Address by Registrar of Credit Unions, James O’Brien to the Credit Union Regulatory Forum, Limerick

10 October 2012 Speech

‘Moving on - to a better governed and financially stronger credit union sector’

Good evening ladies and gentlemen and welcome to the third year of our annual Regulatory Forum for credit unions. The Forum is now firmly and successfully embedded in the annual calendar for the credit union sector and this year more than 1,200 invited directors, managers and supervisors will attend the forum meetings throughout the country.

We welcome the opportunity to engage with those who are at the ‘coalface’ of the credit union business. The insights and feedback we get are a very important input to regulatory policy and each year we get to hear a cross spectrum of views – which is what one would of course expect in a sector comprising now of 399 autonomous credit unions of various size and complexity. This engagement is important for us as we build the new regulatory framework for the sector.

This evening I want to talk about the following areas:

  1. Leadership;
  2. Volunteerism; and finally
  3. Restructuring.
Later we will also be providing short presentations on (1) the year-end process, (2) the new regulatory framework, (3) the introduction of fitness and probity for the credit union sector and finally, (4) our new supervisory engagement model – PRISM.

At the outset let me say that the Credit Union Bill 2012 is a pivotal moment for the credit union sector. There is nothing in this Bill that should cause concern for credit unions or volunteers. The Bill provides a framework for the sector to be re-shaped and develop – something that must happen if the sector is to remain viable into the future.

As you are aware the Bill reflects the recommendations contained in the report of the Commission on Credit Unions – a report which was unanimously agreed by all members of the Commission including the representative bodies. For the sake of the future development of the credit union sector in Ireland, we believe that it is vitally important that the provisions of this Bill are enacted as a package and in full.

1. Leadership

So turning first to the subject of leadership.

The theme we have adopted for this year’s Forum is ‘Moving On’ – ‘moving on to a better governed and financially stronger credit union sector’.

In the past few years the financial world has changed. The economic situation has changed. More importantly, the financial circumstances of many credit union members have changed. The likely impact of the forthcoming personal insolvency legislation on the financial condition of credit unions and the sector overall, is as yet unknown.

There is a new reality to running a credit union. Strict financial discipline, a relentless drive for cost efficiencies and a clear focus on strategy and strategic deliverables is now a must if the sector is to remain sustainable. No more is it simply a matter of opening the credit union door and letting business take care of itself.

The world in which credit unions now operates has changed forever. In this new reality, boards and management must show leadership and act quickly to get on with the business of sorting out their credit unions. Directors are responsible under law for general control, direction and management of the affairs, funds and records of their credit unions. In this regard we expect boards of directors and managers to demonstrate a high degree of integrity and diligence in assessing the performance of their loan books and investment portfolios (and the valuation of fixed assets) - and importantly the impact on the reserves ratio of the credit union. This will be an important consideration for us in assessing the on-going fitness and probity of directors and managers.

There is no doubt that there is hard and demanding work to be done - but it is not optional. While it is pleasing to see that there are a growing number of credit unions taking the initiative to reshape their balance sheets as a first step in this process, the pace of this work needs to quicken considerably.

Any process of development requires change. The American inventor Charles Kettering is quoted as saying ‘The world hates change yet it is the only thing that has brought us progress’. It’s hard to disagree with this. For this reason the credit union sector must develop thought processes that align opportunity with change. In doing so a framework can be created in which prudent change can bring about prudent opportunities - opportunities that do not expose the credit union sector to undue risk.

There is no doubt that transition will always bring opportunity. Positive influence through responsible leadership by all credit union stakeholders can also play a major part in generating these future opportunities. We believe that prudent development built on sound governance fundamentals and business structures is key to a sustainable credit union sector. Those in the movement that are in a position to show leadership can play a big part in this development and be a strong positive voice in the process.

In this new world, strong and responsible leadership is a key critical success factor and it is incumbent on all stakeholders to play their part in the leadership role. Credit unions deserve clear, unambiguous and positive leadership. We believe that representative bodies as influencers of their membership have a responsibility not merely to collect and articulate the views of their individual members, but to also proactively lead and prudently guide their membership through business and governance change for the betterment of the credit union sector and its membership.

We also know from our interaction with individual credit unions that there are future potential leaders out there who up to now have not yet had the opportunity to be influencers on the wider movement. While we would not want to distract from the very important work being done at credit union level by these individuals we would like to see them spread the positive messages and show direction to the wider audience – either individually or collectively. Your movement needs you - and it needs you now.

2. Volunteerism

Moving on to ‘Volunteerism’ in the credit union sector’.

In terms of growth and penetration the credit union movement has come a long way since the first credit unions were established here in the late 1950s. This success has been driven by vision, diligence and commitment by many people over a long number of years. Volunteers have been the backbone on which much of this success has been built.

In more recent years increasing numbers of professional managers and staff have become employed in the sector. In a survey carried out in 2010 as part of the strategic review of the credit union sector, only 18 of the 400 credit unions that responded reported that they had no paid staff on their books. What this means is that less than 5 per cent of credit unions rely solely on volunteers to run their business – a very small number as you can see.

While in general the introduction of professional management to the credit union sector has been a positive development it has also allowed a certain myth to develop – one that is built on a notion that it is ok for volunteer boards to leave it to the professional staff (and in some cases their consultants) to run their credit union. This manifests itself when we meet with some boards of directors who are incapable of articulating clear and well thought out business strategies or analysing the credit union’s financial and operational performance in the absence of their manager (or consultant). Indeed in some problem cases we have come across boards who have absolved themselves of almost all responsibility - both strategically and operationally.

It goes without saying that this is not acceptable to us, nor can it be considered as any form of platform for future development in the sector. The new Credit Union Bill seeks to address this by clearly articulating the respective roles, accountabilities and responsibilities of boards and management. We expect boards to direct and we expect managers to manage. If volunteers are not capable or competent then members’ savings are at risk. As part of our supervisory process we will continue to look closely at how boards and management operate in individual credit unions and in the interest of protecting members’ savings take appropriate regulatory action where we are not satisfied that the relationship is operating effectively – including placing directions and restrictions on business where we believe that the governance of risk is poor.

The new framework is also designed to ensure segregation of duties between those responsible for setting and overseeing the strategy of the credit union – i.e. the board – and those responsible for execution of this strategy – i.e. management and staff. In this new framework we believe that the ability of directors to carry out their functions in an independent manner is critically important. For this reason we are of the view that any potential for conflict of interest between those charged with directing the business and those responsible for running the business on a day to day basis should be limited. We believe therefore that the proposed protections in this area contained in the Credit Union Bill are prudent. This will require proper succession planning to be firmly embedded in credit unions’ business models – something that is long overdue in the sector.

Turning to the topical issue of introducing maximum terms of office for directors in credit unions as set out in the Credit Union Bill. We think this is a sensible approach to ensuring good governance.

In recent discussions on this topic it is being mooted that volunteers will only be attracted to sitting on the board of a credit union if in turn they have the opportunity for life membership of that board. We do not agree. While there will always be those who are attracted to power there are many more individuals who volunteer to work in their credit union who would be happy to continue to do so without the title of director. After all the introduction of maximum terms of office for directors sitting on the board does not preclude individuals from continuing their voluntary work in the credit union in some other capacity when their term of office as director expires.

A strong argument can also be made that directors should go through a period of formal training before sitting on a board. We would like to see this happening and we believe that the concept of ‘trainee directorship’ should be introduced. After all would you be comfortable if the pilot on your plane announced that he or she was ‘learning on the job’? Equally, should you be happy as a member of a credit union for someone who is learning on the job to be making decisions in relation to your hard earned savings?

A different perspective of maximum term limits for directors can be seen if we take into account the need for a period of time for new directors to be trained before formally sitting on a board and the opportunity for those directors who have reached the maximum term of office to act as mentors to new directors. The provisions contained in the Credit Union Bill do not prohibit the involvement of volunteers in credit unions before or beyond the period in which they are a member of the board.

We believe that refreshing boards periodically will invigorate the sector and help in the development of new ideas and thought processes. We also believe that this will drive credit unions towards building good governance frameworks to accommodate new people coming into and onto the boards more frequently. We believe the framework as designed in the Bill can deliver better governance in the credit union sector.

Do we think what is proposed in relation to governance in the Bill will result in a dearth of volunteers in the sector? - Absolutely not: quite the opposite in fact. We believe that quality volunteers will be attracted to well-governed credit unions that have sound and robust governance frameworks in place.

We of course have heard the recurring mantra from some incumbent directors who continuously bemoan the fact that they cannot get people to volunteer to sit on boards. When we challenged this a couple of years ago and asked credit unions to be more proactive by for example identifying skill shortage and advertising for directors to fill these positions – some did. The results were as we expected. These credit unions were pleasantly surprised by the quantity and quality of the responses and some have managed to build up a strong panel of potential directors from this initiative.

We believe that if potential volunteers are comfortable that they are not exposing themselves reputationally then they are more likely to want to join credit unions instead of other voluntary organisations given the potential for personal training and development. So, to attract quality volunteers, proper systems of governance and control must be in place and directors must feel protected. There is no reason why credit unions cannot be the preferred place to volunteer – indeed there are very many positive reasons why it should be the preferred choice over other organisations.

3. Restructuring

Finally, turning to restructuring in the credit union sector.

The numbers of credit unions in the Republic of Ireland grew exponentially in the 1960s and by the end of 1972 there were 354 credit unions registered in the State. The numbers continued to grow steadily until the late 1990s and by the year 2000 there were 438 credit unions with 2.2 million reported members’ accounts and savings of €4.6bn. Today the number of credit unions has fallen to 399 but the amount of savings under management has increased substantially to almost €12bn. The number of reported members’ accounts has also increased and now stands at around 3 million.

That savings have grown to such significant levels in credit unions can in some sense be attributed to their success as ‘trusted deposit gatherers’ however this growth has also exposed fundamental weaknesses in the credit union business model – especially in how credit unions are governed and operationally supported.

While the introduction of proper governance structures and skilled personnel under the proposed new regulatory framework may help to partly address these weaknesses, the timeframe involved to implement these recommendations will be a barrier to allowing the sector develop at pace. The high costs associated with each credit union putting appropriate governance structures and risk management systems in place, in addition to attracting skilled and competent people, will also be prohibitive to the development of a sector where 399 credit unions remain autonomous and do not have a coherent infrastructure in place to leverage economies of scale in terms of skills, expertise and operations.

For this reason the work of the ReBo over the next few years will be vital to the future sustainability of the sector. We are encouraged by the fact that the restructuring process is to be time-bound and to be completed within 4 years. Of course it will be important that ReBo starts this process as soon as possible. We believe time is of the essence in this regard.

We will continue to take regulatory action to deal with weak credit unions in order to protect member confidence – including seeking to use our powers under the Resolution Act where the intervention conditions are met. We have developed a Central Bank policy framework within which we will work closely with ReBo in a positive and collaborative manner, in order to ensure that the impact of resolution actions on member confidence across the sector is kept to a minimum.

We continue to hear of 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 and we do not agree with this. By simply merging two or more credit unions into one without a wider sector context is not a solution to the structural challenges facing the sector.

It is vital therefore that ReBo goes about its work in a systematic fashion and in accordance with a detailed plan of action which will address the structural weaknesses in the 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 this reason it will be important that at the outset there is a clear vision for where the sector will be (and what it might look like) say in 5 or 10 years time. That desired outcome should be the blueprint for shaping the restructuring work over the years to come.

There are many examples internationally to demonstrate how restructuring can be achieved while retaining the credit union strengths. In Australia, the US and Canada restructuring has been on-going for some time and despite the reduction in numbers of credit unions in these countries, membership and assets have increased. Co-operative principles are maintained. The models differ but they all aim to achieve the same corporate goal of serving members and the community in a sustainable way. There is no reason why the same outcome cannot be achieved here.

So in conclusion

We believe that credit unions can continue to play an important future role in the Irish financial sector. However this can only happen if the structural weaknesses in governance structures and the current credit union business model are addressed as a matter of urgency. The challenge is how to restructure the model so that the sector can develop to service the needs of its members into the future while remaining financially strong.

This will require an appropriate policy response and the work of ReBo will be vital in this respect. The willingness of the sector stakeholders and its representative bodies to fully engage and deal with the structural issues that are contributing to the financial decline in an increasing number of credit unions and the sector overall is also vital. Strong and responsible leadership is required from all stakeholders and the speed at which the sector engages to bring about this structural change will be all important to success.

There is no reason why the credit union sector cannot come through these challenges stronger than before. Volunteers have nothing to fear from the changes proposed in the Report of the Commission on Credit Unions. They are designed to strengthen the movement – both financially and operationally - and ultimately for members, for volunteers and for the communities in which credit unions operate.

The commitment and resilience of the volunteers and staff in credit unions is second to none. With direction and a willingness to accept change – to adapt and ‘Move On’ – we see no reason why credit unions cannot develop into real alternatives to the other players in the Irish financial system.

Thank you for your attention.