Executive Summary
2. Last year, the New Zealand Association of Credit Unions and Manchester Unity, which represent approximately 90 percent of New Zealand credit unions, reached agreement on proposals for reforming four areas of the Friendly Societies and Credit Unions Act 1982. The main changes proposed by these bodies are:
- Relaxation of the membership requirements by allowing credit unions to determine their own bond and to accept charities and incorporated societies as members;
- Permission to incorporate a credit union's management committee as a board;
- Permission to raise capital by offering non-withdrawable, tradeable, preferential shares to members;
- Making the statutory limitations on borrowing, investment and capital reserves into default provisions that can be varied by a credit union's Securities Act trust deed.
3. While the NZACU has characterised these proposals as minor, urgent changes, changes to the common bond, the incorporation of a management committee and the authority to issue capital of them are in fact very significant because they would alter the nature of credit unions, their governance structures and their capital structures. In addition, these particular proposals are poorly targeted at the underlying problem and would introduce new problems and deficiencies to the credit union regime. For these reasons, I do not recommend their adoption. I do, however, recommend that credit unions be permitted to have "dual bonds" so that they can serve two distinct customer bases, and that work be undertaken to assess the possibility of making certain provisions variable by the Securities Act trust deed.
4. To reduce compliance and administration costs, I also recommend the adoption of the following proposals put forward by the associations:
- credit union associations should no longer be required to obtain ministerial approval to extend their services;
- each credit union should be able to determine its minimum deposit requirement and its own processes for setting service fees.
5. The paper also considers two other issues that have arisen during the most recent review - the ability of credit unions to transfer to alternative governance structures, and the concerns that some credit unions have voiced about being supervised under the Securities Act 1978 trust deed regime. I recommend that further work be done to design an appropriate conversion mechanism. At this stage, I do not recommend any change to the Securities Act supervisory regime. However, I note that the option of expanding the Securities Commission's oversight of trustee companies will be considered by the Ministry of Economic Development as part of its review of the Securities Act. I also note that the outcomes of the review of the financial sector, to be conducted by the Treasury, the Reserve Bank and MED, may have implications for the supervision of all deposit taking institutions, including credit unions, in the medium term.
6. The paper does not consider whether, in light of the recommended changes, credit unions should continue to enjoy a tax exemption. This matter is to be considered by the Inland Revenue Department after MED has completed its review.
7. I anticipate that the NZACU will be disappointed that it has not achieved all of its objectives in the course of this review. However, the government's previous efforts to develop a more appropriate governance framework have met with opposition from the industry. I therefore intend to make it clear to the industry that (apart from planned review of credit unions' tax status) the review of Friendly Societies and Credit Unions Act will end once the issues identified in this paper have been addressed and, where appropriate, legislated for.
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