CREDIT Unions and other Mutuals were formed with the philosophy of self-help in mind. Usually within a particular profession such as teachers, nurses or the police.

They were founded on the belief that pooling resources would contribute not only to members’ financial wellbeing and security but also to the prosperity of the wider community. By removing the element of profit taking that motivates Banks they are able to offer members better terms and conditions and their staff a secure and positive working environment.

Growth and prosperity would follow by attracting more members wanting to share in the benefits of cooperation. Most Credit Unions then put some of the wealth created directly back into the wider community in which they operate and some large Credit Unions such as the Canadian “Desjardins” and the Spanish “Monfardin” have harnessed local capital for regional development thereby creating new businesses and employment.

This is the fundamental principle that Credit Unions were founded on and it is as valid today as ever. Smaller “profession based” Credit Unions have amalgamated over the years creating larger entities and currently about 3½ million Australians are members of about 150 Credit Unions.

A dedicated team to target a Mutual

The major banks would like these customers. Demutualisation is the key — and it has many advantages.

For some.

Robert Crosbie, then Chairman of CUSCAL (Credit Services Corporation Australia Ltd) which represents some 85% of Credit Unions in Australia, stated at their AGM in ’97: “We are aware of the existence of legal and accounting firms who are openly assessing the net worth of Credit Unions and promoting programs delivering short term wealth distributions even though this eliminates the credit union itself.” Nothing has changed since then except the regulatory environment in the banking industry which makes it harder for Credit Unions to maintain their current status. One can easily imagine that lobbyists from the major banks may have helped formulate some of these changes.

A friend who was an actuary with a major accounting firm in Sydney explained to me how they would establish a dedicated team to target an identified, perhaps vulnerable, Mutual and then work steadily to convince those in control of it that demutualisation was in their best interests. She pointed out that there is good money to be made all round and that most managers and directors finally see the logic and eventually support the move wholeheartedly. One notable “carpet-bagger” is reported to have made some $10m when AMP was demutualised and “carpet baggers” are not the only ones who enrich themselves along the way.

Lawyers, accountants and others take their slice while directors and senior managers may well be offered share options and other enhanced salary packages when the shares are floated.

Entrenching power

Members are sometimes offered a fistful of dollars — and usually accept.

It appears that here in Tasmania, Connect Financial’s directors have understood this logic. They were frustrated by just a few votes in their attempt to demutualise Connect with the “fistful of dollars” approach back in 2004 and now it seems they are trying a more subtle method.

Members are being asked to vote on a number of apparently unrelated changes to the Constitution with the only common thread being that of increasing the power of the Board and entrenching this by giving themselves the ability to appoint a significant number of Board members. Then even further ensuring control by appointing an “independent eligibility committee” to scrutinise all future candidates for election. They claim that recent APRA regulations require this but the reality is simply not so, as reading the relevant regulations make clear.

When the profitable and prospering Queensland based Sunstate Credit Union was demutualised those members who did not wish to (or could not afford to) take up shares were effectively denied their interest in the assets of the Credit Union and received nothing whatsoever in return. Twenty five thousand shares were reserved, however, for the General Manager who also had an entitlement to take up such further shares as might turn out to be available. One begins to fully appreciate the real advantages of demutualisation.

Surveys indicate that around 84% of Credit Union members are happy with the services they receive compared with around 40% of Bank customers. This makes it difficult for banks to win over these customers simply by improving services. They are a long way behind and have their shareholders demanding seemingly ever increasing profits and directors awarding themselves enormous salaries.

The simplest way to get these customers is by eliminating the competition. First demutualisation and then takeovers and mergers reduce competition. We see it happening all the time in other sections of the retail industry and Banking is no different. The competition for your dollar is just as intense. Reduction in competition simply means reduction in choice which inevitably leads to higher fees and charges in the longer term.

Pat Synge
http://www.buyselltrade.com.au/