Address by James O’Brien, Registrar of Credit Unions, to the National Supervisors Forum

Introduction

Good morning ladies and gentlemen.

Mister Chairman, ladies and gentlemen, it is a pleasure to be here this morning and to have the opportunity to address your annual general meeting. To see so many people here at this year’s conference is a reflection of the success of the National Supervisors Forum and the dedication and commitment of your committee to establish and build a support framework within which credit union supervisors can receive advice and direction.

The role of supervisors in credit unions has never been more relevant. In this difficult business environment it is vital that governance in credit unions is disciplined and robust. Supervisors can play an important role in ensuring that their credit union is being run in a prudent and responsible fashion. We look to supervisory reports contained in the annual reports to make an assessment of the quality of Supervisory Committees in individual credit unions. Just as we rely on the work of external auditors so also do we expect that the work of Supervisors is planned and carried out to the highest standards and that reports to members truly reflect the state of affairs in the credit union.

This morning I want to talk to you about three areas:

1. Our regulatory approach;
2. The need for leadership; and finally
3. The need for restructuring within the credit union sector.

Some of what I am going to say today will be familiar however I make no apologies for that. In these uncertain times it is vitally important that credit unions are aware of the challenges ahead.

Our Regulatory Approach

Turning first to the regulatory approach.

These are difficult times. The financial and economic environment has changed beyond recognition in a short couple of years. In this context, credit unions must sit up and take notice of what is happening around them. This is not a time to ignore the realities of our current circumstances and to do so would be foolish. Change is happening in all financial sectors and the operational and regulatory environment for all financial institutions is being transformed.

It is well known that credit unions are seen by their members as a trustworthy and safe place to save and borrow. However, this trust cannot be taken for granted. If confidence is to be maintained in the credit union sector then credit unions must do everything in their power to maintain the trust of their members. This means that credit unions must ensure that every decision they make must be made with the overriding objective of ensuring that they do not put their members’ savings (in some cases life savings) at risk. Trust, once lost, is likely to be hard to regain and credit unions should be mindful of this. The future sustainability of your credit union and the overall credit union sector depends on that trust.

If credit unions are to remain sustainable in the long term then it is vital that a strong and robust regulatory framework is established to ensure the protection of members’ savings and the financial stability of individual credit unions and the sector overall. Our regulatory vision is ‘STRONG CREDIT UNIONS IN SAFE HANDS’ and we will continue to drive regulatory change to achieve this end. Supervisors have a role to play in this and supervisory committees should have this outcome firmly in mind when planning their inspection work.

Our regulatory focus is concentrated on the protection of members’ savings and the general well-being of the credit union sector overall. We want to see credit unions with strong balance sheets built on the sound fundamentals of prudence and transparency. We want to see credit unions run by people who are experienced, competent and careful. Above all we want to see a vibrant and strong credit union sector that is sustainable for future generations.

Our work over the next couple of years will seek to embed in all credit unions a business model built on good corporate governance and strong financials. We will continue with our robust and challenging oversight of the operations of credit unions and the safety buffers of regulatory reserves, liquidity and provisioning. We will also continue to set appropriate standards in order to continue building financial strength in individual credit unions and the sector overall.

For credit unions to function and develop properly there must be a good governance framework in place. Without proper systems of accountability, risk management and control credit unions will continue to struggle to meet the demands of an increasingly sophisticated member base and the increasingly higher risk environment in which they are operating.

In order to develop a good governance framework it is important that some basic principles are adopted. In the first instance there must be clarity of structures and processes so that everybody in the organisation from board member and supervisor to teller knows the overall strategic direction of the organisation and what their individual roles and responsibilities are. Secondly, board, supervisors, management and staff must be equipped with the right range of competencies to run, supervise and manage the organisation’s business. Finally, the governance structure must enable the strategy of the organisation to be implemented in a planned, safe and coherent manner.

Members of credit unions should expect nothing less than the highest level of governance and competence from boards and managers of credit unions and prudence in the management of their funds. Members should also be able to rely on the highest level of oversight by supervisory committees in credit unions to gain comfort that their credit union is being run in a careful and prudent fashion. It is vital therefore that directors. managers and supervisors in credit unions are competent and capable to fulfil the roles for which they are responsible. It is no longer acceptable for this not to be the case and we are seeking changes in the regulatory framework for credit unions to bring this about.

The need for leadership

Moving on to leadership.

How credit unions respond to the changes we are now seeing in the economy will determine the future shape of the sector here in Ireland. Strong leadership has never been more important and if credit unions are to come through these turbulent times then difficult and objective decisions will have to be made in the day to day business operations and in shaping the medium to longer term strategy for the sector.

This leadership must come from individual directors, the collective boards of individual credit unions and the representative bodies that are charged with representing the interests of the sector as a whole. Hard and unpopular decisions will have to be made and we cannot shy away from that. We are in a new business environment where unprecedented pressures can be expected to come to bear on credit unions and in this context, credit unions must sit up sharply and take notice of what is happening around them. This is not a time to ignore the realities of our current circumstances and whilst looking to the past might be preferable to looking at what is coming down the line – if you face backwards while walking forwards you are likely to walk into a lamp post and come to an abrupt and painful stop!

The starting point in solving any problem is to recognise that there is a problem in the first place. If individual credit unions don’t face up to their current business difficulties they are risking their future and possibly that of the sector overall, given the indistinguishable nature of the credit union brand between credit unions and so the potential for contagion to spread.

Those credit unions that recognise the threats and weaknesses in their organisations sooner rather than later and take the necessary remedial action will be best placed to steer their way safely through these troubled times. We are looking to those credit unions to be leaders in their field and show by example how credit unions can continue to be voluntary led but professionally run to the highest standards.

The strategic review of the credit union sector currently underway offers an opportunity for an operational and regulatory framework to be designed which will allow the sector to develop its ability to offer a greater range of services to the members. This opportunity should not be wasted. Progressive thinking underpinned by prudent solutions will be required and while this change may be difficult for some, regulatory, operational and governance changes must happen before credit unions can be in a position to develop these services for their members.

The need for restructuring

Finally turning to the need for restructuring in the credit union sector.

I don’t have to tell you that we are living through extremely challenging financial and economic times. Some credit unions are already experiencing significant difficulties in their day to day business and more can expect to come under pressure as their members come under financial stress. The financial landscape is changed forever and it must be recognised that the credit union sector will not escape the impact of this downturn in the economy.

How the sector will cope in this new business environment is not yet clear but what is certain is that change is coming fast and only those credit unions that adapt quickly, identify the risks and take the difficult business decisions to ensure their long term sustainability will manage in these new circumstances.

The current credit union operational model is coming under increasing stress. It must be recognised that not all credit unions will make it through this difficult financial and economic environment in their current structure. We must prepare for this. We expect that the economic downturn will continue to expose those credit unions that do not have the financial strength to weather the current difficulties – either because of insufficient reserves or because of poor management and business decision making.

The subject of ‘restructuring’ within the credit union sector must now be put firmly on the table for open and considered discussion. Indeed it is encouraging to note that on your own agenda for today’s conference the subject of “rationalisation” is being discussed this afternoon. This reflects the foresight and willingness of the National Supervisors Forum to recognise the challenges facing the sector.

As yet it is unclear as to the level of restructuring that is likely to take place over the next couple of years. However it cannot be ignored in that we are now seeing an increasing number of credit unions coming under financial stress. The trend in arrears is continuing upwards and the opportunities for prudent lending are decreasing. Income is depressed and costs are either remaining static or increasing.

Should these trends continue it is not implausible that a significant restructuring programme for the sector may be required. If the sector is to remain sustainable in the long term then the time for progressive solutions to the circumstances arising in the credit union sector may be coming soon – if it’s not here already. This will call for strong and determined leadership and indeed difficult and unpopular decisions may have to be made. The objective however is to make the credit union sector strong and healthy by identifying suitable and sustainable operating models and structures that will support credit unions for future generations. In this context and with regard to stabilisation arrangements for credit unions trends emanating from the sector are suggesting that even greater reform may be required than those envisaged in our recent consultation paper. We intend to bring forward proposals in this area early in the New Year.

Credit unions should not, however, be waiting on the market to determine their future. Directors and managers should now be looking closely at their own operations and drawing up projections and business plans to establish the financial capability of their credit unions to withstand further shocks on their business and taking the necessary preventative action. Where a credit union concludes that it may no longer be viable on a stand-alone basis, directors should be proactive and take the necessary steps to explore transfer opportunities with other credit unions to ensure continuity of service for their members.

It is important for credit unions to understand that an amalgamation with, or transfer to another credit union, does not always mean that the credit union ceases to exist. In most cases, the transferee credit union continues to provide services to existing members as a branch of the acquiring credit union. This is particularly important in a rural context. We know that the potential loss of identity can be a particular stumbling block in the merger debate, however we would be supportive of looking at solutions where this identity could be retained in the name.

A failure of one or more credit unions could lead to a significant loss of confidence across the sector. This must be avoided. Part of our regulatory work will be concentrating on identifying weak, or non-viable, credit unions and taking pre-emptive action where necessary in order to sustain the financial strength and well being of the sector.

Currently there are no provisions in credit union legislation for the regulator to direct and fund the transfer of such credit unions into more viable entities. It is important however that we are able to take appropriate pre-emptive action to restructure credit unions where we deem this necessary in order to protect members’ funds and the maintenance of the financial stability and well-being of credit unions generally.

Conclusion

So, in conclusion.

A strong and robust regulatory framework underpinned by healthy balance sheets and good governance frameworks in credit unions is a pre-requisite for the long term sustainability of the sector.

Supervisors also have an important role to play. The functions of the supervisory committee are clearly set out in the Credit Union Act, 1997 and it is incumbent on all supervisors to plan and carry out their work so as to ensure that they comply with their statutory functions including the furnishing of a report on the results of their work to the AGM.

We will continue with our regulatory focus on the safety buffers of regulatory reserves, liquidity and provisioning and also continue to set appropriate standards in these areas. We will also be seeking to ensure that directors, supervisors and managers running credit unions are required, by law, to have competencies commensurate with the complexity of their business model.

Operating and running credit unions in these difficult financial and economic times is not an easy task and it requires serious commitment in terms of time and application. We know from experience that the commitment of those involved in credit unions – be they directors, supervisors, managers or staff - is not in doubt. However, the current financial and economic environment demands more than commitment. Hard and difficult decisions will have to be made if the sector is to build the financial strength and good governance structures to take the sector to the next stage of development.

It is becoming increasingly apparent that restructuring of the operating model and the sector overall must take place if credit unions want to remain sustainable for the long term. The quality of the leadership in this process is all important and progressive thinking is called for to arrive at prudent and implementable solutions for the sector.

These are testing times for all credit unions. The pressures of the current financial and economic environment are being felt across the sector and it is unlikely that credit unions will find the going less tough over the next 12 to 18 months. However provided that credit unions continue to act prudently, recognise and embrace the inevitable changes required and continue to be run by responsible people in a common sense fashion there is no reason why the movement cannot come through these difficult times strong and healthy.

Thank you for your attention and I am happy to answer any questions you may have.