The Sunday Times - Money Comment 14/06/09

Posted by Jill Kerby on June 14 2009 @ 21:32

All eyes are still on the insolvent banks, but come September, it might be advisable for anyone concerned with the country’s troubled credit unions to shift some attention in their direction. 


September is the start of the reporting season for the 508 affiliated members of the League of Credit Unions and there is growing concern at the number – perhaps as many as half – which are not paying any dividends to savers this year. The size of the bad loans the unions may be carrying is also a worry given rising unemployment. According to its 2008 annual report, loans account for 50.7% of the combined €13.9 billion worth of assets held by credit unions. (€11.9 billion is savings). If even 7% of these loans have turned bad – as some sources are suggesting - it would nearly amount to the entire savings protection scheme worth about €100 million the League operates to cover insolvency risks. 


Earlier this year about 20 credit unions were told to stop lending by the Regulator but the public has not been told which CU’s are on this list.  Rumours naturally abounded with the inevitable run on deposits and hasty statements of reassurance issued by the union officers. 


The risks are threefold:  bad loans, especially the commercial development loans that some larger credit unions unwisely extended; bad investment decisions, some of which have been highlighted by the Financial Ombudsman in his annual report; and, unfortunately, the continuing voluntary nature of the credit union movement.  


The lack of expertise is a problem mainly for the smaller unions, but organizations run by members on a voluntary or part-time basis are often vulnerable to social pressure or being hijacked by cliques of activists or the disenchanted. It doesn’t just happen at credit union level; just look at the mess that developed at board level at the nation’s building societies where the members who, theoretically, own the institutions, have hardly covered themselves in glory in the choice of the people they’ve elected to represent their interests. 


In their 2008 annual report, the ILCU boasted about how credit growth increased “substantially in excess of market averages” over the year but conceded that “the general economic downturn, which has caused a near universal fall in investment values will have a negative impact on credit union dividends in the year ahead” and at current market values… “will have an impact on individual credit unions.”  


The League insists that it is “overall…well constructed and positioned to withstand much of what is currently threatening the stability and viability of the banking sector.”


If that is the case, they are the only financial sector in the entire western world to have pulled that off that achievement.   We’ll know for sure come September. 




It annoys me how lenders cheerfully allow consumers to think that somehow payment protection and income protection insurance are somehow interchangeable and equally valid. 


The former is a grossly overvalued, expensive, commission-burdened contract that mortgages, car loans and credit cards lenders try to frighten or bully their customers into buying; the latter is a much undervalued protection policy that has saved many a family from penury when a breadwinner has fallen ill and can no longer work to support them. 


This week, Irish Life, who mainly shares this market with Friends First, has re-priced and repositioned its income protection product to take into account our falling incomes and higher tax rate:  premiums have been lowered by 5% and 15%, it says. 


Meanwhile, someone in the Regulator’s office – again - needs to challenge the way payment protection is marketed, especially the implied suggestion that somehow buying a policy that costs you up to €6 for every €100 worth of your monthly mortgage repayment, is “good” value. 


This insurance has already been the subject of some pretty scathing reports by both the Irish and UK regulators, and anyone selling it should be required to prominently display on all advertisements and at point of sale that it only pays off the mortgage, car loan or credit card for a year and only if you’ve been lucky enough to dodge all the restricted clauses and the sneaky, small print. 


If you’re worried about becoming unemployed, cut up your credit card now and start filling up a savings account as quickly as you can.  If you’ve got a family to support and substantial overheads, buy a genuine income protection policy – it will cover 75% of your income up to retirement age if needs be and the premiums are still tax deductible.  




I know that a lot of people are deeply concerned about their investments and in spite of the 12 week stock market rally many (including yours truly) are deeply nervous about its sustainability.  


Should you cut your remaining losses now or hold on for a longer recovery?  Should you put all your money in cash?  Or buy into one of the increasing number of capital guaranteed investment funds that are being launched by the banks and life companies?


I’m all in favour of protecting what little wealth any of us still have, but why would anyone lock up their savings for nearly four or six years in a stock market tracker bond when there is no sign that unemployment or the house price collapse has ended, that crippling personal debt has been paid off, that corporate earnings are up, or that healthy bank lending has resumed? 


All of these features will need to be back in place before anyone should expect a decent return – say, one that beats deposit rates by two or three percent – from a derivative based stock market tracker that must also reward a string of middle men before you see a red cent of profit. 


If you really want to safeguard your capital, find a safe deposit home for the bulk of it, and then take a risk with the remaining portion by investing in an asset that you hope will both outperform the tax and inflation drag on the capital.   If you think (like I do) that inflation is the biggest risk coming down the line, buy some gold. 


Meanwhile, I’m told that a relatively low cost, inflation-linked bond fund and a gold based one, is soon to be launched by a leading assurance company.  Whatever they come up with, it surely can’t be as tired as the stock market tracker model that’s still being flogged.

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