Tuesday 24 April 2018

Credit unions: savers' rescue fund put at risk by shocking flaws

Probe finds litany of issues with credit union bailout fund

Charlie Weston

Charlie Weston

A shocking catalogue of mismanagement, breaches of rules and poor oversight has been revealed in a secret report into a multi-million euro bail-out fund run by the country's credit unions.

Some €13m of credit union money was put at risk because of the way the rescue funds were used, according to the report by accountancy firm Mazars.

The rescue fund, owned by the Irish League of Credit Unions, is known as the Savings Protection Scheme (SPS), and details about it have never been published before.

A copy of the Mazars report, seen by the Irish Independent, outlines a litany of issues. These include how SPS bailout funds were given to credit unions, even though they were not in financial difficulty; missing paperwork; and a failure to follow full and proper procedures.

Protests outside Newbridge Credit Union in 2013
Protests outside Newbridge Credit Union in 2013

The revelations are set to cause mayhem at this weekend's annual general meeting of the Irish League of Credit Unions.

It is the biggest financial scandal to hit the credit union sector since it lost millions of euro on a failed IT system in 2000.

Vice-president of the League of Credit Unions Blanche Ronayne heads the sub-committee of the league which oversees and operates the fund.

Ms Ronayne did not respond when a comment was sought.

Berehaven Credit Union which closed last year on foot of court orders
Berehaven Credit Union which closed last year on foot of court orders

She is standing for election as president of the league at this weekend's AGM in Killarney. She is being opposed by league board member Brian McCrory from Belfast.

The 90-page review of the SPS was ordered by the league's supervisory committee, after concerns emerged about how it was operated.

The Mazars report lays bare the operation of the Savings Protection Fund (SPS), a rescue scheme for troubled credit unions set up by the League of Credit Unions in 1989.

Among other findings are that:

Files were not properly maintained.

There were inadequate checks of credit unions seeking a bailout.

The SPS is outside the normal league management system.

Credit unions being bailed out were allowed to dictate the terms of the bailout.

There were few checks of the amounts of bailout funds being demanded. Mazars also found conflicts between the Central Bank and the monitoring department of the league.

Credit unions got approved for bailout funds before it had been agreed how much they would need.

Bailout funds were used by recipient credit unions for purposes other than those intended.

Credit unions contribute a combined €8m a year to the SPS fund, which is used to provide bailout support to a local lender that cannot meet its financial commitments, or has low reserves.

The 90-page review of the SPS was ordered by the league's supervisory committee, after concerns emerged about how it was operated.

It is the first time details have emerged of how the SPS scheme operates, which credit unions have been rescued and the SPS's financial position.

This is because the details on the fund, and which credit unions are rescued by it, are never published by the league.

It is essentially a secret rescue fund.

The Mazars draft report reveals that the SPS currently has €80.4m in uncommitted funds.

Some €84.9m has been guaranteed to 48 credit unions since the SPS was set up 26 years ago, and €46.6m of this has been drawn down. The Irish Independent has decided not to name credit unions bailed out in case this causes a run on them.

Accounts in all credit unions are part of the State's deposit guarantee scheme, which covers amounts up to €100,000 per person.

In the past two years alone, some €61m from the SPS was used to bail out troubled credit unions.

But the Mazars report outlines a string of issues with how the SPS is run, according to the 'Irish League of Credit Unions - Review of SPS on Behalf of the Supervisory Committee'.

The Mazars report, dated February 2015, shows that the way the SPS fund was run breached its own rules.

It raises questions about the "validity" of guarantees credit unions provided to the SPS in return for a bailout.

This means that the regulator, the Central Bank, may have been given assurances that credit unions were restored to financial health when there were doubts about this.

Bailout money was given to credit unions that were not in financial difficulty, even though this is a breach of the rules of the SPS.

Some 27 credit unions got financial support to help with mergers with other credit unions, but only a minority had been in financial difficulty.

Credit unions that get a bailout from the SPS have to put up some collateral, as a condition of getting bailout funds.

The biggest issue in the Mazars report is the extensive use of member loans that have been written off, and sometimes settled, put forward as collateral.

A written-off loan is next to worthless because the money is not recoverable by the credit union. Mazars says a "settled loan does not exist".

This means it is highly questionable for credit unions to use them as collateral in return for a bailout from the SPS.

There were €13.3m of these written-off loans used as guarantees in 14 credit unions.

Mazars says this is a clear breach of the rules of the SPS. This is set to be a headache for the regulator for the sector, Anne-Marie McKiernan.

"Based on the wording of the formal documentation in place, it was not intended that pre-written off and pre-settled loans would be included in guarantees, and accordingly the inclusion of such loans may have an impact on the validity of any guarantee including same," Mazars says.

The report also uncovered mistakes and miscalculations made on the amount of rescue funds needed, a lack of due diligence and how stated procedures that were supposed to be followed were not.

The Mazars report says SPS funds were used to pay redundancies in breach of the rules.

The report makes 13 detailed recommendations for improving governance and management of the SPS.

The league said it could not comment because of the "confidential" nature of the SPS.

Irish Independent

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