THE FINANCIAL regulator has criticised credit unions for investing their funds in bonds and equities, saying it was "regrettable" that many of them invested surplus funds "in an unwise fashion".
Credit union registrar Brendan Logue told the annual meeting of the National Supervisors Forum, which represents credit union supervisors, in Killarney that if credit unions invested surplus funds "in a conservative and prudent fashion, and held on behalf of members separately from the affairs of the credit union, the investment losses of the past year could have been avoided".
Credit unions have recorded large losses in investments due to the financial crisis. Mr Logue said about half of all credit union assets were held as investments and this has had "a negative effect on the financial model, profitability and ethos of the movement".
"The idea that community funds should be invested in bonds or equities issued by institutions whose connection to local communities is at best unclear, or even in some cases in derivative products whose operations were not understood by board members, and in contravention of our guidance, is hard to understand."
He said "such ill-conceived strategies have resulted in reduced profitability and dividends in credit unions and in a loss of credibility for the movement". Mr Logue said the regulator supported "a stabilisation scheme or schemes" to protect credit unions in difficulties if it was operated in "an independently and transparently-funded fashion", was clear on how it could be accessed and was supervised by the regulator.
He said a few credit unions had sought to increase their surplus by diverting reserves set aside for future bad debts or other prudent purposes to pay dividends.
"Such actions are neither prudent nor acceptable. It is clear that in the light of the current economic situation that provisions and reserves, especially for bad debts, should be increased." Mr Logue said lending by credit unions was traditionally for personal needs, but in recent years loans have been provided "for business capital, project finance or even, in a small number of cases, for speculative purposes". Lending had changed substantially in some credit unions "without a corresponding improvement in risk-assessment".
