Executive Summary
2. In November 2003, the New Zealand Association of Credit Unions ("NZACU") and Manchester Unity ("MU"), which jointly represent approximately 90 percent of New Zealand credit unions, reached agreement on proposals to reform the Friendly Societies and Credit Unions Act 1982 (the "Act"). Their proposals are embodied in a Statement of Agreed Principles (attached as Annex A) and fall under the following broad headings:
- Qualifications for Admission to Membership;
- Trust Deed Duplication;
- Capital; and
- Legal personality and validity of action.
3. In my earlier submission to the Cabinet Economic Development Committee ("EDC"), I highlighted the potential negative impact that some of the proposals may have on investor protection, competitive neutrality, sound governance and risk management. Consequently, I recommended against accepting those proposals. Bearing in mind the long gestation of this review and the value the government places on credit unions' contribution to the financial sector, on 25 August 2004, Cabinet invited the Associate Minister of Finance (Hon David Cunliffe) and me to discuss the proposals with officials, with a view to accommodating the credit unions' proposals as far as possible without exposing investors to significant unmanageable risks.
4. On the basis of that discussion, I recommend that Cabinet approves the following proposals:
- remove the requirement to specify service charges in credit unions' rules, provided a mechanism for levying charges is still spelt out in the rules;
- allow each credit union to determine the minimum deposit holding of each member, while retaining the statutory limit as a default provision;
- allow credit union associations to extend new services to credit unions without Ministerial approval;
- allow each credit union to determine its own common bond as a basis of membership, provided that the Registrar of Friendly Societies and Credit Unions (the "Registrar") is satisfied that the bond is an objectively verifiable characteristic and is specified in the credit unions' rules; and
- allow charities and incorporated societies affiliated with the common bond to become credit union members.
5. I also recommend that Cabinet agrees in principle that credit unions and their trustee supervisors should be able to vary certain statutory restrictions on borrowing, investment and capital reserves. However, further analysis of this proposal will be required to ensure that permitting any variation will not expose investors to increased risk.
6. I remain concerned that the proposal to allow credit unions to issue capital instruments that are non-withdrawable, transferable between members and ranked ahead of ordinary shares creates significant risks that cannot readily be mitigated. Nonetheless, I support credit unions' objective of finding alternative ways of achieving their capital reserve requirements and consider that other options should be investigated and explored with the industry.
7. I also remain concerned that the proposal to incorporate credit union management committees as a board would undermine the mutuality of credit unions and create additional governance risks that may impact negatively on members. However, I note that incorporation of the credit union as a whole remains a viable option under a modified version of the Companies Act 1993.
8. In addition to the proposals put forward by the credit unions, I also recommend that Cabinet agree in principle to introduce a conversion mechanism for those credit unions that wish to convert to an alternative governance regime such as the Companies Act. While the industry has expressed divergent views on this matter, the current alternative of passing a special purpose Act each time a credit union wants to convert is not an appropriate use of parliamentary time.
9. The paper does not consider whether, in light of the recommended changes, credit unions should continue to enjoy a tax exemption. No decisions are being made on this issue at this stage.
10. I anticipate that NZACU may be disappointed that its proposals have not been accepted in entirety. However, the package I have outlined will address most of the industry's concerns. It will also provide a mandate for further work with the industry to refine or explore alternatives to the few proposals that, in their current form, would introduce excessive governance and/or prudential risks.
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