Address by Registrar of Credit Unions Anne Marie McKiernan to the National Supervisors Forum Annual Conference

Good morning ladies and gentlemen,

I would like to start by thanking you for inviting me here this morning to address the National Supervisors Forum Annual Conference. As the recently appointed Registrar of Credit Unions, I appreciate this opportunity to meet with you today and to set out for you my priorities for the credit union sector.

I am acutely aware of the very important role you all play in helping your individual credit unions operate in accordance with legislative and regulatory requirements, particularly in this period of change and restructuring, brought about by a range of economic and sectoral challenges. Change can be difficult, but it is also an opportunity to transform your sector and to build sustainable business models for the growth and development of credit unions into the future.

I will start today by setting out the role and approach of the Registry, as I briefly address some of the main issues facing credit unions. Then, I would like to especially address the question of restructuring, and its importance in transforming and revitalising our sector. I will end with a few words on the Registry’s approach to communications with credit unions and their members.

Role and Approach of the Registry

Turning firstly to our role and approach, at the Registry our statutory mandate is to protect the funds of credit union members and to maintain the financial stability and well-being of credit unions generally. As you know, our strategic objective is “Strong Credit unions in Safe Hands”. We believe that development, growth and restructuring are crucial to ensure that the credit union sector remains viable and sustainable and continues to hold a relevant and substantial place in the Irish financial services landscape. At the Registry, we are fully committed to the development of a strong credit union sector meeting the needs of your members.

We all have a role to play to ensure that credit unions remain relevant and important. Credit unions have a critical role to play in developing strategic plans which better position them to survive and thrive in a changing financial services market and to provide the services your members want. We, at the Registry, have an important role to play in building the framework for supervision and regulation which helps to deliver a safer, stronger sector.

As you know, the Commission on Credit Unions recommended the strengthening of the regulatory framework for credit unions, a process which has been under way for the past couple of years. Later this month, we move on with that process, as we issue a Consultation Paper on a number of draft regulations. These draft regulations contain many requirements that are the same as existing guidance or requirements, some requirements that have been amended, and a number of additional requirements. We will, of course, provide a three -month consultation period, and will be hosting information seminars over a three-week period commencing at the end November, to inform and engage with credit unions on these draft regulations.

Current Environment

Turning to the current environment, there are now 384 credit unions operating in Ireland, covering a wide range of sizes and financial strength. As you are aware, the sector continues to face significant challenges driving the need to develop and build enhanced business models, so that credit unions can compete in a fast-changing financial services market.

These challenges include low levels of lending and declining margins as investment yields reduce while costs rise. Allied to these are challenges of a more fundamental nature, relating to standards of governance and management and sound business practices, which are so necessary to ensure the safety of members’ funds. As with other financial institutions, credit unions depend on public confidence for their success and members need to be assured that their savings are safe.

As you are aware, last May we published our paper Credit union Prism Risk Assessments – Supervisory Commentary which set out key findings from our PRISM engagements. The report highlighted weaknesses in a number of credit unions in the key areas of governance, credit risk, operational risk and strategy and business model risk. This paper provides a basis for all credit unions to benchmark their performance. It allows progressive credit unions to compare their performance against the minimum standards and highlight areas for improvement. For others, it provides an important benchmark to establish the scale and scope of change required to meet the standards required of all credit unions, whatever their size and complexity.

During our current, second cycle of PRISM engagements, I am pleased to note that we are observing some improvement in standards in a number of credit unions, as their boards, management and staff positively respond to the constructive challenge presented through our PRISM engagements.

These improvements include better risk appreciation at Board and management level, improvements in governance and controls, a greater focus on strategic orientation, and more willingness and ability to respond to business model challenges to focus on long term sustainability.

I welcome that, for some credit unions, we see that these improvements are driven by an understanding of the benefits of these changes to their business model, rather than solely by the need to adhere to legislative requirements. While these are as yet early days, I welcome these signs of positive and responsive changes and acknowledge the hard work of credit union personnel at all levels to achieve them. I urge all credit unions to follow these improvements, especially in risk, governance and strategic planning, which will help protect your members’ funds and the recovery and continued viability of your credit union.

Credit unions today are operating in an uncertain and difficult environment. While the economy is in recovery, the downturn has left its mark on the sector. High arrears levels, over –indebtedness and a fall in investment income has dented the financial position of many credit unions and left some in a position where they will not be able to meet regulatory requirements. It is against this background, and in line with the need to provide new and up-to-date services for members, that change and restructuring are necessary to strengthen your sector and protect its viability into the future.

I accept that change can be difficult. However, failure to change, or to recognise the need to change, will further weaken your sector and is a disservice to your members. Credit unions have a long and proud history, but ‘what has got us to here will not get us to where we need to be’. To survive and thrive and to become “Strong Credit unions in Safe Hands” credit unions need to challenge themselves, to change, enhance and strengthen. And, as your Registrar, charged with protecting your members’ funds, we will continue to constructively challenge credit unions in this regard.

Role of Board Oversight Committee

Regarding the role of Board Oversight Committees, recent legislation set out a new and important role for this Committee of which you are members. An effective Board Oversight Committee should provide Credit union members with additional comfort about the operation of their Board of Directors. The relationship between Board Oversight Committees and Boards of Directors is an important one, which, like that with the Registry, works best in an atmosphere of mutual respect and constructive challenge.

The legislation clearly sets out that the role of the Board Oversight Committee is to observe Board deliberations but not involve themselves directly in the operations of the credit union or participate in Board meetings. As observers, your role is to assess and provide informed, objective and helpful critique to your Board, report to members, and notify the Bank of any concerns your objectivity should be grounded in an appreciation of the relevant legislative obligations and a well-developed understanding of sound governance. In this way, objective critique should facilitate better performance, highlighting where sound practices are being observed and indicating - through your regular reports to the Board - where improvements should be made. An effective Board Oversight Committee will mean that Board members are clear on what constitutes sound practice, and supported in carrying it out.

Of course, there will be teething problems as the transition continues and redefined roles are being embedded. Here, the role of the National Supervisors Forum is important in supporting this transition, through its training and support for you, its members.

Where a Board Oversight Committee and Board appreciate fully the nature and scope of their respective roles, we are finding positive and constructive relationships within the context of the new governance framework.

At the other extreme, however, where a Board Oversight Committee and a Board are uncertain or unclear of their respective roles, we are finding strained relationships and, in a number of cases, dysfunctional behaviours and actions. We are aware of instances where it appears Board Oversight Committee members have sought to participate in the Board process, even - in some cases - frustrating board meetings. We have been concerned to find such intervention, which, while it may be well-meaning, can undermine the proper relationship between Oversight Committee and Board and undermine the effectiveness of this governance framework.

These issues are, for the most part, reflective of new structures finding their own equilibrium. The Board Oversight Committee has specific legislative powers, commensurate with the responsibilities of the role. It is a role which, when properly executed, can make a positive impact on the quality of Board performance and I would like to complement and encourage the National Supervisors Forum in the important work which you are leading, in supporting your members in this regard.

Viability and Business Model

I would like to say a few words on the need for credit unions to focus on their future planning and viability. Credit unions aiming, not just to survive, but to thrive into the future, need to develop viable and sustainable long-term business models. It is now clear that credit unions need to develop their sources of income, to attract new, younger, active members by providing the services people want from their credit union, as well as to tackle historic issues such as arrears.

The board and management of individual credit unions need to take responsibility for the transition to new viable business models and structures, which are aimed at securing the future of your credit unions by building a risk-based, financially sound, well- governed, member-focused credit union in which the funds and savings of your members are protected. In some cases this may involve shared services models, voluntary link-ups or amalgamations aimed at strengthening financial positions, achieving economies of scale and operational capabilities to enhance existing services and provide new services to members.

At the Registry, we support the growth and development of the credit union sector and we will support business model innovation where it is grounded in viable business plans. That is good for credit union members and it is good for the sector. We will certainly challenge the business models you propose, but, rest assured, our challenge is grounded in ensuring that proposals are strong and soundly based, well thought- through and assessed for risk. But I want to assure you that we are committed to supporting viable proposals.

Restructuring

I would like to talk for a few minutes on restructuring but, before I do, I think it is important to place restructuring discussions in the context of viability of credit unions into the future. A key expression of viability is a Credit Union’s Strategic Plan, which should reflect its medium term focus and how it plans to achieve its aims. As I mentioned earlier, in the context of the PRISM review, we are particularly concerned about weaknesses in strategic planning across the sector.

Some of the more important findings included:

1. A marked reluctance by Boards and management to confront business model constraints and address viability challenges;
2. Strategic plans which were generic or formulaic, and not reflected in either financial planning or day-to- day operations, with little or no ownership by Boards documented for these plans; and
3. Financial forecasts which were based on unrealistic assumptions, in many cases not linked to stated business objectives or proposed new business.

I very much want to acknowledge that we found some individual credit unions with good standards and prudent strategies. We see these credit unions as setting the standard which the wider sector can build on. We are, as always, committed to working with you in addressing the challenges you face in developing your strategies to the necessary standards. As staff from the Registry engage with each credit union, they examine its strategic plans and business model to assess their viability and sustainability into the long term. We engage and indeed challenge credit unions constructively with the objective of ensuring that the proposals are realistic, financially sound and sustainable into the future. This is always rooted in our obligation to ensure that member funds are protected, and that the sector’s unique and critical role in the financial system is maintained.

And, of course, the PRISM review itself provided you with a better understanding of our expectations in this regard, as well as highlighting the scale of transformation needed under our strengthened regulatory framework. In some cases, the strategic plans or financial forecasts are clearly not viable. In some cases, there are no plans and no clear vision or strategy for the future. As I have already said, the Board of each credit union is responsible for developing the strategic plan, to ensure the future stability and viability of the credit union.

But a key issue to acknowledge is that developing appropriate strategic plans will, for some credit unions, bring to the fore the possibility of fundamental restructuring.

I want to urge you to take control of this process as far as possible. The Report of the Commission on Credit Unions recommended a voluntary, incentivised and time-bound restructuring process. It also recognised that the use of resolution powers should be considered by the Central Bank for those credit unions that meet the grounds for such action. And, of course, the Credit union Restructuring Board - ReBo - was set up to support that aim and has done, and continues to do, significant work to advance the voluntary transfer agenda. We continue to recognise, as the Commission did, that restructuring can be a way to address current weaknesses in individual credit unions, or as a strategy for some credit unions to re-organise to achieve the scale or the cost savings necessary to be more efficient and deliver a broader business offering.

Our role, with respect to restructuring, is to put the protection of member savings and the financial stability and well-being of the credit union sector as a whole to the forefront.

There are, as you have seen recently, situations where the Registry must move to resolution, to protect members’ funds and safeguard the financial stability of the sector. The failure of any credit union has potential to damage public confidence in the sector, which in turn may impact negatively on strong credit unions with viable business plans as well as the weaker credit unions who are trying to find a way forward.

I would like to explain our approach to resolution so that you can see clearly how we examine the situations that arise. From a supervisory perspective, our responsibility is to do the right thing in the right way to protect members’ funds. Where we have serious concerns about governance at a credit union, about the failure to address business problems and to plan for the future, or about the safety of members’ funds, we require the credit union to urgently undertake the changes necessary to deal with these problems. The solution may be a series of changes and / or financial injection to enable the credit union to remain independent or it may involve a link-up with another stronger credit union on a voluntary basis. When we consider restructuring proposals, we expect to see well-thought out plans that are in the best interests of members, are capable of delivering the benefits on which the restructuring proposal is based, and deal quickly and seriously with any regulatory concerns which have been identified.

If voluntary transfer proves not to be possible, a credit union’s difficulties may be addressed by a directed transfer, using the powers set out in the Central Bank and Credit Institutions (Resolution Act) 2011. The Central Bank is committed to taking the appropriate resolution action where necessary, but I want to assure you that action under the Resolution Act will come into play only when it has not been possible to affect a voluntary solution. In the resolution actions the Bank has taken so far, we have shown that we are determined in the first instance to find credit union- based solutions that protect members' funds and facilitate the continuation of credit union services. That will continue to be our aim as far as that is possible.

Seeking the liquidation of a credit union is a last resort which we will use only in situations when all other resolution measures are unviable or inappropriate and where we have very serious concerns for the safety of members’ funds. Resolution is a sensitive process which must be handled delicately to ensure an already-weak situation is not made worse. You will appreciate that, as resolution actions may require the use of public funds, the actions must be taken in the public interest. It is incumbent on us to ensure that our resolution actions – either directed transfer or liquidation – represent the best overall outcome, from the perspective of protection of members’ funds, the stability of the sector and the potential cost to the taxpayer from the resolution action.

Our communications with credit unions

To achieve the transformation needed to ensure a strong credit union sector attracting new members with new services offerings, I believe that good communication between the Registry, credit unions and their representative bodies is important. Co-operation and constructive dialogue in the interests of credit union members and the sector will be required. As we work to protect the funds of credit union members, I am fully committed to open and frank communication with you on the issues that arise and the solutions that are required. We will continue to use a range of opportunities to promote engagement and communication, including information seminars, speeches and presentations, guidance and other materials, updating the Credit union Handbook, our new Newsletter and bilateral meetings with stakeholders.

The Central Bank will only settle for liquidations where this is necessary in the public interest. But as I already indicated, we are committed to first exhausting, within a reasonable timeframe, the other possible options to resolve what is often a very difficult and complex situation. Constructive dialogue with the credit unions and the representative bodies concerned can help in these situations but, at the end of the day, the Central Bank has the responsibility to take the decision required to arrive at an appropriate solution.

Conclusion

So in conclusion, I acknowledge that this is a time of change and challenge for credit unions. Boards are required to proactively address the challenges they face. Planning for the longer-term future of your own credit union should be a priority for Boards and managers. Whether that future is to continue as is, or to engage in restructuring, it is incumbent on Boards to have the debate about their own credit union and its strategy for the future and to carefully construct and test business models to ensure they address the issues they face and provide viable solutions that will stand the test of time.

Restructuring is an important element of strengthening credit unions so that the sector remains viable and sustainable and continues to be relevant to its local community and in the Irish financial services landscape. The Board Oversight Committees on which you serve have an important role in the new regulatory landscape, that includes delivering on the governance and other regulatory changes underway aimed at delivering strong and sustainable credit unions which can deliver on their members’ needs and protect their savings.

The National Supervisors Forum is an important support to you as you take on your new roles on Board Oversight Committees. The offering of training and the opportunity to discuss with your peers the issues that arise for you as you carry out your roles is an invaluable resource. It is always useful to get the benefit of the experience of others who may have had to deal with similar issues.

Finally, I would like to thank you again for inviting me here today and I would like to wish you all, and the National Supervisors Forum, every success in carrying out your important roles, and to assure you of my support, and that of the Registry, as we strive together to deliver strong credit unions in safe hands.