Practical Issues in Australia A Credit Union Perspective


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  • Collectively, credit unions and mutual building societies are fourth largest household deposit gathering force after CBA.
  • Credit Unions On-balance sheet assets reached $46.8bn and grew by 7.1% for the year ended September 2009, down on the 8.3% annual growth recorded in June 2009. Building Societies The building society sector fared strongly with total assets growing by 13.5% in year to September 2009. The Home Building Society merger with Bank of Queensland has ceased to impact on data trends.
  • Credit Unions Net interest income fell by -1.4%, compared with same period a year earlier. Interest margin has improved from 2.58% in June 2009 to 2.78% in September 2009, partly due to softer asset growth. Building Societies The interest margin for the quarter increased to 2.37% in September 2009, which compared with 2.14% a year ago.
  • Intense competition, decline of the traditional personal loan, being “out” of the credit card market for quite some time, the widely held perception that credit unions are not providers of home loans and weak market positioning generally have all contributed to a steady decline in the market share of credit unions.
  • Operational efficiency is likely to play an increasingly important role. Credit unions and building societies have made some modest gains in this area in recent years, enhancing their profitability, but the pressure to achieve more will remain intense.
  • A continuation of the long-term consolidation trend would see credit union numbers down around 82 by 2013.
  • Practical Issues in Australia A Credit Union Perspective

    1. 1. Practical Issues in Australia A Credit Union Perspective Australian-Italian Co-operative Symposium 15-17 February 2010 - Sydney University Village The Co-operative Finance Sector
    2. 2. Presentation Overview <ul><li>An Australian Perspective: </li></ul><ul><li>History of credit unions </li></ul><ul><li>Legislative structure prior to July 1992 </li></ul><ul><li>The Financial Institutions Scheme </li></ul><ul><li>The Wallis Report </li></ul><ul><li>Regulators - APRA & ASIC </li></ul><ul><li>The experience </li></ul>
    3. 3. Credit Unions Meet a Need <ul><li>At first, the philosophy of equality, equity & self-help was confined mainly to the area of retail trade. In the late 1840s it broke new ground in Germany, where Frederick Whilhelm Raiffeissen, the mayor of a small village, embraced the democratic principles of cooperation to form a mutual cooperative through which local farmers could pool their savings & lend to one another at reasonable rates of interest. </li></ul><ul><li>Under the guidance of mayor Raiffeissen and judge Schulze-Delitzsch, &quot;credit unions&quot; gained popularity and by the turn of the century had been adopted by urban & rural communities across Europe </li></ul>
    4. 4. Credit Union Origins <ul><li>The cooperative principles at the core of credit union operation can be traced to the 1800s, to the early stages of Europe’s Industrial revolution. </li></ul><ul><li>For many people of this era, cooperation represented an opportunity to escape exploitation and to regain dignity and self-respect through collective action and mutual self-help. </li></ul>
    5. 5. History of Credit Unions <ul><li>Franz Hermann Schulze-Delitzsch established the first credit unions in the 1850s in Germany to give those lacking access to financial services the opportunity to borrow from the savings pooled by themselves and their fellow members </li></ul><ul><li>Friedrich Wilhelm Raiffeissen transported the financial cooperative concept to rural Germany a decade later </li></ul><ul><li>Experience in Munich & Bavaria in 1994 & ‘98 </li></ul>
    6. 6. History of Credit Unions <ul><li>Early in the 20th century, credit union idea expanded to North America </li></ul><ul><li>1947 Universal Credit Union founded by Kevin Yates in Sydney (Post exposure to credit unions in North America while training as a pilot during 2nd World War) </li></ul><ul><li>Industrial & Parish credit unions developed & supported by Credit Union Leagues in 1960s </li></ul><ul><li>Birth of Hastings Rural Credit Union in 1967 </li></ul>
    7. 7. Credit Unions <ul><li>Credit unions worldwide offer members much more than financial services. </li></ul><ul><li>They provide members the opportunity to own their own financial institution, help them create opportunities such as starting small businesses, building family homes & educating their children. </li></ul><ul><li>In some countries, members encounter their first taste of democratic decision making through their credit unions eg Poland </li></ul>
    8. 8. Legislative Structure Pre 1992 <ul><li>Disparate Laws of the States & Territories regulated credit unions – the encouragement of thrift & the wise use of credit </li></ul><ul><li>Interstate Trading inhibited - State borders with differing legislation </li></ul><ul><li>Differences in standards of operation & supervision between States </li></ul><ul><li>A lack of uniformity in structure & performance, between States impact on brand </li></ul>
    9. 9. The Birth of the Financial Institutions Scheme <ul><li>Crisis of Confidence - Collapse Pyramid Building Society in Victoria 1990 </li></ul><ul><li>Commonwealth Government unwilling to take responsibility for non-banks </li></ul><ul><li>States agreed to Uniform State based legislation in Canberra 31 May 1991 </li></ul><ul><li>Uniformity & Stability through cooperation between the States & Territories </li></ul>
    10. 10. The Financial Institutions Scheme <ul><li>Commenced 1 July 1992 </li></ul><ul><li>Australian Financial Institutions Commission (AFIC) </li></ul><ul><li>Applied to all state based Financial Institutions including Credit Unions & Building Societies </li></ul><ul><li>Uniformity of principle & objectives </li></ul><ul><li>Prescribed standards for operation </li></ul><ul><li>Uniform & standard Supervision </li></ul><ul><li>Prescribed conduct of Supervisors </li></ul>
    11. 11. Objects of FI Scheme <ul><li>The principal objects of the financial institutions scheme were — </li></ul><ul><li>(a) to protect and promote the financial integrity and the efficiency of the State-based financial institutions system; and </li></ul><ul><li>(b) to protect the interests of depositors </li></ul>
    12. 12. The Financial Institutions Scheme <ul><li>Australian Financial Institutions Commission - Peak Regulator </li></ul><ul><li>State Supervisory Authorities - implement supervision at State level </li></ul><ul><li>Special Services Providers eg Credit Union Services </li></ul><ul><li>Standards for Credit Unions & Building Societies prescribed </li></ul>
    13. 13. Financial Institutions Scheme Objectives <ul><li>National Coordination of high uniform standards and practices </li></ul><ul><li>Uniform Prudential Supervision of NBFI based on Prudential Standards, Reporting & Disclosure requirements </li></ul><ul><li>Maintain stability & efficiency of the NBFI System in Australia </li></ul>
    14. 14. Financial Institutions Scheme Philosophy <ul><li>The responsibility for the financial success and viability of financial institutions rests with their boards and management not with governments or supervisors </li></ul>
    15. 15. The Need for Review <ul><li>Inconsistencies in application of supervision on a State to State basis </li></ul><ul><li>The Changing Financial Marketplace – products & services aligned with banks </li></ul><ul><li>The need for efficiencies in the Supervisory arena </li></ul><ul><li>Technological developments - a global market </li></ul><ul><li>New FI’s not within the regulatory net </li></ul>
    16. 16. Reasons for Review <ul><li>Era of accelerated change in the financial system </li></ul><ul><li>Regulation must adapt both to facilitate greater competition and efficiency in the financial marketplace and to secure the integrity and stability of its operations </li></ul><ul><li>Wallis Inquiry established by Federal Government May 1996 </li></ul>
    17. 17. Taxation of Mutual FI’s <ul><li>Before 1995, credit unions in Australia were exempt from payment of company tax on profits (surplus) arising from business transacted with members. </li></ul><ul><li>Since business with non-members comprised primarily the investment of liquid asset reserves in deposits & marketable securities, credit unions in effect paid no company tax. </li></ul>
    18. 18. Taxation Inequity <ul><li>Since 1 July 1995, mutual FIs subject to company tax on their entire surplus </li></ul><ul><li>Imputation Tax system that has applied in Australia since 1987 to avoid double taxation on after-tax profits paid to shareholders as dividends ('franked' dividends) carry tax credits which can be used by the shareholder to offset other tax liabilities. Most mutual FIs have no mechanism available to pay franked dividends </li></ul>
    19. 19. The Wallis Report <ul><li>Report delivered March 1997 </li></ul><ul><li>Clarified regulatory roles </li></ul><ul><li>Consistent regulation of similar financial products </li></ul><ul><li>Competitive neutrality across the financial system </li></ul><ul><li>Foundation for FI’s to adapt to change </li></ul>
    20. 20. Guiding Principles <ul><li>Shift the focus from institutions to functions </li></ul><ul><li>Rationalise Regulators and clearly specify objectives of each </li></ul><ul><li>Promote greater competition, efficiency and consumer choice </li></ul><ul><li>Flexible approach to Supervision </li></ul>
    21. 21. Wallis Regulatory Structure <ul><li>Australian Prudential Regulation Commission (APRC) to supervise all institutions engaged in deposit taking, insurance and superannuation – Created as APRA </li></ul><ul><li>Reserve Bank of Australia separate from APRC & will maintain overall responsibility for financial system stability </li></ul>
    22. 22. Wallis Regulatory Structure <ul><li>Corporations & Financial Services Commission to be responsible for incorporation of FI’s, consumer protection and market integrity (Functions now split between Australian Securities and Investment Commission – ASIC and the Australian Competition & Consumer Commission – ACCC) </li></ul><ul><li>Will standardise and rationalise disclosure </li></ul>
    23. 23. Regulation <ul><li>A n ADI, subject to APRA regulation (Jul 1999) & supervision as well as ASIC regulation under the Financial Services Reform (FSR) legislation & the Corporations Act as well as Austrac - AML </li></ul><ul><li>Must adhere to APRA prudential standards & practices to ensure that financial promises made by ADI’s are met within a stable, efficient & competitive financial system </li></ul><ul><li>L icenced under the Banking Act & hold an ADI Licence & an Australian Financial Services (AFS) Licence under FSR supervised by ASIC </li></ul>
    24. 24. APRA Role <ul><li>APRA is the prudential regulator of the Australian financial services industry overseeing banks, credit unions, building societies, general insurance & reinsurance companies, life insurance, friendly societies, & most members of the superannuation industry </li></ul><ul><li>APRA is funded largely by the industries that it supervises </li></ul><ul><li>It was established on 1 July 1998 </li></ul>
    25. 25. ASIC Role <ul><li>ASIC is Australia’s corporate, markets and financial services regulator </li></ul><ul><li>Ensures Australia’s financial markets are fair and transparent, supported by confident and informed investors and consumers </li></ul><ul><li>Maintain, facilitate and improve the performance of the financial system and entities in it </li></ul>
    26. 26. ACCC Role <ul><li>ACCC - The ACCC promotes competition and fair trade in the market place to benefit consumers, businesses and the community. </li></ul><ul><li>It also regulates national infrastructure services. Its primary responsibility is to ensure that individuals and businesses comply with the Commonwealth competition, fair trading and consumer protection laws. </li></ul>
    27. 27. Mutuality in FI <ul><li>Holiday Coast Credit Union is a public company limited by shares, organised on the basis of the principles of mutuality </li></ul><ul><li>Holiday Coast Credit Union has set out in the preamble to its constitution that these principles of mutuality, although not binding, will provide a keystone for the basis of decision-making </li></ul><ul><li>Board of Directors elected by members </li></ul>
    28. 28. WOCCU Operating Principles <ul><li>Democratic Structure </li></ul><ul><li>Open and Voluntary Membership within “ Bond ” & member responsibilities </li></ul><ul><li>Democratic Control a cooperative enterprise serving and controlled by its members </li></ul><ul><li>Non-Discrimination non-discriminatory in relation to race, nationality, sex, religion, and politics </li></ul>
    29. 29. WOCCU Operating Principles <ul><li>Service to Members </li></ul><ul><li>Service to Members Credit unions services are directed to improve the economic and social well-being of all members </li></ul><ul><li>Distribution to Members To encourage thrift through savings and thus to provide loans and other services </li></ul><ul><li>Building Financial Stability Build the financial strength to ensure continued service to membership </li></ul>
    30. 30. WOCCU Operating Principles <ul><li>Social Goals </li></ul><ul><li>On-Going Education The promotion of thrift and the wise use of credit, and the rights and responsibilities of members </li></ul><ul><li>Cooperation Among Cooperatives to best serve the interests of their members and their communities </li></ul><ul><li>Social Responsibility to the individual members & to the larger community in which they work and reside </li></ul>
    31. 31. Other Legislation <ul><li>S ubject to regulation in accordance with numerous other pieces of legislation, including: Trade Practices , Taxation , OH & S , Industrial Relations / Workplace laws , Environmental legislations a nd other legislation pertaining to corporations </li></ul><ul><li>Holiday Coast Credit Union considers the compliance with legislation as a key operational risk and has various systems and processes to monitor ongoing compliance with these requirements </li></ul>
    32. 32. Issues for Mutual Fi’s <ul><li>Only Mutuals can call themselves credit unions </li></ul><ul><li>Mutuals can become banks </li></ul><ul><li>Mutual Fis incorporation under Corporations Laws </li></ul><ul><li>Emphasis on Institutions own risk management systems </li></ul><ul><li>Capital Raising for mutual FIs in a very competitive market </li></ul>
    33. 33. <ul><li>Determine definition of “Mutual” </li></ul><ul><li>Determine impact of mutuality on Capital, Liquidity, Depositor Protection & Supervision </li></ul><ul><li>Decide how to fit into new national system and retain credit union identity and collective endeavour </li></ul><ul><li>Managing the loss of taxation concessions </li></ul>Post Wallis Challenges for Movement
    34. 34. Market Share By Lender
    35. 35. Current Market Share
    36. 36. CUBS Still a Niche Player
    37. 37. But Assets Growing Steadily
    38. 38. Maintaining Profit Levels Challenge
    39. 39. Margin Squeeze Ongoing Challenge
    40. 40. Market Share Slipped Over The Years
    41. 41. Improving Operational Efficiency
    42. 42. CU Assets Growing as Consolidation Continues
    43. 43. Consolidation Likely to Continue
    44. 44. Lessons Learnt <ul><li>Mutual FIs must maintain close liaison with Governments to ensure that the legislative framework desired is achieved </li></ul><ul><li>Protect the fundamentals of credit unions at all costs - the International Credit Union Operating Principles should be non negotiable </li></ul>
    45. 45. Lessons Learnt <ul><li>Competitors will seek to also enforce a level playing field eg Taxation treatment </li></ul><ul><li>Commit to a unified voice and utilise all avenues of carrying the unified position </li></ul><ul><li>Be prepared to source competitors with the same end goal for structure and lobby with them </li></ul>
    46. 46. Lessons Learnt <ul><li>Do not succumb to short term solutions for issues that are the cornerstone of the credit union movement eg capital raising and its alignment with Mutuality </li></ul><ul><li>Commit to a regime of Self Regulation to underpin sound prudential practices and procedures </li></ul><ul><li>The importance of lobbying with a single voice – Cuscal, Creditlink & NCUA, Assoc Building Societies now ABACUS </li></ul>
    47. 47. Global Financial Crisis <ul><li>The role of APRA </li></ul><ul><li>The importance of the APRA Prudential Standards and a strong FI sector & regulator </li></ul><ul><li>The Federal Government Deposit Guarantee introduced 12 October 2008 for minimum 3 year period – automatic cover for deposits of up to $1m </li></ul><ul><li>A solid performance by APRA regulated FIs </li></ul>
    48. 48. ADI Deposits Gaining Popularity Since GFC
    49. 49. Summary <ul><li>Mutual FIs must play an active & influential role in ensuring that the legislative framework enshrines the fundamental philosophies and values of mutual FIs and at the same time delivers a “level playing field” for competing in the financial marketplace. </li></ul><ul><li>Lobbying and speaking with one voice is key </li></ul><ul><li>Corporations Regulator to be educated in the principles of mutuals </li></ul>
    50. 50. Philosophies & Values <ul><li>“ If an organisation is to meet the challenges of a changing world, it must be prepared to change everything about itself except its basic beliefs as it moves through corporate life… The only sacred cow in an organisation should be its basic philosophy of doing business.” </li></ul><ul><li> Tom Watson Jr - IBM </li></ul>
    51. 51. Questions ???