Enhanced Regulatory Requirements for Credit Unions
On 1 January the Credit Union Act 1997 (Regulatory Requirements) Regulations 2016 (the “Regulations”) came into effect.
The Regulations are the latest stage in the process of strengthening the regulatory framework for Credit Unions which began on 1 August 2013 with the commencement of a tailored fitness and probity regime for credit unions followed by the introduction on 11 October 2013 of new governance and prudential requirements.
The Central Bank is of the view that the Regulations, combined with the commencement of the remaining sections of the Credit Union and Co-operation with Overseas Regulators Act 2012 and together with the prudential and governance requirements already in place “provide an appropriate regulatory framework for the credit union sector at this time”.
The Regulations cover the following areas:
- systems, controls and reporting arrangements; and
- services exempt from additional services requirements.
The Regulations were implemented following a public consultation (CP 88) which received significant feedback from the credit union sector.
Set out below is a summary of the more noteworthy provisions of the Regulations.
The Regulations set out the characteristics of reserves for the purpose of fulfilling the minimum regulatory requirement of at least 10% of the assets of a credit union. Reserves must be:
- perpetual in nature;
- freely available to absorb losses;
- realised financial reserves that are unrestricted and non-distributable.
Any instrument classified or contributing to a reserve must, in order to be eligible:
- not be secured or subject to a guarantee which enhances its security;
- be permanent and without an obligation for repayment of principal;
- have no preferential distribution rights;
- rank below all other claims in the event of a liquidation; and
- qualify as a reserve for accounting purposes.
The definition of liquid assets has been expanded to include the amount of any investment with more than three months to maturity where the credit union has an explicit written guarantee that the funds can be accessed by the credit union in less than three months (excluding penalties).
Regulation 8(2) of the Regulations establishes the requirement for a short term liquidity ratio of 5% of unattached savings. Short term liquidity is defined as cash and investments with a maturity of less than five days. The Regulations also set out an overarching minimum liquidity ratio of relevant liquid assets of at least 20% of unattached savings.
The Regulations establish the following lending categories:
- personal loans;
- commercial loans;
- community loans;
- house loans; and
- loans to other credit institutions.
The Regulations set maximum concentration limits for commercial loans, community loans and loans to other credit unions. Large exposure limits and maximum maturity limits are also set out in the Regulations.
Regulation 25 of the Regulations provides that a credit union may only invest in the following:
- Irish and EEA State securities;
- accounts in credit institutions;
- bank bonds;
- collective investment schemes; and/or
- shares and deposits with other credit unions and shares of a society registered under the Industrial and Provident Societies Acts 1893 to 1978.
Concentration and maturity limits apply to credit union investments and these are also set out in the Regulations.
Savings and Borrowings
The Regulations set a maximum individual member savings amount of €100,000. This has caused significant concern within the credit union movement. Submissions to the Central Bank as part of the consultation process highlighted the potential for negative reputational impact on the sector and the potential anti-competitive nature of the restrictions given that similar rules do not apply to banks. In response the Central Bank indicated its mindfulness of the potential impact on the wider credit union sector of any member losing a portion of their savings and noted that limiting individual member savings to €100,000 would ensure that, where necessary, a credit union could be resolved in an orderly fashion.
Regulation 38 of the Regulations establishes a limit of 25% of total savings on the amount a credit union can borrow.
The credit union sector is emerging from a period of significant change. While there has been significant merger and re-organisation activity in the sector (and some high profile resolutions), such activity has not been on the scale anticipated just a few short years ago. An increase in asset prices and the reduction in the volume of NPLs in the sector have allowed the sector to avoid the worst. The strengthening of the regulatory and governance standards has also undoubtedly contributed to the stabilisation of the sector.
While it has been argued (not least by the credit unions themselves) that the Regulations are overly restrictive in certain areas (such as the limitation on member savings) the enhancement of the regulatory regime should see a stronger, more robust credit union sector which is more able to cope with future systemic shocks and allow credit unions to deepen and broaden their service offerings to meet the needs of the modern credit union customer.