When the Friendly Societies and Credit Unions legislation was first enacted, the world of financial services was completely different. The first ATMs were just being introduced to New Zealand and there was no internet or mobile banking. Fast forward 35 years and the legislation has not kept up. The Friendly Societies and Credit Unions (Regulatory Improvements) Amendment Bill (Bill) is a well overdue opportunity to update that legislation.
Credit unions in New Zealand serve 170,000 Kiwis and are part of a huge movement globally of over 222 million members belonging to 61,000 credit unions in 109 countries. Unlike banks operating in New Zealand a credit union is 100% owned by its members and operates for the benefit of its members. This differs from profit-oriented competitors in the broader banking sector whose purpose is to generate profits for third party shareholders. A credit union’s profits are shared back with its members via lower fees and competitive interest rates, which gives rise to the principle of mutuality.
For credit unions generally, the Bill intends to remove unnecessary operating and compliance costs, promote greater efficiency, innovation, and accountability, bring credit unions into alignment with other financial service providers in New Zealand, and maintain the element of mutuality and the requirement of a common bond between members.
To achieve these aims, the Bill includes measures to simplify the statutory objects of an association of credit unions to cover generally the conduct of activities for the benefit of its members as authorised by its rules and reduce the minimum number of credit union members needed for an association of credit unions to be validly constituted from 7 to 2.
The Bill also intends to allow for the incorporation of a credit union provided it satisfies the Registrar of Friendly Societies and Credit Unions (the Registrar) that its application meets the requirements listed in clause 14 of the Bill, new section 100B(1). This will enable a transition of power from internal trustees to a credit union’s officers who are either a member of the credit union’s committee of management or a person who holds any other office provided for in the credit union’s rules. This change in and of itself is one of the most significant steps of modernisation for credit unions whose legal status will be brought into line with other corporate entities who enjoy the capacity, rights, powers and privileges of a ‘natural legal person’.
Another significant change under the Bill is to permit credit unions to provide financing to small to medium enterprises (SMEs) that are owned by or otherwise closely associated with a member of the credit union. “Closely associated” means:
- A credit union member would be considered related to a body corporate when he or she had the power to exercise (or control the exercise of) 25% or more of the voting products of the body corporate
- A firm under the Partnership Act 1908 would only be eligible to receive a loan if the member of the credit union was a partner of the firm, and their share of the firm’s profits is 25% or more; and
- A loan may be made to a trust if a member or their immediate family had a beneficial entitlement to 25% or more of the trust’s assets.
The proposal of credit unions being able to provide financing to SME’s under the Bill will improve the efficiency by which they may lend to their members’ businesses. In turn this will assist with credit union growth and provide welcome funding for business in communities that credit unions serve.
In order for a credit union to comply with provisions of the Bill once they are incorporated into the Friendly Society and Credit Unions Act 1982 (Act). There are a number of areas of the credit union that will need thorough scrutiny to ensure that it is in compliance with the proposed changes to the Act, the first being the credit union’s rules (Rules), the credit union’s trust deed (Deed), and the credit union’s product disclosure statement (PDS). A Variance Deed will also need to be prepared in order to transfer mortgages held by the credit union to the newly incorporated entity and the Personal Property Securities Register (PPSR) updated.
Overall, the proposed changes to the Act are a step in the right direction to align the legislation with the rapid changes experienced by the financial services industry. Each credit union’s requirements will be slightly different in order to comply with provisions of the Bill once they are incorporated into the Act. The Bill is currently with the Committee of Whole House, and will move to its third reading later in the year.
Business Law team
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Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper, Lisa Catto