Address by James O’Brien, Registrar of Credit Unions, to the Credit Union Managers Association

Introduction

Madam Chairman, members of the Executive, ladies and gentlemen, thank you for the invitation to come here today to Athlone to address your 2010 Autumn Conference.

As I have said in the past, we always welcome the opportunity to speak at CUMA conferences and to have the opportunity to discuss the regulatory challenges facing the credit union sector. Feedback from the managers’ perspective is one very important element in the process of informing our regulatory approach and the development of regulatory initiatives.

The theme of your conference today - “Managers’ Roles and Responsibilities and Best Practice Reporting to Boards of Directors” - is timely. Managers play a key role in the operations of credit unions. In the current economic environment, it is ever more likely that boards will increasingly rely on the integrity, skills, knowledge and expertise of their management teams to help steer their credit unions through these turbulent times for all financial institutions.

For credit unions to survive and prosper in the changing financial and economic times they must protect themselves. Credit unions must embrace regulatory initiatives that encourage prudence, quickly make the necessary organisational changes to adapt to the new business environment and continue to build financially strong balance sheets.

As professional managers in credit unions, it is incumbent upon you to guide the board through these challenging times in order to protect members’ interests. This is especially so where you see board inertia or a lack of capability or willingness to change.

Today I want to talk about three things:

1. Governance structures in credit unions;
2. Our new regulatory engagement model; and finally
3. The 2010 year-end process.

Governance in credit unions

Turning first to governance. In order for credit unions to function and develop properly there must be a robust governance framework in place. Without proper systems of accountability, risk management and control, credit unions will continue to struggle to meet the demands of an increasingly sophisticated member base and the increasingly higher risk environment in which they are operating. In most cases, problems arising in credit unions can be traced back to poor governance.

In order to develop a good governance framework it is important that some basic principles are adopted. In the first instance there must be clarity of structures and processes so that everybody in the organisation from board member to teller knows the overall strategic direction of the organisation and what their individual roles and responsibilities are. Secondly, board, management and staff must be equipped with the right range of competencies to run and manage the organisation’s business. Finally, the governance structure must enable the strategy of the organisation to be implemented in a planned, safe and coherent manner.

So where does the role of the manager fit in? The relationship between the board and manager is fundamental in the proper running of credit unions. Boards must clearly set out managers’ responsibilities, with strictly defined reporting lines and accountabilities. On the manager’s part he or she should expect to have a clear job description, operate in a structured environment and be supported by a strong governance framework.

Managers of credit unions occupy a pivotal position between board and member. Boards rely on managers’ integrity and expertise to protect the credit union. Members rely on the same characteristics and a prudent approach by managers to the business of the credit union to ensure the protection of their savings. Managers therefore are a crucial cog in the governance wheel.

Too often, however, issues in problem case credit unions have been exacerbated by boards relinquishing control to a manager. This is not acceptable to us. We do and will continue to hold boards responsible for the running of their credit unions.

However, neither is it acceptable that managers are not held accountable. Just as we have seen the damage caused by the ‘Dominant Director Syndrome’, so also we have to be mindful of the ‘Dominant Manager Syndrome’.

From a good governance point of view we would wish to see the function of the manager in credit unions more formally recognised in legislation. In this respect we will also be seeking to put statutory fitness and probity arrangements for credit union managers in place as soon as possible. Managers are the professionals in credit unions and we would expect that they are accountable and appropriately qualified in terms of education, experience and competency to manage the complexity of the business they are running.

We all recognise that one of the key advantages credit unions have over other financial entities is the level of trust they engender in their membership. However, in giving this trust, we believe that members who hand over their savings to credit unions (in many cases their life savings) should expect nothing less than the highest level of competence from boards and managers of credit unions and prudence in the management of their funds.

It must be expected that high costs, asset impairment and falling income will continue to impact on distribution policies in 2010 and beyond. With this in mind, it is becoming more clear that the high dividend driven business model of many credit unions is no longer sustainable. The level of dividend paid can no longer be seen as the sole performance indicator as to how well credit unions are run. A strong balance sheet underpinned by a good compliance and governance culture can equally provide the necessary indicators to maintain member confidence – especially in these uncertain times. A business built on a fragile dependency on ‘rate chasing’ deposits is not sustainable in the long term. Our regulatory work over the next couple of years will focus on embedding a business model built on good corporate governance and strong financials.

New regulatory engagement model

Moving on. We are embarking on a new regulatory engagement model for credit unions. This new approach will mean that we will be engaging with the largest credit unions regularly and much more frequently than in the past. We will expect more from the larger credit unions in terms of board and management oversight, risk management systems and competencies. We will also expect to see strong governance frameworks in place in these institutions and for them to have a strong compliance culture at the heart of their operations.

We will be more challenging with these entities and more demanding in terms of timeframes to address any risk mitigation action points that we identify as part of our regulatory processes. This is not to say that we expect less from smaller sized entities. However, our approach will be risk based and where we see significant risk arising we will expect action immediately. We will of course work with those boards and management that work with us and will take a pragmatic approach when agreeing priorities on mitigating actions, taking account of the level of risk involved.

We also want to increase our interaction with individual credit unions on the ground. I know there are hard working boards and managers that want to show us the progress they are making in managing their business in a difficult trading environment and we want to allow for that to happen. We intend to embark shortly on a programme of visits to individual credit unions to meet with the board, management and staff. The purpose is to hear strategies and business plans, discuss operations and allow for an opportunity to talk about the day to day business of the credit union and any regulatory concerns arising. I would hope that, contrary to the popular misconception that we don’t understand credit unions, we can demonstrate that we know the business of credit unions only too well!

We think this will be a useful work programme and would welcome your thoughts in this regard. This initiative is aimed at seeking out those credit unions – be they large medium or small – that want to maintain and develop a sustainable business model built on good corporate governance and strong financials. We are looking to those credit unions to be leaders in their field and show by example how credit unions can continue to be voluntary led but professionally run to the highest standards.

We are also holding our nationwide inaugural regulatory forum for credit unions later this month. Managers have been explicitly invited to attend and we hope to see you there at one of the meetings. Again, this is an opportunity for us to open up a direct communication channel with individual credit unions and to hear views on policy issues facing the sector.

2010 year-end process

Turning finally to the 2010 year end process. We are continuing to focus on the underlying strength of the balance sheet of credit unions coming up to the year-end. At the end of June we issued a circular to all credit unions setting out our regulatory approach to the 2010 year end. We will continue to focus on the regulatory reserve ratio, bad debt provisions and investment valuations to ensure credit unions are maintaining adequate levels of reserves to cushion any unforeseen deterioration in their financial position. We will be looking closely at the levels of loans re-scheduled and the levels of provisions held against loans with atypical payment schedules – for example bullet type repayment loans.

We are currently carrying out inspections in selected credit unions in order to ascertain their financial position and to produce risk mitigation plans of action where required. Many of you will be aware of this process which may be on-going in your individual credit unions. We will be in contact with all credit unions inspected and provide them with an action plan as soon as possible after the completion of the inspection.

In some cases credit unions will be required to make adjustments in their year-end accounts to reflect the findings of the inspection. Where credit unions co-operate with us so that we can reach agreement quickly on the implementation of the recommendations arising from the work of our authorised officers, we will endeavour to ensure that there is no delay to the Annual General Meeting process for 2010.

The annual external audit plays a major role in our regulatory process and we expect the highest accounting and auditing standards to apply to the accounts of credit unions. In coming to an assessment on the financial condition of credit unions we rely heavily on the independent opinion of the external auditor on the accounts prepared by the directors. In the current financial and economic environment there will be an increased focus on the content of statutory duty confirmation and management letters from auditors. We intend to write to all auditors before the credit union financial year end reminding them of their obligations under the Credit Union Act.

Conclusion

So, in conclusion, the credit union sector is going through and will continue to go through a period of change over the next couple of years. This will be difficult for some. Doing business will be tough and boards and management will be stretched. Difficult decisions will have to be made if credit unions want to survive and prosper. Strong leadership from the movement is required.

Our vision is “Strong Credit Unions in Safe Hands” and we will continue to drive regulatory change to achieve this end. However, the responsibility for maintaining sustainable credit unions rests with the current boards of directors, managers and representative bodies. At the individual credit union level, strong and effective management by prudent and effective managers, allied to an organisational culture of strong compliance within a robust governance framework, is a pre-requisite for the long-term sustainability and development of the sector.

You, as managers, know your business better than anybody else. As the old proverb goes - “Only the wearer knows where the shoe pinches”. In this regard, I am calling on individual managers to take a lead – identify the weaknesses in your particular credit union’s business model and drive organisational change with your board to build a strong foundation to enable your credit union to be part of the overall development of the credit union sector in Ireland.