A mainstay of Ireland’s financial services landscape for over 60 years, our credit unions are entering an exciting phase with recent developments presenting new opportunities to adapt and change
Credit unions are an important part of the financial services landscape. With offices a common feature of cities, towns and villages throughout Ireland, they play a key role in the day-to-day finances of many Irish people and communities. There are more than 3.6 million credit union members on the island of Ireland.
A history of credit unions
Credit unions were first established in Ireland in the late 1950s and quickly became a repository for savings and a source of loans for many people. The total value of loans extended by credit unions in the Republic of Ireland is currently around €5 billion, with total savings coming to about €16 billion.
Average sector total reserves, as a percentage of total assets, is approximately 16 percent, which serves to underpin the confidence of their members, particularly in times of uncertainty and disruptive change.
These institutions are not-for-profit financial co-operatives. They are owned and controlled by their members and therefore have a different business model to retail banks. Each credit union is independent, with its own board of directors, charged with overall responsibility for running the credit union.
Because they are part of the financial services sector, credit unions are governed by legislation in Ireland, principally the Credit Union Act 1997, as amended, and regulated by the Central Bank.
Significant amendments to the 1997 Act were introduced by the Credit Union and Co-operation with Overseas Regulators Act 2012, and this is the legislative regime under which credit unions currently operate.
The credit union sector has been relatively stable in terms of any legislative or government policy changes. However, two recent developments, the Credit Union (Amendment) Bill 2022 and the Retail Banking Review (November 2022), present new opportunities for credit unions to adapt and change their business models and enhance their product and service offerings to members.
The Credit Union (Amendment) Bill 2022
The first major legislative change for credit unions since the 2012 Act, the Credit Union (Amendment) Bill 2022 (the Bill) was published on 30 November 2022 following over two years of stakeholder engagement, with over 100 proposals considered. Highly technical and not an easy read, the Bill is currently before the Dáil, where proposals for amendments will be considered.
There is no fixed timeline for enactment and, post-enactment, commencement of sections may occur in phases, with the Central Bank of Ireland having to amend regulations to accommodate the new provisions.
The main provisions of the Bill involve:
- the establishment of ‘corporate credit unions’;
- amending the requirements and qualifications for membership of credit unions;
- altering the scope of permitted investments by credit unions;
- changes to the governance of credit unions;
- maximum interest rates on loans by credit unions;
- provision of services by credit unions to members of other credit unions; and
- participation by credit unions in loans to members of other credit unions.
Collaboration between credit unions
The introduction of ‘corporate credit unions’ should support greater collaboration between credit unions, facilitating a pooling of resources and greater access to funding. A new form of regulated entity, their membership would be restricted to other credit unions, with lending allowed only to those members.
Further collaboration is envisaged with a provision in the Bill allowing all credit unions to refer members to other credit unions to avail of a service that the original credit union does not provide.
While such referral is not mandatory, it is a new option for making additional services available to members—for example, a current account facility where the original credit union may be reluctant to provide this service to all members based on cost or other reasons.
Another provision enabling collaboration allows a credit union to participate in a loan to a member of another credit union. This will facilitate risk sharing associated with the loan and will make it easier for an individual credit union to offer larger loans to its members.
Regarding lending to businesses, and other organisations or associations, there is a further key provision in the Bill for “bodies” (incorporated or unincorporated) to be allowed join a credit union with the same rights and obligations as a “natural person” (member).
This is, however, subject to conditions that a majority of the members of the body would be eligible to join the credit union and the body meets the common bond requirement. Ultimately, this will make it easier for credit unions to lend to such bodies and is principally focused on SMEs.
While none of these changes are mandatory, they do provide new options and opportunities for credit unions.
Governance changes
Regarding changes in governance, two provisions stand out:
- the option to appoint the manager (chief executive officer) of the credit union to the board; and
- reduction of the minimum number of board meetings per year to six, down from the current 10.
The extent to which these changes will be adopted remains to be seen, as many credit union boards may be content with the existing practice.
Where a credit union decides to include its manager as a board member, the Bill proposes that this will be done by their direct appointment to the board and not by election at a general meeting of members. The term can be for any length but cannot extend beyond the individual’s term as manager.
One restriction on the manager as a board member is that they cannot sit on the nomination committee of the credit union, the membership of which is restricted to board members who have been co-opted or elected at general meetings.
Similarly, regarding the frequency of board meetings, the board may be reluctant to change the current practice of having at least one meeting per month, concluding that it cannot adequately carry out its responsibilities with only six board meetings.
Because of the voluntary ethos of credit unions, the historically close involvement of board members with the credit union, and the relatively onerous responsibilities of boards, it may take some time before six board meetings is considered the norm.
Other governance changes proposed by the 2022 Bill include reducing the number of board oversight committee meetings, removing the requirement for the board oversight committee to sign the audited annual accounts, and extending from annually to every three years the review of specific policies by the board.
The Credit Union (Amendment) Bill 2022 includes substantive policy change in the areas of collaboration, members’ services, and governance. It seeks to give more power to credit unions to determine strategy and, when enacted, will require consequential changes to Central Bank regulations.
To fully exploit the options and opportunities enabled by its provisions will require significant work by the sector.
The Retail Banking Review 2022
In November 2022, following its approval by Government, Minister for Finance, Paschal Donohoe, and Minister of State for Financial Services, Credit Unions and Insurance, Sean Fleming, published the report of the Retail Banking Review (the Review).
Driven by the departure of two major banks, Ulster Bank and KBC, this is a broad-ranging review of the retail banking sector in Ireland, including the credit union sector.
In relation to credit unions, the Review states:
“Credit unions have a strong and trusted brand, they are present in communities throughout the country, and have been developing their product offering. The credit unions are already a significant player in consumer credit, and they are making inroads in the current account, mortgages and SME segments of the market. These developments, coupled with their collectively strong levels of capital and deposit bases, leads the Review Team to believe that credit unions could play a greater role in the provision of retail banking products and services in the coming years.”
Referencing the Credit Union (Amendment) Bill 2022, the Review recommends that the credit union sector develop a strategic plan to deliver business model changes that would enable it to sustainably provide a universal product offering to all credit union members. Provided directly or on a referral basis, this would continue to be community-based.
The Review suggests that such a strategic plan should show how credit unions can:
- viably scale their business model in key product areas such as mortgages and SME lending;
- invest in expertise, systems, controls, and processes to deliver standard products and services across all credit unions, while managing any risks arising and continuing to protect members’ savings;
- provide the option of in-branch services for members of all credit unions.
Both the Bill and the Review point to new opportunities for credit unions and demonstrate confidence in their future as part of the Irish financial services sector. For these opportunities to be successfully managed, however, credit unions must continue to maintain high levels of governance so that legislators, the Central Bank, their members, and the wider community can have confidence in the sector.
Credit unions have done much for many people in Ireland for more than 60 years. These developments in legislation and government policy point to their continued and increasing relevance in the years ahead.
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