Address by Registrar of Credit Unions Sharon Donnery to the Credit Union Managers Association AGM

19 February 2014 Speech

Introduction

Mr. Chairman, members of the CUMA executive, ladies and gentlemen, let me begin by thanking CUMA for inviting me to speak at your 2014 Spring Conference. I have recently completed my first year in the role of Registrar and events such as this are a really great opportunity to meet people who are working day-to-day in credit unions and to hear your feedback on how credit unions are managing the many changes currently underway. Before I begin my remarks I wanted to thank in particular, John Hickey and the members of your executive for the many discussions and meetings we have had over the last year. There is a busy agenda for you as managers in credit unions and for us as regulator and the work of your representatives on the executive is critical to us in the Registry in understanding your perspective.

In my various speeches and comments as Registrar, I have said previously that I am struck by the importance of credit unions to our society and communities and to how we undertake financial services. These are the critical elements of the role that credit unions play in their own localities and it is clear that while many things are changing for credit unions, they continue to have immense potential to deliver value for both their members and their local communities. As Registrar, I appreciate fully the immense changes that are underway and the impact that these are having on the ground in individual credit unions. Indeed, you as managers are no doubt fully occupied in delivering those changes and your role is critical to successfully embedding change in your own credit union. Those changes will support the delivery of strong well-run credit unions, which I’m sure you will agree is what we all want. The report of the Commission on Credit Unions, the new regulatory framework and the establishment of ReBo set out a blueprint for the development of the sector over the coming years. Sustainable development for the future is at the heart of that blueprint. Strong credit unions as well as strong regulation are of benefit to members, to the credit union itself and to broader sector representatives. In summary a safe, secure, well-regulated sector benefits everyone.

For my remarks today I would like to consider the current position of the sector based on our latest analysis of the data to hand and map out some thoughts on priorities for the year ahead which will, I think, pick up on some the issues you have no doubt been discussing over the course of your conference.

Current position of the sector

It goes without saying that there continues to be a very challenging environment for credit unions. As at December 2013, the total assets of the sector were €13.9 billion. Loans to members have decreased by almost 13 per cent from December 2012 and currently stand at €4.3 billion, with the sector average loan-to-asset ratio being approximately 32 per cent and it is notable that 190 credit unions now have a loan-to-asset ratio of less than 30 per cent. Average sector arrears at end-December 2013 were approximately 19 per cent.

We continue to focus on credit unions building reserves and provisions and maintaining a prudent dividend policy. Dealing with weakened credit unions is also an area of significant priority for the Registry and all of these credit unions are subject to a heightened supervision regime.

The on-going stresses in the economy, growing arrears and the insolvency regime all create a climate of increased risk in relation to credit decisions. As I have said publicly previously most recently at CUDA’s AGM in January, I’m surprised and concerned that credit decisions and credit control continue to be issues in large numbers of credit unions we visit. I know that the regulator is publicly criticised on many occasions for the imposition of lending restrictions on individual credit unions. However, such restrictions are imposed in the context of our on-going concerns in relation to those specific credit unions. On many of our PRISM supervisory visits, we continue to find an absence of credit policies, inadequate processes surrounding income verification and credit worthiness and significant failings in relation to credit control and following up on arrears. While I fully accept the important role of credit unions within their communities and, of course, that many members have a demand for credit, I cannot emphasise enough the need for credit unions to be prudent in how they lend money. As we all know it is the money of the saving members that is ultimately lent to borrowing members. Ensuring that those borrowers can repay must be paramount in protecting those savings.

Owing to the scale of the issues and concerns identified within individual credit unions, approximately half of all credit unions are now subject to some form of lending restrictions. There was much public comment on this when I mentioned this figure a few weeks ago. The focus was, of course, on the half of credit unions who are restricted. But this misses the important point that half of all credit unions do not have such restrictions. A key question is why is that case? Perhaps because those credit unions have stronger credit assessment processes, utilise credit reference agencies, seek evidence of salary, have strong systems and controls. And importantly, perhaps because those credit unions have engaged with us in relation to any concerns and addressed them in a robust and meaningful manner. I have spoken before that our job is to regulate, that is not always popular. Our job as supervisors is to consider the risks being encountered by the firms we regulate, if and how they are mitigated, the quality of that mitigation and the need for regulatory action, if any. While we will engage in discussions with individual credit unions and try to find a reasonable path forward to the satisfaction of all, ultimately where we are not satisfied we have to make supervisory judgements and use the powers given to use to ensure we fulfil our statutory mandate to protect members savings.

I would emphasise again, that less than 10 per cent of all credit unions have a restriction which limits the total amount of lending within the month. This means that the vast majority of credit unions are not restricted in how much they lend in aggregate for month. And for those with an individual loan size restriction, the level at which the limit is imposed ensures that the vast majority of those credit unions can continue to make loans significantly more than the average loan for the sector of just above €6,000. In fact, only about a dozen individual credit unions have lending restrictions which limit the amount loaned to less than €10,000 per loan. The vast bulk of restrictions limit credit unions to lend amounts of between €10,000 and €30,000. This is evidence, in my view, that we have carefully calibrated our use of this regulatory tool to mitigate risk but recognising the core business of credit unions to lend to their members. In effect, it means that credit unions should still be able to meet the need of the vast majority of their members including if those members need small sums for emergency situations.

Restrictions are, in most cases, intended to be short-term in nature and kept in place until the credit union has addressed the issues giving rise to the concern and until we can evidence that the weaknesses in governance and systems and controls are properly remediated and solutions fully embedded by the credit union. Credit unions that wish to make a submission for consideration in relation to a restriction need to set out clearly the background to their submission, details of how they have addressed each of the specific concerns we had identified, the impact of the changes they have made and evidence that demonstrates that impact. We are motivated to remove restrictions once we are satisfied on these points. In summary, credit unions that address our regulatory concerns and engage with us proactively in relation to mitigating identified risks will find that we are open to reviewing and, where appropriate, easing lending restrictions. I would emphasise again, as I did, when I spoke to you in September, that if your credit union is unclear regarding why a restriction is imposed or what actions are necessary for them to take to progress towards an easing or removal of it, you should engage in discussions with your supervisor.

Finally, on the issue of credit our own work on the multi-debt pilot, which I know led to a lot of debate, is also relevant. The pilot has now concluded its operational phase and has provided real solutions for members and borrowers in trying to resolve their debts. For me that is the key reason why we have started the pilot – the scale of indebtedness is simply so great that ordinary people – your members – need a way to manage their debts. I have to acknowledge great efforts on the part of the participating credit unions to bring forward a constructive approach and to try to deliver a solution for their members. We are now in a period of review, to understand the lessons from the pilot and to address these learning points by adapting the framework and the operating model with a view to taking it forward. As Registrar I would say that, in my view, it is critical that credit unions are at the table as we discuss these important issues to ensure the voice of the sector is heard and its interests protected.

Looking Ahead

As we start the New Year, it is now time to move on from the process of introducing the strengthened regulatory framework to the challenge of getting it working. A top priority for credit unions for 2014 must be embedding the new requirements and practices in the day-to-day operations of their own business. It is not enough to simply tick the box and say that we now have the requirements or indeed that credit unions have procedures written down in a manual.

A number of important issues are on our regulatory agenda for 2014, including our next cycle of engagement under PRISM, the commencement of further requirements under the new Act, the public consultation on the tiered regulatory approach and sector restructuring. I would like to speak about each of these in turn briefly.

PRISM

As many of you know, PRISM is the Central Bank’s framework for the supervision of regulated firms which delivers risk-based supervision underpinned by a credible threat of enforcement through our administrative sanctions process which now also applies to credit unions.

To date, we have generally been pleased with the open and constructive engagement with the credit unions we have visited. There are a number of clear themes emerging from our engagement. You will not be surprised that it is in the areas of credit, strategic direction, risk management and governance that we have identified most areas of concern. In general, risk management competencies and capabilities in these key areas require significant improvement and these should be among your key priorities in your own roles as managers.

Many of the issues we have identified, while worryingly fundamental in nature, lend themselves to relatively easy remediation. Embedding these changes in policies, procedures, and risk culture takes longer and that is where the leadership of the board and management needs to be evidenced most strongly as champions of this necessary change. A credit union can only be sound if it is in safe hands and safe hands includes having the understanding, know-how and capabilities to prudently manage all the credit union’s risks.

My final word on PRISM would be to emphasise that as we start our next cycle of engagement and begin visiting credit unions for a second full-risk assessment or one-day engagement, we expect to see significant progress in rectifying and closing out the issues raised previously. It is not acceptable to either identify risk yourself within the credit union or to have issues raised with you by your internal or external auditor or indeed your regulator and to not address them. Where we find this to be the case, further regulatory actions which may include business restrictions or potentially enforcement action will follow.

Tiered regulatory approach

The introduction of a tiered regulatory approach (TRA) was one of the recommendations of the Commission on Credit Unions. In developing the TRA, we are seeking to develop an approach that supports the operation of financially sound and well-governed credit unions and facilitates the prudent development of the credit union sector, within an appropriate regulatory framework. The consultation is an initial one and seeks views from credit unions and other stakeholders on the proposed approach to tiering; the high level operation of the tiers, including the activities and services proposed for credit unions in each tier; proposals on a provisioning framework for credit unions; and the appropriate timing for the introduction of a tiered regulatory approach.

One of the key questions in developing a tiered regulatory approach is what is envisaged by the prudent development of the credit union sector. That is, for yourselves as credit unions that want to develop beyond the current credit union business model – what additional services and activities do you wish to undertake?

Given the importance of addressing this question and indeed other issues in the consultation, we are proposing a two-staged approach with the first consultation seeking views on how the credit union business model should develop prudently, taking account of the objects and ethos of credit unions and the legal framework provided. Given the recent significant changes in the regulatory framework and the restructuring of the sector that is currently underway, we are also interested in obtaining views on the most appropriate timing for the introduction of a tiered regulatory approach.

The consultation period is now open until end March and I would strongly encourage you to review the paper and to submit any views or suggestions that you may have. While I am sure the representative bodies will make submissions to the consultation, we also welcome submissions from individual credit unions. A further consultation and regulatory impact assessment will follow later in the year.

New requirements

When I last spoke to you in September, the Fitness and Probity regime for credit unions had just been introduced for credit unions with assets greater than €10m. The introduction of the Fitness and Probity regime for credit unions was one of the first visible steps in the introduction of the strengthened regulatory framework. It supports other initiatives such as the new governance framework set out in the Act.

It is important to emphasise that credit unions themselves must have robust processes for carrying out fitness and probity assessments. The credit union must not permit a person to perform any role covered by the regime unless it is satisfied that the person complies with the fitness and probity standards and has obtained confirmation that the person has agreed to abide by the standards. Credit unions should also be in a position to evidence the fitness and probity validation steps and confirmations received and to provide these to examiners from the Registry in the course of any on-site inspections.

On 1 August 2014, fitness and probity will have been fully implemented for credit unions with assets greater than €10m and will apply to all Controlled Functions. By this date, credit unions will need to have carried out due diligence to ensure that all those holding Controlled Functions positions both comply with the fitness and probity standards and have agreed to continue to comply with them.

Since last September, the majority of the new governance and prudential requirements contained in the 2012 Act, including the requirement for all credit unions to have a manager, have come into effect. The manager of a credit union, with responsibility for the day-to-day management of the credit union’s operations, compliance and performance, plays a key role in supporting the board of directors in the implementation of the new requirements. We have developed the Credit Union Handbook to assist boards, managers and other credit union officers in implementing both new and existing regulatory requirements, bringing together as it does regulatory requirements, supplemented, where appropriate, by additional guidance.

On 3 March 2014, a small number of governance provisions that remain to be commenced will come into effect for all credit unions completing the comprehensive governance framework for credit unions that is introduced by the 2012 Act. These provisions relate to the board of directors, the requirement for credit unions to submit an annual compliance statement to the Central Bank and the requirement for the board oversight committee to report to members at the AGM.

In the coming days we will issue a communication to credit unions and other sector stakeholders on the new requirements that will come into effect on 3 March. This communication will set out the main implications of the new governance requirements for credit unions and will include details of an updated Governance Chapter of the Credit Union Handbook.

Some of the key changes that will come into effect for the board of directors from 3 March 2014 are that:

  • credit unions will be required to have a board size of 7, 9 or 11 directors;
  • a full re-election of the board will be required at the next AGM/SGM where an election of the board is held; and
  • certain individuals, as set out in legislation, will not be eligible to be elected to the board of directors.
Looking back at the requirements introduced during 2013 and the remaining requirements that will be introduced on 3 March, I would emphasise that the regulatory changes being introduced are in the context of operating a strong system of oversight which maintains the safety and soundness of the sector. As acknowledged in the report of the Commission on Credit Unions, since the enactment of the Credit Union Act, in 1997, the sector has changed significantly with credit unions growing both in terms of asset size and associated risks. As with all other financial institutions, credit unions depend on public confidence for their success and members need to be assured that their savings are safe.

Sector Restructuring

A further significant change brought about by the introduction of the new Act was the establishment of the statutory Restructuring Board. I hope our colleagues in ReBo will not mind me saying that the Central Bank and ReBo have established a solid and close working relationship. There is regular engagement both between myself as Registrar and the Chair and Chief Executive, as well as on-going interaction between our respective teams. As we all know, a core recommendation of the Commission on Credit Unions was that the credit union sector should be restructured and that this should be achieved on a voluntary, incentivised and time-bound basis. The Commission envisaged that restructuring would involve moving from the situation where over 400 credit unions act independently to one where there is some consolidation through mergers and the development of close networks and shared services. We encourage credit unions in a strong financial position to consider how they can best support their peers – this might be by sharing of knowledge and expertise or, ultimately, being open to the prospect of merging with a neighbouring credit union.

My own view is that some restructuring within the sector is essential if it is to be sustainable for the future and to deliver both for current and future members. As noted by the Governor in remarks he made towards the end of last year, this does mean some dilution of the very local control enjoyed by the members of some credit unions, but it would be more than compensated for by greater operational efficiency, range of services and solidity. And importantly, members remain members of the larger combined credit union with similar rights and benefits as before. So in restructuring it is certainly fair to say there will be changes in governance and control but members can expect at least the same, and in many cases can expect enhanced services delivered in a member-focused fashion.

Credit unions operate an increasingly complex range of services in an increasingly complex and fast-changing world and managing a modern credit union requires greater levels of skill and competence than in the past. It is also fair to say that there is a growing need to reduce overall operational costs and this can be achieved through consolidation while still retaining local presence. The provision of additional new products and services will certainly impose costs on credit unions and so to implement these credit unions will need a certain scale to their operations. For those credit unions who decide that they will remain as is and do not see their structure or model changing, we expect that they will have a clear strategy for the future demonstrating how they will manage the challenges of the external environment they operate in. ReBo has a time-bound mandate and it is important that our credit unions seize the opportunity presented by ReBo to restructure and strengthen for the future.

The Bank and ReBo have worked closely to ensure that the process of mergers will be as straightforward as possible. At a high level, the process will involve appropriate due diligence on both credit unions. This is to ensure that the respective boards have an understanding of all factors before making any decisions. The due diligence process is complemented by an examination of the suitability of any merger and detailed integration planning. Ultimately ReBo will determine whether to recommend a proposal to the Bank. For our part, our strategy will be to support restructuring proposals, where they are sound and well thought out and supported by proper risk and control frameworks. What this means in practice is that we will accommodate restructuring supported by well-thought out proposals put forward by financially strong well-run credit unions and we will take action to mitigate risk and deal with credit unions with a weak financial position including taking resolution action, if necessary.

Conclusion

As I said at the outset, I do recognise that the introduction of the new regulatory framework requires a substantial amount of change for some credit unions. I welcome the work that many have already undertaken to comply with the new requirements and indeed, I commend the work by some credit unions who could be considered leaders within the sector having already implemented governance and risk management changes even before they were a regulatory requirement. I have no doubt that many of you here today have played an instrumental role as managers in delivering those changes. The Registry is not seeking to overburden credit unions with regulation. Rather, a pragmatic approach to implementation is being adopted and I would wish to stress that our priority is firmly set on ensuring financially sound and well-managed credit unions that protect the savings of members. In that sense, the goals of credit unions, members and those of the regulator are well aligned.

It is important that your Conference, and the on-going work of credit unions and all others with a key part to play, also stays focused on achieving the longer-term objectives of development, growth and restructuring which are crucial to ensure that the credit union sector remains viable and sustainable, and continues to hold its relevant and substantial place in the community, and also in the Irish financial services landscape. I look forward to continued engagement with both your credit unions individually as well as with the CUMA.

Thank you once again for inviting me and for you attention. I trust you have had an interesting conference and I wish you a safe journey home later today.