Credit unions not in favour of proposed rule changes

The Irish League of Credit Unions is objecting to proposals by the Irish Financial Services Regulatory Authority (Ifsra) to apply a common consumer protection code to all financial institutions, including credit unions.

Liam O'Dwyer, chief executive of the league, said that the current rules governing credit unions meant that credit unions were "already highly regulated".

Mr O'Dwyer said that "the jury was out" on whether the credit union's ethos as a voluntary, community-based, not-for-profit co-operative movement would remain unscathed by Ifsra's proposed regulations.

The league has previously complained that Ifsra's consultation papers on funding and a unified code of conduct for financial services providers did not show due concern for the distinctive position of credit unions.

It is thought that the league is hoping to avoid "red tape" such as a requirement for financial services providers to give customers "reason why" letters explaining why they have recommended a certain product.

Ifsra, led by the registrar of credit unions, Brendan Logue, is mid-way through a series of meetings throughout the Republic with credit union representatives.

The consultative meetings are focusing on how the movement's future structure might be shaped by amendments to legislation.

Among the issues on the agenda are the future of volunteers in the movement, investment activities, the development of information technology and the restructuring of the savings protection system.

"We are anxious to promote an examination of the structure of the movement with a view to proposing certain reforms," said Mr Logue.

"In this process, we are committed to direct dialogue with the credit unions and with their representative associations in order to develop the greatest consensus possible within the movement," he added.

The credit union movement in the Republic is represented by two associations. The league represents 434 credit unions, while the breakaway Credit Union Development Association (Cuda) represents 20 unions.

Like the league, Cuda is also concerned by Ifsra's proposal to include credit unions in a "one size fits all" consumer protection code.

Ifsra's consumer protection code is still in draft form and is not expected to come into effect until the end of the year. Ifsra is proposing that the code will apply to the core savings and borrowing services of credit unions from 2006.

Interested parties have until April 15th to make a submission to the consultative process. It is likely that "large chunks" of the code will not apply to credit unions, Ifsra's consumer director, Mary O'Dea, has indicated.

"We certainly believe the credit unions provide a valuable role, particularly in relation to financial access. We don't want in any way to affect that," Ms O'Dea said at the launch of the regulator's draft consumer protection code.

"What we do want is to ensure that consumers have the same level of protection wherever they are a customer," Ms O'Dea added. "Why would a customer of a credit union not be entitled to that same protection?"

In the meantime, certain consumer protection principles will be extended to credit unions by amendments to the 1997 Credit Union Act.

From April 1st, credit unions will have to issue members with credit agreements rather than the current promissory notes. The credit unions will be obliged to complete a five-page credit agreement for loans amounts of more than €200.

A programme of more than 70 training sessions for staff of the league-affiliated credit unions is under way.

The extra regulation imposed on credit unions tilts the playing field in favour of the banks, according to Mr O'Dwyer.

"The vast majority of loans granted by the credit unions are for less than €1,000 and no bank will give you a loan for less than that," he said.

The banks instead persuade customers to borrow using overdrafts, which typically have higher interest rates.

From April, credit unions will also be obliged to advertise their APRs - the annual percentage rate of interest - on loans and savings, as banks, building societies and other credit institutions are already obliged to do under the terms of the Consumer Credit Act.

At present, credit unions do not have to advertise this figure. However, they are prevented, under the terms of the Credit Union Act, from charging more than 1 per cent interest per month.

A further change within the movement is the decision of some credit unions to apply for membership of the Irish Credit Bureau (ICB), which allows them to check a member's history of borrowing at other institutions and potentially lower their exposure to bad debts.

Traditionally, credit unions have remained outside the ICB, thereby acting as a valuable source of affordable credit for people who might be deemed a credit risk by mainstream institutions.