Claims by credit unions that they were sold unsuitable products by stockbrokers could end in bitter recriminations, writes JOHN McMANUS

IT IS looking increasingly likely that there is a crisis brewing in the credit union sector. Last week Jonathan McMahon, assistant director for financial institutions supervision at the Central Bank, told an Oireachtas Committee that 20 of the 414 credit unions face “serious” solvency issues, leaving unsaid how many face just plain old solvency issues.

About one in eight credit union loans are in default. It’s a rate that makes the banks’ mortgage default rates look positively good, but it has to be taken into account that historically credit unions have a higher rate of defaults. But the rate has still doubled in two years from 6 per cent to 13.5 per cent of a €6.8 billion loan book. It’s a lot of money.

The issue is likely to come to a head in the autumn because most credit unions have their year end in September and will have to face up to their losses. Coming on top of that is a new requirement for credit unions to substantially increase the capital they set aside to cover rescheduled loans.

As well as their loan losses, many credit unions are also going to have to confront the losses on their investments, particularly on investment bonds sold by stockbrokers. Davy have already settled claims from a number of credit unions including Enfield.

It could end up as quite a mess and the issue arises as to who is going to clean it up. The Central Bank has the job of closing down or merging the insolvent credit unions and last week flagged the issue of how under-resourced it was for this task.

And with the meltdown will come the recriminations. At some point the writs will start and target number one looks like being the stockbrokers and other vendors of investment products that with hindsight were not suitable for credit unions.

One of the reasons we can anticipate a rash of such claims is the strenuous efforts being made by the Irish Stock Exchange to avoid being sucked into the clean- up efforts by the Central Bank

The Exchange does have a case for refusing. It lost its powers to investigate the conduct of stockbrokers and force them to make restitution in 2007, following the introduction of EU regulations requiring the Central Bank to take on the role.

To its credit the Exchange pointed all this out to the Central Bank on several occasions and was told that there was no longer any need for credit unions or other stockbroker clients to have access to any special channel for dealing with grievances outside the court process.

Fast forward three years and the impending crisis in the credit union sector. Throw in an overstretched regulator and you get a request from the Central Bank to the Exchange to reinstate the rules and thus take on the job of voluntarily investigating and resolving an anticipated avalanche of miss-selling allegations against its members.

The Central Bank’s request has a certain moral validity, even if it does involve the consumption of some humble pie on its part. While the Exchange is within its rights to refuse to get involved, there is an obligation on it to be a good corporate citizen; that probably includes helping out the Central Bank. It’s also pragmatic. The Central Bank has a long memory and it’s a long road etc.

The Exchange’s strongest counter-argument is, however, also a pragmatic one. It is the sad fact that nobody really trusts them to investigate the activities of stockbroking firms. The days when there was sufficient trust in Ireland for the investigation of multimillion euro claims against stockbrokers – or any financial institutions – to be left to the firms themselves has long gone.

It is – to say the least – a rather extraordinary admission for the Exchange to make. But, when you consider that it would presumably be pretty hard to reopen its complaints process to credit unions and exclude the thousands of other punters nursing losses on bonds and other investments sold by stockbrokers during the last few years, you can understand why they are happy to swallow their pride on this occasion.