Address to the NZ Association of Credit Unions
Hon Lianne Dalziel
12 September 2003 Speech Notes
Address to the NZ Association of Credit Unions
Novotel Tainui Hotel, 7 Alma Street
I am delighted to join you today at the New Zealand Association of Credit Unions' 41st annual conference.
Approximately 12 months ago my colleague, Hon Dr Cullen addressed your conference and outlined the government's commitment to promote an environment where the credit union movement is:
- a credible participant in the financial services community;
- comprised of credit unions with robust corporate governance systems and staffed by individuals with relevant skills, training and resources; and
- responsive to both the financial and social needs of its members and local communities.
I am here today to re-affirm that commitment and to update you on the progress of the review of the Friendly Societies and Credit Unions Act.
Progress to date
As you know the Ministry of Economic Development released a discussion paper at the end of 2002 outlining the Association's proposed amendments to the Act. These proposals dealt with credit unions':
- Common bond requirements;
- Legal status and validity of action;
- Capital requirements; and
- Trust deed requirements
The amendments were intended to improve the Act's overall efficiency and provide a solid platform for credit union growth.
The wider context
I know that you are all keen to hear about the outcome of this consultation process. I would, however, like to spend a few moments discussing the background to this review before doing so.
As you know there have been concerns, for several years, that the Act constitutes a significant regulatory barrier to credit unions reaching their full growth potential. Since 1998 this Act has been the subject of a number of reviews. The review processes have had a number of commonalties.
First, they have revealed the existence of a broad spectrum of opinion within the movement on its future evolution. These views have often been firmly entrenched and diametrically opposed.
Second, the reviews failed to identify a pathway for resolving the problems that the modern credit union movement faces.
In an effort to re-invigorate the review process, the Hon Paul Swain (then Minister of Commerce) agreed that the new process should depart from the Ministry's normal policy development processes. In particular, he agreed that the discussion paper should invite public comment on the Association's reform proposals. He also asked the Association and Manchester Unity (the movement's other representative body) to engage in talks, ahead of the discussion paper's release, in order to try and reach consensus on some key proposals.
It is important that I publicly thank the Association and Manchester Unity for the time and effort they put into this process. It is equally important that I acknowledge that, despite their best efforts, both associations went in to the recent consultation process with firmly divided views on a number of key issues.
Results of the consultation process
Given this background, the results of the consultation process were not totally surprising.
The good news is that there appears to be "in principle" agreement to:
- Amend the existing common bond requirements;
- Provide credit unions legal personality;
- Clarify the role of trustees and directors;
- Remove the requirement for the responsible Minister to approve the services that can be provided by an association of credit unions; and
- Provide unions with more flexibility with regard to setting fees and charges.
There was also strong support for the Ministry's proposal that the Act should be amended to include a conversion mechanism that enables credit unions that have outgrown the Act to shift to more appropriate governance regimes under the Reserve Bank Act, the Companies Act or the Building Societies Act.
I must emphasise that while there is "in principle" agreement in relation to some of the Association's proposals, this does not mean the proposals have been endorsed by stakeholders or by the Ministry in their entirety.
Example of where the NZACU's reform proposal is accepted in principle
A good example of where the Association's view is accepted in principle but still needing further work, is the proposal that the Registrar of Credit Union's current obligation to approve credit unions' membership qualification rules be replaced by a general obligation to ascertain that there is an objectively identifiable common bond.
The key impact of this proposal is that a common bond would still be a requirement for organisations seeking to register as credit unions but the actual form and substance of that common bond would be a matter for individual credit unions to determine.
In other words, the new common bond requirements would be effectively "self-policing".
The consultation process revealed wide-ranging support for the existing common bond requirements to be updated to:
- reflect social and economic changes in New Zealand society; and
- enable credit unions to grow their membership base and thereby enhance their ability to achieve economies of scale.
It also revealed a significant amount of policy work still to be done on the future role of the Registrar of Credit Unions and indeed the optimum regulatory oversight model for the credit union movement. As a consequence, it is still undecided whether the new common bond requirements should be self-policing or whether the Registrar should have continuing responsibilities in this area.
The challenge ahead
As I mentioned a few moments ago, a number of proposals triggered passionate debate. These included the Association's proposals that:
- shares in a credit union should not rank equally;
- perceived duplication between trust deeds and the Act should be removed; &
- existing limits on borrowings, investments and reserves should be removed.
It is obviously not possible, in the context of this speech, to provide you with a detailed assessment of the arguments advanced both for and against the Association's proposals.
However, I would like to give you some insights into what submitters said on these issues so that you have a full appreciation of the breadth of opinion that exists and the size of the challenge that lies ahead.
Proposal that shares should not rank equally
As most of you know the Association proposed that:
- Shares should not rank equally as this would provide a distinction between a credit unions equity and investment capital;
- Equity shares should be non-withdrawable or, in other words, non-refundable when a member withdraws from a unions; and that
- Investment equity shares should be transferable and evidenced by a share certificate in order to meet normal investment expectations.
A number of submitters were fundamentally opposed to these amendments because the proposal that shares should not rank equally is contrary to the credit union movement's traditional philosophy of "one member, one vote". Submitters were concerned that these proposals would create conflicts of interest and impose significant compliance costs.
Remove duplication between trust deeds and FSCUA
The Association also made a number of proposals that were designed to remove perceived duplications between Friendly Societies and Credit Unions Act and the Securities Act in respect of statutory limitations on credit union borrowing, investments, and reserves.
These proposals generated intense debate. A number of submitters thought that the "real" problem was that the Association had negotiated an overly ambitious trust deed and that the "duplication problem" was largely of the Association's own making.
From my perspective, I do not think it is helpful to spend too much time dwelling on the root cause of this particular problem. The consultation process has demonstrated that the interface between your Act and the Securities Act does need closer examination.
I do, however, think that this issue is important because it provides a window into the breadth of opinion that exists and highlights the need for sectors of the movement to engage in further constructive debate on this issue.
Remove existing limits on borrowings, investments and reserves
The consultation process revealed that there was general agreement that the reserve requirements contained in the Act did require some modernisation.
However, the majority believed it was in the wider public interest that statutory requirements on minimum reserves, and borrowings & investment ratios be retained. This was for two key reasons:
- trust deeds are a private agreement between a credit union and are not a satisfactory substitute for statutory requirements; and
- repealing the statutory provisions would impose significant compliance and transactional costs because of the need for existing trusts to be amended.
The compliance cost issue is of particular concern as the Ministry has received feedback from some credit unions that the introduction of the trust deed regime has increased their operating costs by about $100,000. It is vital that the potential compliance cost impacts of any amendment proposals are carefully identified.
What the Ministry of Economic Development has learned from this process
It is interesting to reflect on what the Ministry of Economic Development has learned from this process. What I can tell you is that some stakeholders share your Association's view that asset growth is the most effective means of achieving critical mass and that this will lead to business efficiency and economies of scale.
Others however, consider that credit unions should continue to maximise the benefits of having a unique business niche (as savings and loan institutions) and should remain relatively small to ensure they can continue the highest possible standard of service for members, while keeping a tight rein on their costs.
The consultation process has therefore revealed new divergences of opinion on how the credit union movement can achieve sustainable economic growth. These are fundamental issues at the heart of the debate about the long-term direction of the movement.
Another important signal from this consultation process is that a number of the smaller unions are deeply concerned that the Association's proposals will precipitate the removal of the tax exemption that they enjoy on income earned within their circle of membership.
I know that some of you here today represent some of New Zealand's larger unions and that many of you may be willing to trade off the tax exemption in exchange for other benefits that you believe will flow from the Association's reform proposals.
The tax exemption is, however, of huge importance to the unions servicing the needs of the smaller provincial centres and whose members may come from lower income groups. These unions play a key role in combating the problems associated with financial exclusion and, it is important that any amendments to the existing regulatory regime promote efficiency but also retain diversity by enabling smaller unions to continue their rich tradition of providing loans and savings facilities to their local communities.
What the government wants to achieve
At last year's conference Dr Cullen told you that the key challenge for government is to develop a credible and efficient regulatory regime that is:
- calibrated to the needs of the movement and is flexible to meet the distinct needs of the small and large credit unions;
- encourages existing and potential volunteers to associate with and join credit unions through the application of clear and reasonable regulatory standards;
- fosters public confidence in the movement; and
- facilitates innovation and fair competition in the financial services sector.
I share Dr Cullen's vision and I want to reassure you that the government is committed to modernising the Act. I have already obtained approval from my Cabinet colleagues to include a Friendly Societies and Credit Unions Act Amendment Bill in this year's parliamentary programme. However, I have neither the time nor the energy to settle industry disputes. That's your job and your challenge.
As I have said before I will introduce a Bill as soon as I know I have industry buy-in. I understand that some of you here today may be anxious for the government to press on with the amendments that have enjoyed widespread support, leaving aside the contentious issues. There are those that say that that would provide some "runs on the board". This view is partly based on the assumption that the Ministry could then come back at a later date to address the more complex issues and develop a second amendment Bill.
Let me say simply and clearly - that is not an option as far as I'm concerned.
The reality is that the changes that enjoy widespread support will do nothing to resolve the fundamental philosophical problems that exist within the movement. Nor will they assist credit unions in achieving their growth aspirations.
Developing amendment legislation is a time-consuming process. It is therefore important that we use parliamentary time to maximum effect. One Bill - that's it.
Where to from here?
So where to from here? The recent consultation process has revealed that there is a growing body of opinion within the movement that moving towards a "two-tiered" regime is the only means of ensuring that the credit union movement remains unified and cohesive.
The option of a two-tiered regime was not canvassed by the NZACU and I have asked my officials to investigate this proposal, as it may help resolve some of the previously intractable problems affecting the movement.
My officials are currently investigating a number of overseas models and will consult other key government departments on a variety of reform options and will report to me on the outcome of its research and consultation before the end of this year. This means that we are on track to introduce an Amendment Bill into the House in early 2004.
Thank you once again for the invitation to join you today. I hope that my presentation has given you an insight into the challenges that this review presents and the widespread opinion that continues to exist within the movement. More importantly, I hope I have reassured you about the government's commitment to develop a regulatory regime that will promote credit union growth and protect the diversity that currently exists within the movement - but that you have a role to play for that to occur.
I wish you every success in that task and for the remainder of your conference here in Hamilton. If time permits, I am happy to spend a few moments taking any questions from the conference floor.