Restructuring of credit unions will bolster them for future or compound their weaknesses
ANALYSIS:A community-driven financial service, the sector is facing a major overhaul
They may have escaped the worst of the banking crisis, but Ireland’s credit unions are nonetheless set to face a period of seismic change, as a combination of stringent corporate governance regulations, an urgent need to modernise and a programme of consolidation to strengthen their financial position gets under way.
For many, such efforts will come not a moment too soon for a sector that has struggled to straddle the divide between a community-driven, volunteer-supported movement and a professional financial services offering.
The changes are coming fast. Last week, the Credit Union Bill 2012 was enacted, giving effect to many of the recommendations of the final report of the Commission on Credit Unions, published last March. It deals with four broad areas: prudential regulation; governance; restructuring and stabilisation; and the provision of support to viable but undercapitalised credit unions.
It is no surprise that a major goal of the Central Bank is to improve governance standards in credit unions at board and management level.
Earlier this week for example, the Community Credit Union was fined €21,000 for a breach of money-laundering and terrorist-financing laws, the first sanction against a credit union for such a breach.
The Central Bank is in negotiations over extending the term of its specially appointed manager at Newbridge Credit Union. Last January, the Central Bank availed of its powers under the Resolution Act to appoint this manager due to concerns about its solvency.
“This is the real world catching up with credit unions,” notes David Jackman, a former regulator with the Financial Services Authority in the UK and an adviser with consultancy firm Resources Global Professionals.
“Regulators are concerned that the sector stays viable and doesn’t get into the trouble that the banking sector has done.”
After all, the sector has had its fair share of concerns over its health. It is facing arrears of some €1 billion while, according to the Central Bank, 10 per cent, or some 40 credit unions, didn’t meet the regulator’s reserve requirement in September 2012.
Fitness and probity
Against this background, the Central Bank announced this week that boards and management of credit unions will now face a fitness-and-probity regime. It has launched a consultation process and plans to introduce the scheme from next July for credit unions with assets greater than €10 million. Smaller credit unions will need to comply two years later. But could this focus on regulatory oversight swing too far in the other direction?
For Kevin Johnson, chief executive of the Credit Union Development Association, which represents 12 credit unions across Ireland, credit unions were not at the centre of the financial crisis. He would like to see “proportionality” when it comes to imposing such a regime on a sector dependant on volunteers.