Deciding on the Davy Proposal

Deciding on the Davy proposal

Context: Credit Union investments in highly illiquid floating rate CMS perpetual bonds having accumulated losses at today’s prices of c40%.

The deal on the table means the credit union will

(a) Crystallise losses incurred to date through granting a call option to Davy at an agreed strike price which Davy at its discretion may call and sell the perpetual bonds at some time in the future – presumably when the bonds realise sufficient excess gain to fund Davy obligations under the 10 year “loss recovery” bond.

(b) Recoup these losses over ten years via a ten year zero coupon bond (the loss recovery bond). This will be funded by Davy who will initially fund at c18% of the face value of the perpetuals. It is anticipated this recovery bond will appreciate to mature at 40% of perpetual bond face value.

(c) Agree to a reduction in the perpetual bond coupon to the ECB rate or the coupon rate whichever is lower. Any excess income over the ECB rate will be for Davy who it seems will use the excess to fund its obligations under the 10 year recovery bond structure.

(d) For at least two years the credit union remains exposed to any further losses below the strike price until Davy exercise its call option and or if the bonds fall in value by more that 15% for more than 60 days permitting the credit union to set aside the call option and sell the bonds itself.

(e) Once Davy exercises the option and sells the perpetual bonds the credit union is exposed to income impairment on 40% of its holding for the remaining term, if any, of the ten year bond. Eg Davy sells in year three – credit union will not earn any income on 40% of the face value of the perpetual bond for 7 years.

On the face of it the bargain is a reasonable proposition that a credit union may consider accepting providing it obtains independent advice. It is most important it demonstrates that it took account of the full context of the proposal including legal, investment, taxation, accounting and compliance issues and risks in making its decision.

It is clear there are compliance and resultant legal issues associated with the initial sale and purchase of the perpetuals and within the structuring of the Davy proposal. However it is highly probable that a regulatory blind eye may apply as the deal is in the interest of credit unions whose boards are obligated to ensure the safety of savers funds. Recovering capital losses on investments, whilst foregoing income, is a reasonable proposition when the alternative scenario is considered.

The alternative is to sue to recover in full in the hope that the courts and or the Financial Ombudsman will rule fully in favour of the credit union. Notwithstanding the Enfield case, success is by no means certain and it would take a very confident board indeed to sue. In doing so the credit union may suffer substantial reputational damage as the full extent of its knowledge and competence in investments will be exposed in a court. It is highly likely that a court may find a credit union partially responsible – in which case the actual result could carry a far higher cost than accepting the Davy proposal. The problem is this is an uncertain outcome with inestimable costs.

The decision is either

(a) accept the proposal in the full knowledge of its risks and costs

(b) reject and sue with its uncertainty and potential for reputational damage

(c) reject, book losses now, sell the perpetual bonds when possible and move on

In the final analysis a credit union board will need to ensure it effects a robust informed decision making process through which its decision can subsequently be shown as being made in the best interests of the credit union.

Many consider that perpetual bonds should never have been sold to or bought by credit unions. They remain innappropriate investments and are no longer permitted under regulatory guidance notes. If it was wrong to sell them, it was also wrong to buy them. Who may have been more wrong than the other is not the issue. What matters now is the commercial reality is dealt with in which case option (a) is the only reasonable way forward.

Perpetual Crisis - The aftermath tackling the fundamentals

In Perpetual Crisis – A fundamental reality that confronts the Movement

The perpetual bond saga is a symptom of far greater problems with the credit union movement, its financial safety net, financial stability and survival.

In pursuing its own agenda, the ILCU has facilitated the decline of credit unions to a point where their financial stability is so threatened there is a very real and growing danger of systemic destabilisation.

The credit union business model is failing fast. The ILCU institutional form has already failed to deliver value. It has become a classic value destroyer whose activities have directly and indirectly resulted in the expropiation of millions in community capital – ISIS and Perpetual Bond losses alone are over €110m.

But its misguided ambition remains: It wants to evolve as a central credit union for all Irish credit unions. Despite nearly 20 years of trying, it is further away now than it has ever been. It remains blind to the reality that confronts it; it is the prime body that has prevented, hampered and frustrated credit union reform and modernisation.

Its misguided ambition was articulated in its submission on investments in 2006:

"The long-term aim of the credit union movement is to build, own and operate a centralised treasury operation around a newly developed, and Financial Regulator approved, unit trust that would manage the credit union movement’s investments. This centralised treasury model is well established in the credit union movements in America, Canada and Australia. The legislators and regulators in these countries insist on the credit unions using the central treasury operation. Such an approach from the equivalent authorities in Ireland would have a very positive effect on the management of investments by credit unions in Ireland.(ILCU Submission on Investments to the Department for Finance 2006)

The central treasury model is not a “unit trust” in any of these countries. Once again, as with Deposit Insurance, the ILCU was playing fast and loose with financial stability concepts to benefit its own agenda.

Both the CIM and CMTF (Unit Trust) are unregulated and unsupervised as “central credit union entities”. Of course the CMTF is regulated as is every other authorised collective investment scheme in the state – but it is not a regulated credit union central treasury entity.

Neither the ILCU nor its advisers have any statutory role, responsibility or accountability for the central management of credit union funds. Many consider it is highly imprudent of the Irish government to continue to allow for such an unregulated unsupervised system.

Central treasury operations are provided by “Central Credit Unions” in the US, Canada and Australia. They are sophisticated regulated banking type operations providing liquidity, wholesale funding and other central services such as access to clearing, etc. The are empowered and incorporated under credit union legislation and are regulated and supervised by credit union regulators.

They operate as a credit union “central banker” many probiding quasi lender of last resort(LOLR) facilities - some are backed by the full faith and credit of the state. In some cases such support is indirect through deposit insurance schemes (Canada).

In Canada and Australia these central credit unions are operating on a similar basis to the federal RaboBank or German/ Austrian Raiffeisen co-operative models. For example RaboBank is a bank owned by 400 odd small co-operative banks.

Centrals have robust governance systems including risk governance, management and internal controls. They even have ratings -the Australians issued a bond in 2006 which carried in part a “AAA” rating. Their existence is the reason why credit unions provide mortgages as they can access to wholesale funding required to support mortgage books.

Canadian and Australian Centrals own subsidiaries that are brokerages, insurance companies, credit card issuers etc. They provide access to clearing and a host of IT based products that credit unions on their own could never hope to provide.

The US differs due to scale and history – but all states have a central etc. Other central services are provided by different entities called CUSO’s. These are companies owned by credit unions such as IT companies, wealth management etc and provide services to their owners and other credit unions.

Centrals actively promote, facilitate and finance rationalisation (mergers) which has seen the reduction in numbers of credit unions – but not outlets or customers: the latter two have grown not shrunk as has the breadth and scope of products and services offered.

Central credit unions are a necessary component of a well designed financial safety net. Credit unions are obligated to place all of or a significant portion of excess funds with them. Centrals stand alone and are specifically legislated for and regulated by credit union regulators. They are viewed as critical components of governmental policy in the control of credit union risk taking and protection of savers funds. Their existence has allowed credit unions to offer better products and services – mortgages etc. Such entities are fundamental to the design of the financial safety net, ensuring credit union financial stability and growth.

Such a system is a huge missing piece in Ireland along with a state owned deposit insurance (guarantee) scheme.

If a central credit union system is ever to be developed it cannot sit within the ILCU system. However there is no reason why existing services provided by the ILCU cannot sit within a Central, as is the case in Canada or separate as in US. In Canada, Centrals also act as trade bodies – but whilst owned by credit unions they are not controlled or dominated by them in the way the ILCU is dominated by its members. Governance is what would be expected of incorporated bodies of such national importance to financial stability.

Developing a similar system here will require a fundamental shift in Irish credit unionist thinking about “independence” and a mind shift towards a federalist subsidiarity. Everywhere else laws are written to establish and empower central credit unions and similar entities. The same will have to happen here if credit unions are to survive.

But the ILCU won’t hear of it. It has a strategy to evolve into the RaboBank of all Irish credit unions, North and South. The problem is it’s starting 30 years behind the game line and hasn’t the resources or professional competence to build the system. Neither has it the trust and commitment of its member credit unions. Critically it hasn’t the reputational capital to persuade government either here or the UK to legislate to allow it to become a central credit union entity. It insists on trying to manufacture a silk purse from a sows ear.

The fundamental issue is this. The credit union institutional collaborative system, the ILCU, is the real problem. Far less than the sum of its parts, it is a failed entity – a classic value destroyer. Unless this problem is tackled, it will remain what it has been for over 20 years the single greatest road block to a sustainable future for Irish credit unions.

Irish credit unionists need to develop new federated structures through which they truly co-operate to survive. Government will have to heed the perpetual wake up call by designing and implementing a proper financial safety net. If not the perpetual saga of one crisis after another will continue and credit unions will eventually disappear.

Hong Kong in July !

Hong Kong Photo Gallery - some familiar faces

http://www.woccu.org/events/wcuc/wcuc_photogallery

Fresh from the Annual Conference credit unionists are looking forward to their annual jolly abroad.

Last year a well known Irish credit union activist volunteer boarded the flight to Calgary in Canada wearing a tee shirt festooned with credit union pins from across the world. This year no doubt they are looking forward to adding to their growing collection of pins. It seems about the only thing of value garnered from these international jollies is the ubiquitous credit union pin.

Once again the largest group of international delegates will probably be the Irish credit unionist brigade who this year will travel to Hong Kong for their annual get together.

What isn’t widely known is credit unions foot the bill for these travelling delegates and sometimes their partners. A quick calculation of the cost of a trip, including the conference, comes to somewhere in the region of €4000 per delegate and €2000 for their companion. It is common for 150 or so Irish delegates to attend which amounts to a cost of €600,000 all paid for by their credit unions.

The Irish delegation to these annual events is always one of the largest. The WOCCU World Conference is touted as a developmental opportunity – yet after years of tripping abroad Irish credit unions haven’t introduced one new product or innovation.

So what value has really accrued save the odd credit union pin, photographs, fond memories of nights out and the odd souvenir ?

In a year when credit unions have lost over €95m in investments with many faced with announcing the lowest dividends ever – can credit unions really justify sending so many so far for so little.

see here for previous trips:
http://www.independent.ie/business/habemus-junketus-maximus-469317.html

http://archives.tcm.ie/irishexaminer/2002/06/24/story30669.asp

The strange story of the Regulator and the ILCU Annual Conference.

It is rumored the Regulator chose not to accept the ILCU invitation as he was precluded from addressing its AGM. The ILCU were incensed it seems by his published speech to the National Supervisors Conference which for the first time highlighted in robust frank language the scale of issues faced by the movement.

“The League considers your public comments to be inappropriate and could contribute to undermining public confidence in the credit union movement, especially in light of the recent issues in the financial markets. It is hard to imagine that any other department head would make similar public comments in relation to the financial service providers that he/she regulates, Such treatment of credit unions is unacceptable”[League letter to RCU following his address to the National Supervisors Conference]

Why has the relationship soured? The answer perhaps lies within the at times belligerent and ambiguous advocacy of the ILCU which is rooted in its continuing ambitions to retain a self-regulatory role and evolve a Canadian type in-system central credit union control and dominance of the movement.

“It is important that Regulators concentrate on their goals of regulation and supervision. In the Republic we have seen the intervention of the Registrar into areas which I consider to be outside his remit, such as accounting standards. This is unacceptable but we of course recognise the Registrar as the only credit union regulator and a key stakeholder. The development of regulation must be done as a process of consultation involving all key stakeholders. The implementation of new regulatory standards without proper consultation and engagement is not acceptable and will be resisted. In this regard, it is regrettable that the Registrar has chosen not to attend this meeting.” ( Presidents Address to ILCU Conference 2008)

Such are the words of the ILCU president at this year’s AGM, indicative of the continuing ambiguity of its response to state regulation and supervision. The ILCU behaves as if credit unions have some form of veto on regulatory reform where its actions have consistently frustrated reforms. For example it now accepts the investment guidelines. It initially frustrated their development delaying their introduction for well over a year.

“The investment framework which was negotiated with the Registrar of Credit Unions is one that allows credit unions invest their excess liquidity in a manner which protects the members’ money yet allows for significant income generation. While the ILCU remains concerned as to the language used to describe how the guidelines will be regulated, it is comforted by the Registrar’s commitment to continue to regulate via the Credit Union Act 1997.” (Presidents Speach ILCU Annual Conference 2008)

Firstly the investment framework was not negotiated with the regulator – this is patent nonsense. The Regulator frustrated in its attempt to persuade the adoption of voluntary guidelines with the ILCU, published draft investment guidelines and through a process of consultation with key stakeholders revised them to their final published form. To suggest the ILCU has some form of “negotiation mandate” or for that matter is afforded this position is wrong.

The ILCU has no legislative, regulatory or supervisory mandate nor is afforded any recognition by the state save that of a body expert in credit union affairs that may be consulted – this hardly amounts to “negotiating” for regulatory change. Regulation is the sole remit of the state regulator and one which the ILCU has consistently sought at every turn to undermine.

In its submission to the Joint Committee is quite telling:
“When initially published, the Central Bank and Financial Services Authority of Ireland Bill 2002 contained a provision which stipulated that the Registrar of Credit Unions would not be subject to the control or direction of the regulatory authority, namely, the board of the Financial Regulator, in carrying out or exercising his responsibilities or powers in respect of the registration of credit unions or the supervision of their affairs or activities. This section was removed prior to the enactment of the Bill. Instead, it is now provided that the registrar, through the chief executive, is subject to the control of the regulatory authority and is required to comply with directions given by the authority with respect to the carrying out of his responsibilities and the exercise of his powers…. The ILCU expressed concern about this in late 2002 and early 2003 when the Bill was going through the Houses. However, it was assured that the only concern of the interim authority was with regard to the accountability of the registrar to the CEO of the authority and that if the ILCU had a problem with what the registrar might be doing, the authority would not act. This is clearly not the case in practice. While the ILCU has developed a reasonably efficient working relationship with the registrar, it has serious concerns about the reporting relationship between the registrar, the chief executive of the regulatory authority and the board of the regulatory authority, which now clearly goes beyond the promise of “accountability” only.”(ILCU Joint Committee on Finance and the Public Sector June 2006)

Did it believe that Government was offering a veto to the ILCU of it “didn’t like what the regulator was doing”? Hardly, but to suggest it had is but more of the nonsensical advocacy it has so often managed to shoot itself in the foot with.

It is past time for the ILCU to mature as a representative body: to cease and desist its negative adversarial advocacy reminiscent of 70’s trade unionism or worse still resonant of another from of unionism – that which cried “no surrender”.

Completing the job of “driving the moneylenders from our communities” may be laudable mission – but surely the primary mission must be to ensure the sustainability of credit unions.

It is important that the reputational capital of the credit union movement is improved – it most certainly has been severely dented by recent media stories – many of which are highlighted on this blog. Continuing to whinge, complain about and attack the Financial Regulator undermines reputational capital further.

Most people realise that credit unions have failed to make the business case for greater flexibility and also understand the risks to credit union instability – some highlight these risks in a genuine effort to get people to wake up and take action.

Looking good and sounding good is rather easy – doing good is where the challenge lies. Professional advocacy is all about persuading and influencing others to take action favourable to your position. The ILCU it appears has a long way to go to repair the consistent damage it has facilitated to credit union reputational capital.

Surely it is in the best interests of the credit union movement that robust effective and effective supervision and regulation underpins financial stability – yet we read of change being resisted unless it is agreed change – this is not a relationship that depends on agreement and voting – credit unionism is not trade unionism.

The state rightfully legislates, regulates and supervises credit institutions – to suggest that credit unions should resist change unless agreed is patent nonsense. To suggest that change be resisted unless there is prior consultation is also nonsense. One has to create the conditions in which consultation is valued and appreciated rather than sustain the conditions in which consultation becomes procrastination and obdurate refusal to recognise and work with a reality they threatens the future of credit unions.

Neither the Regulator nor Government were responsible for the ISIS crisis, increasing credit union instability or investment losses. In contrast the ILCU mandate includes stabilisation supervision, business model development and central investment management. Rather than deflecting attention away from its failings it should address where the real problems lie and start doing something about them.

Captivity and the deficient Credit Union Financial Safety Net

It is unbelievable but true that not one euro of the billions saved by ordinary Irish people in their credit unions is guaranteed should a credit union fail. It is a fact of life that credit unions do fail. But people have been lulled into a false sense of security as an Irish credit union hasn’t failed yet.

The undeniable fact is this. Credit union savers are unduly exposed to risks – only credit union reserves and a controversial stabilisation fund stand between them and the loss of some or all of their savings. The most vulnerable are elderly savers who have their entire life savings in their local credit union.

This risk scenario is a result of political and regulatory captivity of the interests of the Irish League of Credit Unions (ILCU). Captivity can be described as designing laws and regulation and implementing them for the benefit of the industry – frequently to the detriment of the public at large. The absence of a statutory deposit guarantee scheme for the millions who save with Irish credit unions is clearly detrimental to every saver.

Schemes that provide a guarantee are commonly called Deposit Insurance which is a term used and understood internationally. Here in Ireland the Irish Deposit Guarantee scheme has since 1995 provided an explicit limited guarantee to all savers of credit institutions authorised by the Central Bank of Ireland.

Banks and building societies must be members or else their authorisation will be withdrawn. Where they are authorised by in another EU state they must be members of its national scheme. For example AIB, Bank of Ireland, Anglo Irish Bank, EBS are members of the Irish scheme, RaboDirect a member of the Dutch scheme and NIB a member of the Danish scheme.

The design of financial safety nets is critical to ensuring financial stability of credit unions. Irish regulatory authority’s admission that there is come way to go before compliance is achieved is testament to years of self-regulation in which optional compliance was the accepted norm.

This legacy remains a serious issue. At a credit union AGM this year it admitted to non-compliance in both investments and lending. An attending ILCU director and member if its SPS administration committee, in the face of questions over a savings guarantee, provided a verbal (but not written) assurance that the credit union would never be permitted to fail. It was ILCU policy in action which says that SPS support will be provided even where compliance has not been achieved nor will be achieved for the good of the movement. This policy amounts to a blank cheque, underwriting practices that continue to expose savers funds to undue risks. The fact is the ILCU hasn’t the financial resources, competence or standing to provide such an absolute assurance, which amounts to a guarantee – verbal or otherwise.

What’s more it knows this, yet persists in masquerading itself as a deposit insurer. Yet another example of policy in action are statements on ILCU and its members websites that state that “savings are insured”, “savings are protected under the ILCU SPS” and “savings are guaranteed by the ILCU SPS” without providing a scintilla of information as to how such insurance and protection is provided for.


Why credit union savers do not enjoy a savings guarantee?

Why is that credit unions are not members of a deposit guarantee scheme? The answer lies within the EU First Banking Directive which says that credit unions are credit institutions but excludes them from its laws. The later EC Directive on Deposit Guarantee Schemes only applies to credit institutions covered by the First Banking Directive. So when the Deposit Guarantee Directive was transposed into Irish law in 1995, credit unions were of course excluded.

Not so in the UK, its government, as a matter of sound public policy included credit unions under its scheme the FSCS (Fianancial Services Compensation Scheme) even though it was not obliged to do so. As credit unions in Northern Ireland are governed and regulated differently they were excluded from the FSCS. The reason being that FSCS membership is dependent on being regulated by the FSA (Financial Services Authority)– credit unions in Northern Ireland remain regulated by a different body.

The situation is this. Credit unions in Ireland are not members of a deposit guarantee scheme and credit unions in Northern Ireland are not members of a guarantee scheme. Howver in Northern Ireland should credit union regulation switch to the FSA then credit unions would automatically be covered under the FSCS. Not so in the Republic as its legislation is quite different.

In fact it’s a bit of a mess. Irish laws governing credit unions date to 1997. At this time the EC directive on deposit guarantee schemes was in place. The ’97 CU ACT included provisions for what was termed a “savings protection scheme” but not a “savings guarantee scheme”. The difference between protection and guarantee was quite important for considering the subsequent recognition of the the ILCU SPS.

Under 1995 EU deposit guarantee grandfathering provisions: “A Member State may, however, exempt a credit institution from the obligation to belong to a deposit-guarantee scheme where that credit institution belongs to a system which protects the credit institution itself and in particular ensures its liquidity and solvency, thus guaranteeing protection for depositors at least equivalent to that provided by a deposit-guarantee scheme…. the system must be designed to prevent deposits with credit institutions belonging to the system from becoming unavailable and have the resources necessary for that purpose at its disposal”

This permission was possible only where the scheme had been in operation and had been lawfully approved before the Directive was enforced. Furthermore the Directive said that schemes under the control of professional organisations were permissible. However the use of the word protection was clearly meant to mean deposit guarantee.

EU Directive : Protection = Deposit Guarantee
Irish Deposit Guarantee Scheme: Protection = Statutory Deposit Guarantee

At the same time the ILCU had been operating a credit union stabilisation scheme since 1989 which it had called a “Savings Protection Scheme”. But it was careful not to call its scheme a stabilisation scheme – instead it adapted “savings protection” for its own use, playing fast and loose with what it meant ever since.

Credit union stabilisation schemes are not deposit guarantee or deposit insurance schemes. They are schemes that might provide assistance to a troubled credit union. This means they are discretionary. Usually there were used to provide short term liquidity or capital to a credit union experiencing difficulty – developed in the US, in their original from they provided capital or solvency grants to credit unions.

They disappeared from use in the US in the early 1970’s after US credit unions successfully lobbied for state deposit insurance. Some private schemes evolved but these have all but dissappeared following the Rhode Island crisis in 1992 in which a rational run caused by the collapse of the states private insurance scheme forced closure of all credit unions. There is only one remaining private insurer and it has been criticised for not having the financial resources to face a systemic crisis. Those who drafted the Irish CU ACT 1997 shuld have been aware of the Rhode Island crisis and collapse of RISDIC, its credit union owned and governed private deposit insurance company.

From 1989 to 2007 the ILCU represented its stabilisation scheme as a form of deposit insurance, which it clearly wanted people to believe it was by bolting on a discretionary possibility of savers compensation. Whether it realised it or not it had created a mutant deposit insurance scheme which to this day exposes the ILCU and the movement to quite serious risk. Whilst a discretionary scheme, in practice ILCU discretion can really only ever be exercised one way – as the first time the ILCU ever decides not to support a credit union or pay out to savers, all confidence will be lost in credit unions. The ILCU has been caught in a bind of its own making without ever having structured its scheme as a proper stabilisation or deposit insurance scheme.

Its masquerade of “stabilisation” as a form of “deposit insurance” was eventually exposed in expert testimony in the High Court in 2004. Expert witnesses for both the ILCU and the Competition Authority said the SPS was not a deposit insurance scheme. In its Supreme Court appeal the ILCU itself finally admitted to what the scheme was – a credit union stabilisation scheme, nothing more and nothing less. It did so because if it had maintained its scheme was intended to be deposit insurance with may have lost its appeal.

“The ILCU took advice on these matters from various legal, accountancy and taxation consultants and decided in 1987 not to proceed with a guarantee scheme but to develop the stabilisation scheme and call it a Savings Protection Scheme…..The essence of it is that the SPS is a stabilisation mechanism by which credit unions themselves through the ILCU monitor and advise credit unions as to their management and operation, provide remedial help to credit unions who are weak in these areas and may (at the discretion of the ILCU) provide financial assistance to an individual credit union in trouble by allowing it to draw on the SPS Fund for this purpose. This assistance may be a loan, a guarantee or (more rarely) a cash transfer. No credit union has any entitlement as of right to any such financial assistance and has no proprietary interest in the stabilisation reserve such as would entitle any individual credit union to “withdraw” any part of the SPS Fund. Indeed, part of the essence of a SPS Fund is that the persons who participate in an SPS cannot withdraw money from the reserve because if they could do so, the reserve would be depleted and the scheme would be self-defeating” (ILCU SC Submission 2006)

While the ILCU SPS might appear to be mildly similar to the schemes allowed for grandfathering under the EC directive there are quite stark differences. The first is the discretionary nature of the SPS, the second its use, governance, ownership, control, funding & structure and the third it was not approved or recognised by the Central Bank (the competent authority under the Directive). It quite clearly would not have qualified under the EC Directive in 1997. Nor would it qualify for approval today under the EC Directive.

ILCU SPS: Protection = an unregulated, unapproved, underfunded discretionary stabilisation fund to support credit union liquidity and solvency + bolted on discretionary compensation.

Since 1997 deposit insurance has moved on. The preferred option of the IMF and International Stability Forum is for government backed explicit deposit insurance in all but the strongest of financial systems. EU deposit guarantee provisions have been criticised as being too ambiguous and are currently under review. The Northern Rock crisis has focussed minds on financial safety net including deposit insurance provisions.

Roots of political and regulatory captivity -Credit Union Act 1997 – design of the law

In 1997 the EC Deposit Guarantee Directive was very loosely and conveniently interpreted by those who drafted the credit union act. It isn’t surprising then to find its wording may allow for the approval of a scheme designed to provide liquidity and solvency supports equivalent to a deposit guarantee. The use of the words “savings protection” and not “savings guarantee” were critical to allow for the subsequent approval of the ILCU stabilisation scheme within the “broad framework of the EU Directive”.

It is a classic case of regulatory and political captivity. Section 46 of the credit union act was designed for the benefit of the ILCU to the detriment of the public who as savers where to be denied an explicit statutory savings guarantee.

In 1997 the ILCU fought for statutory recognition for its role as a self-regulatory body and approval of its SPS. Its ambition was to become an in-system regulator and stabilisation provider similar to the Canadian model. Despite intensive lobbying and representations of Fianna Fail TD’s during the Dail debates on the Bill it failed. When enacted the law only recognised the right of the ILCU to use the words “credit union” and its right to be consulted as a body expert on credit unions making it clear it wasn't the only expert body to be so recognised.

But the wording of section 46 of the Act- the one dealing with “savings protection” remained unaltered. It is this piece of quite deliberately designed law and regulations that has since held Government and The Financial Regulator captive to the detriment of the millions who save with credit unions and the public at large.

Credit Union Act 1997 – enactment of Savings Protection Provisions 2001

The section of the credit union act 1997 that dealt with savings protection wasn’t enacted until 2001. The Ministerial press release is a marvellous example of just how captive the legislature was:

“The main purpose of section 46 is to give the Registrar sufficient powers to deal with the development of suitable and adequate savings protection schemes for those credit unions which are not members of the League of Credit Unions and which do not accordingly enjoy the protection afforded by the League’s own savings protection scheme.”

The wording is carefully worded to imply the ILCU SPS was an approved regulated savings protection scheme- which of course it wasn’t.

At the time the ILCU was facing a two major crisis. The first was its use of the SPS to fund its failed ISIS IT project and the second a split in the movement as larger credit unions were threatening to leave - they did and established CUDA. It was these credit unions that complained to the Competition Authority which led to the its case against the ILCU for abuse of dominance. The wording of the press release appears to have been quite deliberately targetted at credit unions who were not members of the ILCU and who were threatening to leave.

In its own internal memo the ILCU announced the enactment, using the same wording leading its members to believe the SPS was approved. It then did an unusual thing. It incorporated the precise wording of section 46 into the credit union standard book of rules to describe its SPS. But the SPS is not a savings protection scheme as defined in section 46. So it seems credit unions may be paying into a scheme they are not permitted to pay into.

It gets even messier. The law only allows a credit union participate in an approved scheme – it doesn’t allow them to participate in an unapproved scheme. So if they are participating in an unapproved scheme then their actions seem to be in breach of a law that only permits participation in an approved scheme.

And still messier again. Credit unions are only permitted to do certain things. These things are defined in the law and in the credit union rule book. Rules only take effect when they are registered by the credit union registrar. More evidence of regulatory captivity here as the then registrar, registered a credit union rule which transposes the wording of section 46 into the credit union standard book of rules.

The icing on this very messy cake: A condition of carrying on the business of a credit union (continuing registration) is they must participate in an approved savings protection scheme. They don’t. This means they are apparently in breach of the law whose legal sanctions include prison terms for credit union officers.

The bottom line is the Act says one thing but credit unions are doing something else; which they are not permitted to do.

Just what has Government and the Regulator been doing?

On formation of IFRSA 2003, this body became the credit union regulatory authority and devolves regulation and supervision to a new function called the Registrar of Credit Unions. This move copper fastened state regulation and supervision of credit unions within a super regulator mirroring international developments.

2003
The new regulator assessed financial safety net provisions and regarded the absence of a deposit guarantee as a critical issue. But it has no powers to establish a scheme and only has powers of approval and regulation. It set out the principles by which any scheme must abide if it is to be approved. Since 2003 it has been in almost constant discussions with the ILCU which has been seeking approval of its stabilisation scheme. The Financial Regulator is captive of a law designed to favour the industry trade body.

2004
The Competition Authority case against the ILCU in the High Court, brought into the public domain information that could not longer be ignored – the ILCU SPS was not deposit insurance but a credit union stabilisation scheme. Expert testimony highlighted major issues with the governance, operation, funding and objectives of the scheme. At this time discussions between the Regulator and ILCU were “parked”. They were “unparked” following the High Court ruling.

2006
The Financial Regulator hands have also been bound by the Department for Finance. In 2006 having exhausted discussions with the ILCU, the Regulator produced a draft heads of a bill for a statutory savings guarantee scheme and submitted it to the Department for Finance. At the same time the Credit Union Advisory Council (CUAC) advice favoured a statutory scheme.

This approach was rejected by the Department for Finance, and the Minister “requested” the Financial Regulator to look into a “new” set of proposals from the ILCU. They have since been “in discussions” since late 2006 without coming to a conclusion…rumour is they have once again broken down.

In 2006, the run on Monaghan Credit Union exposed SPS shortcomings and the yawning gap in credit union financial safety net provisions. The legal enforceability of SPS supports became a public issue that led to a run on the credit union. The run only abated after the public assurances of the Financial Regulator.

The Minister was exercised and stated that legal certainty regarding the provision of savings protection was critical – but political captivity remained unaltered as “savings protection” remained deliberately confused with ILCU SPS. The Minister was now playing fast and loose with the meaning of "savings protection".

Instead of seeking a definitive explicit statutory guarantee, the Minister kicked for touch looked for a solution within the current legal context – that is the bad law of the Credit Union Act. It is interesting that at this time no reference was made to the "broad framework of the EC Deposit Directive" – this was introduced as part of defensive Departmental statement in seeking the withdrawal of the O’Toole private members bill in the Seanad 2007 during its second stage hearing.

2007
In March 2007, the Minister said that a conclusion to discussions between the Financial Regulator and ILCU on its 2006 proposals was expected by the end of the month. He said so during the second stage of a Private Members Bill moved by Joe O’Toole and Fergal Quinn, independent senators. The Bill was for laws designed to establish a statutory credit union deposit insurance scheme which included for stabilisation supports and a deposit guarantee for savers . O’Toole withdrew his Bill acknowledging the request from the Minister that ongoing discussions between the Financial Regulator and ILCU should first conclude.

The Ministerial statement to the Seanad is full of the language of political captivity. The SPS is once again quite deliberately confused with savings protection. The broad framework of the EC Directive was thrown in for good measure– it amounted to more than revisionist obfuscation to deflect and stall the O’Toole Bill.

Having effected bad law in 1997 when it failed to provide for a credit union deposit insurance scheme within the context of the EC Directive, Government action further undermined the credit union financial safety net in 1998 when its Trustee Investments Order allowed credit unions invest in instruments they should never have been permitted to invest in. It was a most imprudent slip of the legislatures pen. It seems consideration of credit union prudential regulation fell through the gaps between the Department of Finance and the credit union governing Department for Enterprise and Employment. It is highly probable so too did any consideration of a deposit insurance scheme.

In the autumn of 2007, the Northern Rock crisis threw up a €100m+ credit union exposure. At the same time media stories highlighted credit union loan delinquency and investment losses of over €88m in just two investment instruments. The NR case has since focussed minds on the effective design of financial safety nets. In particular the failure of the FSCS to stave off a rational run is under scrutiny with the likelihood that deposit guarantee levels will substantially increase in the UK. This in turn will create pressure for the Irish government to match these new guarantee levels.

2008
It appears that one again “discussions” between the Financial Regulator and the ILCU have come naught. This can only mean the ILCU cannot agree to reform its SPS to accord with regulatory principles for approval of a private scheme under the control of a professional body.

The ILCU has made great play of the requirement for an “all ireland” solution. It is arguing that any scheme should favour the interests of the institutional form of the credit union movement which can only be to the detriment of the public at large as its solution would deny savers a statutory guarantee – both in the Republic and Northern Ireland. Its argument is based not on what is best for the movement but rather rooted in its ambitions to become an insystem regulator.

Moreover the current state of development of the movement and its immaturity renders it impossible to create a solution. The movement has not built the necessary financial structures and supports required to establish a stand alone private dual jurisdictional deposit insurance system – even less one that is in effect a stabilisation system strong enough to provide the liquidity and solvency support equivalent to or greater than a deposit guarantee. The establishment of such a scheme within the board framework of the EC Directive is impossible. It has been since 1997.

It has been long recognised that members of a credit union are its customers – savers entitled to the same protections as those afforded to customers of other credit institutions. The fact they may also be its shareholders does not remove or dilute their rights as savers. This is why building society customers, who are also their owners, have their savings protected by a deposit guarantee. It is why tens of millions of credit union savers in the US, Canada and the UK are protected by a deposit guarantee.

The ILCU has consistently maintained that credit unions do not have customers they only have members. It claims to represent not only credit unions but people as well. This is why many credit unions continue to debit their customers accounts with their invoiced ILCU affiliation fee. Worse still many debit their customers accounts with their SPS contribution. Credit union customers are paying for the SPS. It is why the ILCU consistently uses the word “members” to mean credit unions and also credit union savers.

Thus it argues its stabilisation scheme supports credit unions and this protects customer’s shareholding (savings). This is an abusive interpretation of what a credit union is - the millions who save with credit unions most definitely do not consider their savings are some form of equity, fully exposed to credit union risks. If they did they would immediately withdraw their savings and move elsewhere.

There is no solution that can be found within the context of current credit union legislation – its savings protection provisions are bad law. They are not designed to favour the public interest but were designed to favour the interests of a trade body and its self-regulatory ambitions. It is bad law and should be repealed.

Escaping from captivity means a new law and regulations designed and implemented in the public interest – a law to create a statutory deposit guarantee for the millions who save with credit unions. Such a law would also provide for credit union stabilisation as it does in Canada and the US. The ILCU could be left with its SPS fund which it could use for a any purpose – to continue to support its members in Northern Ireland or more imaginatively fund the capitalisation and establishment of a central credit union.

Unfortunately it may take a real crisis to expose the deficiencies in the credit union financial safety net resulting from years of political and regulatory captivity.

CUDA a spent penny ?

CUDA a Spent Penny

CUDA’s membership has collapsed from 20 to 10 credit unions. Once heralded as a new beginning, it seems it is now bordering on spent penny status. http://www.cuda.ie/index.html

When established in 2003 it comprised some of the states largest credit unions. By late 2005 Bishopstown, Tralee, Athenry and Lisduggan had left and its CEO had returned to his credit union.

In 2006 under new CEO leadership, CUDA it seems had begun to deliver on its promise with its publication of the “A Call to Action” report, involvement in O’Toole Savings Protection Bill and participation in resolving the thorny lending limits and investment issues.

It was short lived. In early 2007 some of its credit unions refused to fund CUDA’s operations. Its CEO subsequently resigned followed by resignations of members of its management committee and a third of its member credit unions. Some have since re-engaged with the ILCU and some others remain independent of any trade body.

CUDA subsequently re-employed its first CEO in September 2007 who has since announced his departure,to become manager of Dundalk credit union, one of its remaining credit unions.

Today CUDA’s voice has it seems been silenced. Some say it hardly qualifies as a national trade body and is merely a flag of convenience for a disparate few who have little in common save a collective dissaffection with the ILCU. The ILCU is seems is now moving to expel credit unions some of whom are probably members of CUDA - which may lead to more leaving CUDA to re-engage with the ILCU.

Instead of leading the rejuvenation of credit unions for the 21st century, CUDA appears to have become another example of a credit unionist pathology that rejects change in favour of maintaining the way things are.