Is Consumer Protection on the Credit Union Agenda for Change ?

Irish credit unions hold about 16% of total household savings of over a million Irish citizens and lend billions. Of the 434 odd credit unions, the top 150 account for 80% of total savings and loans. The concentration of savings and loans within common bond areas is far higher than the national 16% figure suggests. In many cases individuak credit unions hold savings of over €150m of a local population living within a 15 mile radius. The largest of these have over €250m in savings with a customer base of 20,000+.

Despite their large size, under Irish law credit unions are exempt from EU and Irish state consumer protection legislation and regulations when it comes to their core business of savings and loans. But they are subject to obligatory consumer protection codes when engaged in non-core business. The Irish regulator is currently attempting to introduce a “voluntary” consumer protection code for savings and loans.

Credit Union trade bodies, CUMA, CUAC, IBF and others have recenty responded to the Regulators draft code.

http://www.financialregulator.ie/frame_main.asp?pg=%2Fconsultation%5Fpapers%2Fcp%5Frecs%2Easp&nv=%2Fconsultation_papers%2Fcp_nav.asp

“credit unions have members (not customers / consumers) who own their respective credit unions and unlike the customers / consumers of commercial financial service providers who simply avail of a service, credit union members are uniquely placed to participate in the operation and governance of their credit union.” ILCU Submission July 08

“Putting the member first is at the heart of what Credit Union is all about. It’s what makes Credit Unions different from other financial service providers and significantly explains why Credit Unions are so successful and respected by their members who are not customers or consumers but owners of their Credit Union”. CUDA Submission July 08

CUDA even argues the introduction of a code would have a “serious" negative impact on its members. Indeed it repeats the word serious twice in one sentence. Quite what these serious impacts would be is not explained. Readers are left guessing. So too the ILCU defines “membership” as a unique relationship that requires differing treatment. In short “let us decide what’s best for our members”.

Such redundant rhetoric lies at the heart of credit union leadership failure to realise that members are both owners and customers who are consumers.

Alone in the western world, Irish credit union trade body leadership continues to peddle this rhetoric. CUDA’s submission, when you decipher its opaque language, rejects out of hand any consumer protection code on the basis that credit unions are different. The ILCU adopts a similar line. Both complain “you said you would treat us differently” and both implicitly threaten non-compliance in highlighting the voluntary nature of any code introduced. You can see what’s coming next – obfuscation, delay, procrastination; skills credit union leaders are proficient at.

It is noteworthy indeed that CUMA, CUAC and some others do not pontificate on this platform. These contibutors implicitly accept the member/customer position.

All credit union contributions make great hay out of proposing that the voluntary ethos is the reason why credit unions should not be required to apply the same or equivalent standards of customer care as those that do not deploy a voluntary ethos. They argue because the board is voluntary then customers should not expect the same degree of protection. This is an odd proposition as it could well be argued the voluntary ethos should give rise to far higher standards of consumer protection than that of a for-profit enterprise. So why would credit unions argue the exact opposite?

It must be accepted that members of credit unions are customers and therefore fall within the definition of a consumer. It matters little that they are also owners as this right extends only to the right to a vote, some operational participation and residual ownership benefits on voluntary windup.

The argument that credit union law contains inherent consumer protection is wrong. The law relates to prudential standards of safety and soundness defining a legal entity, its rights and powers. The credit union act is not consumer protection legislation and is constructed to ensure the protection of savers funds rather than their general rights as consumers of financial service products and services.

Credit Unions are already subjected to statutory codes such as mortgage intermediation, insurance intermediation and consumer complaints. Both trade bodies were almost silent during the introduction of these codes. Why should a customer be afforded lower protection when saving or borrowing to the protection they are entitled to should they buy life insurance, arrange a mortgage or buying other products? Why should a code be voluntary?

Quite what voluntary ethos means has never been defined. It appears to be a reflection on the communal or collective collaborative nature of the ownership structuring of the credit union. Why this should impede or impact on the application of general principles of consumer protection has never been explained in a logical and cogent reasoned case. In fact the ILCU lost its argument of "members not being consumers/customers" at EU level when its representations were rejected by the ECB.

The argument appears to be that as owners, customers will be more vigilant in protecting their interests or that the elected board will protect the member as customer’s interests over the interest of the credit union as a legal entity in own right. The term “voluntary ethos” is a credit union philosophical construct that differs from consumer protection principles. If members were so involved in ensuring their interests were being protected by elected boards why then do less than 5% ever turn up at their credit union AGM?

Credit unions should embrace the values inherent within these principles and ensure their service becomes a consumer benchmark all others seek to emulate.

But it seems that such thinking about the member as a customer being at the centre defeats credit union leadership that would prefer to consider members as a variety of mushroom to be protected in the dark and fed a diet of rhetoric.

Millstreet Credit Union and the Tsar of Russia

“Let the Tzar of Russia beware, this Skibbereen Eagle has its eye on him”

It seems the spirit of the Skibbereen Eagle is alive and kicking in Millstreet Co Cork. Its response to the voluntary Consumer Protection Code for Credit Unions brought some light relief during a wet August.

Sir,

As regards the above proposed code, we think it is unnecessary
and unwarranted. There are, already, more than enough rules and regulations
governing credit unions. We are aware that this new code is being pushed by the
EU.

EU thinking is driven by the Liberal-Left, who want to control everything. These people are the heirs to the so-called "Enlightenment" of the 18th Century.

This led on to the French Revolution with its massacres of innocent people and the "Reign of Terror".

Later, this thinking led to the rise of socialism, Marxism, communism and Naziism (National Socialism), all springing from the same root.

We do not need that kind of thinking in Ireland

The people who started credit unions, 40 to 50 years ago, set out to give a service to their communities. If they could have foreseen attempts, over the past few years, to impose totalitarian control on credit unions, they would never have started them, in the first place.

This new code, added to the impositions of recent years, is a recipe for driving all the volunteers out of credit unions; as they will not stand this type of tyranny.

Irish politicians and Irish civil servants seem very anxious to stand on
their heads to prove what good Europeans they are. The voters of Ireland,
recently, sent a message that they are not impressed with this craven mentality.

Irish civil servants, who are paid by Irish taxpayers, should serve the Irish people, and not some foreign masters.

Yours faithfully,

Dermot Kiely
Treasurer

http://www.financialregulator.ie/data/CF_Files/Millstreet%20Parish%20Credit%20Union%20Limited.pdf

Canadian Expose – Debunking the ILCU pipedream

Canadian Expose – Debunking the ILCU pipedream

Canada has evolved a system of regulation, supervision, stabilisation and deposit insurance the ILCU has sought to copy and develop in Ireland. The majority of Irish credit union directors and boards are completely unaware of this ambition. Canadian government and provincial state policy differs dramatically to both Irish and UK government policy in respect of laws, regulation, supervision and deposit insurance. Ireland has adopted a super regulatory system through which power has been devolved to a statutory officer the RCU. It is this office which is responsible for the regulation and supervision of credit unions. However as the CU ACT 1997 was badly designed law as the RCU cannot operate with the degree of flexibility required to respond to the emerging risks to the instability of the credit union sector.

In Canada regulatory powers are split between the overall banking authority, the deposit insurance corporation and provincial central credit unions. These latter bodies are owned by credit unions and act as the credit union central banker. The are incorporated regulated and supervised bodies under Canadian credit union legislation. These central credit unions provide liquidity services to credit unions who must under law deposit their excess funds with the central credit union.

Canadian state authorities have powers of stabilisation exercisable when a credit union is placed under “supervision”. The authority places the credit union “under supervision” where it has wide ranging powers to instruct action to redress financial stress. The authority may devolve its powers to a qualifying credit union central which has demonstrated a capacity and competence to exercise such stabilisation powers. In all cases the overriding concern is that depositors’ funds are secured. Credit Unions may also establish a stabilisation fund to finance interventions under the stabilisation regime and other interventions. Not all provincial centrals have a stabilisation fund. Ontario has a stabilisation central credit union which has supported troubled credit unions, mainly financing merger costs. The Canadian credit union system continues to rationalise with many mergers taking place as small credit unions cede independence merging into a larger credit union.

Central Credit Unions in exercising devolved powers of stabilisation when dealing with credit union placed under “supervision” may provide financial assistance. They do so by borrowing from the Deposit Insurance Scheme – a state body. They may have their own established stabilisation fund – held in a separate body. But the fact is the deposit insurer calls the shots – thus the pre-eminence of protecting deposits is maintained. In turn the deposit insurance scheme is backed by stand by line of credit in effect the full faith and credit of the Canadian government.

Central to the financial stability of Canadian credit unions is the provision of central bank type facilities by central credit unions. CCU’s provide liquidity, ALM, access to the clearing system and inter-credit union funds transfers. They also provide trade body services to their members. The provision of the latter service is secondary to their primary function of central bank type operations. They are externally rated by credit rating agencies and may raise funding from wholesale money markets and issue funding instruments. They have access to government backed stand by lines of credit. In this way the full faith and credit standing of the Canadian state backs the deposit insurance scheme and the operations of credit union central bankers.

It is because these were in place that these entities were permitted under law to exercise powers of stabilisation under credit union supervision regime.

It is not a system designed to secure the credit union at all costs. It differs entirely from the Irish stabilisation system which is designed to secure the future of the credit union at all costs. In practice however rather than failing, Canadian credit unions are merged into larger credit unions. Indeed this has been the experience in the US as well, although the UK has experienced a number of micro (smaller than small) credit unions failing. The existence of deposit guarantees, supervision status and powers to enforce work-outs, all of which are regulated by Government agencies has meant that public confidence in credit union stability and safety of savings remains high – members of troubled credit unions do not run. Instead they vote to merge with safer credit unions.

This is entirely different to the Irish model which has never developed a central credit union entity and does not contain the legal obligation for credit unions to participate in such an arrangement. Whereas centrals appear to be self-regulatory, they can only exercise these powers as they are legally incorporated under credit union laws, which subjects them to strict regulatory oversight.

The ILCU is nothing like a Canadian Central Credit Union. It is an unincorporated entity which is not incorporated in the same way as Canadian central credit unions. It does not act as the credit unions central banker. Does not offer access to the clearing system nor has it an inter-credit union funds transfers.

It does not have devolved powers of stabilisation under a credit union supervision regime. It maintains a stabilisation fund which is not incorporated within a specific regulated legal entity. Its funds remain intermingled with its general funds and thus are open to be used for purposes other than stabilisation and can be attacked by ILCU creditors.

The Irish system contains only a regulatory authority which is hide bound by poor laws that were designed ad-hoc in 1997. Irish law unlike Canadian legislation did not design the financial safety net and focussed only on credit unions and how they would be regulated and supervised. This was despite the existence at the time of Canadian and US legislation that could have and should have been used as a template or benchmark.

The Irish system is critically flawed- to such an extent the very system itself actually undermines it primary objective – to ensure financial stability. It deals only with the individual credit union and did not design the financial safety net context that these independent entities should sit within. Why?

The principal failure of the legislature results from its captivity of the institutional interests of a trade body, the ILCU. The act was mainly designed by the then regulator and the ILCU. The regulator was almost entirely compromised by years of close co-operation with the ILCU as both evolved an all too cosy self-regulatory system under 1966 laws. Furthermore the regulator was overseen by the Department for Enterprise and Employment and not the Department of Finance, which had oversight of credit institutions (banking system). The root of credit union law lay within laws enacted in 1898 for provident societies. It is no surprise then to find the 1997 laws did not deal with the full context of credit unions as credit institutions and the design of an appropriate effective financial safety net. The powers of the regulator are severely and dangerously restricted within primary legislation with no flexibility allowed to urgently respond to risks as they emerged. For example the most recent guidelines on lending and investments are at best voluntary and are not binding on a credit union. In Canada the Deposit Insurance Corporation (a state body) has the powers to issue by-laws that are binding on credit unions. It does not have to resort to changing the primary legalisation. The Irish act was quite deliberately designed to shackle the regulator – why?

Again the trail goes back to the ILCU. Its ambition was statutory recognition as a type of credit union central body. What it was after was its statutory recognition as a self-regulatory body and the statutory recognition of its stabilisation powers and fund. Thus it was important that regulatory flexibility – the setting of by-laws etc should sit within the ILCU system and not within the state system. In effect it wanted the state to devolve powers to it. In this way its strategy would allow it to evolve as a central credit union.

But as with all such moves the ILCU failed to deliver. It was seen then as it is today as an amateur body unable to deliver on its promise.

The pace of development in Canada may see the two largest credit union centrals merging – British Columbia and Ontario creating a larger central banker with greater financial muscle in the marketplace. The Canadian system is similar in some respects to the federated system evolved in Europe – for example the financial co-operative RaboBank. The concept of subsidiarity is both voluntary and obligatory (legal obligation to maintain liquidity with the central credit union).

Recently in its strategy for the movement the ILCU central credit union ambition again re-appears. The ILCU is positioned itself as providing central treasury services and stabilisation. Critical to the development of both is the IS or data required which is of course the main objective of the IT strategy. Taken together then Treasury, Stabilisation and IT create the platform for developing as a central credit union similar to Canada. But and this is the BIG BUT this strategy is not based on a realistic appraisal of capabilities and or the commitment of stakeholders.

The funding costs of establishing such an entity are not provided – the "Strategy for the Movement" document amounts to pieces of a jig saw that don’t quite fit…there are missing pieces. These are the legal basis and more importantly supporting government policy and an empowered regulator. Key to unlocking this ambition are revised laws that permit its development. More importantly and this is where the ILCU have gotten it so badly wrong, will be the establishment of a statutory state backed deposit insurance scheme. This is the missing piece the ILCU remains stubbornly opposed to. It is fundamental part of the structure of the financial safety net and one which has to be in place before anything else can be and will be allowed to develop.

In the final analysis the ILCU and its member credit unions haven’t the ability, resources, competence or commitment to effect the changes needed to make the strategy work. Execution will take a fundamental change in behaviours and attitudes that this generation of directors are simply incapable of making. Most important of all, credit union directors are too old – they will have the energy to make the commitment needed for changes required.

The sector may well experience a major crisis triggering urgent Government intervention. It is this intervention which will decide on the future fate of Irish credit unions. In Canada credit unions buy bank branches – the prospect here is that the opposite may happen. This crisis is not too far off now and may happen within the next 24 months or so. If so it will happen during an economic downturn which will amplify the severity of the intervention required. It won’t be nice. Many credit unions will be forced to rationalise. Indeed the prospect of nationalisation with the sector placed in supervision mode is a likely scenario. If it happens it will happen quickly and with speed. Credit unions and their leadership will not be ready for it and many will resign. Billions may be withdrawn in a combination of overt and silent runs – it is already happening. People are moving their money elsewhere as credit union dividends collapse in 2007 and 2008. No longer do people see credit unions as a safe place to save.

In the past 5 years the stand off between the ILCU and State has undermined credit union stability – pussy footing around with savings protection has denied savers the protection they will look for should a crisis start. One they realise their money is not protected they will take it out – it’s a simple at that. This process may start in earnest later this year when credit unions will announce record reductions in dividends and publish accounts showing large investment losses. It is sad but predictable – the credit crunch effect has speeded up the fateful day when the credit union movement will be faced with its greatest ever challenge – that of survival itself.

Collective Sigh of Relief

Collective Sigh of Relief

Davy’s High Court vindication sets the cat amongst the pigeons. Those familiar with the case were unsurprised at the ruling which found the Ombudsman’s procedures flawed.

This should come as cold comfort indeed to credit union boards and management. Faced with losses which will now be recovered in the majority of cases (it appears all but a handful have accepted the Davy workout), boards are breathing a collective sigh of relief. Until, that is, they get down to the job of deciding on dividends.

All indications are credit unions will pay the lowest dividend in years. In the face of growing high street competition for funds which won’t abate for some time, the credit union failure to structure their business to compete at market rates is causing significant funding problems particularly for those who are over invested in long term investments and finding liquidity a growing problem.

The signs are not so good. Apart from investment losses, rising bad debts and increasing loan delinquency will undermine profits for this year and more particularly next year when credit unions adopt more stringent provisioning rules. Implementation of these new rules has been delayed this year as investment losses began to make themselves heard of. It appears also there was a significant delay in specifying the nature of IT systems changes. Not for the first time untimely implementation underscores the reality that trade bodies should stay out of business they are not competent to participate in.

The greatest danger at this time is the almost complete absence of emergency liquidity and solvency supports for the sector which faces trying times. All eyes are on Q4 when the annual round of credit unions AGM. Boards will face the genuine enquiry of members who have been dismayed and are increasingly questioning their continuing membership of their local credit unions. The prospect of many declaring losses and no dividends looms large.

It appears that few if any boards have recognised the underlying issues highlighted by the credit crunch and related investment losses. Many have never really engaged in proper strategic assessment and structuring of the business.

The question remains just what are credit unions doing about realising a sustainable future?