Address by Registrar of Credit Unions Sharon Donnery to the LIA Credit Union Awards

12 November 2013 Speech
Introduction

Madam President, Ladies and Gentlemen, I am delighted to be invited to be part of the LIA Credit Union Awards Ceremony today. It is a genuine pleasure to see so many credit union volunteers and staff receiving their Award Designations. On a personal level, as a graduate of UCD myself it is also a great privilege to be asked to award you your LIA designation parchments and I know you will be receiving your certificates and diplomas from UCD.

I would like to congratulate all of the recipients of awards today and also to particularly mention the many recipients of awards who unfortunately could not make it to today’s event in person. I would also like to give a special word of praise to your guests and families – I know that undertaking your studies is a significant time commitment and no doubt you relied heavily on your family for support during that time. As Eleanor mentioned, whether you are in a position of volunteer or employee your presence here is evidence of the importance you place on education and competence. The dedication you have all shown to your credit union and to your own personal development is to be commended.

I don’t intend to keep you and your guests from the celebrations for too long but I would like to say a few words about some of challenges and changes facing credit unions at present and how you can contribute to dealing with them to help develop a strong and sustainable sector for the future. Before that let me begin for a moment by talking about the importance of competence and education.

The importance of competence and education

As many of you know, I have only recently taken on the role of Registrar and prior to that my regulatory experience was in the area of consumer protection. The consumer protection framework which the Central Bank imposes is founded on two key pillars: conduct of business rules which set out standards for how firms treat their customers and the minimum competency code which sets out minimum professional standards for persons providing certain financial services, in particular when dealing with consumers. It aims to ensure that consumers obtain a minimum acceptable level of competence from people who provide advice and other services in connection with retail financial products. While no minimum competency framework yet applies to the core savings and loans business of credit unions, the Commission on Credit Unions recognised that those who are entrusted with safeguarding members’ money must be skilled and experienced people of integrity with the necessary underpinning systems and controls to run credit unions in a verifiably prudent way.

An important element to ensure people have those skills and experience is the implementation of the new fitness and probity regime. The regime applies to all credit unions with more than €10 million in assets and will apply to the rest of the sector from 1 August 2015. The regime provides that people in positions of significant influence or control must be competent and capable; honest, ethical and act with integrity; and financially sound. Many of you may be in positions which are covered by the regime. So, what does it mean to be competent and capable? Really it means that the relevant person has the qualifications, experience, skills and capacity to carry out their role. While skills and competence can come through experience, education and training are also key elements. This is recognised in our Code which supports the Fitness and Probity regime. It notes that those to whom fitness and probity applies must be able to demonstrate that they have a professional or other qualification and capability appropriate to their role and they have obtained the competence and skills through training or experience.

Fitness and probity is an important element in improving governance in credit unions and our general position in the Registry is that we would like credit unions to focus on improving governance and also competence at board and management level. Education and training programs such as those offered by the LIA and others are an important support for credit unions boards, staff and volunteers in that regard.

Changing times

It is certainly a busy time for credit unions and their boards and managers as they continue to deal with a number of significant challenges as well as implementing the new requirements from the 2012 Act. It goes without saying that there continues to be a very challenging environment for credit unions. Loans to members continue to decrease with the sector average loan-to-asset ratio now being approximately 34 per cent. The continuing decline in loan books across the sector is having a direct impact on the interest income generated in credit unions. Also, the impact of the new Insolvency Act has not yet kicked in and it is to be expected that loan loss experience will be amplified by the new debt settlement arrangements. Maturing legacy books are reducing interest income, and investment yields are on a downward sloping trajectory at a time when the investment portfolio continues to grow. This is most recently evidenced by a further interest rate cut by the ECB last week to an historic low. And all of this at a time when embedded costs in many credit unions continue to rise.

All of the different elements of the credit union business: lending, investments, arrears and indeed provisioning combine to determine the overall strength of individual credit unions. Credit unions need to focus on their business model and particularly the loan-to-asset ratio and stemming its on-going decline to ensure that the business is viable for the future. Of course, this must be done in the context of a prudent approach to lending with strong underwriting and credit assessment.

Of course the financial services market is changing too. 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 and people want their services delivered on the move and with ease of access. New entrants from other industries are also entering the market. They are expert at retailing and marketing, offering new payment and other financial services outside of the systems traditionally provided by credit unions as well as by the banks.

And of course, many consumers including many of your members are still suffering the effects of the financial crisis with unemployment, declining income and indebtedness all a concern for many. Competing in this market and responding to members’ needs and expectations of modern, real-time financial services is a further challenge for credit unions. Ensuring your business is strong and sustainable but also flexible and responsive to members’ needs is key to success for the future.

New Regulatory Framework

It is in the context of the current challenging environment I have just described that the new legislative requirements, particularly those improving governance standards, risk management, compliance and internal audit need to be viewed. I am of the firm view that the new legislation and the related regulatory reforms we are introducing are an important support which can drive and enhance the ability of credit unions to address the current challenges and the rapidly-evolving market in which they operate. The requirements, including strategic planning, also support an important forward looking perspective where strategic direction and future viability are clearly articulated and understood within the credit union.

In the Registry, we see the implementation of proper governance as being a key element which will secure a financially strong and more sustainable sector which can continue to serve future generations of members. Management and oversight of a credit union has at its core responsibility for the money of other people. Often we find that despite our work to bring about an improvement in oversight, for example, relating to bad debt provisioning or poor underwriting, once we cease to have a close hands on approach credit unions revert to bad habits. In our view, good governance is central to addressing these concerns and good governance ensures that there is clarity about how authority and control are exercised within a firm, or for our purposes, a credit union. If we are all clear about who is responsible for decisions taken, it is much easier to ascertain who is responsible when things are going well but also when they go wrong. It is certainly fair to say that the responsibilities on board, managers and board oversight committees are significant and it is important that people who undertake these roles appreciate that.

In a number of the credit unions we have visited as part of supervisory engagement, we have found a lack of strategic planning added to poor risk management frameworks and practices. Strategic plans must include a realistic appraisal of the business model, including analysis of income and expenditure and financial position as well as operational capabilities. This must also be orientated towards the future to ensure that the board is thinking about where the credit union will be in three to five years. The critical questions for boards are: where are we going; and how are we going to get there are. Boards and management alike need to look on the strategic planning process and development of their risk management systems as an essential element of their business rather than a simple tick box exercise to fulfil a regulatory requirement.

So in summary, by getting the focus on the right issues, that is the general control and oversight of the credit union, boards can ensure that they take the right decisions for their credit union and at all times act in their members’ interests.

Conclusion

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 but credit unions 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 people’s choice.

Since those years of establishment credit unions have grown in number and have changed and adapted be that to deal with previous recessions or previous regulatory change. We are once again in a time of great change and challenge for credit unions, as well as for your members, although I think most of us would agree that it is a pivotal time with changes that will impact in a very fundamental way in how credit unions are operated. Credit unions must be alive to those challenges and ensure that they are proactively considering how to address them. The commitment of volunteers and staff in credit unions is second to none and with this energy harnessed to bring about the changes necessary for the future, we believe there can be a positive future for the sector within a new financial services landscape in Ireland.

I know that the LIA is putting significant effort into developing its courses, CPD and related materials and supports for credit unions which is very encouraging. I also know that LIA programs are proving popular with you and your colleagues and almost 10 per cent of LIA membership is now made up of credit union members. All of you here today, and the over twelve hundred others of your colleagues in credit unions who hold LIA designations, have shown a commitment to learning and development and I hope will also show similar commitment to delivering the change that is happening within the new regulatory framework.

Given the change underway in the sector, support for those of you working in and volunteering in credit unions through education, training and on-going professional development is critical. Nelson Mandela once said, “Education is the most powerful weapon which you can use to change the world”. While the recipients of the Awards here tonight may not have such global aspirations, your training and your energy will be important in addressing the challenges and change happening in the world of credit unions in Ireland at present.

Addressing those challenges depends on you, the people on the ground serving your members in individual credit unions all around the country. Each of you through the knowledge you have gained from your studies are now well positioned to play a leadership role in embedding a culture of good governance in your individual credit unions. I hope you will rise to this challenge. A prudent culture allied with appropriate education can be a major force in bringing about the appropriate governance framework to allow the sector develop at pace. These changes are essential to delivering credit unions which are strong and sustainable and which deliver on their members’ needs and protect their savings. As I mentioned earlier you are responsible for the money of other people: you must be prudent in how you lend it; aware of risk when you invest it; and have the systems and controls in place to protect it.

I look forward to engaging with the LIA and with those of you here today and your colleagues over the coming years as we all strive to deliver strong and sustainable credit unions that meet members’ needs and most importantly protect their savings.

Thanks once again to LIA for inviting me today and for your attention. Congratulations on your achievements, I hope you have a lovely evening and well done.