Report on the Transfer of Responsibility for Northern Ireland Credit Union Registration to the Appropriate GB Authority

Report No. NIA 55/11-15

Committee for Enterprise, Trade & Investment Report on its Consideration of the Legislative Consent Memorandum Concerning the Transfer of Responsibility for Northern Ireland Credit Union Registration to the Appropriate GB Authority

Background

1. On 4th May 2012, the Minister for Enterprise, Trade & Investment wrote to inform the Committee of the Department’s intention to seek a Legislative Consent Motion (LCM) under urgent procedure to permit HM Treasury by Order, to amend the Credit Unions (Northern Ireland) Order 1985 to enable the transfer of the function of registrar of Northern Ireland credit unions from DETI to one of the successor bodies of the Financial Services Authority (FSA) (Appendix 1).

2. Following the inquiry of the previous Committee for Enterprise, Trade & Investment into credit unions, the Department and Treasury agreed to reform credit unions in Northern Ireland to enable them to provide a similar range of services to their counterparts in GB. The transfer of functions will be the first step in enabling the recommendations from the previous Committee’s Inquiry to be implemented. Both the previous Committee and the current Committee have closely followed and scrutinised developments as progress has been made.

Committee Consideration

Introduction

3. The previous Committee completed its Inquiry into Northern Ireland credit unions in February. Since the start of the new mandate, the current Committee has regularly reviewed progress on the implementation of the recommendations from the Inquiry.

4. The Legislative Consent Memorandum (Appendix 2) will have the effect of enabling HM Treasury, by Order, to amend the Credit Unions (Northern Ireland) Order 1985 to permit the transfer of any function of a Northern Ireland Department or the Registrar of Credit Unions for Northern Ireland to be transferred to one or more of the successor bodies to the Financial Services Authority.

FSA/Treasury Consultation

5. In September 2011, the FSA and Treasury launched a consultation on FSA regulation of credit unions in Northern Ireland. The document included details of proposals to reform credit unions, timetable, details of road-shows, draft legislation and draft handbook and rules for credit unions. The consultation closed on 31st October 2011. The planned date of implementation was the end of March 2012. In October 2011 the Committee agreed a response to the consultation (Appendix 3). It was not clear which and how many of the recommendations of the previous committee’s inquiry would be implemented as a result of the proposals. The Committee commissioned Assembly Research and Information Services to consider the proposals and identify which recommendations would be implemented and which would remain outstanding. The research report (Appendix 4) outlines those recommendations which will be implemented through the proposed LCM and those which will require Northern Ireland legislation in order to be enabled.

6. Following consultation, the proposals were amended to take account of some of the suggestions made. In January 2012, the Chair met with representatives of the Ulster Federation of Credit Unions (UFCU) and the Irish League of Credit Unions (ILCU). The purpose of the meetings was to obtain the views to the two organisations on the revised FSA proposals. While both organisations were content that many of their issues had been addressed following consultation, they felt there were some important issues left outstanding. Concerns were expressed in relation to limits on the investment maturity period, increased provision for bad debt and the need for financial assistance to cope with the additional management and administrative burden on credit unions.

Limits on the Investment Maturity Period

7. This issue was raised by the Committee in its response to the consultation (paragraph 5). Both the UFCU and ILCU still had concerns in relation to this issue. Version 1 credit unions under the FSA scheme would only be allowed to invest surplus funds for one year. This had not changed as a result of the consultation. Both organisations believed the revised proposals were a major backward step for credit unions here and were being put in place solely to fit in with what is happening in GB. Credit Unions in Northern Ireland have much more surplus funds to invest than their GB counterparts. It was felt that the proposals, as they stood could put some credit unions at risk. Version 2 credit unions would be able to invest for up to five years however, in order to qualify as Version 2, a credit union would have to have all necessary documents in place when they apply. The revised proposals would permit credit unions to invest for up to three years for the first year as an interim measure.

8. The ILCU believed that the measures were being proposed in order to ensure liquidity of credit unions. It believed credit unions here have a much higher degree of liquidity than their GB counterparts and, unlike their GB counterparts no credit union has had any difficulties in the past.

9. The Treasury/FSA policy statement following consultation acknowledged that Northern Ireland credit unions have excess liquidity and agreed that they should be able to earn income on their surplus funds. It goes on to state:

“We have no objection to Northern Ireland credit unions investing for up to five years but….we think it appropriate that they first apply to become version 2 and demonstrate that they have the minimum prudential requirements and necessary risk management arrangements in place. For example, in order to become version 2, credit unions should be able to demonstrate that they can manage liquidity pressures while tying up funds longer-term.”

Provision for Bad Debt

10. The ILCU felt that, although bad debt requirements were an issue, it would only have a small impact on their member credit unions. This was more of an issue for the UFCU which felt that the proposals were still substantially above current requirements.

11. The FSA requires credit unions to make provision of 35% of the net liability to the credit union of borrowers where the amount is more than three months in arrears; and 100% of the net liability to the credit union of borrowers where the amount is more than 12 months in arrears. It goes on to state that credit unions should maintain a general provision for bad and doubtful debts of at least 2% of the net liability to the credit union of borrowers not in arrears.

Additional Management and Administrative Burden

12. The Committee raised this issue in its response to the consultation (paragraph 17). It was also included as a recommendation in the report on the previous committee’s credit union inquiry that credit unions should be supported by FSA and DETI to implement the new measures. Both organisations believe that the new systems they are required to put in place will be very burdensome and expensive. They also believe that considerable training will be required in order to assist credit unions and enable them to comply with FSA requirements. In the Treasury/FSA policy statement following consultation, Treasury states:

“Northern Ireland credit unions will not become eligible for funding programmes such as the Modernisation Fund. The allocation of funds within Northern Ireland is a matter for the Devolved Administration.”

13. In relation to queries on whether the government could give financial help to Northern Ireland credit unions to aid the transition to the new regime, Treasury states:

“the government does not consider it appropriate to provide financial assistance to Northern Ireland credit unions to cover the transition costs. However, for one year following transfer, the FSA will waive the £250 fee for Northern Ireland credit unions applying to become a version 2 credit union.”

14. In response to the issue of its supervisory responsibility, the FSA states that it intends:

“…to invite all Northern Ireland credit unions to surgery events in 2012 after transfer. This will give credit unions an opportunity to meet FSA supervisors, ask questions, and discuss any issues or concerns with the transition to the new regime. Following this, we will continue to visit Northern Ireland as part of our normal supervisory activities."

Committee Consideration of UFCU and ILCU Concerns

15. As Group Membership of credit unions is a matter for the DETI, the Committee wrote to the Department in December 2011, to ask what steps are being taken to extend this provision to Northern Ireland credit unions. The Department Responded:

“The provisions contained in the Great Britain Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011 may not be extended to Northern Ireland. These may only be introduced through primary legislation in Northern Ireland. DETI intends to include proposals for a Credit Unions Bill in the Assembly’s draft legislative programme for the current mandate. This signals the Department’s intention to bring forward provisions to mirror those measures, including group membership, within the GB Legislative Reform Order 2011, which is due to come into force on 8 January 2012.”

16. Following this confirmation that a Northern Ireland Credit Union Bill would be included in the Assembly’s legislative programme. The Committee wrote to the Minister on 15^th December 2011 (Appendix 1) to ask her to consider the Bill as a high priority in the Department’s legislative programme.

17. On 9th February 2012, the Committee wrote to the Financial Secretary to the Treasury (Appendix 1) seeking reconsideration of some of the proposals and to the Secretary of State for Northern Ireland (Appendix 1) requesting his support for the Committee’s view and reiterating the Minister’s similar concerns, expressed in her letter to the Financial Secretary to the Treasury on 1^st February (Appendix 1) and copied to the Committee.

18. The Committee wrote to the Minister on 9^th February 2012 (Appendix 1) requesting her support to assist credit unions with the transition to regulation by the FSA including support for a financial package of measures to assist credit unions with training and equipment costs. The Minister responded on 29^th March (Appendix 1) agreeing that some assistance was required and informing the Committee that her officials are considering options for the provision of such support.

19. Having considered the Research Paper from Assembly Research and Information Services, the Committee wrote to the Minister on 26^th April 2012 (Appendix 1) requesting her support for the implementation of the remaining Inquiry recommendations through the Northern Ireland Credit Union Bill. The Minister responded on 21^st May (Appendix 1) confirming that the Bill will address a number of outstanding recommendations from the Inquiry. The Minister also stated that officials would brief the Committee on the options for the provision of assistance to credit unions following the transfer of regulatory authority to the FSA. In her statement to the Assembly on 22^nd May (Appendix 5) the Minister summarising how many of the concerns of the Committee and the UFCU and ILCU had been addressed and outlining a package of financial support to assist the credit union movement through the transition.

20. At its meeting on 24^th May, the Committee noted that, in her letter of 21^st May, the Minister indicated that legal intervention at Northern Ireland level would be required, along with the prior consent of the FSA, in order to enable the reinvestment of credit union assets in community development projects. The Committee agreed to receive oral evidence from the FSA , the ILCU and the UFCU after summer recess to scrutinise the implementation of the new arrangements and to explore options to permit reinvestment of credit union assets in community development projects through the proposed Northern Ireland Credit Union Bill.

Committee Position

21. Having carefully considered the options for extending the range of services offered by Northern Ireland credit unions and the proposals from HM Treasury, the Committee is of the view that this Legislative Consent Motion, coupled with the forthcoming Northern Ireland Credit Union Bill, is the best available means of enabling Northern Ireland credit unions to extend their range of services in line with the recommendations from the Inquiry of the previous Committee for Enterprise, Trade & Investment. The Committee therefore supports DETI in seeking the Assembly’s endorsement of the Legislative Consent Motion:

“That this Assembly agrees that the provisions in Part 3 of the Financial Services Bill, as introduced in the House of Commons on 10 May 2012, dealing with the transfer of functions in relation to Mutual Societies should be considered by the UK Parliament.”