Address to NZ Association of Credit Unions Conf.
Hon Dr Michael Cullen
Address to NZ Association of Credit Unions Conference
The theme of this 42nd annual conference of the NZ Association of Credit Unions is 'Building Tomorrow'.
In a rapidly changing financial services industry it is not easy to say what tomorrow might bring.
On the one hand, there is a continuing demand for greater diversity, flexibility and ease of access. New Zealanders are demanding an increasing range of financial products, and due to the efforts of the Retirement Commissioner and others they are becoming better informed about their savings options and the best means of setting and achieving their goals.
New Zealanders increasingly expect savings products to be customised to meet their individual circumstances and integrated into related services such as insurance. What we also seeing from the work of the Working Party on Workplace Superannuation is that many New Zealanders are also seeking integration between savings products and remuneration packages. In this regard, the shift in the 1990s away from collective schemes towards a purely individual focus for saving appears to have overstepped the mark.
We must add to these factors the impact of technological advances (in particular the extension of the internet as a tool for personal financial management) which have raised expectations about the ease of access to information about one's savings and debt, and the capacity to fine tune financial plans almost at will.
Running somewhat counter to these forces has been the demand for greater degrees of assurance in the wake of widely publicised scandals. Consumers expect flexibility and entrepreneurial service; but they also expect prudence and probity. The last decade has seen increasing pressure on financial institutions around the world to raise the bar in terms of accounting standards, management expertise and governance practices.
One might be forgiven for believing that 'building tomorrow' will in fact be a significant challenge fraught with difficulty and risk.
In light of this, many members of your association have expressed concerns about the ability of credit unions and friendly societies to continue to play the significant role they have played over many years in facilitating savings and lending for many thousands of New Zealanders.
Over the last decade, the number of credit unions has fallen from 160 to around 57, including the two associations of credit unions: Manchester Unity and the NZ Association of Credit Unions. The decline in numbers has come from amalgamations, closures and, in some cases, management failings.
Nevertheless, at the same time, the number of credit union members has remained fairly stable at around 180,000 to 190,000 and total assets have grown from around $350 million to around $490 million. While these numbers are small in relation to the major trading banks, they need to be seen in context. A high proportion of credit union members are low-income earners and beneficiaries, people who would not otherwise be able to access banking services or develop savings habits. The credit union is, therefore, meeting a need that is not provided for by other financial institutions.
Credit unions continue to provide a service that is valued by a significant number of New Zealanders. The issues going forward are whether credit unions have the flexibility to match their services to the changing social and economic conditions of New Zealanders, and how they can achieve economies of scale.
Understandably, the focus has fallen on the Friendly Societies and Credit Unions Act 1982, particularly given that credit unions are now subject to trustee supervision. Clearly the Act is outdated in some important respects, and imposes constraints upon the quality and type of services that credit unions can offer their members, and on the way credit unions are structured and governed. However, in the view of many, some of those putative barriers reflect the essential distinguishing characteristics of credit unions and friendly societies, and their original raison d'etre.
Since 1998 the Act has been the subject of a series of reviews, without as yet any firm conclusion. Nobody will deny that the process has been protracted and at times difficult. Despite the frustration this brings, it is important to remain focussed on the long game. We need to get the legislative framework right, and the investment of time and energy in this in recent years will pay off in due course.
I want to reaffirm the government's commitment to the credit union movement. We are working in good faith towards a future in which credit unions and friendly societies:
· remain a credible participant in the financial services community;
· operate with robust corporate governance systems;
· are staffed by individuals with relevant skills, training and resources; and
· are responsive to both the financial and social needs of its members and local communities.
When I spoke to your conference two years ago I stressed that the key challenge for government and the industry 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.
There is a fair degree of consensus over a number of proposals for change, but also very divergent visions of what the future should be.
As you know the industry put forward an agreed Statement of Agreed Principles in November of last year. It contained a set of proposals covering:
· Qualifications for Admission to Membership; · Trust Deed Duplication; · Capital; and · Legal personality and validity of action.
Cabinet has considered these proposals, and I want this morning to give you our response.
However, before I go into the detail I think it is important to make clear what factors influenced our deliberations. They are essentially threefold:
First, we are interested in ensuring that the law is clear, effective and robust. Any changes to the Act need to improve its efficiency and facilitate credit unions' growth, while safeguarding the interests of credit union members and maintaining competitive neutrality in the financial sector.
The current Act enshrines a range of purposes for credit unions and friendly societies and gives effect to mechanisms (not the least of which is an advantageous tax regime), which are designed to serve those purposes. The Act protects the interests of investors and the broader public interest, and it is a high priority for us to maintain a clear focus on these objectives.
What this implies, among other things, is making sure that the regulatory regime for the whole of financial services sector is clear and logical and addresses the most important risks. In contemplating changes to credit unions and friendly societies we need to avoid a situation where supposedly distinct types of institution overlap to the point where it creates confusion and opportunities for manipulation.
The second factor is strongly allied to this, and relates to maintaining prudent governance in the financial services industry. The credibility of organisations of all kinds that handle large or small financial transactions on behalf of ordinary consumers is very important, and not only for those consumers themselves. New Zealand currently has a very good reputation for strong oversight of financial services. Although there have been some instances of fraud or mismanagement on a large scale, these are very rare and the response to them has been invariably swift, decisive and effective.
That reputation has flow on effects for the business environment in this country and for how we are perceived by overseas investors. It goes without saying that it is a reputation we are eager to maintain. For that reason, the issue of risk to consumers has played an important part in our consideration of the industry's proposals. While consumers no doubt would benefit from a broader range of savings options, we need to ensure that the level of additional risk that would be involved in any changes is conscionable.
Thirdly there are some practical considerations that relate to the management of the legislative timetable. This is perennially very tight, and free slots are the subject of fierce competition from bills that aim to benefit many aspects of New Zealand life, government and commerce.
For this reason, we have made it clear throughout that it is not a practical option to have two bites at the cherry when it comes to amending the Credit Unions and Friendly Societies Act 1982. It has been suggested that a number of non-contentious amendments be put into an initial bill, and that a further space on the timetable be created for a bill that reflects the resolution of more contentious issues. In the best of all possible worlds this might be practical; however, that is not the world we live in. As Leader of the House I can assure you the timetable can accommodate only one reform bill, and that means that all issues have to be brought to a point of agreement or not proceed.
So what have we agreed? Essentially we are happy to amend the Act to remove provisions that tie the hands of credit unions without good reason. Hence we have agreed to changes affecting membership, deposit requirements and fee setting.
The changes will:
· Allow credit unions to extend their membership to charities and incorporated societies that meet the common bond requirements.
· Remove existing restrictions on membership, provided that the rules of the credit union contain an objectively identifiable common bond.
· Allow credit unions to provide new services without Ministerial approval, provided that the services are consistent with their own rules and with the Act.
· Allow credit unions to determine a higher minimum deposit requirement than the present $10 limit, if they wish.
· Permit credit unions to determine and specify in their rules their own processes for setting service fees.
We have also made two decisions in principle. These decisions relate to providing a statutory mechanism for facilitating credit unions' conversion to alternative governance regimes, if they wish. Secondly allowing statutory restrictions on borrowing, investment and capital reserves to be varied by credit unions provided that it does not expose members to unjustifiable risks. MED will work with the industry on both these issues and report back to Cabinet by March 2005.
Other issues are more difficult to resolve. The government is fully supportive of credit unions' objective of finding alternative ways of achieving their capital reserve requirements. However, our concern is that the specific proposal to allow credit unions to issue capital instruments that are non-withdrawable, transferable between members and ranked ahead of ordinary shares) would introduce undue risk. We are proposing that the Ministry of Economic Development work with the industry to identify alternative measures for meeting capital requirements.
I appreciate that there will be some who are disappointed that the government did not agree to all of the proposals put forward. However, the changes that have been agreed, and in particular the changes relating to the common bond requirement, should lead to significant growth in credit union membership. So much so that we believe a review of credit union governance provisions (such as the duties of trustees and committees, disclosure obligations, and the ability of creditors to petition for a wind-up) should be carried out to ensure that they are sufficiently robust.
I would like to reiterate our commitment to finding a viable way forward that maintains the important features of the credit union movement into the twenty-first century. I trust it will become apparent that these changes are a major step towards that goal.