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

04 September 2012 Speech


Mr. Chairman, members of the Executive, ladies and gentlemen, I am delighted to be invited here today to speak at the 2012 Autumn Conference of the Credit Union Managers Association. We always welcome the opportunity afforded to us by CUMA to interact directly with credit union managers and discuss regulatory strategy and policy for the sector.

As I have said on many occasions, strong and responsible leadership has never been more important in the credit union sector than it is now and all stakeholders must play their part in that leadership role. We believe that representative bodies as influencers of their membership have a responsibility not merely to collect and articulate the views of its individual members, but to also proactively lead and prudently guide its membership through business and governance change for the betterment of the credit union sector and its membership.

CUMA as the representative body for professional management in the credit union sector is well placed to be a positive influencer for change. We are therefore encouraged by the theme for today’s conference – ‘Transition & Opportunity’. Developing the thought process to align opportunity with transition, helps to create a framework in which prudent change can bring about prudent opportunities that do not expose the credit union sector to undue risk. Too often in the past ‘perceived opportunities’ for credit unions have been ill conceived with little or no thought of the risk involved or the potential for such ‘opportunities’ to damage the stability of individual credit unions and the sector overall. We believe that prudent development built on sound governance fundamentals and business structures is key to a sustainable credit union sector.

Today’s theme also builds on the theme of your Spring Conference - ‘Change or be Changed’. When I spoke at your conference in February, I argued that change is constant and that while we don’t have much influence on the action of change we can influence the way change affects us. If we become involved in the management of the change process then we can have an opportunity to influence the way change affects us. It is extremely pleasing to see CUMA continue with the theme that change is both required and necessary for the sector to remain sustainable into the future. There is no doubt that transition will always bring opportunity. Positive influence through responsible leadership by all credit union stakeholders can be a major factor in generating these opportunities. We believe that CUMA can play its part and be a strong positive voice in this process.

Today I want to talk briefly about three areas:

  1. Firstly, the development of the Fitness & Probity framework for the credit union sector;
  2. Secondly, regulatory engagement; and finally
  3. Credit union restructuring and resolution.

1. Fitness and Probity Regime for the credit union sector

As recommended by the Commission on Credit Unions, Part III of the Central Bank Reform Act, 2010 which provides the Central Bank with the powers to set out the Regulations and Standards of Fitness and Probity for regulated entities, will commence for credit unions shortly.

In the first instance, the fitness and probity framework for the sector will be aimed at individuals that hold board, management and supervisory responsibilities within credit unions in order to focus on improving overall governance standards within the sector. We believe that persons who exercise significant influence and control in a credit union and those that are responsible for ensuring compliance should be capable and competent with the appropriate skills, experience, knowledge and integrity to manage and govern the credit union prudently.

The framework is being tailored for the credit union sector and how the fitness and probity regime will be applied to an individual credit union will be determined by its size. In general, what this means is that in larger credit unions there will be a wider application of the requirements under the framework than in smaller credit unions with a limited business model.

By its nature any framework such as this needs to have a defined process with detailed requirements and standards. However, it is important not to lose sight of the overall objective of implementing such a framework which is to ensure that those entrusted with safeguarding members’ money are skilled, experienced and people of integrity. We would expect all credit unions – be they large, medium, or small – to be operating in accordance with this principle in mind, regardless of the level of regulatory requirements that apply.

It is important for credit unions to note that our planned approach to the introduction of this framework is on a phased basis with transitional arrangements in place. There will be full consultation with all stakeholders on the implementation approach. It is intended that this consultation will take place towards the end of this year with implementation planned for 2013. Of course, as always, we advise credit unions to be ahead of the game and in this vein you should start preparing for the introduction of fitness & probity now.

We have already begun the engagement process with the sector, including CUMA, on the development of the framework. We look forward to working with you to ensure that this important change to how credit unions are governed is implemented successfully. We will be elaborating more fully on the specific fitness & probity requirements at the Credit Union Regulatory Forum which will be held in October, about which I will talk later.

2. Regulatory Engagement

As you are aware the Report of the Commission on Credit Unions highlighted a range of challenges currently facing the sector, including increasing levels of loan losses, falling incomes, and other macroeconomic indicators which are adversely impacting on the sector. These challenges are being reflected in the composition of credit unions financial statements with significant decreases in loan books, high levels of loan arrears and increasing reliance on investment income identified across the sector.

Other external factors, such as the introduction of personal insolvency legislation, may also have a significant impact on the future financial stability of some credit unions. Boards and management should be preparing for the introduction of this legislation and seeking to make an assessment of the likely impact on their individual credit union. Credit unions should carry out a review of their loan books, taking account of available information and their knowledge of their members’ circumstances, with a view to taking appropriate actions including the making of provisions.

In accordance with Financial Reporting Standard 11 – Impairment of Fixed Assets and Goodwill - credit unions should also be reviewing their fixed assets for impairment, if events or changes in circumstances, indicate that the carrying amount of the fixed asset may not be recoverable.

Where issues regarding potential impairment of fixed assets have arisen and a ‘value in use approach’ is adopted, the directors should consider the appropriateness of the underlying assumptions used in the calculation to ensure that they are reasonable and supportable. This is particularly important where the carrying value of fixed assets is significant relative to the total assets of a credit union and/or the total realised reserves of a credit union. This may be the case where a building has been acquired, or significant building work has been undertaken, in more recent years.

In advance of the 2012 year-end we have issued two circulars one to credit unions and one to auditors - highlighting areas for focus when preparing and auditing the annual financial statements. From a credit union perspective the principle remains that boards of directors must protect the financial stability of their credit union by focusing on the underlying strength of the balance sheet. In this regard adequate regulatory reserves, bad and doubtful debt provisions and appropriate levels of liquidity must be maintained. Any decision in relation to payment of dividends in 2012 must be underpinned by the principle of protecting the financial stability of the credit union. With this in mind, directors and managers should proactively manage member expectations regarding the proposed level of dividend this year, especially if the level proposed will be small or nil.

We have reminded auditors of the importance of the external audit in our regulatory process. In making an assessment of the financial condition and performance of each credit union we rely heavily on the annual audited accounts and independent opinion expressed by the auditor to the members. The management letter from auditors is also one of the key information mechanisms used in our regulatory process.

We have found, however, the content of management letters generally to be variable in highlighting areas of significant concern about systems and controls in credit unions. Our concerns about the quality and content of the management letters has been re-enforced during our on-site PRISM engagement. We have highlighted this to auditors and have indicated that we expect to see an improvement in the reporting of significant issues that come to their attention during the course of the audit of credit unions. In reviewing management letters, we will also expect to see adequate and appropriate responses from boards and management to address the issues highlighted within appropriate timeframes.

The new on-site regulatory engagement model for credit unions, which as you know is entitled the Probability, Risk and Impact System or PRISM, was rolled out for credit unions in May 2012. So what has this meant for our supervisory approach and how have we engaged with credit unions since the roll-out?

In this new framework we have commenced engaging with credit unions at a level that corresponds to their impact category. In general this means that we are engaging more intensely and more frequently with the larger credit unions.

Our engagement approach involves either a one day visit during which we would seek to interview key management, key executives and the external auditor or a more intensive Full Risk Assessment which can typically take from three to five days in duration including testing. Our engagement covers current regulatory issues, issues identified from a review of the documentation requested in advance of our on-site engagement and discussions with board and management to better understand the key challenges for the entity (and how they are being addressed). The credit union’s business model and its strategy are also important areas of focus. We will challenge robustly where our experience and analysis would suggest that certain key underlying assumptions driving these plans, or underpinning the current business model, appear unrealistic and seek the necessary changes as appropriate.

We have been pleased in general with the open and constructive engagement with the credit unions we visited. However, there are a number of clear themes emerging from our engagement particularly in the areas of Strategic Planning, Operational Risk and Governance.

In assessing strategic plans and their formation, we are looking for robust and thoughtful analysis of the credit union’s economic, social and competitive environment and a comprehensive realistic appraisal of its business model and capabilities. Under our PRISM framework a credit union’s strategy, as documented in its strategic plan, is a key evaluation component in our dialogue with credit unions. We would expect that directors and managers have a deep appreciation of all aspects of their credit union’s strategy and can convincingly demonstrate that they fully subscribe to the appropriateness of the strategic plan and have full ownership of it. We would also expect to see ongoing consideration of key performance metrics and appropriate responsiveness where objectives and targets are not being met or where anticipated results are not being achieved.

We are deeply concerned that few of the credit unions visited have engaged in any proper strategic planning, especially given the challenges facing the sector. This needs to be addressed.

However, while it is important that credit unions get this process underway, I would specifically caution against any mind-set developing that the production of a strategic plan, or any other plan for that matter, is to satisfy a regulatory requirement. A strategic planning exercise, properly executed, will result in a plan which better positions the entity for current and future challenges. Poorly conceived and rushed plans are a waste of time for both the credit union and regulator alike. In order to assist credit unions in this area we will shortly be providing guidance as to our expectations in this area to help credit unions in undertaking this essential exercise.

With regard to controls around operational risk, we are pleased that some of the credit unions visited had reasonably sound control systems and processes in place to identify manage and mitigate key operational risks - but unfortunately these were the exception rather than the rule.

Particular areas of concern relate to core issues such as a failure to establish Business Continuity Planning and Disaster Recovery procedures or failure to test the adequacy of these key processes. Other operational risks identified include areas such as data security weaknesses, undocumented conflicts of interest, failure to implement proper separation of duties in key areas and a failure to document policies and procedures relating to new and existing products and services.

We also remain concerned about the robustness of IT system infrastructure and the level of oversight and controls in this important area of the business. As you are aware, under the new credit union legislation all credit unions will be required to establish and maintain IT policies and procedures to strengthen their IT control framework and to identify and mitigate risks to member information systems. We are developing a high-level IT questionnaire in order to assess the readiness of the sector to operate in this new environment and intend to roll this out shortly.

The need for credit unions to review the effectiveness of their core systems and control environment cannot be emphasised too strongly. As a core element of this review, credit unions must ensure that they have documented and implemented policies, appropriate internal controls and processes and systems to manage and mitigate operational risks identified.

The main theme arising under the Governance heading relates to the need for boards to be more focussed strategically and be less involved in operational day to day decision making. Strategic leadership was not evident in most cases. We also found that regular board review of key policies and implementation of these policies in the credit union was deficient, or absent, in a large number of cases.

Of course our regulatory engagement goes beyond on-site visits under PRISM and the Credit Union Regulatory Forum continues to be a significant part of our regulatory model. Following on from the successful forum meetings in 2010 and 2011 we are holding our 2012 forum meetings during October. The forum will take place over a period of three weeks in seven locations around the country, starting this time in Limerick. The Athlone Forum will be held here in the Hodson Bay Hotel on 17 October.

The forum provides an opportunity for directors, supervisors and managers to discuss regulatory policy and operational matters with us. We welcome the direct interaction which the forum provides as this is a valuable input in shaping regulatory policy. Topics that will be included on the agenda this year include our regulatory approach including PRISM and resolution, the new legislation and regulatory regime for the credit union sector and as I mentioned earlier the fitness and probity framework as it will apply to credit unions. At this stage the booking details have been circulated to credit unions and completed forms are due to be returned by 21 September. I look forward to seeing you at one of the forum meetings.

3. Credit Union Restructuring and Resolution

Finally, turning to restructuring and resolution in the credit union sector and our developed policy in this area;

As you are aware a core recommendation of the Commission on Credit Unions is that the credit union sector should be restructured. This is to be achieved on a voluntary, incentivised and time-bound basis. The Commission recommends that restructuring should be overseen by a board called ReBo, which will be established on a short-term basis and the process is to be completed within 4 years.

At the same time the commission recommends that credit unions that meet the intervention conditions, or grounds, set out in the Central Bank and Credit Institutions (Resolution) Act 2011 should be considered for resolution. The commission is of the view that resolution can serve a useful purpose by dealing with non-viable credit unions before they pose a risk to their members and the wider movement. The commission also recognises that circumstances may arise where liquidation takes place.

While the commission is clear that restructuring must not impinge on the Central Bank’s independence, or resolution actions, the Central Bank recognises the need to adopt a suitable policy framework in which restructuring and resolution can operate side by side, be complimentary in achieving financial stability and sustainability in the sector while avoiding regulatory forbearance during the restructuring period.

In developing its policy approach the Central Bank believes that while voluntary restructuring and resolution are distinct and separate processes, both courses of action can be structured within a single framework to operate in a complementary and orderly fashion and help towards achieving the twin aims of (a) protecting sector stability and (b) enabling sector development. This framework provides transparency and clarity to credit unions on the restructuring and resolution process.

In order for this approach to work the Central Bank recognises that it will be necessary to provide some ‘breathing space’ within this framework for the restructuring board to carry out its work. We are encouraged by the fact that the voluntary restructuring process is to be time-bound and consider that that this allows for some flexibility in the approach taken to resolution actions.

The Central Bank is of the view that by working closely with ReBo it can be possible to deal with failed or failing credit unions, in a positive, collaborative manner with the aim of ensuring that the impact of resolution actions on member confidence across the credit union sector is kept to a minimum.

While the commission has recommended that where a credit union’s regulatory reserve ratio falls below 7.5 per cent the credit union should be considered for the resolution process, the Central Bank considers that a more graduated approach can be taken to resolution in the context of a time-bound and planned restructuring programme under ReBo.

In accordance with our Restructuring and Resolution policy we will require credit unions below the minimum regulatory capital of 10 per cent to either recapitalise, or seek a restructuring solution. The time allowed for this to happen will be dependent upon the level of capital in the credit union requiring intervention. Credit unions requiring intervention will be categorised into three capital reserve bands – those below 10 but above 7.5 per cent; those below 7.5 per cent but above 2.5 per cent; and those below 2.5 per cent. ReBo will be notified of our intention with regard to the credit union requiring intervention and asked to advise us of its position in respect of a re-structuring solution for this particular credit union. A reply will be required within one month of notification to ReBo by the Central Bank. If ReBo decides that a restructuring option exists for the credit union involved then the timeframe in which we will expect the restructuring to be completed will be dependent upon the level of capital in the credit union requiring intervention; the lower the capital the shorter the timeframe. If no restructuring solution is found, or if the proposed restructuring process is not completed within the required time-frame, at that point the Central Bank will consider its next steps including the options available to it under the Resolution Act.

A key feature of our policy in this area is the requirement for asset reviews to be carried out in those credit unions that the Central Bank views to be vulnerable. In order for our policy approach to be robust, it is important that credit unions make an accurate assessment of loans in arrears and provide appropriate bad debt provisions for these loans. In this regard, the Central Bank expects credit union boards and management to demonstrate a high degree of integrity and diligence in assessing the performance of their loan books and the impact on their reserves ratio. This will be an important consideration for the Central Bank in assessing the on-going fitness and probity of directors and managers.

It is important that the restructuring and resolution processes operate as efficiently and effectively as possible in order to maintain member confidence, protect financial stability and enable sector development. We believe that the design of this collaborative approach will allow necessary resolution actions to be accommodated within the restructuring process as far as possible with the intention that the desired outcomes are achieved in an orderly and co-ordinated manner.

The policy is transparent and time-bound while providing the necessary flexibility to allow ReBo time to carry out its work as envisaged by the Commission. We have provided the Credit Union Implementation Group members with a copy of our restructuring and resolution policy and it has been broadly welcomed. We intend to elaborate on the finer detail of this policy response at the upcoming Regulatory Forum.

Although ReBo is not yet up and running, we are already hearing of some ill-thought out merger proposals being discussed between certain credit unions. This is not a recipe for long term sustainability, either for these individual credit unions or the sector as a whole. Simply merging two or more credit unions into one is not a solution to the challenges facing the credit union sector. The creation of larger scale credit unions naturally increases the risk profile of the sector, especially in a sector where there are fundamental weaknesses to be found in many credit unions in the areas of governance, systems of control and business models. For these reasons suitable transferee or receptor credit unions to absorb the weaker credit unions are likely to be thin on the ground. While an individual credit union might be running perfectly well on its current standalone basis asking that same credit union to takeover one or more weak credit unions, integrate them with the existing business, address all of the problem issues (financial and otherwise) and run a bigger entity creates potential risks that need to be addressed. In most cases given our knowledge of the level of governance, systems of controls and IT capability on a sector wide basis we believe that significant post-merger and integration support and expertise for the majority of potential transferee or receptor credit unions participating in the restructuring process will be required. It is vital therefore that this is taken into account by ReBo when developing and considering restructuring proposals. The risk of simply creating bigger ‘weak’ entities must be avoided.


Many challenges lie ahead for individual credit unions and the sector as a whole. Continuing adverse financial trends in individual credit unions continue to be a concern and the likely impact of the forthcoming personal insolvency legislation on the sector is as yet unknown. Any restructuring must be carried out within a defined and time bound plan designed to create a long-term sustainable business model on a sector wide basis; one that is founded on sound governance and risk management fundamentals.

In the debate on the future sustainability of the credit union sector, the need for change in how the majority of credit unions are run is now incontrovertible. In general, changes in governance structures, business models and skill levels are fundamental if the sector is to continue to be relevant and viable into the future. The recommendations of the Commission on Credit Unions are a major step forward in achieving this, and will when implemented help shape the regulatory framework to build and support a robust credit union sector.

Although the challenges are obvious, there can be a positive future for those credit unions that differentiate themselves and change and act quickly to effect those changes necessary to ensure future viability. In recognising the constancy of change, that change can be positive and the need to influence and drive this change, I believe CUMA can provide positive leadership for these credit unions and help sustain the credit union sector for future generations.

I wish you well in the remainder of your deliberations at this year’s Autumn Conference. Thank you for your attention and if you have any questions I would be happy to answer them now.