ILCU Treasury Ambitions in Shreds?

In what appears to be a rancorous divorce, ex-partners Davy and the ILCU are locked in a struggle for credit unions hearts, minds and wallets as they vie for control of credit union investment portfolios. Their eleven year partnership through which they co-manage a fund of €2.3bn ended abruptly as Davy withdrew, opting instead to focus on its relationships with individual credit unions. The partnership called Central Investment Management (CIM) comprises an ongoing fund of c€1.7bn in individual credit union accounts and a €600m collective investment scheme or unit trust called the Central Treasury Trust (CTT).

Whilst Davy has offered to continue to provide support until a new partner is found, its decision to end the relationship raises more questions than it answers. One is thing is clear the ILCU needs a new partner as it is neither an approved deposit taker or regulated investment manager.

On the 2nd October last Davy wrote to the ILCU formally confirming its decision to end its CIM relationship. The following day it announced its decision to credit unions including an assurance it would continue to business with them on an individual basis.

Beaten to the punch, the ILCU countered, claiming that it had requested Davy to resign. This claim was strenuously denied by sources close to Davy who expressed surprise and annoyance on hearing the ILCU had also urged credit unions not commit to doing business with Davy until a new partner is found. The old adage “when in a hole, first stop digging” may well apply as ILCU action could be construed as anti-competitive behavior exposing it once again to scrutiny by the competition authority.

The ILCU/Davy relationship goes back eleven years during which time funds under management grew from about €500m to €2.3bn. As credit unions lending lagged way behind savings growth, the CIM arrangement grabbed a sizeable share of the €7bn in excess credit union funds generating a lucrative income stream for its partners. In 2006 this valuable partnership seemed to have been cooper fastened when it launched a unit trust vehicle, the CTT, promising credit unions instant access to their funds without putting capital at risk. Last month credit unions were shocked to be told instant access would result in capital losses as the credit crunch had taken a sizeable €40m bite out of the €600m CTT fund.

Despite the sundered partnership, Davy remains open to dealing with individual credit unions allowing it to cherry pick rather than having to deal with all 430 credit unions under the CIM arrangement. As a significant number of larger credit unions have solid relationships with Davy they will ignore the ILCU memo which is something Davy is obviously counting on and the ILCU has every reason to fear.

A remarkable feature of the Irish credit union movement has been its failure to evolve central treasury operations similar to those found in the US and Canada where central credit unions (a credit union for credit unions) exist. Called “Centrals”, they are state approved regulated credit union entities providing the pooled liquidity and solvency funding services fundamental to a well designed credit union financial safety net. Davy decision to go its own way could scupper an ILCU long standing strategy to develop similar services for its members. Unless the ILCU retains its member credit unions support and find a new partner quickly its ambitious strategy will fail.

In the struggle for control of credit unions investments Davy appears to have upper hand as the ILCU hunts for a new partner so necessary for it to retain control over billions in credit union funds. It is a struggle that exposes a gap in the credit union safety net that may take Government and regulatory intervention to address as concerns grow over investment losses in the c€7bn held by credit unions in their investment portfolios. The concern is accumulating losses could impact on credit unions balance sheets, profits and dividends which in turn may cause liquidity and solvency problems.