Address to CUDA - Patrick Casey, Registrar of Credit Unions

Good morning Ladies and Gentlemen. Thank you for inviting me to speak at your 2019 Annual Conference. It provides me with an opportunity to meet people integral to the strategic direction of many large credit unions.

As a representative body, CUDA engages constructively with the Registry of Credit Unions.  In that regard, I would like to thank the Chair of your Management Committee, John Grogan, the Chair of your National Council, Breda Flynn and your CEO, Kevin Johnson and his team. As we all seek to navigate the credit union landscape in terms of our respective mandates, we look forward to the continuation of this cooperative approach.

While I hope my remarks will be of interest to credit unions of all sizes, I am conscious that I am addressing many larger credit unions, and accordingly my comments today are intended to be particularly relevant to you. I will address the following issues:

1. Firstly, the financial health of the sector including larger credit unions, highlights the pressing need for business model development;
2. In transitioning credit unions must continue to strengthen prudential foundations and retain their member-centric ethos;
3. The safe and sound restructuring of the sector since 2013, underpins the appropriateness of transfers as a strategic option for credit unions; and
4. Finally, credit unions benefit from a tailored and proportionate regulatory framework, that is responsive to prudentially justified change.

This is a time of significant change for the sector and credit union members, and therefore your theme for today’s conference, “Winning Minds as well as Hearts” is both timely and relevant. Indeed, it speaks to a central question relevant to the future sustainability of the sector – namely, how do credit unions become a financial services provider of choice for members?

The significant role that credit unions play in the Irish financial sector, the strength of your brand and the depth of member trust, are well recognised. Indeed, for the fourth consecutive year, you have again won awards for excellence of customer experience^{1 2}. This is a very strong endorsement of the positive relationship that exists between credit unions and your membership.

Of course, the most important commercial challenge facing Irish credit unions today, is to transition the member relationship from being a deposit taker of choice to being a financial services provider of choice. It is not an easy transition. With loan to asset ratios ranging from 11% to 73% across the sector, some credit unions are faring better than others at serving their members’ lending needs.

In transitioning, each individual credit union needs to be clear regarding its own desired offering to members, whether as a full service provider of financial services, a niche provider or somewhere in between. This will differ amongst credit unions, in line with each one’s own risk appetite, competence and capability.  For those eager to transition, they need to be clear on how they are going to affect related and necessary change, and what will set them apart from competitors. CUDA’s consumer research³ which I understand will be presented later, may provide further insights to assist you in this regard.

We, in the Registry of Credit Unions, have been clear regarding our vision for the sector of “Strong Credit Unions in Safe Hands”⁴. That vision underpins our statutory responsibility to ensure the protection by each credit union of the funds of its members and the maintenance of the financial stability and well-being of credit unions generally.

We seek to realise that vision through our four Strategic Priorities⁵ - Inspections and Supervision, Regulatory Development and Safety Nets, Intervention and Restructuring and Business Model Development.

I will now address the first area I mentioned above. 

The financial health of the sector including larger credit unions, highlights the pressing need for business model development

Financial Conditions Report

In December 2018 we published the 4th edition of our “Financial Conditions of Credit Unions"⁶ publication, which highlights improvements in financial position across the sector. There is evidence of a strong overall reserve position, continued growth in new lending and a sustained reduction in arrears. This is welcome, reflecting as it does, positive loan growth. However credit unions continue to encounter difficulties relating to income generation and return on assets – two key measures of credit union financial health. At a time when savings growth continues to outpace lending growth, the financial health of credit unions is constrained by low interest rates, low loan to asset ratios and high cost income metrics.

I am conscious that many credit unions represented here today are larger in balance sheet terms. Within the reported data, it is notable that the financial performance and position of the €100m peer group of larger credit unions⁷ is similar to the wider sector. Indeed the average loans to assets ratio for larger credit unions is marginally below the sector average (26.9% compared to 27.8%), while loan arrears, cost income ratio and return on assets, are broadly similar. Taking a closer look at the loan to asset ratio, shows a range for large credit unions of 11% to 50%, compared to a range of 11% to 73% for the wider sector.

The most meaningful difference with the overall sector appears to be in the composition of loan books, with larger credit unions more involved in longer term loans – both loans greater than 5 years (19.2% v 14.6%) and greater than 10 years (4.7% v 2.3%).

So what are the key messages regarding sector financial health?

• Firstly, and importantly from a sustainability perspective, credit unions are retaining their share of the household consumer credit market at c.35% . 82% of credit union total gross loans outstanding have a maturity of 0 to 5 years.
• Secondly, larger credit unions retain similar financial performance and position metrics to the wider sector, notwithstanding their greater relative size and scale.
• Thirdly, there is a disparity in terms of lending capability between the largest credit unions.
• Fourthly, whilst loan growth has returned and core consumer credit market share has stabilised, investment in new lending initiatives is not yet delivering meaningful growth.
• Finally, larger credit unions are becoming more active in longer term lending, which may ultimately dilute income generation and return on assets (when compared against traditional shorter term lending).

As regulator, the cost income performance of credit unions is an area of particular concern with average ratio in excess of 74  per cent across the sector.  It is incumbent on all credit union boards to actively manage operational costs in service of sustainability.

Market developments

 In the current environment, consumers of financial services increasingly expect choice, ease of access, speedy decisions and multi-channel service fulfilment. Meeting these expectations requires enhanced capabilities, new processes and investment in enabling technologies.

Progress is being made across these areas. 2019 is likely to be a pivotal year in particular. Current account functionality will become available to members of over 50 larger credit unions as MPCAS is rolled out. This will be a significant development for the credit unions concerned, and is likely to be a central tenet of their aspiration to be a primary financial services provider for members. The progress demonstrates the capacity to prudently advance business model development through earned flexibility, using a structured risk-based approach.

There is an increasing level of collaboration occurring between credit unions. We also see an increasing level of shared service supports emerging, involving both established and new entrants. Indeed many of you are supported by the Solution Centre’s SAM framework and its new digital transformation programme, which I understand will feature in presentations later. All of these activities represent important steps forward. As you would expect, we require the fundamentals to be in place within the transitioning credit union to protect members. Turning to the second key area I wish to address.

In transitioning credit unions must continue to strengthen prudential foundations and retain their member-centric ethos

Core prudential foundations

 Strengthening credit union core foundations across governance, risk management and operational capabilities continues to be a key focus of the Registry’s 2019 supervisory strategy. Strong core foundations enable larger credit unions to engage in transfer activity as potential transferees and to undertake prudent business model development opportunities in line with their strategic aspirations, capabilities and risk appetite.
From a supervisory perspective, we continue to focus our inspection activity on ensuring expected minimum standards are met by all credit unions. In delivering our approach of supervisory proportionality, our expectations are highest for credit unions with more complex business models. Accordingly, we apply greatest intensity and depth of engagement to those larger credit unions with elevated risk profiles. To align to our supervisory expectations, the leadership of large credit unions must demonstrate that their firms are effectively governed, professionally managed and staffed by competent, capable people who appreciate and prudently manage risks, while successfully meeting members’ product and service expectations.

In supporting credit unions in strengthening core foundations, we delivered our first series of Credit Union Workshops last year focused on governance. It is important that board representatives avail of the support being provided. Our forthcoming Supervisory Commentary based on 2018 supervisory findings, will also highlight credit union risk vulnerabilities, providing further support to boards.

Member-centric focus

Effective governance and an appropriate risk mindset and culture are central in achieving successful business transition.

I would like to touch briefly on the topical issue of organisational culture.  The findings of the 2018 Central Bank report entitled: “Behaviour and Culture of the Irish Retail Banks”  have been well publicised, highlighting the importance of an embedded consumer focus. This focus is strongly aligned with the member-centric ethos of credit unions. The report is particularly relevant for credit union leaders pursuing a strategy of transitioning into new business areas. As you transition going forward, you must ensure you continue to retain your member-centric ethos through your individual and collective conduct as boards and management teams.

All customers of financial institutions have an expectation that their funds will be safeguarded. For credit unions, effective safeguarding of member funds is built upon robust governance and systems and controls.  The board of a credit union retains primary responsibility for these matters, and therefore must adequately oversee and manage all activities of a credit union, including any activities that are outsourced. 

Where minimum standards are not being met by credit unions, we will take enforcement action. As recently demonstrated, where we have cause for concern regarding the commitment of a board and management team to effect necessary changes to protect members’ funds, we will use the powers available to us – including direction and enforcement powers – to ensure that the required change is implemented. We have also shown that we will pursue individual accountability where it is necessary.
Turning to the third key area I wish to address.

The safe and sound restructuring of the sector since 2013, underpins the appropriateness of transfers as a strategic option for credit unions

All stakeholders made an important contribution to the transformation of the credit union sector through the restructuring process initiated in 2013 by ReBo .

Under our Intervention and Restructuring activities, we continue to facilitate the ongoing consolidation. The impact of restructuring activity is the subject of a soon to be published Central Bank thematic review entitled: “Thematic Review of Restructuring in the Credit Union Sector”. The key findings from the review will include:

• There has been a significant volume of restructuring since 2013, with 135 individual credit unions (or 34% of credit unions in operation in 2013) transferred on a voluntary basis and a further two credit unions subject to a directed transfer via resolution.
• From a geographical perspective, restructuring has been widespread with transfers of engagement occurring in all but two of the 26 counties. In terms of highest levels of transfer activity, counties Dublin and Cork had 52 and 10 transfers respectively, whereas the lowest levels of activity were in counties Monaghan and Leitrim.
• Many enlarged transferee credit unions are now operating from expanded branch networks:

• Contrary to expectations, restructuring has not led to widespread closure of transferor credit union offices.
• The majority of transfers (77%), have involved no reduction in business locations.
• Restructuring has therefore secured the continued physical presence of credit union services within common bonds in most cases.

• The transfers undertaken since 2013 have resulted in c.420,000 members becoming part of enlarged and stronger credit unions. Those credit unions who have engaged in restructuring are, in general, delivering higher levels of lending growth.
• Restructuring has led to the transformation of asset profiles. Whilst the number of credit unions with assets over €100m increased by 26 from 28 to 54 credit unions since 2013, 19 of those 26 were as a consequence of restructuring activity.
• There is also evidence that those credit unions who engaged in restructuring, have experienced lower operating cost growth relative to others. They have also achieved higher, albeit modest, increases on return on assets. That said, as already mentioned, cost income metrics across the sector remain very high which is concerning.

It is also useful to reflect that sectoral restructuring commenced in 2013 at a relatively low point in the economic cycle. As well as meeting ongoing business challenges, credit union boards and management teams were required to channel energy towards restructuring-related agendas. This deserves to be positively recognised. The robustness of the approach adopted to transfers by transferor and transferee credit unions, supported by representative bodies, ReBo, third party advisers as well as the Central Bank, enabled a very material transformation process to be undertaken on a safe and sound basis.

Ultimately proceeding with a transfer is a matter for boards and members. In a post-ReBo world, we continue to work with individual credit unions in seeking to progress potential transfers – with a current active pipeline of 16 proposed transfers, following the completion of 16 transfers during 2018.

Since 2013, restructuring has to a large extent been driven by push factors, with smaller transferor credit unions seeking a strong partner to help overcome challenges. As a consequence, the credit union sector overall has been placed on a sounder footing, with the advent of larger credit unions supported by stronger reserves bases. In the future, while those push factors will likely persist, it is expected that restructuring will be increasingly led by large credit unions seeking to increase scale.

We continue to encourage credit unions to consider restructuring as a strategic opportunity in service of enhancing member services, in achieving scale efficiencies and in consolidating strength in reserves. Turning to my last area of focus.

Credit unions benefit from a tailored and proportionate regulatory framework, that is responsive to prudentially justified change

Minimum regulatory standards
Many forward-looking credit unions today are focused on developing their business models to serve their members’ needs into the future. They distinguish themselves from peers by embracing a risk mind-set and recognising minimum regulatory standards to be what they are – the minimum of what is expected. The Boards of these credit unions effectively  leverage the support functions provided under the 2012 legislation of Compliance Officer, Risk Management Officer and Internal Auditor, to assist them in discharging their important strategic and oversight role. These credit unions exhibit a positive culture of professionalism, honesty, integrity and accountability, by seeking to deliver fair outcomes that have the interests of members at their heart.

The revisions under the Credit Union and Co-operation with Overseas Regulators Act 2012 strengthened the governance framework, and the process of embedding related changes has been in focus since. We have seen six cases of credit union failures since 2013, and whilst small in number, they represent very significant developments in the evolution of the sector. In each case, although financial difficulties precipitated failure, the root cause of the failure lay in the absence of strong core foundations and poor governance in particular. It clearly follows that there is a need for ongoing strengthening of governance to prevent credit union failures from re-occurring into the future. 

It is therefore surprising to us that we still occasionally hear references from some within the sector to over-regulation. It speaks to an out-dated mind-set grounded in the past. The reality is that the regulatory framework applying to credit unions today is both tailored and proportionate and continues to evolve. In fact, credit unions have frequently been excluded from the application of a range of EU and domestic regulation which applies to other regulated financial service providers. As credit union business models evolve towards more complex products such as mortgages, credit unions automatically become subject to a broader range of mandatory European and domestic regulation. This is the price of participation.

Post the financial crisis, those providing financial services at retail level are subject to much higher minimum regulatory standards than in the past. What some refer to as over-regulation in fact represents the minimum expectations of those placing their trust in their financial service provider. It is from this perceptive that we must all view the need for minimum regulatory standards to be met by every credit union. After all, we all recognise the member-centric ethos of credit unions and share a common desire that your members receive the equivalent protections available to the customers of other regulated financial service providers. The Central Bank intends commencing a review of the Consumer Protection Code in 2019, and as part of that review, it will consider the application of the Code to the regulated activities of credit unions that are not currently in scope.

Long Term Lending

I highlighted earlier that today there is a wide disparity across the sector and amongst large credit unions in terms of the loan to assets ratio. This confirms that it is commercial challenges which are constraining credit unions from advancing their business model and meeting their members’ lending needs.  

Save for a small number of outliers, the current framework accommodates those who have the capability to lend to their members today. Notwithstanding this, some in the sector have advocated for longer term lending and we are responsive to credit unions who want to prudently develop their business models.  On 24 October 2018 we published Consultation Paper 125 (CP125) on potential lending framework changes, including:

• The proposed removal of the existing lending maturity limits, which introduces a level of flexibility for credit unions, in particular to increase 5-10 year lending;
• The introduction of concentration limits, on a tiered basis, for house and commercial loans expressed as a percentage of total assets; and
• Clarification of the scope and parameters for commercial lending.

CP125 proposed that certain credit unions would be permitted to apply for higher concentration limit for longer term lending up to 15% of total assets. We view that strong core foundations are a necessary pre-requisite to undertaking increased long term lending, and we anticipate that only larger stronger credit unions will be capable of demonstrating the necessary scale, available resources and competence/capability required. It is proposed that this will be evidenced as part of a new regulatory approval process. 

Credit union boards considering any significant change in the profile of their loan books will need to give careful consideration to the consequential impacts. The Longer Term Lending guidance paper which we published in December 2017 will be useful in assisting credit unions in this regard.

For any new business line, a gradual growth trajectory is prudent, whereby new skills and processes are developed over time and become embedded on a safe and sound basis. We anticipate that credit unions considering expansion will reflect this in their business planning including the timeframe over which they increase longer term lending. Pricing and credit quality are also critical. Credit union boards, in developing a viable long term loan proposition funded by members, must ensure that all of these factors are taken into account.

The public consultation period for CP125 closed on 9 January and we are pleased with the level of interest shown. We would like to thank all those who took the opportunity to respond. The process of reviewing the 36 submissions received (representing 51 individual credit unions) has commenced, following which we will formulate our final proposals.  In accordance with the Credit Union Act 1997, we will then undertake a statutory consultation with the Minister for Finance, the Credit Union Advisory Committee and representative bodies, before publishing a feedback statement and regulations.

In conclusion, credit unions fulfil a critical role in the Irish financial services landscape. The level of change and competition continues to increase at pace. Challenges to your commercial fundamentals remain, reflected in your key financial health metrics, which you need to take ownership of and overcome. Operating within the same regulatory framework today, some credit unions are faring better than others at serving members’ credit needs. Some challenges can be overcome on a standalone basis, others require scale efficiencies through collaboration. 

For our part, the Registry continues to support prudent business development through a variety of channels in line with our statutory mandate. We do this through our stakeholder engagement, through our publications including thematic reviews, consultation and guidance papers, our sectoral supervisory commentary and statistical publications, through our regulation making powers and our supervisory engagement.
Significant work continues to be undertaken by the Registry and boards and management teams to ensure strong prudential foundations are in place within credit unions. This continuously evolving process is designed to enable credit unions to effectively address key vulnerabilities and prudently avail of growth opportunities.

I also welcome the work of the CUAC Implementation Group and its recently published report which will be covered by the next speaker, Brian Corr of the Department of Finance.  I note the emerging issues and future challenges called out in the Report as well as the recognition of initiatives underway. Significant progress has already been made by the Central Bank on key recommendations in the Implementation Group Report such as the review of the lending framework, consultation and engagement, and consideration of an element of tiering in the development of new regulations.

Collaboration will continue to be key to prudent business model development. In this regard, I would like to acknowledge the work of the CEO-led Forum on Business Model Development under the Chair of Professor Donal McKillop. This Forum initiated by the Central Bank in July 2018, is independent and through CEO-led collaboration, seeks to foster engagement on the business model challenges of credit unions of all sizes. The Forum recently surveyed the sector, identifying key areas for its 2019 work plan, and through workstreams is currently focused on revolving credit solutions, member engagement and effective collaboration.

I would also like to acknowledge the work of the Solutions Centre, CUDA’s commercial arm, which facilitates access to collaborative opportunities for many credit unions represented at the conference, and I congratulate you in particular on those projects delivered to date.

For credit unions today, becoming a financial services provider of choice involves providing the range of products and services that members need, and having the competence and capability to deliver these sustainably. From a prudential perspective we continue to emphasise the importance of having in place strong core foundations, in order to transition the business model on a safe and sound basis.  The recognised trust and regard of members is a strong basis from which to grow new products and services. In transitioning, credit unions must retain the valued member-centric ethos they are recognised for.

For now, I would like to thank you for your attention and I wish all of you well for the remainder of your conference.

¹ Survey carried out Amárach Research on behalf on behalf of the Cx Company wherein Credit unions identified as top Irish brand for customer experience for fourth consecutive year in 2018 CXi Report 2018.

² 2018 RepTrak

³ CUDA research

⁴ In terms of “Strong Credit Unions in Safe Hands”:

⁵ The Appendix sets out the vision and strategic priorities of the Registry of Credit Unions towards the sector.

⁶Financial Conditions of Credit Unions Issue 4 (PDF 1.05MB)

⁷ 54 credit unions with greater than €100m total assets compared to 199 credit unions less than €100m total assets as at 30 September 2018

⁸This relates to personal lending only and does not relate to house purchases. Source Central Bank Statistics – Consumer Credit - Table A.5.1 Loans to Irish Households – Purpose and Maturity

Trend of market share in consumer credit – Chart A18, Financial Conditions of Credit Unions Issue 2 (PDF 1.23MB)

⁹ Operational Expenses = Net Loan Protection / Life Savings Insurance + Salaries and Related Expenses + Interest on Borrowings + Interest on Deposits + Other Expenses (As reported in the PR I&E)

¹⁰ Behaviour and Culture of the Irish Retail Banks (PDF 756.85KB)

¹¹The Credit Union Restructuring Board.