Appleby warns of credit union director loans risk
'Potential conflict of interest' as customers sit on boards
The issue of directors' loans at credit unions, believed to be widespread in some parts of the country, has the potential to cause major conflicts of interest, the corporate watchdog Paul Appleby has said.
In a letter and submission to Financial Regulator Matthew Elderfield, Mr Appleby said credit unions had customers on their boards and among their management ranks, which poses certain dangers. He said proposals on related-party lending (which includes director's loans) from the regulator appeared to exclude credit unions.
Mr Appleby, who has spoken publicly about the dangers of directors' loans generally, said Mr Elderfield might want to take a more specialised approach to credit unions, but might not be advisable. "They can also run the risk of allowing excessive lending to senior management and board members, which may lead to conflicts of interest,'' said Mr Appleby.
"It would, therefore, be preferable if it were indicated that credit unions will be subject to a parallel, but perhaps less onerous, regime," he added.
Mr Appleby's submission was not released electronically in the first batch of responses to Mr Elderfield's consultation. But upon enquiries from the Irish Independent, the submission was issued.
"Credit unions represent a unique form of institution, they tend to be regionally based and would by their nature have customers on their boards and in their senior management,'' said Mr Appleby. He said the reason for excluding the credit unions had not been stated.
Mr Appleby also said the definition of a loan should also be looked at afresh. "The definition of loan used is a comparatively restrictive one, contrasted for example to the wide range of transactions that give rise to disclosure requirements under company law.
"You may wish to consider whether the broader range of transactions as specified within general company law should come within the scope of the code. For example, the code as it is drafted could be circumvented by the relevant institution standing as guarantor for a loan taken out with a separate institution," he explained.
Mr Appleby has also suggested broadening the definition of a "related party". "We note the definition of shareholder is limited to those holding shares. The beneficial owners of such shares may in fact be the persons who exercise control over the shares.
"As such, they would be the appropriate persons to come within the definition of related party," he said.
"We note the absence of bondholders in the list of related parties. While significant shareholders are rightly included, in particular in the current environment we believe that substantial bondholders should also be considered related parties."