Address by Registrar of Credit Unions Sharon Donnery to the Irish League of Credit Unions

Introduction

Mr. President, members of the Board, ladies and gentlemen, let me begin by thanking the Irish League of Credit Unions for inviting me to speak at your 2013 AGM. As you know, I took up the position of Registrar almost three months ago and in those few months since my appointment, I have tried to use as much of my time as possible to meet many people across the sector and it’s allowed me to listen, learn and gather views, facts and perceptions. The League’s AGM now provides me with a very welcome opportunity to meet with this audience of people who are so integral to the strategic direction, management and oversight of the credit union sector, now and in the future, and to share my initial thoughts on key priorities, aspirations and approach with you for the first time.

This AGM is timely in that it takes place in the context of recent and significant legislative and structural developments for credit unions. As we all know, those developments include the enactment into law of the new credit union act and the establishment of the Restructuring Board (ReBo) in January. And the timing is also important because, while at present much of our combined focus is quite rightly on resolving the current challenges in the sector, this AGM provides an opportunity to reflect on and remain cognisant of the reason why these changes matter. It is important that your AGM, and the on-going work of credit unions, the League 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.

The new Act (including the establishment of ReBo) firmly places future development of the sector in a position of high priority and such development must take place within the strengthened regulatory framework facilitated by the new Act. That framework is of course, also in the process of evolving – an evolution which has governance, prudent management and sustainable development for the future at its heart. As Registrar, I look forward to engaging with credit unions, the League and other stakeholders in its implementation, and I will return to some key regulatory comments later.

The Registry of Credit Union’s overarching vision is “Strong Credit Unions in Safe Hands”. I intend to address some of both the immediate and longer term issues facing the sector within this context - thus the theme of my remarks for today “Credit Unions - towards 2020”. In considering how we get from where we are today to where we want to be in 2020, I would like to spend my time with you addressing three key areas:

1. Managing the business today with an eye to the future;
2. The changing regulatory environment; and
3. Resolution and restructuring.

Managing the business both now and in the future

The credit union sector has a proud history and has been part of the very fabric of Irish society for many years. When first established in 1950s Ireland, the distinct business model reflected the socio/economic, geographic and demographic circumstances of local people and communities. It was a very different time when most people lived from week to week, pay packet to pay packet with little left over to save, and limited desire for or availability of credit. People didn’t have bank accounts as they had little need of banks and banks had little need of them. The credit union sector understood and responded to the community’s needs - a safe home for their savings and local, trusted access to affordable loans were what made credit unions the peoples’ choice.

By the mid-1980s the Irish credit union sector had grown significantly and was providing an essential financial service supporting many people to save, borrow and pay back money.

Fast forward to today and how things have evolved. The expansion of the internet and more powerful information systems means that the future business of financial services is changing rapidly and fundamentally. People are moving on from carrying out their basic transactions over the counter, through the use of “plastic” and on to the rising use of mobile devices – the smart phones that an increasing number us are using in more sophisticated and day-to-day ways, especially the younger generations who certainly would put me to shame.

Branches are changing too. Cash counters, tellers and counter staff are being replaced with help-yourself technologies. Already millions of transactions are being carried out remotely on online banking systems and over the internet. Younger and indeed older people are becoming more mobile, less loyal and more prepared to shop around for the best deal and demanding convenience, service and choice at a fair price.

Of course, the branch will most certainly remain important as it will be there to so people can receive a face-to-face service to address their more complex needs, and to assist those who are vulnerable or less financially capable. The market is also changing with new entrants’ from other industries, expert at retailing and marketing, offering new payment and other financial services outside of the systems traditionally provided by banks and insurance companies.

And of course, many consumers are still reeling from the effects of the financial crisis and have lost trust and confidence in the banking system but, importantly, they maintain their membership of their local credit union. Indeed, the trust of your members is one of your key strengths. This should not be taken for granted and it is important to work to ensure it is maintained.

Competing in this market, and responding to peoples’ needs and expectations of modern, real-time financial services, requires operational capability and expertise as well as deep pockets to provide the investment necessary to continuously keep pace with changing customer behaviours, market developments and rapid technological advances such as smart phones, the internet - and others that have yet to be developed.

All financial firms, including credit unions, must think carefully about their strategy and business plan for offering modern, responsive, accessible and affordable services. For example, as more credit unions offer debit cards consideration needs to be given to the cost to their members of such services to ensure they cover the operational and investment costs, as well as assessing the implications and costs of responding to consumers’ future expectations and demands.

The business of making loans is also changing for the credit union. Most people are taking home less in their pay-packets and the cost of living and demands on that money continues to rise. We have yet to understand the effect of the last few years on how people use credit. The lack of demand for loans may last a lot longer than we think. For certain, there will be no going back to the heady credit fuelled days of boom time Ireland.

I don’t underestimate these and the many other very real challenges being faced these days by credit union boards, staff, volunteers and members. The sector will need to demonstrate its capacity and ability to evolve, adapt and grow through change and challenge to ensure it remains relevant and strong for its members, communities and the wider financial system.

With positive leadership and strategic planning the sector can and will continue to hold and further grow its valued services and membership. And this leadership and resolve is needed particularly now in this time of significant change for credit unions. Rather than being fearful of change or having change forced upon you, I believe that the credit union sector must focus on the opportunity presented by change – prudently managed change can bring about prudent opportunities – opportunities that do not expose the sector to undue risk and continue to position you firmly as a key part of the Irish financial system, now and in the future.

And so as you manage your business and consider how your credit union will look in 2020, I would ask you to consider these questions:

• Does your board have a shared vision of where your business is going - essentially a clear direction of travel?
• Does your credit union have the appropriate governance, systems and controls to ensure your business is prudently managed?
• What services will you be delivering to your members and how will you remain relevant and vital to your existing and potential membership?

As you consider these questions, it is critical to manage change and seize opportunity, but all the while mitigating risk and avoiding drift.

Changing regulatory environment

Turning now to the changing regulatory environment:

PRISM

As many of you know, PRISM is the Central Bank’s risk-based framework for the supervision of regulated firms. Since May 2012, much of our formal engagement with credit unions now takes place through the PRISM framework. Essentially it is the bedrock of our approach to assessing and challenging all the firms we supervise, judging the risks they pose to the economy and to the consumer, and ensuring the mitigation of those risks where they are unacceptable.

To date, we have been pleased with the open and constructive engagement with the credit unions we have visited. Overall, we have found credit unions to be appreciative of the interactions and feedback given by our supervisors, and supportive of the risk mitigation plans resulting from our assessments.

However, there are a number of clear themes emerging from our engagement and I’d like to draw attention to two: strategic planning and governance.

In a number of credit unions which we visited, we have found a lack of strategic planning and absence of meaningful targets being set by boards to support their effective planning and risk management. I would urge credit union boards to look on strategic plans as an essential element of their business rather than producing them simply in order to satisfy a regulatory requirement.

The main governance-based issue relates to the need for boards to be more strategically focussed and less involved in operational, day-to-day matters and decision making. This is coupled with concerns about a lack of focus by boards on the assessment of their own effectiveness, succession planning and skill sets.

Under the new legislation, the board of directors retains primary responsibility for the general control, direction and management of their credit union. The board has also been assigned specific responsibilities – including obligations in relation to strategic planning, risk management and decision making. While boards may find it useful to obtain external advice and support, they should be mindful of their accountabilities and responsibilities and ensure they remain proactively involved in these areas.

Fitness & Probity

The introduction of the Fitness and Probity regime for credit unions is one of the key and first visible steps in the introduction of the strengthened regulatory framework. It will support and underpin other upcoming initiatives such as the new governance framework set out in the Act. The proposed framework was issued for consultation late last year. We are currently considering the submissions received with a view to finalising the proposed regime for implementation in August of this year.

The regime has been specifically developed and tailored for the credit union sector, and it is aimed at individuals that hold board, management and supervisory responsibilities in order to improve overall governance standards. We have consciously taken a decision to have a regime with somewhat less extensive requirements than in other sectors.

It is my aim as Registrar to ensure that our approach is proportionate and provides credit unions with the necessary time to have the arrangements in place to comply with the requirements. Therefore, it will be implemented on a phased basis with transitional arrangements. In order to enable the successful introduction of the regime, the Registry will be holding information seminars around the country in advance of its introduction. We will be in contact with you shortly regarding dates and locations.

Credit Union Handbook

Although the requirements in the 2012 Act have not yet been commenced, credit unions should start planning and preparing for their introduction. In order to assist the sector in these preparations, the Registry will issue a Credit Union Handbook, previously referred to as the Prudential Rulebook, to bring together the new and existing requirements supplemented, where appropriate, by additional guidance, for example, covering areas such as risk management, strategic planning and internal audit,

The Handbook will be issued in modules which will provide flexibility to add additional sections as regulations are made in specific areas, for example, on the introduction of the tiered regulatory approach. It is anticipated that information on the Handbook will also be included within the information seminars I mentioned a moment ago.

Coping with Change

I trust you will agree that the new regulatory requirements reflect prudent and sound practices that would be present in all professional and well managed business, including credit unions. However, I do recognise that their introduction will require a substantial amount of change for some credit unions. I welcome the work that many have already undertaken to comply with the new requirements in advance of their introduction. This bodes well for their positive and timely implementation.

The Registry is not seeking to overburden credit unions with regulation. Rather, a pragmatic approach to the 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. In that sense, the goals of the sector and those of the regulator are well aligned.

Resolution and restructuring

Turning now to restructuring; as you are aware the statutory body – the Restructuring Board, ReBo, came into effect from the first of January and you will hear a lot more on the specific role of ReBo in the presentation from the Chair Mr Bobby McVeigh, tomorrow, so I will not steal his thunder! Rather, I will focus on a few key points directly relevant to the Central Bank.

I see two alternative approaches to restructuring and I would ask you as the leaders of the sector to consider these as you debate both the future of the sector and consider the future approach of your own credit union. Restructuring can come about because of identified weaknesses in a particular credit union or because of a proactive strategic decision by a credit union or group of credit unions to undertake a reorganisation.

Dealing with weak credit unions in the first instance. A key feature of our policy in this area is the requirement for asset reviews to be carried out in those credit unions that are viewed as vulnerable. We commenced a programme of such reviews during 2012 and are currently working with those credit unions we have examined regarding the outcomes. Asset reviews of further credit unions are planned for later this year.

Asset reviews are an important regulatory tool and form the basis on which we make judgements about individual credit unions. While we are prepared to enter into a dialogue with credit unions about the outcomes, at the end of the day we must make a supervisory judgement and we expect that when we issue regulatory directions they will be complied with in full by the board and management.

We will require credit unions which we find to be below the minimum regulatory capital of 10 per cent to either recapitalise, or seek a restructuring solution under ReBo. The time allowed for recapitalisation to happen will be dependent upon the level of capital in the credit union requiring intervention. Our policy also provides, for the winding up of insolvent credit unions, where necessary.

By contrast, planned restructuring can result from a proactive decision by a credit union or group of credit unions to undertake a reorganisation based on a well thought through strategic approach. Naturally, as Registrar, my preference would be for this latter option and I would ask you as the leaders within the sector to consider your approach carefully for your own credit union where restructuring may be required.

Much can be learned from your peers internationally who have already undertaken consolidation. The building of strong and vibrant businesses that deliver value through a growing membership demonstrate the potential offered by proactive restructuring.

For our part, the Registry will work closely with ReBo to ensure that we deal with credit unions in a positive and collaborative manner with restructuring occurring within a defined and time-bound plan designed to retain the confidence of members and create a long-term sustainable business model – one that is founded, needless to say, on sound governance and prudent management.n Sharing

Reserves and burden sharing

Before concluding my remarks, I think it would be useful to say a few words on reserves and burden sharing which are somewhat topical and pressing at the time of this AGM. The 10 per cent regulatory reserve requirement which we have set is a minimum requirement for each credit union. However, credit unions are expected to operate with a level of reserves above the regulatory minimum taking account of the scale and complexity of the business, its risk profile and prevailing market conditions. From a regulatory perspective, adequate reserves are one of the foundation stones on which the financial stability of a credit union rests, supporting a credit union's operations, providing a base for future growth and protection against the risk of unforeseen losses as well as for the protection of members’ savings. A lack of adequate reserves can threaten financial soundness, stability and the future of a credit union while strong reserves enable a credit union to deal with future uncertainties and to act flexibly in adverse economic conditions. Unfortunately, we have had to impose, on a case by case basis, certain restrictions on lending and dividend payments by credit unions with a stressed reserve position.

One of those future uncertainties is the potential impact of the new arrangements for insolvency about which we heard Lorcan O’Connor speak earlier today. I have heard many different views about the state of preparedness of all lenders for this new and significant regime. To my mind, what is certain about this regime is that it will impact on all lenders both operationally and in terms of imposing losses. Credit unions should preparing for the introduction of the regime and boards should be well on the way to having policies and operational plans in place. It is clear that any unsecured creditor can expect to receive very little return in the insolvency process, be that through the debt settlement agreement (DSA), or a personal insolvency arrangement (PIA).

However, for many cases, it is my view that we don’t need to go there. The Central Bank’s analysis of the available data indicates that many cases can be resolved by mutual effort among lenders before that difficult end-stage is reached. Indeed, there are many cases which will not be eligible for an insolvency arrangement as the borrower is in difficulty but not insolvent.

As you know, and was discussed earlier today, the Central Bank is facilitating work on the problematic issue of burden sharing between banks and credit unions to deal with people who have loans from a number of lenders, many of whom may also be members of your credit union.

I would encourage all lenders, but in particular credit unions, to take the opportunity presented by those discussions to agree a workable framework that can be used as the basis for holistic solutions for borrowers. Whilst requiring compromise and pragmatism from all creditors, an agreed framework would reduce costs and time for the lenders and provide peace of mind, sustainability and certainty to the borrower. Given the potential losses faced by credit unions in the insolvency process, the absence of such a framework will clearly inform our approach to provisioning policy in the future. As Registrar, I am participating in the facilitation of those discussions and I would hope that the various parties will move quickly towards a workable practical outcome.

Conclusion

In conclusion everyone here today has a key part to play in managing the current challenges and securing the future development of a strong, responsive, and sustainable sector: be that credit unions, representative bodies, the Government, ReBo and the Registry.

It is important to realise that legal provisions or regulations on their own are not sufficient to ensure strong governance frameworks in credit unions. My colleagues in the Central Bank often allude to culture when we speak about financial services. No matter which sector we examine, culture plays a big, and perhaps the critical part in how that sector operates, builds trust and engenders confidence. My observation, after only a short while in my new role, is that the culture of credit unions is distinct when compared with other financial services sectors. The role of the credit union in the community and with its members, the place of volunteers in supporting the smooth running of credit unions, and the alignment of members and shareholders’ interests through the member based model is testament to that.

A positive, member-focused culture and strong, purposeful leadership is even more important now as you, the leaders of the credit union sector, embark on a program of change that will take some years to conclude and embed. All of you here today are in a position to provide input to that leadership both through the League and through your own credit union board or management. The commitment of all involved in credit unions at grassroots level over the years is second to none and I am hopeful that this energy will continue to be harnessed to bring about the change that is necessary for future growth and development.

For my part, I will continue to build on the engagement and interaction between the Registry and boards and management of credit unions to ensure that the regulatory environment we establish is designed and implemented in the best interests of the sector, and that in so doing we remain at all times alert to protecting members. This means establishing a regulatory environment which ensures strong governance and prudent management. I believe that credit unions built on these strategic pillars will have the ability to develop and grow their business over time.

I believe that as we continue towards 2020, there can and will be a positive future for a restructured credit union sector within a strengthened regulatory framework. My challenge to you is to secure that future and, in so doing, to remain focused on the prize – a restructured, strong and sustainable credit union sector; a sector providing a modern, safe and trusted service that keeps the needs and expectations of its members at all times centre stage – in short, working together to deliver “Strong Credit Unions in Safe Hands”.