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

05 October 2010 Speech

Credit Union Regulatory Forum 2010


Good evening ladies and gentlemen and welcome to the inaugural Credit Union Regulatory Forum. It is a pleasure to be here this evening and to have this opportunity to speak directly with so many credit unions together in one place.

The establishment of the Credit Union Regulatory Forum is founded on the need for us, as regulators, to open up a direct communication channel with individual credit unions to ensure that our regulatory messages and approach are clearly communicated and understood. We are delighted to see so many people here this evening. Over the past three weeks or so the Forum was held at five other locations around the country and overall around 900 people attended. The response has been overwhelmingly positive and it has been suggested by credit unions that the Forum next year be expanded to include operational workshops.

Operating and running credit unions in these difficult financial and economic times is not an easy task and it requires serious commitment in terms of time and application. It is pleasing to see in the numbers attending this inaugural Forum that this commitment shows no sign of abating and this is a testimony to the dedication of credit union volunteers who have over generations built the credit union sector in Ireland to the size and strength that it is today through strong and visionary leadership.

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. Circumstances that resulted in the rise of the credit union movement have returned and no doubt the credit union sector will once again – as it has in the past - step up to the plate and provide the necessary support to members.

However, these are testing times for all credit unions. The pressures of the current financial and economic environment are being felt across the sector and it is unlikely that credit unions will find the going less tough over the next 12 to 18 months. The question is - can credit unions rise to the challenge? We believe they can. Credit unions are resilient and they have survived tough times before. However, how well credit unions come through this time will firmly depend on the attitude, ability and the willingness of boards and management to adapt to change in their business environment and take the necessary steps to steer their credit unions safely through these relatively uncharted waters.

This evening I want to talk about three things:

  1. The need for a new regulatory approach;
  2. Regulatory contact and communications; and finally,
  3. Leadership and the future development of the sector.

The New Regulatory Approach

Turning first to the regulatory approach.

The current financial and economic circumstances we find ourselves in are extremely challenging. The financial landscape is changed forever and it would be foolish to expect that the credit union sector can escape the impact of this downturn in the economy. Some credit unions are already experiencing significant difficulties in their day to day business and more can expect to come under pressure as their members come under increasing financial stress. These are difficult times. Change is happening in all financial sectors and the operational and regulatory environment for all financial institutions has been transformed.

It is well known that credit unions are seen by their members as a trustworthy and safe place to save and borrow. However, this trust cannot be taken for granted. If confidence is to be maintained in the credit union sector then credit unions must do everything in their power to maintain the trust of their members. This means that credit unions must ensure that every decision they make must be made with the overriding objective of ensuring that they do not put their members‟ savings (in some cases life savings) at risk. Trust, once lost, is likely to be hard to regain and credit unions should be mindful of this. The future sustainability of your credit union and the overall credit union sector depends on that trust.

If credit unions are to remain sustainable in the long term then it is vital that a strong and robust regulatory framework is established to ensure the protection of members‟ savings and the financial stability of individual credit unions and the sector overall.

Our regulatory vision is “Strong Credit Unions in Safe Hands‟ and we will continue to drive regulatory change to achieve this end. We want to see credit unions with strong balance sheets built on the sound fundamentals of prudence and transparency. We want to see credit unions run by people who are experienced, competent and careful. Above all we want to see a vibrant and strong credit union sector that is sustainable for future generations.

Our regulatory work over the next couple of years will focus on embedding a business model built on good corporate governance and strong financials. We will continue with our robust and challenging oversight of the operations of credit unions and the safety buffers of regulatory reserves, liquidity and provisioning. We will continue to set appropriate standards in order to continue to build financial strength in individual credit unions and the sector overall.

For credit unions to function and develop properly there must be a good governance framework in place. Without proper systems of accountability, risk management and control credit unions will continue to struggle to meet the demands of an increasingly sophisticated member base and the increasingly higher risk environment in which they are operating.

In order to develop a good governance framework it is important that some basic principles are adopted. In the first instance there must be clarity of structures and processes so that everybody in the organisation from board member to teller knows the overall strategic direction of the organisation and what their individual roles and responsibilities are. Secondly, board, management and staff must be equipped with the right range of competencies to run and manage the organisation’s business. Finally, the governance structure must enable the strategy of the organisation to be implemented in a planned, safe and coherent manner.

Members of credit unions should expect nothing less than the highest level of governance and competence from boards and managers of credit unions and prudence in the management of their funds. 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 are seeking to have this requirement put in place as soon as possible.

We expect that the economic downturn will continue to expose those credit unions that do not have the financial strength to weather the current difficulties – either because of insufficient reserves or because of poor management and business decision making in the past. As Warren Buffett the well known American investor famously said – “Only when the tide goes out do you discover who’s been swimming naked‟.

In this respect it must be recognised that some credit unions will be non-viable in the long term and we must prepare for this. Although it is not a favourite topic for the credit union sector the subject of “amalgamation or merger‟ must now be put firmly on the table for open and considered discussion. A failure of one or more credit unions could lead to a significant loss of confidence across the sector. This must be avoided. Part of our regulatory work will be concentrating on identifying weak, or non-viable, credit unions and taking pre-emptive action where necessary in order to sustain the financial strength and well being of the sector.

Credit unions should not, however, be waiting on the market to determine their future. Directors and managers should now be looking closely at their own operations and drawing up projections and business plans to establish the financial capability of their credit unions to withstand further shocks on their business and taking the necessary preventative action. Where a credit union concludes that it may no longer be viable on a stand-alone basis, directors should be proactive and take the necessary steps to explore transfer opportunities with other credit unions to ensure continuity of service for their members.

It is important for credit unions to understand that an amalgamation with, or transfer to another credit union, does not always mean that the credit union ceases to exist. In most cases, the transferee credit union continues to provide services to existing members as a branch of the acquiring credit union. This is particularly important in a rural context. We know that the potential loss of identity can be a particular stumbling block in the merger debate; however we would be supportive of looking at solutions where this identity could be retained in the name.

Regulatory Contact and Communications

Turning now to regulatory contact and communications:

It has become increasingly apparent to us that the traditional regulatory contact communications channel through the representative bodies is somewhat flawed in that it can lead to distortions in the message. In this regard, the misinformation which circulated around the Section 35 initiative is a particular case in point. A proposed framework aimed at credit unions adopting a prudent and conservative approach to loan rescheduling, to ensure that the financial stability of each credit union is protected somehow became a message that credit unions would no longer be able to help members who are coming under financial stress. This is clearly not the case, so the message became distorted in transmission. We want to avoid this happening again.

At some of the recent speaking engagements we have undertaken, credit unions have made it very clear to us that they would welcome more direct contact with us, to ensure that our regulatory approach is fully understood. We believe that this annual regulatory forum will offer credit unions an opportunity to clarify and discuss regulatory initiatives in an open and constructive way directly with us and provide valuable feedback which will help inform our approach on regulatory matters.

In addition, we want to increase our interaction with individual credit unions on the ground. We know there are hard working boards and managers that want to show us the progress they are making in managing their business in a difficult trading environment and we want to allow for that to happen. We intend to embark shortly on a programme of visits to individual credit unions to meet with the board, management and staff.

The purpose is to hear strategies and business plans, discuss operations and allow for an opportunity to talk about the day to day business of the credit union and any regulatory concerns arising. We would hope that contrary to the popular misconception that we don’t understand credit unions we can demonstrate that we do know the business of credit unions and understand the difficulties being experienced on the ground.

This initiative is aimed at seeking out those credit unions – be they large, medium, or small – that want to maintain and develop a sustainable business model built on good corporate governance and strong financials. 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.

The new regulatory approach will also mean that we will be engaging directly with the largest credit unions regularly and much more frequently than in the past. We will expect more from the larger credit unions in terms of board and management oversight, risk management systems and competencies. We will also expect to see strong governance frameworks in place in these institutions and for them to have a strong compliance culture at the heart of their operations.

We will be more challenging with these entities and more demanding in terms of timeframes to address any risk mitigation action points that we identify as part of our regulatory processes. This is not to say that we expect less from smaller sized entities. However, our approach will be risk based and where we see significant risk arising we will expect action immediately. We will of course work with those boards and management that work with us and will take a pragmatic approach when agreeing priorities on mitigating actions, taking account of the level of risk involved.

Leadership and the future development of the Sector.

Finally, turning to leadership and the future development of the sector:

In these difficult times strong leadership is required. There is an old saying that “anyone can hold the helm when the sea is calm‟. Well we are in stormy waters and the credit union sector needs steady and experienced hands to get on the tiller over the next couple of years. We will be looking to those people to come from within the sector to help drive the changes necessary to ensure that their individual credit unions and the sector overall remains sustainable for the long term and develops in a prudent and safe fashion to serve future generations.

We are in a new business environment where unprecedented pressures can be expected to come to bear on credit unions and in this context, credit unions must sit up sharply and take notice of what is happening around them. This is not a time to ignore the realities of our current circumstances and whilst looking to the past might be preferable to looking at what is coming down the line – if you face backwards while walking forwards you are likely to walk into a lamp post and come to an abrupt and painful stop.

The American science fiction writer Isaac Asimov is quoted as once saying “It has been my philosophy of life that difficulties vanish when faced boldly”. Now while it can’t be guaranteed that the threats to credit unions will go away, the starting point in solving any problem is to recognise that there is a problem in the first place. If individual credit unions don’t face up to their current business difficulties they are risking their future and possibly that of the sector overall, given the indistinguishable nature of the credit union brand between credit unions and so the potential for contagion to spread.

Those credit unions that recognise the threats and weaknesses in their organisations sooner rather than later and take the necessary remedial action will be best placed to steer their way safely through these troubled times. We are looking to those credit unions to be leaders in their field and show by example how credit unions can continue to be voluntary led but professionally run to the highest standards.

The Amarach Research Report commissioned last year by the Irish League of Credit Unions – “Investing in Our Future‟ – found that members and non-members would like to use credit unions for more of their financial needs. The research found that there was a strong interest in current accounts, debit cards, ATM‟s etc. The provision of such services should not be beyond credit unions. However this can only be achieved by having proper risk management and IT systems in place, allied with the relevant expertise and skill sets required and overarched by a robust regulatory framework in which to operate. The highest level of governance and standards in relation to IT systems will be required and in this respect we have embarked on an initiative with the IT providers to establish minimum standards against which credit union IT systems can be validated.

The strategic review of the credit union sector currently underway offers an opportunity for an operational and regulatory framework to be designed which will allow the sector to develop its ability to offer a greater range of services to the members. This opportunity should not be wasted. Progressive thinking underpinned by prudent solutions will be required and while this change may be difficult for some, regulatory, operational and governance changes must happen before credit unions can be in a position to develop these services for their members.


So, in conclusion: A strong and robust regulatory framework underpinned by healthy balance sheets and good governance frameworks in credit unions is a pre-requisite for the long term sustainability of the sector. We will continue with our regulatory focus on the safety buffers of regulatory reserves, liquidity and provisioning and also continue to set appropriate standards in these areas. We will also be seeking to ensure that directors and managers running credit unions are required, by law, to have competencies commensurate with the complexity of their business model.

We intend to increase our regulatory engagement and be more challenging with the larger credit unions, in line with our risk-based approach to supervision. We also intend to provide more opportunities for direct interaction with all credit unions and we are looking to identify leader credit unions in best practice to drive the development of the sector.

With regard to weak or non-viable credit unions we will continue to focus on identifying those credit unions that are displaying these characteristics and seek to take pre-emptive action to avoid any potential shocks through contagion to the overall credit union system.

I believe that 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 develop and secure its future. The credit union sector has survived through many difficult economic times in the past and the inherent strengths of member loyalty, volunteer commitment and ethos of co-operation will continue to stand it in good stead through these current difficult times.

Our regulatory vision is “Strong Credit Unions in Safe Hands”. However, ultimately the responsibility for maintaining sustainable credit unions rests with the current boards of directors, supervisors, managers and representative bodies. We are saying to directors, supervisors, managers and representative bodies - rise to the challenge and help to create a strong and sustainable credit union sector to pass on to future generations.

Thank you for your attention. I will be happy to answer any questions you may have in the Q&A session.