help those who were not particularly wealthy, so we needed the credit union movement.
The credit union movement was very much built on voluntary effort. Today, credit unions have staff and fine buildings, and rightly so, but in the early days, it was mostly voluntary effort which brought credit union branches into existence and helped them to develop. It is now a huge financial institution. However, it is the small member who must be considered, acknowledged and protected. I am glad nobody ever lost shares or deposits in a credit union. This is a wonderful achievement. It is not accidental. It happened because the correct structures were in place. Over the years, we saw those structures adapt. I am aware the Registrar of Credit Unions was in touch with the Irish League of Credit Unions. It put forward certain proposals on protecting savings and these will continue to be examined, which is as it should be.
Having stated all that, much of this took place and we were not fully aware of it. Senator O’Toole did a great service to this House and the credit union movement by making us stop and consider where we are. I support the view of the Minster of State. At this stage, we must ensure all those with an interest in this, including credit unions, have an opportunity to bring forward their views and ideas and that we have a forum in which to do so.
Labhrás Ó Murchú: Ultimately however, the credit union movement and individuals must be considered. The only way this can be done is to ensure everybody has a voice in his or her own right. We all received correspondence expressing different points of view. A variation in views was visible in what we received from branches of the Irish League of Credit Unions. There is nothing wrong with this either. If a branch within what is considered the established approach to this problem has a view, it must also be given a voice and the opportunity to ensure it will be dealt with in a proper manner.
I am glad the Bill is before the House for discussion. It is evident that a great deal of work went into it. The Bill may only have so many pages but it is quite clear somebody had an ear very close to the ground and took on board certain views. It is easy to discuss an issue on the Order of Business. It is especially good that we are able to deal with this in a focused way. I know the Government’s position on the Bill. However, I still believe what is in the Bill will not be lost on the Minister of State, the Department or the Government because that is how it should be.
I compliment Senator O’Toole on bringing this forward and providing us with an opportunity to express our views and allow others express their views through us. We also received the up-to-date position from the Government.
Mr. O’Toole: I thank the Minister of State and Senators for their contributions. They were very helpful. The debate progressed the issue substantially. I welcome the point made by Senator Ó Murchú. I also heard differing views from various credit unions. The one aspect which depressed me about the matter was that some people told me their views but asked me not to mention their names. It bothered me because I sensed a type of oppression in terms of putting forward viewpoints. As Senator Ó Murchú stated, it is important to hear various views. This was one reason I wanted to discuss the matter today.
As Senator Mansergh correctly stated, my natural inclination is to negotiate my way through difficulties. However, when matters sit around, as this has, encouragement is needed to move them on. The timescale is important. Senator Quinn made a point which I did not. We only have one and a half major mutual societies in the country, namely the EBS and half another organisation which is about to change. Much as I regret stating it, the EBS will not hold against becoming a plc. Within a short period, credit unions will be the only mutual part of the financial services.
I enjoyed the speech made by the Minister for State. I thank him for agreeing with everything I stated and supporting me on the issues. I could not find any point of difference. The Progressive Democrats learned the game quickly. The Minister of State agreed with me on everything and then opposed my Bill. There is a logic there which escapes me. We Independents are naive in these situations. I notice the issues raised by the Minister of State. He explained the reasons for not supporting the Bill. They were not to do with the content of the Bill but the timescale. He expects proposals to come forward and have something towards the end of March. This is important and I will return to it.
Senator McDowell raised the fact that we do not have a split and we should not do anything to encourage one. Everything we do should be aimed at pulling people together in the long term. I hope this is the case because, as Senator Phelan pointed out, this service is provided to all of Ireland.
The question of statutory compulsion was raised by Senators McDowell, Mansergh and Fitzgerald from various points of view. We must be clear that, if this is established either through the system being negotiated with the Minister of State or through my Bill, ultimately we cannot have a choice and credit unions must be part of it by ensuring and guaranteeing. It does not give offence to the freedom of association provision in the Constitution. It is a different matter. It is protective in that if an entity is to be called a credit union it must be part of it.
In the letter I quoted which was sent from the credit union advisory committee to the Minister of State, the first point made was that a fund must be separate from individual credit unions and credit union associations to lessen the risk of funds being used for purposes not related to insolvency and financial default. Many speakers stated this, and it is important.
I agree with Senator White on the need to create an all-Ireland dimension. I also want to examine it in the context of a number of credit unions in the South and a significant number in the North not being affiliated. This would provide a great opportunity to create an all-Ireland dimension and ensure it through shadow legislation, agreement or financial instruments. It can be done and I was through it before.
I cannot believe Senator Mansergh caught me out on section 12 and I concede completely on it. I conducted that business over the phone and got a drafter to examine it. He put in the traditional reference to TDs, Senators and local authorities. I asked him to remove that reference. He removed the reference to TDs and Senators but allowed in local politicians. I apologise to my colleagues on the other side of the House. It will be removed on Committee Stage and they will not see it again.
All other issues raised by Senator Mansergh are dealt with. Ring fencing, which was also raised by Senator McDowell, is part of the Bill. I accept the power to amend legislation should be clearer and must be dealt with on Committee Stage. Under the Bill, investment is with the approval of the regulatory authority and on the basis of what the regulator states, so this is not an issue. Taxation is not dealt with but it would be unusual to do so. Taxation is a legal instrument in itself and the Bill would be governed by the instruments of taxation and tax law. I dealt with the other issues.
Nobody mentioned the main issue, which is consumer protection. We all implied it. However, I wish to state that this is a consumer protection issue. I was pushed on this because, in a recent case, experts gave evidence to the High Court that the current scheme was deficient. This concerned me and I want legislation which will stand alone. The point of most significance and influence was made by the Minister of State when he stated that he put a time limit on this matter and will know something by 30 March. I did not know this when I drafted the Bill two months ago. It is significant. On that basis, I propose to withdraw the Bill and re-enter it at a later date if I do not see progress. I want to use this to put pressure on people to do what is required. At this time I would, with the leave of the House, propose that the legislation be withdrawn.
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