The Credit Union and Cooperation with Overseas Regulators Act 2012 sets out substantive changes in the regulation and compliance, governance and restructuring of Ireland’s credit unions. Claire Moran looks at things differently.
It is undeniable that the credit union sector in Ireland has been subjected to considerable upheaval in recent times. The keenly anticipated work of the Government-appointed Commission on Credit unions manifested itself in the final report of the commission in April. This report sets out wide-ranging recommendations to change the way in which credit unions are regulated and governed – both internally and externally.
It was on foot of this report that the Credit Union and Cooperation with Overseas Regulators Act 2012, a landmark piece of legislation setting out substantive changes in the areas of regulation and compliance, governance and restructuring came into being. When one considers also the developments brought about by the Central Bank’s proposed fitness and probity regime and the Personal Insolvency Act 2012, and it is clear that the challenges now faced by the credit union sector are great and plentiful.
Tiered regulation
The act has introduced measures for the regulation of credit unions on a basis proportionate to their asset value. In a move broadly welcomed by credit unions, the act provides for ‘tiered’ regulation and specifically states that, in making regulations under the act, the Central Bank shall have regard to the need to ensure that the requirements imposed by the new regulations are effective and proportionate to the nature, scale and complexity of the credit union, or the category of credit union to which the regulations apply. To this end, the Central bank has conducted nationwide exercise of visiting credit unions to assess the risk categories into which they fall.
These ‘probability, risk and impact system’ known as PRISM inspections, have resulted in the compilation of a centralized data base by which credit unions will be regulated. While, in the past, some elements within the sector were strongly opposed to tighter regulation, it is clear that opposition is no longer an option, with hundreds of thousands of people and small businesses dependent on credit unions for access to cheap credit.
Sophisticated model
The act has introduced increased regulatory requirements on credit unions and has effectively introduced a sophisticated compliance model. This model is designed to ensure that each credit union adopts a compliance programme. Each credit union must also implement policies, procedures, systems and plans to monitor compliance on an ongoing basis, including requirements under all legal and regulatory requirements.
This programme is to be overseen by a compliance officer, who must be appointed by the board of directors and who must have the necessary authority and resources to manage the compliance programme. The intention of the Central Bank to police the new regulations has been made clear-shortly after the enactment of the Credit Union Bill in December 2012, a Dublin-based credit union was fined €21,000 for a breach of anti-money-laundering regulations. Reporting requirements have also increased. Credit unions will be required to submit an annual compliance statement to the Central Bank certifying their compliance within two months of their financial year-end, or within such other period as the regulator may decide. Credit unions are further required to develop and maintain a risk-management system and controls to allow it to identify, assess, measure and report risks to which it is or might be exposed. A risk-management officer is to be appointed in each credit union to oversee this function.
Reporting lines
Clear organisationl structures with well- defined, transparent and consistent reporting lines and governance arrangements will be required in order to ensure that there is effective oversight of the activities of the credit union. As with the regulation of credit unions, the governance arrangements will take into account the nature, scale and complexity of the business being conducted by the credit union.
In line with good governance standards, credit unions will be required to document in writing their governance arrangements, setting out the roles, responsibilities and accountabilities of each officer. They will be requirements will pose quite a challenge for credit unions, where previously an informal approach may often have been taken to such matters.
A policy is to be drown up for identifying, managing and resolving conflicts of interest, which will apply to all officers of a credit union. There will be an increased responsibility for each officer of the credit union to ensure that no conflict of interests and the interests of the credit union, and also in terms of declaring his or her own interests to the board.
Fitness and probity
The Central Bank has also launched a consultation process with respect to a proposed fitness-and-probity regime. It is planned to introduce the scheme from July 2013 for credit unions with assets of greater than €10 million. Smaller credit unions will be afforded an additional grace period and will have to comply two years later.
The implementation of these standards for credit unions will ensure that members have confidence that those individuals holding senior and board positions in credit unions can demonstrate that they are competent, capable, acting honestly, ethically and with integrity, and are financially sound. The introduction of this fitness-and-probity regime complements the governance framework brought about by act. Ultimately, the regime will involve the Central Bank designating certain job functions as ‘pre-approval controlled functions’ (PCF), where those positions are of such a nature that the people occupying them would exercise a significant influence over the affairs of the credit union.
The Central Bank may then examine the proposed appointment of any individual to a PCF to ensure that they are fit and proper to discharge their responsibilities. In the event that the Central Bank is not satisfied, then the proposed appointment could be refused.
The regime will require increased reporting to the Central Bank on the part of the credit union and its cooperation with it. Credit unions will be expected to conduct extensive due diligence to assess the fitness and probity of candidates to ensure that they meet the new standards – and will continue to meet the standards on an ongoing basis.
Reserve requirements
The final report of the Commission on Credit Unions established that 51 of the country’s 403 credit unions are failing to meet the requirement that their reserves exceed 10% of their assets. Of these, 25 are seriously undercapitalised.
In addition to those 51 credit unions that fail to meet the minimum reserve requirements, a further 50 are reckoned not to be strong enough to survive on their OWN. With this in mind, the act has provided for the establishment of the Credit Union Restructuring Board (REBO). A statutory body, REBO is expected to be in place for three years or more with a view to overseeing and assisting in any mergers or transfer of engagements between credit unions.
REBO will initially encourage credit unions to put forward their own proposals as to how to move forward. There is no denying, however, the steel within the velvet glove here-should these proposals not be accepted as viable, REBO itself can then act in pairing credit unions together in a merger, or a ‘transfer of engagements’ situation. The funding for this restructuring will be provided, in part, by the Credit Union Fund which has been established for this purpose and for the purpose of meeting the costs and expenses of REBO itself.
Credit unions shall contribute to the fund by paying a levy, the level of which will very in accordance with the capacity of the credit union to pay and the nature, scale, risk and complexity of the business of each individual credit union. The fund is also at the disposal of a newly appointed Stabilisation Committee to provide financial support to credit unions that are not meeting their regulatory reserve requirements, but that are, in the opinion of the Central Bank, viable credit unions.
Hard-hitting legislation
The Credit Union Commission has predicted that the personal insolvency legislation will hit credit unions hard and will add further to the worsening of the financial position of the sector. The provisions of the legislation will affect union members at every end of the spectrum, ranging from those with borrowings of less than € 20,000 who will be able to apply for debt-relief certificates allowing for the write-off of their debt, subject to a three-year supervision period – to those with secured dent of up to €3 million and unsecured debt up to an unlimited amount, who may be entitled to secure a settlement arrangement with their creditors.
The report of the commission highlighted that loan arrears across the sector collectively stand at €1 billion and that credit unions have had to put aside €801 million to provide for bad debts. The Credit Union Development Association, headed up by voiced its concerns that the impact of the personal insolvency legislation could be such that it will deter credit unions from lending to those who are financially excluded by the banks – and may potentially lead to the emergence of widespread unregulated moneylending. The Irish League of Credit Unions has also expressed the view that the legislation is weighted against the sector.
The full impact of these new measures for reform in the sector remain to be seen. Despite an increased enthusiasm by those spearheading the need for reform within credit union circles, it is clear, however, that never before have boards of directors and managers of credit unions faced such a challenge in progressing and securing the future of their credit unions. The question is, can the bridge be built between the sector’s volunteer ethos and the need to bring the sector into line with the professional financial services establishment?
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