Report of the Commission on Credit Unions March 2012
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Report of the Commission on Credit Unions March 2012 Report of the Commission on Credit Unions ii Report of the Commission on Credit Unions Table of contents Letter from the Chairman to the Minister for Finance ii Executive Summary iv Abbreviations ix Chapter 1 Introduction 1 Chapter 2 Defining Features of Credit Unions 9 Chapter 3 Current Financial Position of the Credit Union Sector in Ireland 19 Chapter 4 Credit Union Survey Analysis 35 Chapter 5 Synthesis Report on the Public Consultation 53 Chapter 6 International Perspectives 65 Chapter 7 Future Models of Credit Unions 79 Chapter 8 Deposit Protection, Resolution, Stablisation and Liquidity 97 Chapter 9 Sector Restructuring 103 Chapter 10 Legislation and Regulation of Credit Unions 117 Chapter 11 Governance of Credit Unions 139 Chapter 13 Conclusion 157 Appendix 1 Terms of Reference 159 Appendix 2 Public Consultation Request July 2011 161 Appendix 3 List of Consultation Submissions 163 Appendix 4 Efficiency Study 165 Appendix 5 Operating Principles for Credit Unions 175 Bibliography 177 Endnotes 183 iii Report of the Commission on Credit Unions Executive Summary 1. Background 1.1 This is the final report of the Commission on Credit Unions and was presented to the Minister for Finance, Mr. Michael Noonan, T.D., on 31 March 2012. The purpose of this report is to inform the preparation of credit union legislation, to be published by end- June 2012, and to make recommendations regarding the strengthening of the regulatory framework of credit unions, including more effective governance and regulatory requirements. 1.2 The Government established the Commission on Credit Unions on 31 May 2011 to review the future of the credit union movement and make recommendations in relation to the most effective regulatory structure for credit unions, taking into account their not-for-profit mandate, their volunteer ethos and community focus, while paying due regard to the need to fully protect members’ savings and financial stability. 2. The current financial position of the Credit Union Sector in Ireland 2.1 The adverse economic conditions have resulted in a decline in credit union performance and have made it difficult for some credit unions to replenish reserves through retained earnings. As at 31 December 2011, of 403 credit unions that submitted prudential returns, 51 credit unions had total realised reserves less than 10% of assets and 25 credit unions could be considered seriously undercapitalised (less than 7.5%) 1. At that time, 352 credit unions (87%) held at least 10% of assets as total realised reserves2. 2.2 Despite the financial crisis and the challenges that it has posed, average liquidity has remained high and in December 2011 stood at 47.38%. The loan-to-asset ratio in the sector was 40.76% in 2011. 2.3 The financial profile reveals a commonality of the issues faced by credit unions of all sizes and common bond types. The declining fortunes of the Irish economy have not only put an additional brake on credit union development but arguably have contributed to regression in some credit unions. The Central Bank of Ireland’s projections envisage a further deterioration in credit union solvency. While the financial challenges now faced by credit unions are evident, they are not insurmountable but do reinforce a clear need to reform how credit unions are 1 Since that date non-State stabilisation support has been agreed for some of these credit unions to address the position. 2 The Regulatory Reserve Ratio requires credit unions to hold a minimum of 10% assets in Total Regulatory Reserves. iv Report of the Commission on Credit Unions structured, governed and regulated. A strengthened and re-vitalised sector can be in a position to play an increasing role in the retail financial landscape. 3. Summary of the main recommendations Implementation 3.1 The Commission recommends that a group be established to oversee implementation of the recommendations of the Report. Restructuring 3.2 A core recommendation is that the credit union sector should be restructured. This should be achieved on a voluntary, incentivised and time-bound basis. Credit unions approved for restructuring should be provided with funding, where required and subject to conditions, to ensure they have adequate capital and to upgrade systems. 3.3 Restructuring will not apply to all credit unions. Some credit unions will continue to operate successfully on a stand-alone basis should they so choose, provided that they have a viable business model capable of meeting regulatory requirements. 3.4 The amount of funding required for restructuring will not be known until the position of the participating credit unions is fully assessed over the coming months. It is envisaged that a significant funding requirement will be needed. 3.5 The Commission proposes that restructuring should be funded as follows: • The first call should be on any available excess capital within the participating credit unions • The affordability of sector-wide contributions should be assessed, having regard to the cost of existing and impending levies on the credit union sector for regulation, resolution, stabilisation, etc. • Exchequer funding should be provided on a recoupable basis 3.6 The Commission recommends that restructuring should be overseen by a board established on a short-term basis with a view to completing the process within four years. The Board will also have a limited operational role in facilitating and coordinating restructuring proposals. Resolution 3.7 The Commission recommends that the resolution powers provided to the Central Bank under the Central Bank and Credit Institutions (Resolution) Act 2011 should be considered for those credit unions that meet the intervention conditions or grounds set out in that Act. Regulation 3.8 The Commission recommends the introduction of a strengthened regulatory framework which credit unions will have to adapt to as it is phased in over time. v Report of the Commission on Credit Unions However, credit unions should not be regulated on a one-size-fits-all basis; rather a tiered regulatory approach should be adopted. 3.9 The Commission considered that some of the new regulatory requirements may not be required for those smaller credit unions that want to operate a simpler business model. Therefore, it is recommended that those credit unions be permitted to opt for a more limited business model under a simpler regulatory regime. 3.10 Some larger credit unions that are capable of operating on a more sophisticated basis should be allowed to offer a wider range of products and services and engage in a broader range of lending and investment activities. This should be permitted under a more sophisticated regulatory regime for these credit unions. 3.11 The Report recommends revisions to the requirements around loan rescheduling, usually referred to as “Section 35 Requirements”, to make them clearer and more effective and to respond to feedback on their implementation to date. Consultation and Impacts 3.12 The Commission recommends that a consultation protocol should be in place between the Central Bank and credit unions. 3.13 When setting out new regulations, the Commission recommends that the Central Bank undertake a Regulatory Impact Analysis (RIA) in line with existing requirements and having regard to international best practice. Governance 3.14 As the sector’s key decision makers, boards of directors shape the strategic direction and performance of credit unions around the country. The Commission recommends a Governance Standard for credit unions to ensure that those entrusted with safeguarding members’ money are skilled and experienced people of integrity, with the necessary underpinning systems and controls to run credit unions in a verifiably prudent way. Many of the governance changes will be phased in over time and will be calibrated according to the size and complexity of the credit unions to which they apply. 3.15 The Commission makes recommendations in relation to governance including: • The composition and role of the board • The role and responsibilities of the manager • Fitness and probity 3.16 The Interim Report recommended that operational responsibilities currently assigned to the Supervisory Committee should be transferred to the internal audit function. In recognition of the change to the Supervisory Committee’s responsibilities and the key oversight role played by the Supervisory Committee, the Commission further recommends that the Supervisory Committee is renamed as the Board Oversight Committee and the primary function of the Board Oversight Committee should be to assess whether the board has operated as required by the governance standard. vi Report of the Commission on Credit Unions Legislation 3.17 The report sets out the draft outline of the Credit Union Bill to be published in June 2012 under the EU-IMF Programme. That Bill will provide for many of the regulatory and governance changes recommended and set out in this report. 3.18 The Bill will also provide the statutory basis for the stabilisation scheme recommended in the Commission’s Interim Report. To avoid any conflicts or overlaps during the restructuring process, the Commission recommends that stabilisation strictly be used to address short-term problems at credit unions that are viable but undercapitalised. Stabilisation should not be used to address underlying structural problems with credit unions that ought to be addressed more appropriately through restructuring or resolution. 3.19 The Commission also recommends a number of amendments to the Credit Union Act 1997, including an appeals mechanism for regulatory directions. Credit Union Model 3.20 The Commission is not recommending fundamental change to the common bond (the membership charters that apply to credit unions and defines their membership base by reference to geographical location or occupation). 3.21 The Commission recommends that where credit unions seek to broaden the range of services they offer, this should be done within the tiered approach to regulation.