Address by Registrar of Credit Unions, Anne Marie McKiernan, to the National Supervisors Forum AGM

03 November 2015 Speech
Thank you for inviting me to address your annual conference here in Kilkenny. I welcome this opportunity to address some of the challenges which the credit union sector is dealing with at this time and to update you on some developments in our work at the Registry. I would like to thank your chairman, Joe Mulvey, and your executive for their productive engagement over the past year.

I am very aware of the important role that members of the National Supervisors Forum play in supporting Board Oversight Committees to discharge their statutory role in a consistent and informed fashion. The training, guidance and benefits of a network of Board Oversight members - who share many similar challenges – is a valuable support. As we work through this period of change together, the developmental role of the NSF in helping you, its members, in your oversight role is more important than ever.

Today, I will reflect on the progress that has been taking place with the recovery and restructuring of your sector and the need to harness this opportunity to build realistic plans for business model development, which will provide your sector with a viable and sustainable future. I will set out some of the efforts which we are making to support the sector in focusing on business model development, especially our forthcoming sectoral dialogue process. I also outline some of the initiatives we have undertaken in the last year to better position credit unions to benefit from the current economic upturn, including our review of lending restrictions. Then, I will set out some changes we are making to our engagement approach from 2016 and finally set out some thoughts on our new Regulations.

Recovery and Restructuring

For a number of years, we have been dealing with the effects of the very significant economic downturn and a period of fundamental change for the credit union sector. There is a nautical saying that “You weather the storm and prepare for the future”. Recent legislation and regulation have been designed to better position the sector for that future and from the opportunities that can emerge. The decisions which we in the Registry have taken are designed to ensure that credit unions have more robust business models to serve their members’ future needs and are also in a better position to address the significant business challenges which the economic downturn has left on credit unions, and put the sector in a better position to deal with future economic and other challenges.

We are now, though, in a different economic situation to that of a few short years ago. Economic growth and employment have picked up quite markedly recently and are becoming more broad-based, while spending is increasing as confidence builds in households and firms. Are these economic benefits spreading to the credit union sector? To some degree, yes - new lending (as percentage of total loans outstanding) has increased; arrears have reduced somewhat; average reserves are slightly up, and fewer credit unions are below the required reserve ratio. There are, though, areas for continuing concern: for example, the sector loan-to-asset ratio continues to decline and is now below 28 percent (compared to 33 percent just two years ago and 45 percent in 2010), while total loans outstanding – both in value and volume terms- have also continued to fall.

What is obvious is that the credit union sector continues to grapple with the burden of both the earlier economic crisis and the longer term structural challenges. It is this combination which limits the potential of the sector to benefit from the wider economic upswing. We have all acknowledged these issues before but I do think it is important to revisit them and to keep a focus on resolving them. These factors include:

  • The ageing active membership base of the sector, and the difficulty in attracting new active members who will become the backbone of lending growth into the future;
  • Related to this, the difficulties - for many credit unions - in changing the business offerings to attract and retain members, by providing them with the products and services that financial services customers increasingly expect and need;
  • The overhang of financial and operational weakness for many credit unions - including high arrears rates, declining loan-to-assets, and failures to meet expected standards of regulatory compliance to appropriately protect members’ funds, and
  • more competition from other providers of credit, but also more competition for recovery of unsecured debt arrears.

It would be a mistake to see the current cyclical economic upturn as being the solution to the underlying structural issues in your sector. Instead, we should welcome the current economic upturn as providing some necessary breathing space for credit unions to deal with your sector’s biggest challenges. This is the juncture at which leadership and focus on the bigger issues and longer term challenges is most needed and possible.

I want to acknowledge here the significant efforts that credit unions’ volunteers, staff, management, boards and oversight committees have made, over a number of years, to keep your sector going through very difficult times and steering credit unions towards calmer waters. But, while the storm has abated, the weaknesses still need to be dealt with.

We all agree about the need to revitalise your sector, although we may differ on the path to get there. As Registrar, my statutory mandate is to protect the funds of credit union members and to maintain the financial stability and well-being of credit unions generally. Our strategic objective, as you know, is “Strong Credit Unions in Safe Hands”.

We firmly believe that restructuring and business model development are key to future growth in the sector and are necessary to ensure that it recovers its substantial place in local communities and in the Irish financial services landscape. You can be assured that I, and the whole Registry, are fully committed to the development of a strong credit union sector meeting the needs of your members.

For many credit unions, restructuring is the most important step towards a sustainable and viable future and it is good to see solid progress here. I also want to acknowledge the strong collaboration between the Registry and the Restructuring Board (ReBo), and welcome the recent announcement by the Minister for Finance that ReBo can continue to accept restructuring proposals up until March 2016. Most importantly, I want to compliment the many credit union boards involved in restructuring, for the realistic and forward-looking approaches they have taken on their members’ behalf.

The motivations driving consolidations differ, of course. Sometimes, it may be the recognition of future financial stresses, or, as is frequently the case, the reality of the need for scale – through consolidation with a larger credit union – to have the potential to offer a broader range of products to meet current and future member needs, supported by a variety of customer service platforms in a cost efficient fashion.

I welcome the increased momentum on restructuring, as reflected in the number of active credit unions - now 343, from 384 at the start of the year. Most mergers provide an important starting point to address financial and operational weakness and the ability to transform the product and services offerings. But, equally clearly, more needs to be done on restructuring, given the extent of viability challenges that continue to face many credit unions. I would urge all credit unions who are considering possible restructures, for whatever reason, to take this opportunity to engage with ReBo, now that they will be able to facilitate the merger process for longer.

It is also important to highlight that size alone will not deliver a vibrant and sustainable business model, and consolidation of itself does not guarantee viability. The current challenges of low Loan to Asset ratios are equally an issue for some larger credit unions. Leadership and the astute assessment of opportunities - which the improved current environment may present - are important ingredients to drive thriving business for credit unions into the future.

Financially incentivised Restructuring

I particularly welcome that, in 2015, we have been able to expedite the consolidation of a number of distressed entities using the private fund made available by the sector itself, through the Irish League of Credit Unions. We welcome the fact that we have been able to engage constructively with the sector to simultaneously (i) resolve unviable entities, all within the sector itself, (ii) put legal safeguards in place to best ensure the resulting mergers represent a safer and sounder outcome than before, and (iii) save taxpayers money. Of course, we stand ready to act using public funds and our resolution and restructuring powers, where necessary, always acting in the best interests of members and having regard to financial stability more broadly.

Dialogue on Business Model Development

As credit unions build on the benefits of restructuring to address financial and operational weakness, the Central Bank welcomes well-considered proposals to develop product and services, to enable the sector to compete and thrive into the future. I would say, however, that we have a concern at the sometimes quite big gap between where most credit unions are now and the ambitious development aspirations being mooted by or for them. While there is nothing wrong with ambitious and stretching targets, it is important that they are grounded in reality regarding how they can possibly be taken forward, especially where proposed developments could be very costly and involve heavy losses if they do not succeed.

To put it clearly - we want to see credit unions becoming strong providers of Irish financial services into the future, but, from where most credit unions are now this has to be a multi-step process. Each step needs to be carefully assessed for risk and reward before it is undertaken, and a prudent approach will serve the sector well in the long run.

There has been some criticism that the Central Bank is holding back the development of credit unions into new business areas, or that regulation is too restrictive. I would like to respond to these assertions. To date at the Registry, we have not seen enough from credit unions by way of well-structured, viable and sustainable plans for development which are rooted in the current realities and challenges that have to be dealt with to move forward successfully. Many of the proposals we assess are not aligned to current business strategy, business fundamentals and capabilities. They often lack relevant cost and viability analysis, and - importantly - fail to demonstrate how the proposed new service or product will contribute to the development of the credit union(s) profitability and sustainability.

I have no issue with proposals being mooted at an early stage for our challenge – that is an important role that we already play. But our concerns extend to the fact that, even after considerable engagement and challenge for improvement on emergent proposals, we often see a slow pace or a piecemeal approach to addressing our concerns, or a continued failure to demonstrate feasibility in the emergent proposals, or overly-ambitious plans for the nature, scale and complexity - not to mention the current weaknesses – of the sector at this time.

Let me be clear - we are not seeking to constrain business models, but to ensure that proposed developments are carefully assessed, including the additional technology, expertise and governance required; properly costed and assessed for risk and potential return. I want to acknowledge that this is one of the biggest challenges which your sector faces, that there are no easy solutions, but that we all have to take a considered and lower-risk approach where possible. Anything else and we could put the funds of members at greater risk.

Given the size and importance of this challenge, we have planned a series of dialogues with credit union representative bodies – including NSF – and managers, to discuss desired business model transformation, and to identify any changes that may be required to the regulatory framework to facilitate prudent development. We hope to see strong sectoral engagement in these discussions. We aim to give credit unions clarity on what is required in terms of a well thought-through business proposal and ensure that prudent sectoral development is not unintentionally hindered by the regulatory framework.

These dialogues will give us an opportunity to listen to your views on the services that credit unions plan to develop, including, for example, payment accounts, payment card services, revolving credit, longer lending terms including further developments on the provision of mortgages to members. The dialogues will also provide a forum for us to address the information that may be required in applying for provision of additional services.

We have recently seen some promotion through the media of credit unions as a third banking force and aligned to this has been a suggestion that credit unions are currently subject to a level of regulatory oversight as strict as, or indeed in excess of, that applied to banks. While it may be a good sound bite, it is highly inaccurate, as anyone familiar with the scale and complexity of banking regulation and legislation at European and domestic level will quickly appreciate. The environment that we are in is one of cross-the-board strengthening of regulation across all financial sectors – domestically and internationally - to adapt to lessons learned from prior periods. While the regulatory requirements on credit unions have been raised markedly in recent years, much of this represented catch-up to the level required of soundly-regulated systems (as acknowledged by the Commission on Credit Unions), and the higher standards we all expect from institutions that lend and manage other people’s money. Overall, the regime remains proportional to the nature and complexity of the Irish credit union sector.

Credit unions have an important part to play in many parts of the financial market, where they can achieve a significant market share; unsecured smaller-scale lending is an area of strength already, and there are fresh opportunities emerging. But being realistic, given their individual sizes, credit unions cannot compete with banks across all business lines. We want to see credit unions planning for a viable and sustainable future where they will offer members the services they want and will grow and thrive and attract new members. This will take time, require investment and commitment and may indeed, in time, see credit unions emerging as a strong and competitive force in the financial services market. We will always work constructively with you on that journey, consistent with our statutory mandate to protect members’ funds and to ensure the wellbeing of the sector generally.

Lending Restrictions

There is no doubt that the route to future viability in your sector is growing income responsibly. Recognising this, and to provide an incentive to ensure better credit standards are embedded across the sector, we undertook a review of lending restrictions. These restrictions had been introduced as carefully calibrated short term measures to limit excessive lending, in the midst of crisis, while necessary remediation work in that area was being undertaken. But we had subsequently found, in our PRISM engagements, that the weaknesses which had given rise to these restrictions remained unaddressed in many cases. We were also concerned that the ongoing presence of these lending restrictions had led to a certain acceptance of the situation in many credit unions, rather than an impetus to improve standards to have them removed.

As you know, last February we invited credit unions to apply for a review of their lending restriction, setting out clearly what would be required to have restrictions lifted. Almost three quarters of the credit unions contacted confirmed they would apply within the specified timeframe and the vast majority of that group subsequently formally applied before the closing date of 30 September, albeit nearly 35% of applicants actually applied in the final two weeks. Given that lending restrictions are often cited as an impediment to loan book growth, it is surprising that a number of credit unions did not engage with the review process at all. A number of these stated that they were not applying as they were content with the lending restriction imposed. We contacted these credit unions again to emphasise that this was not an appropriate position and that applications are expected to be submitted.

I am disappointed to say that, generally, the quality of the applications received was poor. This led to repeat requests for information and submissions. At this stage, we have reviewed almost 3/5ths of the applications received. Of the applications which have been fully reviewed, some 83% have had their lending restriction lifted and are now operating under their board’s stated credit risk appetite.

So far, we rejected some 17% of the applications and gave the individual credit unions concerned a period of 6 months to resolve the outstanding issues. Most of the rejections were due to lack of evidence that stated remediation actions have been effective and also to inappropriate Internal Audit findings arising from their loan sample. At this stage, some 39% of credit unions currently have a lending restriction in place compared with 52% at the start of the review process, with this figure expected to decrease in coming weeks as the review process concludes.

This was an important initiative in compelling the affected credit unions to address their credit standard issues. It enables credit unions to move forward with a more robust lending framework, and fundamental policies and procedures in place to address meaningfully and prudently any increase in demand for consumer credit. Members can be assured that, where their credit union has no lending restriction in place, the credit standards in that credit union in general meet our requirements.

Supervisory Engagement 2016 and beyond

We are also adapting our PRISM engagement to take account of the changing environment and the increase in different risk types which inevitably arise in a changing sector and one which is embracing new technologies and potentially new product offerings.

Our enhanced engagement approach moves us from an engagement cycle based on impact to one which includes an impact probability basis. We want to ensure that those entities undergoing structural and business model change and entities with identified weaknesses and vulnerable to failure are prioritised for our onsite engagement. The PRISM framework -with which credit unions are familiar - is not unduly changed, but the scheduling and nature of the engagement will differ in accordance with the nature, scale and complexity of the individual credit unions.

For smaller credit unions with most simple business models our engagement will be most straightforward, focussing on key processes, and viability – similar to our temporary approach this year. For the largest, more complex entities our expectations are highest. Here, we expect to see evidence of strong controls and governance framework, as well as depth of analysis and strategic vision. For entities which have been involved in consolidation, our focus will include quality of integration and, in particular, how the migration onto a common risk, control and governance platform has been managed.

Our engagement with the Board Oversight Committees will differ also, moving from a standard component of our onsite engagement to engagement on a case by case basis. We will of course be getting your minutes and reports in advance of our onsite visits. We anticipate that, if there are issues which need to be brought to our attention, they will be reflected in your reports of meetings and the matters you bring to your Boards and members and which you raise bilaterally with the Registry. Our approach with the Board Oversight Committee, like that with other oversight functions, is to challenge where we have concerns about the quality and performance of the function.


As Regulator, our role is to build the framework for supervision and resolution which helps to deliver a safer, stronger sector. Credit unions must comply with the regulatory requirements to protect their members’ funds. I have said on many occasions that we will not hesitate to take action where there is non-compliance and where members’ funds or the stability of the sector is at risk.

Last month the Central Bank concluded our first Enforcement actions under the Administration Sanctions Procedure since it became fully applicable to credit unions on 1 August 2013. These enforcement actions involved a reprimand for both a credit union and a former manager, and a fine on the credit union.

The case against the credit union involved breaches relating to failure to submit prudential returns to the Central Bank within the required timelines, failure to have adequate systems and controls in place to ensure the information was submitted on time and accurate. These enforcement cases show that the Central Bank will take the actions needed to ensure the appropriate standards of regulatory compliance in the sector, in fulfilling our mandate to protect members’ funds.
Are there wider lessons for the credit union sector from these cases? They highlight the importance of making the required returns to your Regulator within the required statutory timeframe and to the necessary standard and accuracy. This is the information we require to prioritise our efforts as we carry out our responsibilities to your members and the sector. It also highlights the need to ensure that, in your credit union, those who are given the responsibility for submitting information are fully aware of their responsibilities and competent to carry them out. It highlights that credit unions boards should ensure that people who are appointed to carry out such roles are competent to do so and receive the training and support required.

New Regulations

As you know, the Credit Union Commission recommended the strengthening of the regulatory framework for credit unions. The Central Bank believes that the recently published regulations, combined with the commencement of the remaining sections of the 2012 Act and the prudential and governance requirements already in place, provide an appropriate regulatory framework for the credit union sector at this time.

There has been intense lobbying against some of the new regulations due to come into effect soon. The regulation that appears to have been subject to the most debate has been the decision to cap the amount of savings an individual member can hold in their credit union at €100,000. We have listened carefully and considered all of the arguments put forward, but we remain convinced that putting this cap in place is the right decision for your members and your sector at this time.

As you know, this cap is based on the savings amount protected under the Deposit Guarantee Scheme and would therefore ensure that no member of a credit union would lose any of their savings in the event of a resolution. It is aimed at protecting members’ savings and also at protecting the financial stability of the sector, given the wider potential negative impact on the sector of any credit union member losing some of their savings.

One of the arguments put forward against the cap of €100,000 is that it will limit the ability of credit unions to develop their business models. This is hard to accept, given that the figures show, at this time, that savings of over €100,000 represent a very small number of members and a very small proportion of total funding. Just over one in every 1,000 credit unions members has savings of more than €100,000 in their credit union, while savings of over €100,000 represent just €161 million out of the current total members’ funds of over €12 billion. With average loan size still below €8,000 and average savings of just under €4,000, the figures do not support the argument that individuals’ savings of over €100,000 are needed to underpin lending and future growth.

We have indicated that where there is clear business case and sufficient safeguards in place to protect members’ funds that we can consider permitting the retention of such savings, and we will shortly communicate the likely criteria involved.

Because we foresee that restructuring and the future business model development of credit unions may change the landscape significantly, we have undertaken to review the savings limit within three years from the commencement of the Regulations. The provision of regulation making powers to the Central Bank on commencement of the remaining sections of the 2012 Act provides flexibility so that the Central Bank can, in the future, review and update regulations as appropriate on a timely basis following consultation.

The Central Bank is committed to ensuring that all aspects of our regulatory framework remain appropriate for the credit union sector. In the future, where credit unions set out a clear path on how they wish to develop we will consider any amendments to the regulations that may be appropriate.


We are emerging from very stormy waters, and the question is how are credit unions preparing themselves for the future. Many certainly have engaged in a comprehensive fashion, and those credit unions are best positioned to take advantage of future opportunities.
However, there remains a significant number of credit unions for whom meeting fundamental standards of governance and practice is still a challenge. Our PRISM engagements and our review of lending restrictions highlight continued weaknesses in policies, procedures and practices across a range of credit unions. Most significantly, they highlight gaps in terms of a coherent vision for the future. Consolidation remains an option for these credit unions, considering the major investment of time and energy that would be needed to make necessary changes to systems and framework.

The role of the Board Oversight Committee in calling out these leadership and strategic deficiencies is significant. You have a very important role, a statutory role, and, critically, a reporting role directly to your members on how their credit union is being governed and led. The BOC works best in a constructively challenging role with the Boards, not dysfunctional disagreement which can only inhibit credit union development. It is a challenging and demanding role and adds clear value when performed well.

I know the NSF is instrumental in providing the necessary supports and training to BOCs in delivering on their statutory function and managing these challenges.

I wish you and your colleagues my best wishes for continued success in this important endeavour, and the full support of the Registry in playing our role to take action and make decisions, which share the same objective as you, of ensuring sound credit unions which can best protect members funds and thrive into the future, serving communities, households and businesses in the best spirit of the credit union movement, while being attuned to the challenges and requirements of today’s changing financial landscape.