Reform needed for credit unions

Reform of how Irish credit unions are governed and regulated is needed if the sector is to overcome the financial challenges it faces, a new report said today.

The interim report from the Commission on Credit Unions has proposed a series of reforms, some of which are already in place or planned for Ireland's banks.

Some 27 credit unions out of more than 400 in the State are "seriously under-capitalised" , and 13 failed to meet the 20 per cent regulatory requirement on liquidity, the review found.

The report made a number of recommendations, including retaining the State's deposit guarantee and beginning financial contributions under the scheme, the establishment of a stabilisation fund and developing internal audit functions.

"While the financial challenges faced by individual credit unions and the credit union sector are evident, they are not impossible to overcome," the report said. "However, the challenges highlighted in this report point to a clear need to reform how credit unions are governed and regulated."

Under the proposals put forward by the commission, the Central Bank would have the power to set out the regulations and code of fitness and probity for the credit union sector, and the resolution powers that are being granted to the banking authority under the credit institutions Bill should be considered for credit unions who meet the intervention conditions.

Credit unions should also appoint a risk management and compliance officer, with risk systems addressing lending, liquidity, investment and operational risks. A prudential rule book, which will set out in detail what is required of credit unions, should also be introduced, the report said.

The Credit Union Development Association (CUDA) said it supported the recommendations on governance, particularly those relating to risk management and internal audit.

"The vast majority of credit unions have been able to strengthen their capital position over the years through their own resources which demonstrate the strength and sustainability of the credit union model," said chief executive Kevin Johnson.

"This model allows credit unions to take a long term view and to work with their members in times of difficulty rather than adopting the short term profit maximisation approach of other financial institutions."

President of the Irish League of Credit Unions Jimmy Johnstone said it was necessary to work together to address the challenges facing the sector.

"While many of the difficulties we now face were not of our movement's making, we must now address the shortcomings which are highlighted in this report," he said.

"We must all play a part in successfully implementing the commission's recommendations. We look forward to the genuine consultation, dialogue and engagement that the credit union movement deserves. It is incumbent on us all to ensure that the necessary reforms and development take place."