April 2007 / Issue 1
Australia: Credit Unions Facing Hostile Takeover
Due to their growth and good performance, credit unions are facing increasing takeover interest from third parties. Abacus, the credit union industry body, is working with the Australian government and the credit union sector on responding to demutualizations and stronger laws for mutuals confronted with takeover threats.
The new regulations are intended to ‘fix' a long-standing gap in the law, which could require a credit union to release its member share register details to third parties. The reforms also require advance notice to credit unions of any contact with members and that communications meet the full legal requirements regarding disclosure standards and misleading and deceptive provisions. These issues are the subject of a federal court appeal, in which the companies' regulator has ordered a credit union to provide its register to a local competitor that wants to market a takeover offer to members. Australian credit unions are strongly opposed to the release of registers to third parties.
Get to Know Australian Credit Unions
Australia's 142 credit unions continue to perform strongly in the domestic market. With over three million members, credit unions offer a full range of financial services to members. They are regulated under the same laws and regulatory agency as banks, meet the same prudential standards, pay corporate tax and abide by the same company laws.
Source: Abacus Australian Mutuals, www.abacus.org.au
Canada: Federal Government Amending Law on Financial Institutions
In recent months, the Canadian federal government introduced Bill C-37: An Act to Amend the Law Governing Financial Institutions and to Provide for Related and Consequential Changes, in which it outlined proposed changes to the legislative framework governing federally regulated financial institutions. The bill includes amending the Bank Act, the Cooperative Credit Associations (CCA) Act,the Trust and Loan Companies Act and the Insurance Companies Act. The amendments are aimed at achieving three key objectives: (i) enhancing the interests of consumers, (ii) increasing legislative and regulatory efficiency and (iii) adapting those Acts to new developments. Bill C-37 would also amend the Bills of Exchange Act to provide for the introduction of electronic check imaging.
The amendments include changes to the CCA Act that will facilitate the incorporation of federally chartered co-operative financial institutions in Canada. There are currently only two such institutions incorporated under the CCA Act. As noted below, most of the Canadian credit union system is provincially regulated.
On February 19, 2007, David Phillips, CUCC President and CEO, David Phillips, appeared before the House of Commons Standing Committee to convey the credit union system's general support for Bill C-37 and propose amendments to the CCA Act. In particular, he stated that "amendments [in the bill] will make incorporation under the Act more of an option for credit union organizations interested in acquiring a federal corporate charter."
Get to Know Canadian Credit Unions
The Canadian credit union system is regulated by an interplay of federal and provincial laws. Credit Union Central of Canada is a wholesale and trade association regulated by the Canadian federal government, while provincial Centrals are regulated by both the federal and provincial governments. The credit unions themselves are provincially regulated and derive their general powers from provincial credit union statutes that define business and investment powers, corporate governance practices and capital/liquidity requirements. Credit union members/customers are protected by legislative requirements embedded in either provincial credit union legislation or by general provincial consumer protection laws.
Source: Credit Union Central of Canada, www.cucentral.ca
United States: New Federal Credit Union Bill Develops
On March 15, the 2007 Credit Union Regulatory Improvements Act (CURIA, HR 1537) was introduced in the House of Representatives. The Credit Union National Association (CUNA) seeks regulatory relief to modernize the credit union regulatory structure to improve service to members. The banking industry is strongly opposed to any efforts by Congress to ease burdens and restrictions on credit unions.
The new bill is similar to the 2006 version, but with the addition of two key provisions: one addresses field of membership rules, and the other establishes additional consumer safeguards in the event of a credit union conversion. As introduced, the bill would:
- Reform the National Credit Union Administration's prompt corrective action/risk-based capital standards to make additional capital available to credit unions, which would provide members with better and more affordable services.
- Increase the current cap on loans to members from 12.25% to 20% of assets for business purposes (MBLs). This would allow credit unions to assist more members start and expand small businesses and would promote economic growth. The bill would also exempt loans under $100,000 and those to nonprofit religious organizations from the MBL calculation.
- Establish additional consumer safeguards to ensure even greater participation and transparency in the process of converting credit unions to another type of financial institution, including the requirement that at least 30% of a credit union's members participate in any vote to convert to a mutual savings bank.
- Clarify the 1998 Credit Union Membership Access Act to allow all credit unions, regardless of charter type, to serve those in underserved areas. The bill would also update the definition of an underserved area, incorporating definitions from the Community Development Financial Institutions Act and the New Markets Tax Credit.
Other provisions of the 2006 CURIA legislation were included in the Financial Institutions Regulatory Relief Act, which increased general loan maturity limits to 15 years for federal credit unions and allowed them to provide certain services to non-members.
Source: Credit Union National Association, www.cuna.org
Great Britain: Complete Review of 30-year-old Credit Union Legislation
At the end of 2006, Economic Secretary to the Treasury, Ed Balls, announced a review of legislation affecting credit unions and other cooperatives in Great Britain. The Association of British Credit Unions (ABCUL) had previously spoken to Balls and stressed the need for legislative change in a major scaling up of the credit union movement. Credit unions are at the center of the government's current emphasis on financial inclusion. The Government recently distributed £36 million of funding to increase the availability of affordable credit - the first ever national government funding for credit unions in Britain. HM Treasury is currently carrying out the legislative review and is expected to publish a consultation paper within the next two months.
The main changes ABCUL is proposing:
- Relaxation of common bond requirements: Credit union boards should be able to determine their own common bonds (similar to the changes the New Zealand movement has recently secured). This will enable credit unions to provide services to groups of people currently excluded from credit union membership.
- Once a member, always a member: At the moment, people who leave a credit union's common bond become non-qualifying members. A credit union can have no more than 10% of its membership as non-qualifying members, at which point it must ask them to leave the credit union. Replacing this with "once a member, always a member" will prevent exclusion from credit union membership because of a change in address or job - essential in an increasingly mobile society.
- Organizational membership: Credit unions in Britain can currently only provide services to individuals. Organizational membership will mean credit unions can help local groups, encourage enterprise and benefit from companies' and local organizations' capital. Organizational membership will also allow the creation of a credit union for credit unions.
- Ability to pay interest on savings: Credit unions are currently restricted to paying dividends on shares.
- Relaxation in the legal objects of credit unions: Relaxation would enable credit unions to provide the services their members need.
When the consultation paper is published there will be a 12-week consultation period after which decisions will be reached about what changes will be made and how they will be completed. It is likely that primary legislation will not be necessary, so the changes could be in place by the end of the year.
Source: Association of British Credit Unions, Ltd., www.abcul.coop
India: New Avenues for Capital Formation
A working group led by the Reserve Bank of India (RBI) is recommending a number of different instruments to enable Urban Co-operative Banks (UCBs) to attract equity and quasi-equity investments. The new instruments include bonds, non-voting preference shares, long maturity deposits (treated as tier II capital) and non-voting special shares (treated as tier I capital). RBI is also proposing appropriate legislative and supervisory frameworks to enable UCBs to put the new capital instruments into operation. RBI recommends the Government of India defer the application of income tax on UCBs for three years to help boost their retained earnings. For the complete RBI report please visit: http://rbidocs.rbi.org.in/rdocs/PublicationReport/docs/74324.doc
Source: National Federation of Urban Co-operative Banks and Credit Societies Ltd. (NAFCUB)
Ireland: Revised Lending Regulations Enable Members to Borrow More
The Irish League of Credit Unions (ILCU) and the Registrar of Credit Unions have obtained an increase in the current lending term limits to allow credit unions to begin entering the mortgage market.
Section 35 of the Credit Union Act of 1997 currently limits longer-term (i.e. over five years) lending by credit unions. Under Section 35, a maximum 20% of a credit union's loan portfolio may be outstanding for periods in excess of five years, of which half (10% of the loan portfolio) may be outstanding for periods in excess of 10 years.
ILCU sought an increase in the Section 35 lending limits and in April 2006, the Minister for Finance, Brian Cowen, TD, sought the advice of the Credit Union Advisory Committee (CUAC) - the expert statutory advisory body on credit union matters under the Credit Union Act.
CUAC recommended in July 2006 that Cowen establish a review group to evaluate the current credit union limits on longer-term lending. Cowen appointed representatives from the ILCU, the Credit Union Development Association and the Registrar of Credit Unions to prepare the report.
The report recommended that Section 35 lending limits be increased from 20% to 40% of the total loan portfolios for loans over five years and from 10% to 15% for loans over ten years. The recommendations applied to credit unions that have been approved by the registrar as having necessary controls and safeguards and acceptable financial criteria in relation to arrears and reserves.
Credit unions that wish to access the new rates will be required to submit a statement from their board of directors confirming that the lending processes, resources and operating systems in place are appropriate to the business needs of that credit union. The credit union will also need to confirm that its loan arrears are no greater than 5% (PEARLS A1 ratio), that the statutory reserve over total assets is 6% or greater and that total reserves over total assets is 8% or greater (PEARLS E5 ratio).
Credit unions who wish to continue using the current percentages of 20% over 5 years and 10% over 10 years may do so with no change in lending conditions.
The board members' statement mentioned above will be the subject of a guidance note from the League Office in due course, coupled with relevant lending policies and procedures and asset and liability management policies and procedures. Following approval from the registrar, credit unions should maintain liquidity (PEARLS L1 ratio) at 17.5 % over a period of time.
The group recommended that the legislature amend the wording of Section 35 as soon as possible to provide for a practical interpretation of the lending limits which would exclude loans where the period remaining on the loan falls below the specified limits. The Department of Finance has agreed to examine the scope for including the provision in the Markets in Financial Instruments Directive (MiFID) and Miscellaneous Provisions Bill in Section A of the Government's 2007 Spring Session legislation program.
ILCU's short-term changes, such as deposit account limits, Section 35 and nominations the movement sought in the past three years have now been largely met. The league will soon begin a consultation process with its members to discuss developing credit union legislation to meet long-term member needs in the context of a new movement strategy.
Click here for the Review Group's Report
Source: Irish League of Credit Unions, www.creditunion.ie
Poland: Credit Unions Begin Offering Long-Term Mortgages
The president of the Republic of Poland signed a new bill on financial support to the Families in Obtaining Housing. The Polish credit unions, or the SKOK system as it is known in Poland, became a government partner in the new affordable housing program. According to the bill, the SKOK system is now allowed to offer regular long-term mortgages, and credit and loan timespan limits for SKOKs were completely abolished.
The president recently announced that his Chancellery would be preparing the comprehensive changes to the Credit Union Act regulating SKOKs to allow them to offer more services to members. Over 1.5 million Polish families utilize credit unions.
Source: National Association of Cooperative Savings & Credit Unions, www.skok.pl
Caribbean - Trinidad and Tobago:
New Policy Proposal Brings Credit Unions Under Central Bank Supervision
The Cooperative Societies Act will be amended to transfer the supervision of credit union financial activities from the Commissioner of Cooperative Development to the Central Bank. The new policy proposal was developed based on inputs from a number of sources, including WOCCU's Model Law for Credit Unions.
The Bank of Jamaica has also proposed to directly supervise all credit unions.
Source: Co-operative Credit Union League of Trinidad & Tobago, www.ccultt.org
New Zealand: Relaxation of Common Bond Requirements
Until the end of 2006, New Zealand credit unions operated under a common bond that was regionally and geographically restricted. It was an impediment particularly with the retention of members. For example:
- Loss of members when they had to resign from their credit union because they had moved out of the town or community covered by the credit union's common bond.
- Students who left their family residence for university education had to resign from their home credit union.
- When a member moved from one community to another for employment.
After considerable battles by the New Zealand Association of Credit Unions the government approved relief to the common bond structure. Now credit unions can apply to the Registrar of Credit Unions to expand their common bond, providing they can be objectively determined.
Credit unions can also now accept registered charities and incorporated societies as members (similar changes are being sought in Great Britain and Poland). Incorporated societies in New Zealand can be best described as quasi-registered companies. These relief measures will contribute to a faster growth of credit unions in New Zealand.
Source: New Zealand Association of Credit Unions, www.nzacu.org.nz