Irish credit unions are generally in a strong financial position. According to the Irish League of Credit Unions’ annual report, published in December, member credit unions have €880m in capital above the 10% minimum capital required, while reserves across the sector rose by 8.4% in the last reporting year, to €2.3bn.
However, there are occasional failures. Newbridge Credit Union had to be rescued in 2013, having been caught out by the property bubble. The recent liquidation of Rush Credit Union was a very different matter. Superficially the core issue was the lack of reserves – it was €4.73m short of the minimum capital requirement of 10% of assets.
But the court papers supporting the appointment in November of Jim Luby and Tom Rogers of McStay Luby as joint provisional liquidators to Rush present a more detailed picture which should be a warning to auditors of any organisation operating without sufficient checks and balances, or internal and external challenge.
A review by Grant Thornton of the operations of Rush Credit Union indicated a number of issues that underpinned a serious failure of corporate governance. The board did not operate as an effective team; there was a breakdown in the relationship between the board and management; compliance issues brought to the board were not addressed; related party loans went into arrears and were not treated appropriately; a small number of board members dominated several committees; and some committee meeting minutes were incomplete. Perhaps worst of all for a credit union, the lending policy was not adhered to and was insufficiently robust.
In addition to this catalogue of governance failures, there was a shocking specific failure. A decision was taken by the credit union to hold a car draw, which all members could take part in. But Grant Thornton’s review found that deductions were made from members’ accounts even when, in some instances, members had not given permission for this. No reconciliation was conducted of income and expenditure. Most astonishing of all, there was no database showing who had won the prizes. As a result, compensation of €9,000 had to be repaid to members.
Nor was this all. There was a potential tax liability for two individuals engaged as contractors. Money laundering regulations had been breached, leading to the Central Bank suspecting actual money laundering activity. Other behaviour by people associated with the credit union are subject to investigations by the Garda and were redacted in the publicly available documents presented to court. But we do know there were a number of unauthorised transactions, some conducted on Rush Credit Union credit cards.
Irregularities initially came to light in 2011, as a result of the Central Bank appointing Grant Thornton to conduct a limited inspection as part of a routine programme. Grant Thornton found a shortfall in the provision for bad and doubtful debts of €540,000; non-compliance with regulatory lending restrictions; and weak loan recovery policies.
These findings were followed by further reviews by Grant Thornton, by the credit union’s own auditors and by external consultants. These investigations found other apparent reporting errors and serious corporate governance failings.
The government’s Deposit Guarantee Scheme has made compensation payments to nearly 10,000 members, up to a maximum of €100,000 per person. Former members are now able to join another local credit union – the Progressive.
Paul Lonán of the Irish League of Credit Unions stresses that the movement is generally well governed. “The issues at Rush Credit Union were at the extreme end of the scale and were not representative of the movement as a whole,” he says. “This has also been emphasised by the Central Bank. This was an extremely rare occurrence. Overall, the movement is strong and very well capitalised.” He point out that as well as the movement’s total capital reserves figure of €2.3bn, there are additional bad and doubtful loan provisions.
“Since the publication of the Final Report of the Commission on Credit Unions four years ago,” continues Lonán, “huge changes have taken place in relation to the governance and operation of credit unions. Additional compulsory functions such as Risk, Compliance and Internal Audit have been added to the pre-existing controls within credit unions. The governance requirements on credit unions in Ireland are now as comprehensive as those in place in the most advanced of credit union movements.
“Our Boards of Directors are subject to a detailed fitness and probity regime. The Irish League of Credit Unions has almost 3,000 people registered on our Continuing Professional Development Scheme, who we expect will carry out over 45,000 hours of CPD training this year. All credit union personnel including our volunteers are fully committed to upskilling and development to be the best they can be for credit union members.”
Despite this, it is clear that lessons can and should be learnt from the failures at Rush, not just for other credit unions, but also for other organisations – particularly for those that rely on voluntary membership on their management committees.
Aidan Clifford, ACCA Ireland’s technical director, explains: “Being a member of the board of directors of a credit union is quite close to being a full time job. It is also unloved, there are long hours, it can be arduous, difficult and confrontational. You must surrender up your personal bank account details to the Central Bank and attest to your fitness and probity, attend training and be challenged all along the way. A director’s loans and those of their children and other relatives must be subject to closer scrutiny and disclosed separately in the financial statements.
“And one credit union director has pointed out that ‘You can’t even enter the car draw!’ – although media reports have suggested that this last rule did not appear to apply in Rush Credit Union. Volunteering as a director of a credit union is just too much to ask of people. Yet without credit unions Ireland would be awash with lenders willing to lend at rates in excess of 700% instead of the 12% or less typically charged in a credit union.
“Credit unions need to change their governance model – perhaps it is time to allow an honorarium be paid to a professional financial services qualified director. Perhaps all credit union managers should be required to have a minimum qualification.
“I know of one situation where a member of ACCA with a deep knowledge of credit unions expressed an interest in volunteering to be a director of their local credit union and was told by the manager that they did not want somebody like them on the Board. The credit union in question had to be subsequently rescued.
“Most credit unions now have strong boards of directors and professional staff, but a few subsist on well-meaning but not fully competent volunteer directors and inept management. It is important to support the former while encouraging the latter to merge or wind down in an orderly manner. In the most part the Central Bank is achieving this goal, but many ACCA members report that some Central Bank supervisors are sometimes a little less encouraging and supportive than they feel is appropriate for well-run credit unions and a bit slow to act for the poorly run ones.”