Dalziel: Credit Unions Annual Conference
Hon Lianne Dalziel
Minister of Commerce, Minister for Small Business,
Minister of Women’s Affairs, MP for Christchurch East
15 September 2006 Speech Notes
Speech to New Zealand Association of Credit Unions Annual Conference
Thank you for inviting me to join you today at this the 44th annual conference of the New Zealand Association of Credit Unions. There is an element of déjà vu about this address, as a result of my downloading my 2003 speech to your 41st conference. There has been a lot of water flow under the bridge since then.
Your theme this year is “Meet the Challenge” and I'm aware that there are many challenges and the prospect of many changes for today’s credit unions. How do you stay true to your ethos of “people helping people” while remaining vital and relevant in the modern-day financial landscape? How can credit unions continue to contribute to sustainable economic development and to the social fabric of New Zealand? How do you attract able professionals to work with you in taking the organisation to the next level? How do you compete with players that have more financial muscle? How does the movement preserve its diversity and its integrity?
To me, the key challenge is about marketing your business within a modernised regulatory framework true to what you are: a New Zealand-owned financial institution of choice for many New Zealanders.
Today I intend to update you on the
progress of the first part of this government’s
modernisation programme for credit unions through the
Business Law Reform Bill. I will then spend some time
talking about the improvements that you can expect further
down the line through the Review of Financial Products and
Providers. In conclusion, I’ll say a few words about the
challenges for credit unions on financial education.
If there is some time at the end of my speech, I’ll be more than happy to take questions.
This Labour-led Government is committed to the credit union movement, and to ensuring there are no impediments to the growth of the non-Bank deposit-taking sector. Those of you who have attended the Association’s annual conference in the last few years would have heard this from my colleague, the Hon Dr Michael Cullen.
The NZACU has been instrumental in highlighting that the existing credit union legislation presents a significant regulatory barrier to credit unions reaching their full growth potential. We have listened to those concerns and responded to your calls for change. Very soon, credit unions will be able to extend their membership to charities and incorporated societies who agree to abide by the credit unions' rules, or common bond, as it's known. The NZACU will also be able to provide services that are contained in the credit unions’ legislation without having to go through the time and expense of seeking my approval – subject always of course to the prudential requirements of the regulator.
These changes form part of the Business Law Reform Bill currently before the Commerce Select Committee. The Select Committee is considering submissions and is due to report back to the House on 19 October 2006. I am aware that you are anxious for these changes to become law. We have tried to speed up the process – for instance, the Select Committee has been given a shorter timeframe to report back to the House, and the Bill has priority in the legislation programme to be passed by 2006. I have been assured by my officials that they are working towards that goal.
Other changes to the regulatory framework affecting credit unions will follow through the Review of Financial Products and Providers. Two papers that I have released will be of special interest to you – one on the governance of mutuals’ and the other on Non-Bank Deposit-Takers.
I would like to say a special thank you to those of you here today who have been involved in the development of those, and the other seven, discussion documents as part of the Review. Your efforts in the Advisory Groups and in discussions with officials at the Ministry of Economic Development have been much appreciated and will go a long way to ensuring that the resulting regulatory framework for Credit Unions is the right one.
When “governance” is mentioned, in reference to the discussion document on mutual's governance, many automatically associate it with the governance requirements for corporations. What I would like to reassure you is that there is no attempt to impose Companies Act requirements wholesale on credit unions.
I do, however, see benefits in all mutual financial institutions of adopting good governance practices. At the highest level, good governance would reduce the risks of business failure and strengthen protection for your members. One way of achieving this is to require those in the driving seat to be competent, effective and ethical. A well-governed financial institution inspires trust and confidence.
Earlier, I mentioned credit unions’ potential to play a bigger role in New Zealand-owned banking alternatives. Credit unions seeking to meet this challenge must be governed to high professional standards. The discussion paper on mutuals’ governance presents options for designing a set of baseline processes that are designed to promote transparency and accountability.
The baseline requirements build on the standards that most credit unions are currently meeting, and that others may need to transition to. The options for change that are set out in the discussion paper should not significantly impact on most of the current arrangements. That being said, we are open-minded about where we are going with this and I encourage you to let us know your views.
Moving onto another aspect of governance, I would
like to congratulate the Association for taking the
initiative in undertaking a strategic review of education,
training and development for credit union directors.
I am heartened that the Association recognises the pivotal role that credit union directors play in improving governance standards.
I understand that a key recommendation to emerge from the review is the establishment of a New Zealand Credit Union Institute as a professional body for credit union directors. Its key functions I am told will include conferment of membership status, promotion of education, training and development for directors, standard-setting, award and accredit qualifications, administer continuing education standards and requirements and administration of the Director components of the Director Code of Ethics.
The Institute will work closely with the Association and the supervisor for credit unions. This co-regulatory approach which has been advocated for the Institute has much to commend it. I also think the Institute could consider partnerships with like-minded organisations, such as the Institute of Directors. We are a small country and consequently we need to maximise our resources. While I recognise that directors of companies and credit unions serve organisations with different ethos, they do bring a set of common skills to the job. So, I see value in the Credit Union Institute working alongside the Institute of Directors to share expertise and harness synergies where possible.
I have also released a discussion paper on Non-Bank Deposit-Takers. Non-Bank deposit-takers include finance companies, building societies and credit unions. I would like to focus on two aspects in the paper today – supervisory options and impact of on in-principle decisions on the credit union review. Before I go into the details, I would just like to emphasise that the paper contains policy options which MED are consulting on but the government has not yet made any decisions.
The paper has proposed strengthening regulation for all Non-Bank Deposit-Takers. To better allow investors to differentiate among the raft of deposit-takers in the market, a new tier of deposit-takers will be created that will be supervised by one supervisory authority. It has been suggesetd that this supervisory authority could be the Reserve Bank.
There are good reasons for this, including the similarities of requirements for this tier of deposit-takers and registered banks. Locating supervision in one government agency will also help realise economies of scale.
The proposal for an Authorised Deposit-Takers category is designed to enable consumers to better distinguish risks between institutions and will be subject to a framework similar to that for registered banks. Membership in this class will be optional although the Reserve Bank, in its supervisory capacity, will have the authority to require large enough deposit-takers whose failure could threaten the soundness of the financial system to become an authorised deposit-taker.
The proposal then provides that other deposit-takers will be Tier 2 deposit-takers. These will continue to be supervised by trustees through trust deeds, although a number of improvements are also proposed to this model.
Credit unions can opt to be an authorised deposit-taker if they meet the entry requirements. One possible way might be for credit unions to band together under a form of cross-guarantee arrangement to make it over the hurdle, although the practicalities and legal robustness of such an arrangement have not yet been worked through in detail and would need to be discussed with the regulator. The reality, for the present moment, is that credit unions may fall below the proposed minimum capital level or the minimum BB rating proposed to become an authorised deposit-taker.
So, this leaves two ways of moving forward – one is for credit unions to be supervised as Tier 2 institutions; and the other is for the Reserve Bank to supervise credit unions as a special category of non-Bank deposit-takers.
The discussion document states a preference for the second option for a number of reasons.
All credit unions provide similar core services and it would be confusing for investors if some are supervised by one supervisory authority and others by trustees; there would be economies of scale and scope if there was supervision by one authority and it would be more likely to promote a consistent approach than if they were supervised as Tier 2 deposit-takers; and most importantly, if some credit unions restructure their affairs to become Authorised Deposit-Takers, the remaining Tier 2 (and new credit unions) may have difficulty getting a trustee to take them on.
The main impact of the review on the credit union reforms is that the Reserve Bank would be replacing trustees as the prudential supervisor of all credit unions. Those of you who attended last year’s meeting in Invercargill would have met the Governor of the Reserve Bank and been acquainted with the way the Bank does its job.
You may rightly be wondering what will replace your current trust deeds. Trust deeds would no longer be the supervisory instrument as prudential requirements would be imposed by the Reserve Bank. The regulatory framework would be flexible so that credit unions that wish to grow more aggressively may do so provided they adhere to stricter prudential risk management practices. Alternatively, credit unions can choose to conduct their business within the constraints of the current prudential requirements in the credit union legislation, adapted and updated as required for the new regulatory requirements.
The replacement of trust deeds will mean that while the substance of the in-principle decisions will be retained, some of them may need to be implemented differently. As for the substantive requirements, officials will be consulting with you soon.
I am keenly aware that compliance costs are a
paramount concern for small to medium sized businesses like
credit unions. Credit unions went through a round of
consolidation when the trust deeds were introduced in 2001.
You must be wondering if the changes in the pipeline mean another round of costs increases for you.
The Prime Minister has charged me with leading the Quality Regulation Review to take a fresh look at regulatory frameworks. What I will say is that, in the spirit of that Review, the government will make sure that any regulatory changes will remove inflexibility and unnecessary costs on business, and will make regulation more transparent and effective.
Lastly, I would like to say something about the financial education challenge.
Credit unions have traditionally played an important role in educating our young people about the importance of thrift. Another challenge would be for credit unions to play a bigger role in improving the financial know-how of its members.
Many of you will undoubtedly have heard of the ANZ-Retirement Commission Financial Knowledge Survey last year. Overall the Survey tells me that New Zealanders are still ill-prepared for the financial decisions they need to make. In today’s world it is crucial that we are all financially savvy. And I mean all New Zealanders, regardless of income levels. The results of this survey will be useful for credit unions too. I would like to see it picked up and used by credit unions to improve information and services provided to customers. I hope you will take up this challenge.
Interesting times lie ahead for credit unions. I hope you will continue to engage with us going forward and enrich the policy process with your experience.
Thank you again for the invitation to join you today and I wish you every success for the remainder of the conference.