One of New Zealand’s better-known credit unions is planning to transfer its operations over to the country’s largest, saying the cost of compliance is becoming too much to handle.
Credit Union Auckland members will vote on whether or not to transfer their operations over to First Credit Union on April 18, with the merger to take place on around June 1 if approved by 75 percent of members.
If the merger isn’t approved the credit union, which has around $23 million worth of loans on its books, would face being dissolved.
In a note to the Gazette (the Government’s official journal) on the proposed transfer, Credit Union Auckland said as a small financial entity, it had been finding it difficult to compete due to relatively higher costs to meet and deliver services and, in recent years, the increased cost of compliance.
In the wake of the Global Financial Crisis, and the collapse or bailout of finance firms such as Hanover and South Canterbury, governments have tightened controls on small lenders and deposit-takers.
It expects these trends to continue.
More recently The Treasury and Reserve Bank have advanced a depositor insurance scheme, designed to compensate individuals if their bank or deposit taker fails.
Such schemes are common overseas. New Zealand’s will come into force partway through next year.
Consultation on the design of the scheme is ongoing, but small deposit takers, such as credit unions fear setting the bar too high would hit them hard and favour the major banks.
Firefighters
Less than two years ago Credit Union Auckland absorbed another credit union under similar circumstances to where it finds itself now.
In May 2022, the New Zealand Firefighters Credit Union ‘begrudgingly’ voted to transfer their engagements to the bigger and better capitalised Credit Union Auckland after it fell short of the Reserve Bank’s capital requirements.
Part of the reasoning was soaring audit and compliance costs. Its audit fees increased by $156,000 in 2020, and 400 percent over three years.
It told members it had cut wages by 21 percent, legal costs by 50 percent and accounting fees by 33 percent, but that it wasn’t enough.
At the time Credit Union Auckland’s chief executive Rudolf Laumatia told Newsroom that unless the Reserve Bank and other regulators changed their approach to small financial institutions such as credit unions, “the future of non-bank deposit takers will be in doubt”.
“In terms of the additional strain credit unions will face because of the ever-increasing regulatory change, I agree 100 percent that smaller financial institutions such as ours will suffer,” he said.
Credit Union Auckland’s most recent accounts echo this prediction.
In breach
In the 12 months ended June 2023, it posted a loss of $805,884. It has lost money every year since 2019.
Its administration expenses rose by 50 percent in 2023, suggesting higher regulatory costs.
These losses put it out of position with the Reserve Bank’s capital requirements.
On June 30 it had a capital ratio of 7.75 percent, in breach of the Reserve Bank’s eight percent requirement. Shortly before this it had been bestowed an Equifax credit rating of CCC+, a very high level of risk.
The Credit Union continued to be in breach of these requirements from June 2023 to September 2023.
A breach of this ratio leads to an ‘event of review’ by its supervisor Covenant Trustee Services.
Potential outcomes of an event of review include remediation steps being put in place to address the breach or ending its business by way of a transfer of engagement or wind up.
In October 2023, First Credit Union threw it a lifeline in the form of a $350,000 capital note arrangement and a $300,000 lump sum payment to stabilise its financial position, leading its directors to believe it could continue operations through to June 2024.
The largest of its kind in New Zealand, First Credit Union had 56,000 members as of June 30, 2023.
It appears more financially stable than Credit Union Auckland, holding a credit rating of BB and having delivered a $2.3m surplus in the 2023 financial year.
