Over 50 years after its establishment, the Irish credit union movement is entering a period of unprecedented change. The enactment of the Credit Union and Co-operation with Overseas Regulators Act 2012 (the “Act”) introduces a sweeping reform of the sector with an ambitious and wide scale restructuring programme, rigorous corporate governance regulations and stringent financial and prudential requirements. The Act provides a blueprint for the transformation of the Irish credit union sector with a focus on four key areas:
- Stabilisation; and
- Prudential Regulation.
One of the primary objectives of the Act is to strengthen governance both within the sector generally and at individual credit union level.
The Act clarifies the distinct and separate roles and responsibilities of the chair, the board and management. The terms of reference and functions of the board are defined and include the requirements to develop the long term strategy of the credit union, operate a comprehensive decision-making process and ensure that there is an effective management team in place.
Additionally the board is responsible for implementing and maintaining a range of new measures including approving, reviewing and updating all plans policies and procedures of the credit union. These must now specifically deal with such complex matters as:
- Strategic Planning:
- Regulatory and Investment Polices and Procedures;
- Risk Management Systems and Controls;
- Compliance Programme;
- Business Continuity Planning;
- Information Systems, Polices and Controls;
- Outsourcing Procedures;
- Internal Audit Polices and Controls;
- General Governance including Conflicts of Interest.
These obligations are on-going and must be reviewed annually. While the volunteer ethos of the sector is recognised, the Act widens the exclusions from board membership to include employees, voluntary assistants, directors of other credit unions, connected persons and professional advisors. The number of board members is to be reduced from 15 to between 7 and 11 members and limits in respect of length of tenure are to be introduced.
The Supervisory Committee will also evolve into the Board Oversight Committee with an increased focus on an independent assessment of the board’s performance. The culmination of the various amendments will create a clear distinction between the respective roles of the management (i.e. operational) and the board and supervisors (i.e. governance and strategic).
A core recommendation of the Commission on Credit Unions Report is the restructuring of the sector in a manner which allows it to perform more efficiently while preserving the credit union identity and ethos. There are currently 399 autonomous credit unions of various size and complexity. The Act provides the framework for the restructuring of the sector on a voluntary, incentivised and time-bound basis via consolidation through amalgamations, transfers of engagements and the development of close networks and shared services. This process of restructuring will be overseen and facilitated by the Credit Union Restructuring Board (“ReBo”) which has already been established with Mr Bobby McVeigh as Chair. ReBo’s role is:
- To engage with credit unions to facilitate agreement on restructuring proposals;
- To assist credit unions in the preparation of restructuring plans;
- To consider restructuring plans submitted to it, including any funding requirements, and approve or reject those plans; and
- To oversee the implementation of restructuring plans, including the provision of post-restructuring support.
A levy will be imposed on the sector to meet the costs of ReBo with regulations providing how the different rates of levies may be imposed on different categories of credit unions. €250m will be contributed to the Credit Union Fund to provide financial support for the restructuring of credit unions. ReBo is working to the timetable specified in the Commission Report, which envisages the process being completed by the end of 2015.
Viable but undercapitalised credit unions may avail of stabilisation support from the Credit Union Fund. Any stabilisation support is subject to approval by the Central Bank of Ireland (the ‘Central Bank’) but, ReBo must first make a recommendation to it that the credit union be considered for support. The Central Bank must then be satisfied that the credit union is viable, has a regulatory reserve above 7.5% and has the ability to maintain its reserves and fund the business for up to 3 years after the support has been provided.
The final element of reform deals with the prudential requirements that apply to credit unions across a range of areas, including reserves, liquidity, investments, lending and borrowing. Each credit union must ensure that it has appropriate oversights, policies, procedures and processes in place to comply with the new measures contained in the Act and with the requirements of financial services legislation (the Central Bank Acts 1942 – 2012, as applicable to credit unions). The Central Bank may also issue regulations setting out the standards and procedures to be applied. The Central Bank must however, consider the proportionality of any such measures having regard to the nature, scale and complexity of credit unions or certain categories of credit unions. The aim is to develop a prudential rulebook and a tiered regulatory approach which will provide clarity to credit unions on the requirements that apply across their business.
The Act is to be introduced on a phased basis with the sections in respect of restructuring and stabilisation having commenced in December 2012. Prior to commencement of the remaining provisions and ancillary regulations and requirements, the Central Bank is expected to undertake a regulatory impact analysis and consultation process with stakeholders including ILCU, CUDA, CUMA, CUAC and the Department of Finance. Credit Unions and their representative organisations should stay up to date with the consultation periods and engage at an early stage in order to inform the decision making process.
Fitness & Probity
Against the backdrop of the enactment of the Act the Central Bank also issued a consultation paper in December 2012 in relation to the implementation of the fitness and probity regime for credit unions. The fitness and probity regime will be introduced on a phased basis and will come into force from 1 July 2013 in respect of credit unions with total assets greater than €10 million. For the remaining credit unions it will come into force on 1 July 2015. The Controlled Functions (“CFs”) and Pre-approval Controlled Functions (“PCFs”) apply to individuals holding senior positions i.e. the Chairman, management, board members, supervisory committee, risk officer, compliance officer, MLR officer and internal audit positions. The fitness and probity regime aims to ensure that individuals who are in such senior positions are capable, competent and financially sound individuals with the appropriate skills, experience, knowledge and integrity to manage and govern the credit union.
Transitional arrangements will apply so that within 2 months of commencement, the standards will apply to all new appointments to CFs and within 1 year the standards will apply to all CFs. PCFs (Chair & Manager) in-situ at the commencement of the regime may continue for the remainder of their term of appointment, however within 4 months of the regulations being applied, credit unions will be required to submit a list of all in-situ PCFs to the Central Bank and confirm that those persons are fit and proper. All new PCF appointments will require pre-approval from the Central Bank. Comprehensive due diligence will be necessary on an individual before proposing him for appointment to any such role.
Practically, there is a timing implication and a rigorous administration process, both in terms of in-situ positions and new appointments. Failure to comply with the fitness and probity regime may also result in the imposition of sanctions under the Central Bank’s Administrative Sanctions Procedure. Credit Unions should therefore ensure that are fully aware of the strict requirements of the fitness and probity regime and actively engage at an early stage.