Address by James O’Brien, Registrar of Credit Unions, to the Irish League of Credit Unions AGM

25 April 2010 Speech


Mister President, members of the League Board, ladies and gentlemen, I am delighted to be invited here today to address the 2010 Annual General Meeting of the Irish League of Credit Unions.

This is indeed a momentous occasion. How times have changed. The healthy tension between the regulator and the credit union sector remains as strong as ever but we find more things in common these days. I guess out of adversity comes a recognition that our objective is the same after all – to have ‘a strong healthy credit union sector where members savings are safe’.

Matthew Elderfield spoke yesterday of our good working relationship with the leadership of the League. I would like to echo those comments. Over the past 12 months there has been significant constructive engagement, discussion and consultation on such important initiatives as the minimum regulatory reserve ratio and the current Section 35 amendment. This approach shows how outcomes can be achieved in a planned and pragmatic fashion to the satisfaction of the Regulator and the credit union sector.

Today I would like to talk to you about what I see as the important challenges for the credit union sector over the next 18 to 24 months, under the following four headings:

  • Governance and Compliance;
  • Business Operations
  • Regulation; and
  • The Strategic Review

Governance and Compliance

Turning first to Governance and Compliance.

I believe that one of the main building blocks for any sustainable credit union model is a strong compliance and governance culture. Compliance and sustainability are interlinked and long-term sustainability can only be achieved if the governance framework is robust.

For the credit union sector in Ireland to move successfully to the next stage in its development one of the key changes required will be in how individual credit unions are governed.

Too often, the same credit unions appear on our radar over and over again. In most cases, we have been working with these same credit unions over a number of years to deal with recurring regulatory issues. A common theme across these particular credit unions is poor governance structures and standards and in some cases a lack of willingness on the part of boards and management to engage with us in a meaningful fashion. However, on the positive side, we have found many other credit unions to be extremely co-operative and regulatory matters are resolved quickly in a manner that is satisfactory to all.

We want to work with all credit unions in a co-operative fashion. Where there are regulatory issues to be addressed our approach is to be constructive, supportive and pragmatic and we expect boards of directors and management to respond accordingly. Obstructive and imprudent behaviour by those charged with governance in credit unions is not in the best interests of the members they are serving, nor in the best interests of the credit union sector overall.

It has become increasingly apparent over time, that if proper governance is to be achieved in credit unions, the general quality of boards, supervisors and managers within the sector must be improved in terms of skills, expertise and competence. In order to bring this about, we are of the view that statutory fit and proper competency based requirements for directors and managers are required and we have included this proposal in the scope of the strategic review of the credit union sector – which I will speak about later.

With regard to compliance in credit unions, let me make the following comments. We regard the attitude by boards and management to compliance as a yardstick to measure how well credit unions are run and one which is key to making an informed assessment of risk to members’ savings. In some credit unions, compliance is seen as optional, where one can pick and choose from the menu to satisfy particular tastes and requirements – an a la carte approach.

We expect full compliance with all legal and regulatory requirements. Our view is that the protection of members’ savings must take precedence over all other aims and objectives of credit unions and we expect that diligent boards and management would take the same view. Compliance will continue to be a key focus of our regulatory oversight in twenty ten and beyond.

Business Operations

Moving on to the business operations.

Credit Unions have never been more relevant than they are today. The world has turned full circle. The Celtic Tiger has come and gone and the self-centred culture of the individual that grew in tandem with the rise in material wealth has taken a severe dent. There is a well known saying that ‘no person is an island’ and in the current economic environment this has never been more apparent. People are struggling financially and need help. Circumstances which resulted in the rise of the credit union movement have returned and no doubt the credit union movement will once again – as it has in the past – step up to the plate and provide the necessary support to its members.

However, here I must urge credit unions to exert extreme caution.

Nobody can deny that we are experiencing an extremely challenging economic and financial period. Twenty Ten is proving to be even more challenging than 2009 and credit unions are facing uncertain times for their business. High levels of unemployment, reductions in workers’ pay and increasing mortgage rates will continue to impact on members’ ability to service their loans.

In this regard, unprecedented pressure can be expected to continue from members seeking new loans, or to re-schedule existing loans, as more and more come under financial strain. We fully understand the impact of this pressure on credit unions and the need for member support in these difficult times.

However, while credit unions will be expected to help their members they must tread very carefully. We are now seeing a significant spike in arrears levels and in the numbers of loans being rescheduled by credit unions. There is a fine line between helping member borrowers and putting members’ savings at risk.

We expect boards and management to put the potential risk to members’ savings at the forefront of the decision making process. Clear and objective decision-making is required now more than ever. Savings entrusted to credit unions – in many cases the life savings of members – must be adequately protected. The future of your credit union depends on those decisions and directors must be conscious of that responsibility at all times. The experience and skills of directors and managers will be severely tested in this new environment and managing demands and expectations may be difficult. Strong governance of the credit function allied with strong liquidity, reserves and provisions for bad and doubtful debts must be maintained in order to protect the financial position of credit unions and the sector overall.

We will continue with our strong and close regulatory oversight of the lending and investment functions. This is not a time for any relaxation of lending standards and in some categories, lending criteria must become more restrictive to reflect the increased risk. The decision to lend must be based on conservative estimates of the ability and commitment of the potential borrower to repay. In addition, as many financial institutions are now finding to their cost, the lending decision must never be based on the value of security alone.

In the current economic environment it is inevitable that arrears in credit unions will continue to rise and subsequently the level of bad debts. Sufficient resources should be made available in the credit control area of the business and it is vital that there is strong oversight of the credit function at this time. Credit unions must continue to make appropriate provisions for bad and doubtful debts that truly reflect the quality of their loan books - including those loans that have been rescheduled. Prudent and transparent accounting must be maintained and we will not accept any fudging of the position, for that is in nobody’s interest.

Where credit unions undertake rescheduling of loans in order to assist members that are experiencing financial difficulties, they must always ensure that the financial position of the credit union is safeguarded. Practices such as loan re-scheduling, top ups, or share to loan transfers must not be used in an attempt to avoid making provisions for impaired loans. Members putting funds into a credit union have a right to know the true financial condition of the entity to which they are entrusting their savings. Directors must be fully aware that they are required by law to prepare accounts that show a true and fair view.

While the sector overall currently has a reasonable level of reserves, credit unions must continue to remain vigilant, to ensure that levels are adequate. We have been working on building capital and provisioning levels in credit unions over the past 2 years. The introduction of the Regulatory Reserve Ratio for credit unions in 2009 was a key part of this work. While, in the past, many credit unions have looked upon statutory reserves in the negative sense because they can’t be distributed, this attitude appears to be changing and many can now see the need for strong reserves. Reserves are the safety net for the credit union and should be built to (and maintained at) appropriate levels.

Over the years, credit unions have been able to rely on a stable savings base to fund their operations. Indeed, in more recent years, the high level of savings in the sector has caused difficulties for some credit unions, as they chased high investment returns on surplus funds. However, while in the past savers have been noticeably loyal to their credit union, this strong funding base cannot be taken for granted. Members’ savings are likely to become less ‘sticky’ in the future as credit unions experience increased competition for these funds. It is also likely that members will need to draw down on their savings as finances tighten. Credit unions should prepare for this eventuality. The age profile of savers is also important and steps should be taken to ensure that there is not an over- dependency on funding from any one category of age profile.

Given that over 80 per cent of overall savings within the movement is unattached, this is an area that credit unions should focus hard on over the next couple of years. Funding and lending projections should be drawn up to ensure that sufficient levels of liquid funds are maintained. We are working closely with those credit unions that have low liquidity in order to bring their ratios up to adequate levels.


On the subject of regulation, there is a global reform effort underway to address the flaws and weaknesses exposed so clearly in the global financial regulatory system. The overall objective is to create a more resilient financial system that can withstand unexpected shocks like those we have seen over the past 18 months to 2 years. At a high level, what is envisaged is a financial system that is underpinned by better (though not necessarily more) prudential regulation and increased supervisory engagement and challenge and one that has stronger levels of capital and liquidity. At this high level, we would concur with this approach and credit unions can expect that, as their business model becomes more complex, regulatory oversight will increase commensurate with their risk profile.

In order for the Irish credit union sector to develop it must embrace regulation. Whilst the sector here is mature, in my view it has not developed at the pace one would have expected. Regulation must be seen as an ‘enabler’ rather than a ‘disabler’. Well governed and compliant credit unions will have a distinct advantage in that they will have the systems expertise and controls in place to enable their business to grasp opportunity to expand services and grow in a prudent and safe manner. We will be looking to those well governed credit unions to set the standards required to bring the Irish credit union sector to the next stage in its development. On our part we will be supportive of business initiatives coming from those credit unions that can clearly demonstrate to us that they have the appropriate governance structures, expertise and systems of control to mitigate and manage the risks involved.

For directors of credit unions strong regulation is a protector. Regulation sets the boundaries against which directors can judge their own performance and be judged by the members they are serving. Directors are responsible in law for the control, direction and management of their credit unions. Boards need to be aware of these responsibilities and protect themselves. Directors should embrace the ‘protective cloak of regulation’ for their own sake as well as that of their credit union.

Strategic Review

Finally, with regard to the strategic review of the credit union sector, it is intended that this process will begin in June and be completed by end March 2011. Matthew Elderfield outlined the scope of the review in his speech yesterday.

The current business model and governance arrangements in the credit union sector have, up to now, produced certain advantages for credit unions, however it has become increasingly clear that changes are required in how credit unions operate which will enable the sector to progress. The current regulatory framework for credit unions is outdated and requires significant change. Credit unions have also been seeking change in the legislative framework for some time now.

A key focus of the strategic review will be on how to protect the strengths of the movement while having an enabling legislative and regulatory system that 19

allows credit unions to develop in a prudent manner. It is intended that there will be wide consultation with all stakeholders in the sector during the review to ensure that all views are considered in the work.

Credit unions should not be fearful but welcome this review. We all want modern, well-regulated and financially sound credit unions that operate in line with best international standards and offer members a real alternative to other financial institutions. However, this can only be achieved through a robust legal, regulatory and operational framework allied with strong internal governance.

I believe that this is a valuable opportunity to design a sustainable credit union business model and regulatory structure to support the strategic development of the sector over the next 10 to 15 years. This opportunity should not be wasted. It should be grasped with both hands and internal politics should not be allowed to get in the way of progress. All stakeholders within the credit union sector will need to show strong leadership if real progress is to be made.


So in conclusion.

The strategic review offers the opportunity to develop an operational and enabling regulatory model for credit unions to sustain the sector going forward.

In the meantime credit unions will continue to find the going tough over the next couple of years and there will be significant demands on boards. Directors must have (and if not acquire) the necessary skills, expertise and competence to deliver the sector through what is going to remain a challenging time for the foreseeable future.

Those credit unions that will perform stronger in this new environment will be those that embrace regulation, have adopted good governance and risk management frameworks, are pro-active in managing business difficulties and can adapt strategies, policies and practices accordingly.

Credit union directors should be confident to embrace change for the good of their credit unions and the sector overall. Now is the time for boards and management to step up to the plate, take a critical look at their credit unions, recognise problem areas where they exist and take the hard and perhaps difficult decisions to make the necessary improvements. Directors must take all steps necessary to protect the savings of their members, including ensuring that their credit unions have adequate reserves and provisions. Directors are responsible in law for the proper running of their credit unions.

These are indeed testing times and a question arises - can credit unions rise to the challenge? I believe they can. The credit union sector has survived through many difficult economic times in the past. The inherent strengths of member loyalty, volunteer commitment, ethos of co-operation and self help culture will stand it in good stead in the current difficulties.

There is no reason why the credit union sector cannot successfully come through the present financial and economic challenges in good shape, provided the movement faces up to the need to implement the operational and regulatory changes necessary to allow the sector to develop and secure its future. How well credit unions come through these relatively uncharted waters depends on the response from those in charge. Strong leadership will be required.

‘Your members savings and the future direction of the credit union sector is in your hands’

Thank you.