Credit Unions Tax Free Status

Should Irish Credit Unions continue to enjoy tax-free status?

Taxation status of credit union is rooted in their societal purpose rather than ownership structure. This purpose is the provision of (a) a safe place to save and (b) personal credit to an underserved population. The key question arising is do credit unions continue to fulfil this purpose to the extent that tax-free status should continue?

Today this societal purpose is no longer unique and is largely irrelevant save for those who are socially excluded which amounts to less than 200,000 of an adult population of 2.7m. Millions of people have long had access to basic banking services (savings, loans and transactional accounts).

Credit unions however only provide for savings and loans. They do not provide for transactional accounts nor do they provide 24/7 access to cash accounts or participate in the national money transmission system.

Credit unionists argue they provide social finance. But their argument is based on defining “social finance” as lending to the individual. They claim this amounts to €700m or about 10% of total credit union lending. This figure has never been independently verified and is likely to be a guesstimate. The figure, provided by the ILCU, seems quite odd as MABS says it has c18,000 clients with about €68m in loans out.

Assuming people in this ILCU defined category borrow smaller amounts of money, say up to €5000, then the €700m equates to c140,000 adult borrowers which is about 4.83% of credit union membership. This also amounts to 70% of the defined socially excluded population- makes one wonder who the moneylenders are lending to. Of course people borrow from more than one source, including taxed entities.

Should tax free status be afforded on the basis that only 10% of the loan book is “social finance” by the ILCU definition? Should the status continue if less than 5% of credit union members are social finance borrowers by ILCU definition?

The case for tax free status collapses altogether with employer credit unions, most of which are either state or semi-state employee based. This population have secure pensionable employment and enjoy reasonable levels of income. There is no argument that appears to support their continuing tax free status.

Still again hundreds of credit unions lend less than 40% of savings with many as low as 20%. Their social purpose is more the provision of savings accounts and some over the counter bill payment services – of course many open only a few evenings a week which calls into question service convenience and availability. Should tax free status be afforded these credit unions simply because they provide non-unique local services?

The largest and most successful credit unions are located in what have become solidly middle class common bond areas. It is remarkable how few credit unions exist within socially deprived areas. It is also quite remarkable that many credit unions have created “social fund reserves” that remain unused.

Many would argue the Tiger economy has solved for the purpose of credit unions. They may be right but only if the purpose remains rooted in credit unionists ill-conceived arguments. If middle class credit unionists do not define and deliver on a societal purpose for a modern Ireland then tax free status may become a thing of no value at all.

Credit Union Fiscal Farce

A Credit Union Fiscal Farce

The Irish tax authorities are to insist credit unions return the names of people who have been paid dividends (interest) on non interest taxable accounts. Like many tax regimes, the Irish government taxes interest earned by Irish residents on their savings accounts. It’s called DIRT (Deposit Interest Retention Tax).

The current DIRT rate is 20%. Once paid, the taxpayer has no further liability. But where a person has a non-taxable account, interest earned is subject to their marginal tax rate which is between 0% and 41% depending on their income.

In 2000, in the run up to a general election, Irish Prime Minister Bertie Ahern forced the Minister for Finance, Charlie McCreevy (now EC Commissioner), to shelve his plans to tax credit union dividend payments – he did so as, the ILCU and credit union activists threatened to run candidates in the election. Irish coalition governments at the time were highly vulnerable to independent single ticket candidates being elected and holding the balance of power. http://www.tribune.ie/article.tvt?_scope=TribuneFTF&id=34925&SUBCAT=&SUBCATNAME=&DT=20/02/2000%2000:00:00&keywords=credit%20union&FC=

The solution cobbled together allowed credit unions to continue offering non-taxable accounts. This politically captive “solution” created a new Irish phenomena of the “credit union mattress” in which new Tiger wealth would be subsequently squirreled away from the prying eyes of the taxman.
Then Minister for Finance appears to have anticipated subsequent events: http://www.ireland.com/newspaper/frontpage/2000/0309/00030900003.html

Today it is reckoned that billions sit un-taxed in these accounts. Most of this money is not held by the over 65’s and certainly not by the under 18’s. Indeed a lot of it is probably undeclared income of varying legitimate and illegitimate origins.

Why would anyone want to deposit in a non-DIRT account when they could face income tax at their marginal rate? Well the answer is more than likely that the typical self employed credit union member who did very well in the Tiger years continued to use their local credit union to stash the cash.

Of course the ILCU is now quite exercised and publically stating that it doesn’t condone tax evasion – well it could hardly say anything else could it? But its statement comes with a typical ILCU rider – it says that retrospective application of Irish Revenue demand for names back to 2005 wouldn’t be fair on the elderly saver and would lead to an administration nightmare.

So on the one hand the ILCU is implicitly acknowledging that tax evasion has probably occurred but on the other hand, is once again pleading special status based on “elderly savers” and “IT system” problems.

Such a position could be seen as unwittingly providing cover for those who used credit unions to evade the taxman. Many consider it to be a regressive and poorly thought through position and one which the ILCU should immediately stand down.

Whatever the outcome of such regressive activism, it flies in the face of public expectation that financial institutions do not provide safe havens for tax evasion. This is all the more acute as credit unions have enjoyed two significant state fiscal subsidies – credit union profits are not taxed and DIRT free savers accounts.

As the cosy comfort of the non-DIRT mattress is removed, many may well shift savings out their credit unions. Many more may be very angry indeed if their credit union did not explain the taxation implications of non-DIRT accounts.

Could this be what is exercising the minds of leading credit unionists? One could ask another interesting question - have credit union directors availed of non-DIRT accounts?

The tyranny of the dominant director

The tyranny of the dominant director

“The real challenge for credit union people is developing higher levels of personal and group awareness and responsiveness. The single biggest inhibiter of change lies within the cadre of voluntary directors which is why Irish credit unions will inevitably fail."

This is the stark conclusion of leading credit union thinkers in Ireland and internationally.

So far credit union people have not created the structures and evolved the appropriate governance models and systems required to respond to the demands of a modernised society. They have not learned how to craft compelling propositions for their members.

The largest decision or action unit remains the credit union board. These are frequently dominated and controlled by two or three individuals. Few of whom have professional qualifications or experience in business management.

These dominant directors' views, opinions, behaviours and attitudes have all been formed from their experience of the small works of their local credit union and chapters. They remain intensely local and have not evolved a wider commercial collaboration with others. They are convinced their partial view is the right one and as a result they ignore or deny the larger systemic nature of credit union issues. Participation is based upon past memory, which tends to recall a lot of “not” – what did “not” work, what could “not” be funded and so on.

Achievement and recognition is down to how well a person articulates credit union social philosophy and understanding of credit union law, rules and regulations.

Discourse is limited to adversarial debate or point scoring. Few conversations progress to consensual dialogue. An evolved parochial language blinds groups to wider influences where the credit union horizon is no wider than its local parish boundary. Change can only be agreed through a political system of town hall public meetings. Even then agreement is discretionary allowing for opt-outs at credit union level.

Collectively directors ignore and block external realities. They fail to develop intelligence and knowledge and are unaware of anything other than that which exists within the boundary of the credit union. They create the autistic board.

The nonsensical notion of “not-for profit”, defines director reality. Without profit credit unions cannot survive. Profit is required to create reserves, finance investments in infrastructure, new products and services and of course pay dividends. “Profit” is translated into “Surplus” not because of any inherent philosophical reason but to shore up the argument for non-taxable status.

The reality created through language of “surplus” is one where financial performance is unmeasured and unmanaged by credit union boards. Few if any boards are exercised by financial performance standards. Profit is seen as something alien and unworthy of credit unionist attention.

Directors ignore profit, cost, revenue and risk realities that are undermining sustainability. They eschew business management practices such as financial, risk, marketing, operations and human resources. These practices are seen as belonging to the for-profit sectors. The credit union credo of "not for profit but for service" and its language has created the reality for most if not all credit unions. Thus credit unions are not governed as commercial enterprises but rather some form of NGO financial co-operative.

The language of social finance has been adopted for use. Credit union leadership claims social finance lending of €700m but the facts and data do not support this claim is social finance is defined as lending to community enterprises not the individual. But the ILCU alone insists on a its broader definition as lending to the underserved individual – those who cannot access banking services.

This position has in effect left credit unions off the hook in developing innovative responses to social finance. Contrast this to innovative community credit unions in the US, the home of social capital and social finance concepts. Once again the language of credit unionism defines a reality shared only by credit union people. Why is it that millions lie unused in credit union social funds?

Most directors have a passive dependence on a few perceived “knowledgeable ones” from whom they wait for direction or answers. This deference to others retards the capacity of credit unions to innovate or develop because “the many” are constantly waiting for the “few” for decisions and initiation. This is highly evident in the ILCU system in which people have abdicated initiative and creativity to a centralist hierarchy and autocracy that further stultifies creativity and innovation.

The ILCU system is a larger manifestation of board autism. The autistic reality and its deficit thinking are magnified through the chapter structure and onwards to the ILCU board itself. Its board comprises credit union directors many of whom are drawn from small credit unions that are still staffed solely by volunteers, only opening a few evenings a week. The ILCU appears to be more of an association for dominant directors than a credit union trade and development body.

The ILCU is indeed a carbon copy of the autistic credit union board. Deficit thinking is magnified and external reality rejected. In such systems people become more concerned with looking good than doing good and leading change. They become invested in defending their positions, rather than in asking themselves how their thinking is contributing to a solution. They develop defensive postures, seeking to escape blame. Such defensive moves lead to greater separation between people and the problem itself, making it difficult to build trust. People are more concerned with avoiding blame than with discovering new approaches. They are more concerned with looking good than in doing well. People caught in this defensive spiral become masters of what is called “skilled incompetence” – experts at protecting themselves from the risk of learning and failing, thus blind to their own need to learn and change. They get better and better at doing the wrong things. The consequence is a breakdown in relationships and trust.

The ILCU system provides fertile ground for the dominant director to seek wider influence – first as chapter delegate and then to the ILCU board. Their views, opinions and behaviours remain local and parochial – never national. Thus credit union discourse remains routed within the autistic board with all its unawareness and unresponsiveness.

Credit union people must find a way to break out of the negative spiral of deficit thinking. It’s a thinking that blinds them to external realities. The tyranny of the dominant director must be undone as they provide far too many with sustenance derived from celebrating past glories and believing in the rhetoric of the “most successful movement in the world”. Whilst it right to celebrate, it is also right to move on. Looking and sounding good has to give way to doing good.

In the past decade credit unions have funded the the ILCU by over €110m. In this time not one transformative,innovative nor creative initiative has been successfully executed.

There is a need for a new form of collaboration that ensures transformation, innovation and creativity - led by those who are drawn into the future rather than dwelling in the past and who come together and begin the process of change.

Enfield set for feud with ILCU

Enfield to take on Mountstreet – cutting the apron strings ?
http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=MARKETS-qqqm=nav-qqqid=31799-qqqx=1.asp

The Enfield motion launches an exocet missile into the heartland of Irish credit unionism setting the scene for a major family squabble.The enfolding saga comes from an extraordinary public exposition of credit union investment competence and its historic reliance on an organisational system, through which many credit unions have abdicated fiduciary responsibility to an unregulated parental guidance system.

Many consider the Ombudsman has highlighted a fundamental problem in holding that Enfield has no more than layman status. The Ombudsman opinion appears to be based on experience of “credit union people” who it seems cannot be deemed to have a professional competence. What’s more, it appears everyone should know this.

Is this to say that "credit union people" have no more an ability to assess investment risks than the average person in the street? This may well be the case – they may not be competent professionals – but public expectation is that a credit union, as a regulated financial firm, should be a competent firm.

It is an expectation enshrined in legislation. Credit union law clearly implies that credit unions must have investment competence by empowering Boards to make investment decisions. In the same way the law empowers a Board to make lending decisions and other decisions relating to credit union business operations.

What of the Regulators position? It has strongly advised that credit unions pronounce themselves to be retail investors - a self declaratory layman status. Thus the implied official position of the Regulator is that credit unions are no more competent than the average unsophisticated consumer. Additionally the dominant trade body, the ILCU, has also urged credit unions to pronounce layman status.

Its recognition of the reality that credit unions have not achieved levels of organisational competence required of other regulated financial firms. It is a recognition that cuts to the heart of credit union sector safety and soundness.

What of ILCU status as an investor? Is it not itself but a co-operative of credit unions, governed by laypeople who make decisions on the investment of millions in its Savings Protection Fund and its insurance subsidiary? Should the ILCU seek to recover, any investment losses it has incurred through its investments on the same basis as Enfield?

Enfield is probably right to demand an independent review and report but for the wrong reasons and of the wrong body.

It could demand the Regulator do its job and review the totality of regulated and unregulated relationships and systemic risk inherent within the ILCU system.

Credit unions are public interest bodies. The public interest can only be served through an independent review and public report by the statutory body charged with the regulation and supervision of credit unions, the Financial Regulator.

Deposit Insurance and the Irish Credit Union Financial Safety Net

Deposit Insurance and the Irish Credit Union Financial Safety Net

Public confidence in financial firms is dependent on their financial stability. Any loss of public confidence and risks of runs emerge. Financial stability arises from the effective financial safety nets - the combination of regulation, supervision, lender of last resort and deposit insurance provisions.

Irish credit unions have suffered considerable reputational damage of late. Consistent media stories of financial losses, loan delinquencies and regulatory investigations have undermined public confidence in what are increasingly seen as amateur bodies out of date and out of touch with modern society.

Worldwide the development of financial safety nets has resulted in the specification of state regulation and supervision twinned with state deposit insurance as being the preferred option.

Proponents of the “let the markets self-regulate” view have been wholly undermined by the sub-prime crisis which has triggered calls for greater regulation and more robust and effective financial safety nets.

In Ireland the credit union sector holds over €14bn of household savings on deposit. There are 434 odd independent credit unions. Of these the top 100 control 80% of savings with the top 50 having about €6bn. Some of these hold well over €200m in savings of a local population living within the common bond area of ten square miles or so. This concentration of household savings is unparalleled anywhere else.

Despite this concentration of sectoral risk , the Irish state has failed to provide the necessary financial stability supports required of a modern credit union financial safety net.

Irish Credit Union Regulation & Supervision (R&S)
The adequacy of prudential regulation and the legal framework for enforcing regulations provides regulatory authorities with powers to set and enforce limits on risk taking by credit unions. Effective supervision and regulation is regarded as essential to ensure stability by limiting the amount of risk to acceptable levels. Just how effective is Irish credit union R&S?

Irish credit union R&S is hamstrung by legislation designed to reflect credit union risk profile of the 1980’s. It is a system derived from laws enacted in 1997 when credit unions had less than €2bn in consumer savings. Even when enacted, these laws failed to reflect modern regulatory guideline practices and failed to take account of risk based capital, liquidity and other issues. Changes to the few risk limits that exist require primary legislation, effected through a process fraught with trade body politics and lobbying.

It difficult to appreciate R&S effectiveness as the Regulator doesn’t publish any useful information. Transparency which is a cornerstone of financial safety net provisions is almost non-existent. People have no access to information that would inform them of the relative risk profile of their local credit union or the overall sectoral risk profile. Nationally it is impossible to tell the good from the bad. Yet the Irish regulator collects, through its prudential returns, risk performance benchmarking information that could be made public.

Worryingly the Irish Regulator has admitted that there is some way to go to ensure compliance which is seen as an admission of ineffective R&S since 1997 when the state adopted greater legal and regulatory powers.

The parallel existence of an alternative self-regulatory and supervisory body in the form if the ILCU and its Savings Protection system has meant that principal agent and moral hazard risks were not as limited than should have been the case. The continuing ambivalence shown by influencial credit union leaders to the State R&S is rooted in a regressive credit union ideology of self-help, self-regulation and supervision. Beneath the surface is a toxic and dangerous conflict between professional state regulators and amateur volunteers.

The Irish state strengthened credit union R&S in 2003 through the formation of IFSRA and the new statutory regulatory office of the Registrar of Credit Unions. But such was the regulatory and political capture in the decades prior its establishment that it has since struggled to contain credit union risk taking.

Such captivity was starkly highlighted in 2001 when on the enactment of credit union savings protection (deposit insurance) provisions the government announcement implied the ILCU scheme was an approved regulated scheme, when it wasn’t.

Since 2001, Irish credit unions are compulsorily required to participate in an approved regulated savings compensation scheme as a condition of authorisation. As no such scheme exists, every credit union in the state is carrying on business in non-compliance with the law.

This inherited legacy has given rise to regulatory tardiness in response to limiting risks. For example it took IFRSA until late 2006 to publish investment guidelines and 2007 to produce lending guidelines. These guidelines are voluntary as a credit union cannot be legally obligated to comply with them. The same is true of the planned publication of consumer protection and fitness & probity codes.

The overall R&S system is quite unusual. On the one hand credit unions are subject to mandatory regulations in respect of non-core business (mortgage arranging, insurances etc) but remain outside the fold of effective R&S when it comes to their core risk business of savings and loans.

Rules based V Principles based regulation
There is a view that the most effective form of credit union regulation is rules based and not banking type principles based. Banks have the scale, resources, structures and professional competence to apply a principles approach.

But given their size and relative governance, management competence together with limited resource capability, the adoption of credit union principles based approach would result in a multiplicity of inadequate applications and risks.

Some credit union leaders promote a principles approach, positing that credit unions should have maximum flexibility. They argue that they have the sophistication and competence in delivering on complex bank type risk governance and management support systems and structures. This of course is a rather naïve position espoused by some as an excuse for non-compliance behaviour by those who have deliberately ignored the law on the basis that it is out of date.

To be fair this position also reflects a wider credit unionist frustration with laws and regulations that hinder the introduction of more flexible products and services.

It is not at all certain if the Financial Regulator is attuned to principles based risks. A comparison with regulatory approaches in the UK, US and Canada highlights the depth of regulatory guidance versus the Irish system of high level guidelines unsupported by detailed guidance on effective implementation.

Culture of Regulatory Opacity
There is some justification in the view that considers the current regulatory system also reflects the circumspect opaque central bank culture.

Certainly a reading of regulatory publications doesn’t inform people on R&S effectiveness. The Regulator is long on highlighting its activity but quite short on detailing its findings and responses. Consequently it is almost impossible to externally validate R&S effectiveness.

Recent regulatory public commentary has taken on a more strident tone where officials have highlighted concern over safety and soundness issues including investments, lending, credit risk, bad debts, IT and governance.

Delivering on modern credit union Regulation & Supervision

The Irish state must insist that effective modern credit union rules based R&S is implemented and must enact laws that empower IFSRA to deliver. The current state of credit union maturity with all its governance, management and operational challenges requires such an approach.

In time it may be possible to consider principles based regulation.

It is entirely possible to establish an expert group charged with developing and ensuring a modern system of credit union laws, regulation and supervision. There is an urgency required here that the current system of trade body procrastination and obfuscation prevents.

Meanwhile the regulator should improve its guidelines with comprehensive guidance notes similar to the FSA “CRED” and NCUA approaches. The regulator will also need to significantly improve transparency.

Deposit Insurance for Irish Credit Unions
High R&S standards are required for efficient deposit insurance (DI). Solving for a modern R&S system should go hand in hand with the establishment of a well designed system of credit union deposit insurance.

It should be designed based on sound international practice and experience. The preferred option of a state backed scheme is widely recognised as a requisite in all but the strongest of financial systems.

Therefore a credit union DI agency should be a statutory agency and governed as such. It should provide for a guaranteed level of savers compensation in the event of credit union failure and also provide for early stage intervention with high risk credit unions. Its mandate and legal powers, human and financial resources must be appropriate and its actions must be well coordinated with those of IFSRA. Credit Unions should be legally obligated to participate and their regulatory authorisation to carry on business dependent on continuing participation. Withdrawal of DI coverage should trigger regulatory action up to an including withdrawal of authorisation as a credit union.

The commitment to depositor protection should be backed by adequate funding. The arrangements should assure depositors that the guarantee will be honoured and they will be able to obtain rapid access to their funds.

Typically this includes both ex-post and ex-ante funding with credit union schemes. In recognition of the need to an adequate ex-ante protection, funding is in the range of 1.2-2% of insurable deposits. This recognises the concentration of risks inherent in credit union systems and is contrasted with a banks scheme which may require lower ex-ante funding of .2% (Ireland).

In addition provision should be made for reconstitution where a fund is depleted. Emergency funding needs also to apply for example access to state guaranteed stand by lines of credit etc. Such funding is required in crisis situations where the fund is rapidly depleted and where reconstitution or raising additional funding from members is not feasible.

Clearly a private scheme may not have access to state supports and will either be limited in support up to its current fund level or reliant on commercial bank borrowings, if possible to put in place. For this reason the US GAO and NCUA reports to Congress were critical of the one remaining US private credit union deposit insurance agency. Both maintained it did not have the financial resources to sustain a systemic shock.

A Private Deposit Insurance Agency won’t work
The notion of the possibility of converting the current ILCU stabilisation scheme to a DI agency structured as an independent entity is fraught with risks.

Indeed this proposal reflects the continuing ILCU ambition of statutory recognition of its role as a self-regulatory supervisor. It hardly qualifies as a financial stability or consumer protection ambition given the ILCU mandate is to represent its members who are regulated financial service firms. It is quite unusual to find a trade body insisting on a private scheme given the well documented problems elsewhere with such arrangements.

There is little encouraging evidence that such a private credit union trade body controlled DI agency will coordinate its activities closely with the regulator. Indeed the evidence points to a strong probability of interagency conflicts preventing the coordination required.

Credit union trade body mandates have recognised conflicts of interest with DI agency mandates. This is why schemes elsewhere are established on an independent statutory footing. Whilst such DI agencies typically provide for credit union representation, they are legally mandated to deliver on financial stability and consumer protection objectives.

ILCU's leadership maintain that as theirs is an all Ireland movement there must be an all Ireland DI agency. This is to argue that sovereign government has no role to play. Yet the ILCU only represents 60% or so of Northern Ireland credit unions.

Regulation and supervision of Northern Ireland credit unions remains considerably underdeveloped and thus arguably more overly exposed to financial stability risks than credit unions in the Republic of Ireland and Britain. Unlike credit unions in Britain they are not subject to FSA oversight or FCSC membership but could be brought within the remit of the FSA and the FSCS which is a legal provision HMG has provided for. Additionally membership of a private scheme cannot be made compulsory under current legislation in Northern Ireland. This means a private scheme would include some but not all of the insurable deposits and credit unions.

Whatever about the all Ireland dimension, the governance and operation of a private DI agency and interagency coordination problems with regulators and supervisors in two sovereign and differing legal jurisdictions will greatly increase complexity and risks. It is a recipe for interagency conflict that will undermine rather than enhance financial stability.

The truth of the matter of Private DI
The ILCU ambition is to evolve as a Canadian insystem type regulator and DI agency. This ambition flies in the face of Irish government policy underpinning the establishment of IFSRA. It is also at odds with HMG policy which includes credit unions within FSA and FSCS mandates.

The ILCU focus on statutory recognition and stabilizing R&S powers together with central liquidity and treasury ambitions is seen in its continuing ambiguous response towards state R&S and lies at the heart of its abject refusal to consider a state DI agency.

The conclusion is that ILCU leadership believes that they have the competence, resources and professional ability to establish, govern and manage a deposit insurance agency. It sees control over a private DI agency as key to achieving it ambition to become an insystem regulator and supervisor. When read from this perspective, its “Strategy for the Movement” is a manifesto for its own trade body ambitions.

Public Confidence and Trust is vital

The key objective of DI is ensuring public confidence. The public have to trust their savings will be protected. Public confidence and trust will not be engendered through an ILCU controlled private scheme with its core mandate of self-regulation and supervision. The public will not have confidence in such an arrangement.

The financial stability of the Irish credit union sector is exposed to unnecessary risks mainly due to political inaction and a reluctance to face down trade body self interests. Providing for effective laws, efficient R&S and proper DI is the responsibility of government and its agencies. The only solution is a well designed statutory DI agency.

Despite heightened public concern over financial safety net provisions, Irish government policy continues to deny the millions who save with credit unions adequate protection for their savings. It is a form of constructive ambiguity resonant of political capture that exposes the state to full accountability for the safety of over €14bn of household savings held in credit unions. In the absence of an explicit limited state backed DI the publics’ rightful expectation is that its government will provide a 100% guarantee for all credit union deposits should a crisis emerge.

In 2006 Senator Joe O'Toole, a long time credit unionist, published a Bill which if adopted would deliver on a statutory DI agency with a well designed mandate for Irish credit unions and their savers. It is entirely possible for Government to adopt the Bill and ensure its enactment.

Those who are concerned with credit union financial stability should focus their attention on calling for a state backed DI and endorse the O'Toole Bill rather than meekly accepting an ILCU regressive in-system ambition and its private scheme.

Credit union leadesrhip has a duty of care to pass on to the next generation a strong, vibrant credit union system. This includes insisting that Government provides a robust credit union financial safety net of modern laws, effective R&S and statutory Deposit Insurance.

The alternative is an increasing irrelevance and a subsistence existence on the margins of Irish society where a 75th anniversary celebration may not happen.

Time to dismantle and rebuild the Irish credit union system

Time to dismantle and rebuild the Irish credit union system

At the centre of the movement lies a system that has evolved and developed to where it now is in urgent need of reform. To put it simply the ILCU system is a fundamental part of the problem. (CUDA has proven it’s no different, just a more condensed version)

In the past 7 years well over €70m of credit union funds have financed the operations of this system with little or nothing to show for it. The figure rises to well over €110m when ISIS write offs are factored in. Irish credit unions have invested hugely for little or no gain.

Frankly speaking the system has failed to deliver and in its current form is incapable of delivering on the transformation so necessary if credit unions are to survive.

It is not the fault of the people employed in the ILCU system or its board, chapters and member credit union directors and managers.

What has happened is a natural result of people coming to together to get things done. Over time they create structures and ways of doing things which become embedded as a system evolves full of rules, structures, processes and procedures.

Structure and Process becomes more important than Purpose and in time process or the way people have always done things becomes the only sense people can make out of the whole. People learn how to relate to each other, developing a shared language and understanding with all its inbuilt self-perpetuating deficit thinking.

Those who have attended ILCU AGM’s will have experienced how the self-organising system at work with its attention to agenda, standing orders and endless mind-numbing debate on procedures and minor changes to by-laws. Chapter meetings and many board meetings are similar experiences.

It’s a system designed for self-control and manipulation by narrow agendas. Worse still it's a system that stifles discourse, ideas, creativity and change. It’s also a system that has learned how not to learn and how not to make decisions.

Frustration frequently leads to breakaway groups who within a short time begin to replicate the same way of doing things and then fragment.

CUDA is a good example of a breakaway group. CUDA started with 20 members, claiming to be the progressive voice of credit unions, promising a new form of leadership.

It now has only 10 members left some of whom comprised the group that led the charge against the ISIS project. It has become an irrelevant coalition of differing agendas having proven that breakaways don’t work unless there is a real commitment to change. Furthermore it is proof that transformational change cannot be effected by credit union trade associations.

It is time then for the ILCU system to be dismantled and rebuilt as a modern trade association focussed on representation and providing development support services to its members. CUNA, is one of many examples of trade associations that divested their commercial interests. There are may other examples of credit union systems that truly deliver.

ILCU commercial operations should be sold off or wound down. The days of trade associations competing in the provision of insurance and investment services are long over. Leave the matter to open market competition and its many competitors.

ILCU should give up its role as a supervisor and stabilisation fund manager. Credit unions in the US gave up on this in the 1970’s and state deposit protection has not prevented their growth. Arguably state deposit insurance underpinned their continuing success through increasing public confidence in credit unions, promoting professionalisation and creating the financial stability that credit unions have exploited.

The League should promote and facilitate rapid consolidation and rationalisation and persuade boards to merge operations. It should not provide a safety blanket and claim that other cosier structures are possible. Theoretically they are, but everywhere else credit unions have rationalised into bigger operations having the scale and scope to take full advantage of the credit union business model.

Cease attempting to provide a CIM type facility in house. Advocate and facilitate the establishment of a central treasury management facility using the Central Credit Union model or a similar structure. Ensure that is properly state regulated and supervised. Do not seek a commercial interest nor operational or governance influence.

Positively promote the creation of a modern system of credit union state regulation, supervision and deposit protection for credit unions. Creating the pressure that forces Government to deliver on its duty of care to provide state backed compensation for savers and a modern credit union legislative and regulatory system. Forget about trying to become an Canadian type insystem regulator. This policy battle was lost in 1997 and copperfastened in 2003. It is an irreversible reality.

Concentrate on core trade association services such as advocacy, representation, training and development for boards, managers and staff etc. Allow larger credit unions a little more say similar to Leagues everywhere else. This can be done in a fair and equitable way.

Forget about a centralist federalist type movement such as controlling IT and other core business competencies. Modern credit union IT systems already exist elsewhere. There is no need to re-invent the wheel. It’s up to credit unions themselves to ensure they develop the necessary IT and operational capabilities.

Above all, be the principle facilitator and champion for change and help create the conditions that will revitalise the credit union mission and purpose for a modern Ireland. Focus on working with credit unions that are committed and capable of changing. Let the few lead the many as has happened everywhere else.

This would be a good start.

Solving the leaderless vacuum - is there anything to lead ?

Leaderless vacuum - nothing to lead ?

Take a journey back in time. Ireland 1975 when few people owned their own car. Televisions were rented or bought on the HP. Few if any went abroad on holidays. It was a time when most people had just enough to get by and a little left over.

Most people were workers paid weekly having no need for bank services. Banks just didn’t provide financial services to them simply because most people had no need for them. No one invested with insurance companies. Investment Funds etc were unheard of. Life insurance was bought and paid for weekly on the door step. If we borrowed we did so “on the tick or slate”. Chalky was a common nickname.

If you owned your home you were middle class, a second property you were a landlord. We saved what little we had with our local credit union so that we could borrow.

In the 80’s we opened bank accounts so employers could pay us electronically and moved from being paid a wage to a salary. Convenient on the hoof tick became available – the ubiquitous credit card. Then the banks took on the building societies and property ownership became a right for everyone. People didn’t have to queue for mortgages or wait for loans. They had access to cash 24 hours a day through a “hole in the wall”. Still times were tough as we continued to save with our credit union so that we could borrow if the bank didn't lend us the money. We were paying most of what we earned in tax.

Fast forward through the Tiger years. Almost overnight the little money we had became a lot more. We became consumers moving from near impoverished workers to comfortable middle class. We buy financial services because we can afford them. Today, we can shop physically or online 24/7. We buy foreign holiday homes in far away places like South Africa.

We are no longer largely poor. We don’t need to go cap in hand to the credit union and demean ourselves by answering our neighbours all too curious questions. We no longer need to go to what we now see as the "poor mans bank".

Thing is it never was a poor mans bank. It was a people’s bank, a bank for the right time and situation. And it did wonders. A generation financed college education for their children and other meaningful things.

But now many credit unions have become backwaters, remnants’ of what were once vibrant communities that have passed on or grown up and moved away. These are the small cosy savings clubs that open three evenings a week and still staffed by volunteers. Few people borrow anymore as they don’t need to. They are quite literally dying off.

In other cases people have stopped borrowing and continued saving as the demographic profile shifted getting older. These are also savings clubs where for example one well known national employer credit union lends only 18% of its savings base.

Some others have grown as their local communities expanded where they are now dominant providers of loans to a new impoverished working class. Some show signs of exploitation with high loan rates to pay high dividends to their middle class savers. More than a few can be justifiably accused of knowingly exploiting the new poor working class.

Still others have hidden “private banks” for a few local wealthy people. The local man made good who still uses his credit union but for purposes credit unions were not designed for like commercial business lending and speculative building developments.

Many have become the modern Irish mattress where money is hidden from the tax man in non-DIRT share accounts. If this deisgnation were ever renoved there would be a flight of savings!

Our growing wealth has it seems solved for the designs of the credit unions founders.

Yet you can’t help thinking that there is something missing here. Why were credit unions founded, what greater good do these co-operatives represent and why have they lost their way ?

One thing is for sure. They were not founded as social finance vehicles. They couldn’t have been as the concept had yet to be articulated.

Lately and unfortunately credit union leaders have hijacked social finance, twisting its meaning to substantiate special treatment. The Irish credit union is not and never was designed as a vehicle for social finance. To claim it is, is but fresh ideological baggage or argument deflecting people away from the core purpose. Or worse still a “feel good” logic that prevents facing the brutal facts that Irish credit unions have lost their way and are stuck moribund in the mud facing an onrushing tide.

Nor were credit unions designed for the unbanked, the financially excluded, although this is an admirable social need fulfilled by some credit unions.

The core purpose of credit unions is to provide affordable financial services to ordinary people and educate them in the wise use of money. Irish credit unions must re-invent themselves to deliver on this purpose and deal with the brutal business facts facing them today.

Leaderless vacuum - nothing to lead!
One of these brutal facts is credit unions have no leadership. There is, it appears an aspect of national leadership, but this is merely clever messaging where rhetoric replaces thoughtful, purposeful leadership.

Credit union people are it seems incapable of being leaders or followers within the structures they have created for themselves. This structure when viewed is both a control command hierarchy and a democratic process. It has spawned an autocracy that only volunteers could create. An autocracy of the masses, that can only agree on collective actions through complicated voting on endless stream of minor changes to hundreds of arcane rules.

Yet the paradox is that credit union leaders object to rules based regulation when their own rules are the very reason why innovation and creativity have been stifled. In an attempt to deal with this stultifying process the mass voted to have meetings every two years which meant of course that critical decisions would have to wait two years or more ! What business could survive of all its members were required to vote on anything of value and then only every two years? Yet this is how the system works.

Of course aside from leaders there is another requirement of followership - “committing to be led”. Collaboration stops at the main door of the credit union. Beyond it is a structure designed to ensure its continuing local “independence”. The entire system is designed bottom up to ensuring there is no personal accountability …thus there are no leaders for there is nothing to lead.

Boards are off the hook because of their democratic mandate, managers are off the hook because the boards won’t let them lead and the ILCU is off the hook because the boards won’t accept its leadership. It is in fact a leaderless vacuum.

At the heart of the problem too is a failure to create a professional cadre around which the amateur volunteer can coalesce. Credit union professionalism matches the state of development of the sector.

In as much as there are a few good directors there are also good managers. One of the necessary conditions to transformation is having the right people involved. Unfortunately one of the brutal facts is there aren’t enough in place at this time and under current conditions are hardly likely to emerge.

In a sense there is a need to create something out of which change and transformation has the best chance of happening. We know in our bones that this is not the ILCU. Nor is it a CUDA.

Change will require new forms of collaborative enterprise structures that will need to be much more commercial in focus, governed properly and staffed by professionals.

The starting point is to get the right people on board. But who are they ? They are those who can face the brutal facts, are challenged by them and figure out a way to collaborate in co-creating great credit unions. Those who would want their legacy to be “I helped build great credit unions with others”.

There is something in this thought that focuses the mind on what could be rather be than what is. This is the shift people must make if they are to truly lead credit unions in the right direction.

Deciding on this right direction is less important than it might appear at first. Things will start to happen when the right people are engaged. Get them on the bus first and create the environment through which they will begin to define what might be, agree with them and then get out of their way and support them as they build it.