Brendan Logue: introducing fitness and probity tests for credit union directors, maximum terms of office for credit union board members and statutory reserve requirements

HAVING committed himself to tighter financial regulation in the banking meltdown, finance minister Brian Lenihan's newfound resolve is already wavering in the face of a battle royale over the future scrutiny of the country's credit unions.

In recent weeks, the Irish League of Credit Unions (ILCU) has launched a sustained assault on the sector's regulator, the Registrar of Credit Unions, Brendan Logue, over his attempts to beef up the credit unions' regulatory framework in the wake of the global financial crisis.

Since the start of the year, Logue has proposed new regulatory measures including fitness and probity tests for credit union directors, maximum terms of office for credit union board members and statutory reserve requirements. Although these measures are commonplace in other financial institutions, they are being strenuously resisted by the ILCU, which is applying intense pressure on Lenihan to call Logue off.

The credit union movement, because of its size, wields considerable political influence; it famously forced finance minister Charlie McCreevy to abandon proposals to tax credit union dividends in 1998. More recently, the ILCU has concentrated its political fire on Logue. For instance, in 2006, it wrote to its members asking them to persuade local TDs to support the watering down of lending limits proposed by the registrar.

ILCU met the minister for finance last month. Afterwards the minister promptly announced a sudden review of credit union risk profiles, parking Logue's regulatory initiatives until well after the elections.

In what might have been a signal to Logue, the review was announced by ILCU, rather than the minister's own press office. But Logue shows little sign of backing down in a battle which could prove to be the first real test of the state's newfound commitment to tough financial regulation.

The registrar is already planning to submit new proposals to address regulatory deficiencies in credit union legislation, in a move which could force Lenihan to choose between the ILCU and the regulator.

Logue is also continuing to advance the most controversial of his proposals: a plan to introduce a regulatory reserve ratio of 10% of total assets for all credit unions by 30 September. The move is an attempt to protect credit unions from bad debts and investment losses amid projections that half of the country's 405 credit unions will lose money this year.

"In the light of the current turmoil in the financial markets we are anxious to ensure that the capital position of credit unions is protected and maintained to the fullest possible extent," said a spokeswoman for the registrar. "Credit unions should also be mindful of the potential for increased levels of arrears and the need to ensure that appropriate bad debt provisions are maintained to reflect any deterioration of quality."

But the ILCU argues that the regulator's focus on reserves and bad debts takes no account of the role of credit unions and the profile of their membership.

"Credit unions are not banks; they are not-for-profit, community-based co-operatives. Bad debts in themselves are not unusual in the work the credit union movement does. The credit union movement has experienced recession and high unemployment amongst its membership in the past," said ILCU in a statement to this newspaper.

It is also concerned that Logue's reserve proposals could leave many profitable credit unions unable to pay dividends to their members, undermining confidence in the sector.

"If the regulator's proposal were to become law, it could lead to a position where many credit unions around the country would be unable to pay dividends to members. This would inflict unnecessary reputational damage on credit unions."

The organisation also claimed it was incorrect to state that it was opposed to the two corporate governance measures being promoted by Logue: fitness and probity tests for credit union directors and maximum terms of office for credit union board members. But the Sunday Tribune has learned that one of these measures was attacked by then ILCU president Samuel Adair in his presidential address at its AGM six weeks ago.

Adair told delegates that maximum terms of office would mean that "lifetimes of voluntary credit union experience and invaluable know-how are simply discarded at a time when volunteers are not easily found – and for what? I wonder whether, after years of dealing with our movement, the regulator in the Republic has acquired any true understanding of who we are and what we are about".

Despite the ILCU's willingness to portray Logue as a naïve figure who is unable to distinguish banks from credit unions, the fact is that the registrar has at times been more alert to the risks facing credit unions than the league itself. As early as 2004, Logue had spotted the dangers inherent in the now infamous perpetual bonds sold to credit unions by the ILCU's investment advisers, Davy Stockbrokers. He attempted to prevent their sale but was blocked by the Department of Finance after the ILCU flexed its political muscle. The result was that credit unions were allowed to continue investing in the bonds, amassing investment losses of at least €75m as the global financial markets deteriorated.

The memory of such incidents is likely to have sparked Logue's newfound resolve, leaving the ILCU facing its worst nightmare: a financial watchdog straining at the leash at the thought of sinking his teeth into its movement. Lenihan now faces a stark choice between letting Logue loose or returning him to his kennel: a decision which will reveal how serious the state is about financial regulation.