21 February 2012
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Mister Chairman, members of the Executive, ladies and gentlemen, I am delighted to be invited here today to speak at the 2012 Spring Conference of the Credit Union Managers Association.
The theme of the today’s conference - ‘Change or Be Changed’ - is an interesting one. Although I think most of us believe it, the notion that we can somehow avoid the need to change is, I would argue, probably misplaced. The Japanese photographer Masatoshi Naito is quoted as saying - ‘Everything is in a process of change, nothing endures; we do not seek permanence’. Whether this is true the process of change can be a difficult journey for most of us.
What is certain however is that change is constant. Regardless of whether we as individuals want to change, the world around us changes every second of every day. So we really don’t have much influence on the action of change. Where we can have influence however, is in the way this change affects us. How we embrace change therefore becomes vitally important. If we can become involved in the management of the change process then we can have an opportunity to influence the impact of that change on us to our best advantage.
There appears to be a growing recognition within credit unions that structural changes to the sector’s overall business model is required if the movement is to be sustainable into the future. The theme of today’s conference here in Athlone is timely and it is encouraging to see CUMA demonstrate proactive leadership thinking by bringing this very important (and emotive) topic to the forefront for consideration by all credit union stakeholders.
Today I want to talk about three things:
- Firstly, governance standards and impact on volunteers;
- Secondly, our new regulatory engagement model; and finally
- Structural change in the sector.
Governance standards and impact on volunteers
Our vision ‘Strong Credit Unions in Safe Hands” remains at the heart of our regulatory strategy and underpins our regulatory agenda for the sector. One of our main strategic objectives is to bring about the establishment of a proper legislative and regulatory framework in which credit unions can operate prudently and develop where they have the financial strength, business capacity and skills and expertise to do so.
The recommendations contained in the Interim Report of the Commission on Credit Unions will, when implemented, be a major step forward to achieving this. Here, we must acknowledge the input of the Credit Union Managers Association, as a member of the Commission, in helping to bring forward these significant recommendations. As you would expect discussions in the Commission about regulation were not easy and indeed sometimes became very heated! It is however a great credit to the positive leadership shown by all of the representative bodies – not least CUMA – that it was possible to reach broad consensus on the shape of the future regulatory regime for the sector.
The recommendations in relation to governance are particularly important. The requirement to establish appropriate governance structures and to comply with governance standards will help to improve the capability of credit unions to manage their businesses more efficiently and effectively and develop in a prudent fashion. An appropriate fitness and probity regime and minimum competency requirements for officers in credit unions will also help in raising standards of governance towards a level required to sustain the sector into the future.
There are some who voice concerns that the introduction of governance standards for credit unions will impact negatively on the number of volunteers in the movement. We do not concur with this view. We think that such comments do a great disservice to the capabilities and expertise of the majority of volunteers in the sector. Credit unions that are well governed by competent people should not be concerned with the introduction of these new standards. After all these credit unions are already likely to be doing what is expected of them – prudently managing their members savings within a well structured governance framework.
On the contrary, we believe that the introduction of formal governance standards will help attract more volunteers into the sector. Many credit unions tell us that they find it difficult to attract volunteers with the necessary skills to sit on the board. This is not surprising and one would expect this to be the case. After all people with the necessary skills to oversee the running of a financial institution are likely to be in demand in other voluntary organisations also.
However, by putting in place a properly defined governance framework, where for example, responsibilities are clear and supporting training programmes for directors are in place, we believe credit unions can be in a better position to attract from a wider pool. An active nominations committee in credit unions would also be important to achieve this.
Credit unions that have the proper governance structures and standards in place to enable directors be confident in their roles and responsibilities are likely to have the edge when seeking to attract volunteers. Indeed there is no reason why credit unions should not be the preferred choice of the volunteer given the opportunities for personal and educational development in return for their time and contribution.
While we accept that some volunteers may not be able to ‘raise their game’ to meet the standard required we believe that this is not an excuse for setting the governance bar low. The least that can be expected of those who are overseeing the management of €12bn in savings of over two million people is that they are capable, competent and operate to prudent governance criteria.
New regulatory engagement model
Moving on to the new regulatory engagement model for credit unions.
The Central Bank’s new risk based supervisory framework – Probability, Risk and Impact System or PRISM - will be implemented for credit unions in May 2012. As you will be aware, in this new risk based framework all firms supervised by the Central Bank will be categorised into one of four categories – high impact, medium high impact, medium low impact and low impact.
In this new framework the Central Bank has a different risk tolerance to failure for firms in different impact categories and accepts that, in any market economy, firms will be created and they will fail for a whole variety of reasons. As you would expect there will be a low tolerance to failure in the highest impact firms while the highest tolerance will be for low impact firms. The Central Bank recognises that for the supervisory framework for low impact firms to work it is important that there are strong safety nets in place in the event of failure. As you will be aware members’ savings in all credit unions are covered up to €100k under the Deposit Guarantee Scheme.
So what will this mean for our supervisory approach and how we intend to engage with the credit union sector in the future? The impact metrics which determine which category credit unions fall into are a combination of total assets, number of members and levels of regulatory reserves. In this new framework we will be engaging with credit unions at a level that corresponds to their impact category. The higher the impact category the higher the level of the engagement.
So in general this will mean that we will engage more intensely and more frequently with the larger credit unions. There will be on-going direct interaction with directors and managers in these credit unions to ensure we understand strategic developments and emerging risks in these entities and that there are sufficient mitigating controls around such risks.
Credit unions that fall into the low impact category will be regulated using a combination of reactive and thematic supervision. So individually these credit unions can expect less on-going direct supervisory engagement. This is not to say however that we expect less from credit unions in the low impact category. They will be required to comply with all of the appropriate prudential and consumer regulations in the same way as all other credit unions.
Ultimately, the responsibility for maintaining sustainable credit unions, whether they be high, medium, or low impact, rests squarely with the incumbent boards of directors, supervisors and managers. The future sustainability of the movement will be dictated by how those charged with governance run their individual credit unions. Regulation alone cannot prevent credit unions from becoming weak or failing. An embedded organisation culture of sound and prudent management is vital to ensure credit unions remain viable into the future.
Representative bodies also have an increasingly important role in seeking to maintain a sustainable credit union sector. We expect prudent and responsible leadership from all bodies charged with representing the movement stakeholders. This has never been more important than in these challenging times for credit unions. There is a responsibility on representative bodies to fully analyse and articulate the risks to individual credit unions and the sector overall (and especially the impact on the future of the movement) when there are calls for changes to, or easing of, regulatory standards.
The need for structural change
Finally, turning to the need for structural change in the credit union sector.
We expect that the financial stresses emerging and latent in some credit unions will continue to be exposed over the next couple of years. We are proactively identifying these credit unions and taking pre-emptive action in order to protect members.
As you will be aware from recent media coverage we embarked on our 2012 resolution programme in January. We are working closely with those credit unions that are showing signs of financial weakness. The legislative framework and funding is now in place to allow us to take early steps to bring about a resolution solution that maintains confidence in the sector. Credit unions however should not be waiting for us to intercede. We expect to see directors and managers of weakening credit unions taking the initiative at an early stage and seeking solutions that protect the interest of their members into the future.
Resolution actions in themselves will in effect bring about a certain restructuring of the sector. However, while this approach is effective and deals with immediate problem credit unions it is unlikely to deliver an overall optimal structural solution – one that will bring about the financial strength and structure to support business development. A piecemeal approach to changing the structure of the sector is not ideal. In fact sub-optimal structural change could be damaging if it does not bring about the establishment of a framework in which credit unions are freed up to develop products and services and achieve the efficiencies required to compete effectively and remain financially sound.
The prospect of unplanned ‘merger mania’ where credit unions ‘jockey for position’ within the sector is also a concern for us. Ill-thought out voluntary mergers happening in a chaotic fashion with little professional oversight of the restructuring process could have a catastrophic impact on the sector where the outcome simply creates bigger ‘weak’ entities incapable of developing.
We believe that if the credit union movement is to develop prudently and work towards its potential then it is vital that a blueprint is developed for the overall sector which will direct structural change in a planned and coherent fashion. Any such plan must be sufficiently detailed to ensure certainty as to what is to be achieved in terms of the final shape of the sector - post restructure. It must also have clear time-bound deliverables. The restructuring process would require strong and intensive oversight and support. The new structure will also have to facilitate the pre-emptive resolution of weak and failed entities in a timely fashion.
We will continue to progress our resolution programme in 2012. Ideally we would like to see this work carried out under the umbrella of a ‘top down’ countrywide framework designed to achieve the optimal structural changes required for the sector to work towards its potential. We are continuing to work in the Commission on Credit Unions to achieve this outcome.
It is extremely encouraging to come here today and see the change agenda being brought to the forefront for debate. How this manifests into action on restructuring will be important for the future development of the sector. Unplanned change is extremely unlikely to deliver the optimal structural framework required and so we are calling for a blueprint for a ‘top down’ countrywide solution to be developed – one that will facilitate voluntary mergers and resolution actions in a seamless and planned fashion.
We believe that the future can be bright for the credit union movement. The regulatory framework is being designed to guide credit unions towards prudent development and attract volunteers with the necessary competencies to oversee this development.
There is strong genuine public support for (and confidence in) credit unions. It is therefore incumbent on those involved to build on this support and make the changes necessary to sustain their individual credit union and the sector overall. Whether this is on a stand-alone basis or as part of some other structural model is not important. What is important is that credit unions consolidate their position in the re-shaped financial sector and continue to serve their local communities for generations to come.
Thank you for your attention and if you have any questions I would be happy to answer them now.