Financial regulator Matthew Elderfield speaking at the Irish League of Credit Unions AGM in Limerick last month

New registrar of credit unions James O'Brien has been in the job for just a month, filling a key position on Financial Regulator Matthew Elderfield's new team, but already he is facing a revolt by the entire credit-union movement over proposed changes to the way the non-profit financial institutions are to be regulated.

The credit unions are upset at conditions O'Brien plans to attach to provisions in the Central Bank Reform Bill 2010 which make it possible for credit unions to extend loan terms from three to five years for borrowers in financial difficulty. To balance any extra risk incurred by changing repayment terms, O'Brien wants to impose tougher rules on reserves, liquidity and arrears accounting – something the bill explicitly empowers him to do, but which will limit the ability of credit unions to pay dividends and attract new savers.

Representatives of the credit-union movement say O'Brien and the Department of Finance are giving with one hand and taking away with the other. They say the so-called 'Section 35' reforms, which grew out of finance minister Brian Lenihan's wish in April 2009 to make it easier for credit unions to reschedule loans, could actually have the opposite effect and unnecessarily restrict credit unions from helping borrowers in need.

"We don't need a sledgehammer to crack this nut," said Selena Gilleece, chair of the Credit Union Managers Association (CUMA). "The Central Bank Bill is almost being rushed through to facilitate the restructuring of the financial system. I don't see why credit unions should be penalised for malpractice in other institutions."

Earlier this month CUMA united with the National Supervisors Forum and the two credit-union representative bodies, the Irish League of Credit Unions (ILCU) and the Credit Union Development Association (CUDA), to call for the total removal of changes to credit-union regulation in the Central Bank Reform Bill until a strategic review of the sector can be completed later this year.

"We will approach the government collectively to seek a deferral of all amendments to Section 35 pending the introduction of primary legislative reform arising from the strategic review of the credit-union sector, initiated by the minister for finance, to commence summer 2010," the groups said in a collective statement. "In the interim we have identified a number of solutions which we will put to the Minister for Finance and the Financial Regulator to address refinancing issues as originally intended."

The strong stance represents a total reversal by ILCU, which represents more than 400 credit unions with €14bn in assets, and the supervisors. Exactly a month ago, in a press release before the group's agm, ILCU chief executive Kieron Brennan specifically singled out the new conditions on rescheduled loans for a positive mention. "There are... conditions attached to rescheduling of loans, certain provisioning against bad debts and particular liquidity levels must be maintained," he said. "This new arrangement is good for our members and good for credit unions."

At the league's agm in April, ILCU president Mark Bailey urged members to accept the changes "to protect the long-term interests of credit unions".

But after coming under sustained pressure from CUMA, individual member credit unions and rival CUDA, which had opposed the government and the regulator from the start, the league did an about-face following a board meeting on the issue last weekend, despite having been part of the long-term consultation process on the new rules.

"We were happy with the conclusion of the negotiations in so far as the minister was acknowledging that we had issues regarding the rescheduling of loans, debt provisions and liquidity levels which could not continue," an ILCU spokeswoman said. "The publication of the bill was only ever the first part of what we viewed to be a longer process involving an engagement with credit unions for their views on how this would impact operationally going forward. Finally there were also a number of sub sections contained in Section 35 in relation to regulation for credit unions which neither the ILCU or other representative organisations were consulted on prior to publication."

Neither the Department of Finance nor the Financial Regulator are pleased that an issue considered settled enough for legislation after months of talks has now been thrown open for debate, though.

"The position now being adopted by ILCU, which represents approximately 90% of credit unions, is a complete about-turn by them," the department said in a statement. "The minister has no plans to amend the legislative proposals in relation to Section 35. They are prudent measures required by the Registrar of Credit Unions in order to help safeguard the stability of both the credit-union sector and individual credit unions."

The regulator is being slightly more conciliatory. The registrar has clarified that a missed repayment on a rescheduled loan may not always require a 1005 provision. There is also a mechanism whereby the level of provisions held on re-scheduled loans can be reviewed and reduced once the loan has performed for a period of time.

These measures may also turn out to be short term, as they will be fully reviewed as part of the strategic review of the credit-union sector which is due to commence in the second half of this year.