Ms Anne Marie McKiernan:

I thank the joint committee for the invitation to appear before it. As members know, our statutory mandate is to ensure the protection by each credit union of the funds of its members and to maintain the financial stability and well-being of the sector generally. I start by acknowledging the very important role credit unions play in Irish society and the financial system and the strong voluntary and community ethos of the sector. In my statement I will focus on three main areas - the current position of and main challenges facing the sector; the standards the Central Bank requires of credit unions in order that members’ funds are protected; and the need for transformation in the sector, drawing on priorities raised in the credit union advisory committee's review of 2016.

With regard to the profile of and challenges facing the sector, in the past decade credit unions have dealt with the effects of the financial crisis, increased competition, major business model challenges, significant restructuring and increased regulation. From 428 credit unions a decade ago, there are 281 active today and a further 27 mergers in progress. The sector has assets of €16.1 billion. The unprecedented level of restructuring was made possible by a huge effort across the sector to safely conduct so many transfers, while ensuring a continuation of services and the safety of members’ funds. We thank the sector for its involvement in that process. As a result, it has changed significantly. There are now more large and fewer small credit unions, although levels of resilience vary widely across the sector. At the registry we have prioritised regulation and supervisory changes to improve credit union safety and better position the sector for the future. Some of the decisions we have taken include strengthening the regulatory framework, as recommended by the commission on credit unions in 2012; restrictions on lending to contain losses and their later removal, where appropriate; broader on-site engagement with credit unions; restructuring to support the needed transformation; and resolution of the weakest credit unions, all without loss of members’ funds.

The combined effect of these measures and appropriate actions by many credit unions over a number of years has better placed the sector to deal with its challenges. However, significant challenges remain. The biggest challenge is how to grow lending responsibly, following falls of over 40% in both loan income and volume in the last decade. Net lending is still only marginally recovering, even after seven years of decline. This core lending weakness reflects market factors such as prolonged de-leveraging by households and small businesses; increased competitiveness in the short-term unsecured lending market, where credit unions tend to predominate; and some credit union-specific structural factors such as an ageing and, therefore, more likely saving membership base and difficulties in changing business offerings to attract younger borrowers, which often require investment. The investment income of credit unions helped to offset some of the decline in loan income for a number of years, but it is also now falling in the low yield environment. Cost-to-income ratios are increasing. All of these factors, taken together, put pressure on the long-term viability of credit unions. This highlights the urgent need to address the business model challenges the sector faces.

On our required standards, our on-site engagement with credit unions is prioritised by risk and impact, or size, and we adopt a proportionate approach. It is aimed at deriving the benefits of tiered regulation within our existing framework. We have higher standards for larger and more complex entities and simpler expectations for smaller and simpler models of credit union. We have a minimum standard for all, which is to ensure the safety of members’ funds. We also use a differentiated application of common regulatory rules as another way to achieve the benefits of tiering, while accommodating the changing shape of the sector coming from restructuring. Regrettably, standards of regulatory compliance are still well below those required to credibly safeguard members’ funds and position credit unions to tackle business model development. We are still seeing an unacceptable number of credit unions failing to display a strategic understanding and good governance. In several cases we have encountered limited financial skill sets and weak management, poor systems of control, weak risk, compliance and internal audit functioning and weaknesses in credit practices. For example, we encountered several cases of problems in meeting the most basic financial requirements, including bank reconciliations. It is the responsibility of credit union boards of directors to ensure appropriate control, direction and management of credit unions and to ensure risks are identified, monitored and mitigated. We have communicated our expectations and findings to the sector, including that credit unions must meet regulatory requirements for their current business before embarking on riskier ventures. We have also demonstrated and will continue to do so our willingness to take serious actions, including enforcement, restructuring and liquidation, to ensure credit unions adequately safeguard their members’ funds.

The third major issue is the need for transformation. Our view is of a thriving credit union sector that is financially strong, that provides choice and for inclusion in the financial system and that carries out its important community role, while meeting regulatory requirements. To get from where the sector is now to where it needs to be requires four main changes: a drive for younger active borrowers to increase core lending; deriving benefits from restructuring; developing the business model in a multi-step, risk-managed way; and increasing sectoral leadership and co-operation on shared services.

The drive to attract and retain active borrowers is critical to the sector’s future. We have urged the sector to consider how it can leverage its community advantages and trusted brand to attract a new generation of borrowing members, while pricing appropriately for risks and services and meeting regulatory requirements. Some credit unions have used low cost but effective member profiling and targeted marketing to attract members which, together, are an important starting point.

On business model development, it is the responsibility of the sector to set out its vision and plans. Our responsibility is to challenge them for risk, affordability, relevance and possible regulatory change. We are concerned at the absence of a coherent future path supported by appropriate proposals, as well as at the length of time it takes for proposals to develop and mature and this is an area where we have called repeatedly for more sectoral leadership and clarity.

There has been some criticism that the Central Bank holds back development of the sector, especially with respect to long-term lending. We would disagree with that. First, the reality is we have not received any specific applications or proposals for long-term lending that are sufficiently well structured and have clear, sustainable aims. We engage extensively with the sector in many different fora to better understand long term lending aims and to ensure that any evolving proposals address reasonable issues such as the investment costs, the projected impact on return on assets over time, shared services arrangements for costs and capabilities, changed funding arrangements that will be needed for the balance sheet risks, how to manage collateral and legal aspects and to meet evolving regulations, both domestic and international, that consumer mortgages require.

As we indicated in the Credit Union Advisory Committee, CUAC, review, we are willing to consider amending the long-term lending limits but we require clarity on credit unions’ plans for prudently developing longer-term lending and addressing the issues I have mentioned above. Given the sector’s current capabilities, any increase in mortgage lending would likely require changes on funding maturity to deal with balance sheet risks and be restricted to the more capable and financially-sound credit unions before being extending further. Again, there is need for greater sectoral leadership in vision and clarity and a fuller understanding of risks involved to develop the roadmap of business model development.

For our part, the registry has provided guidance and analysis, through both the stakeholder dialogue forum and bilateral engagements. We covered the potential impacts of long-term lending changes. We have also undertaken to publish, within coming months, enhanced guidance on what we expect to see in long-term lending proposals.

In addition, we have taken a range of measures to support the sector’s efforts including, in 2016, the establishment of a new business model development unit, which is headed up by deputy registrar, Frank Brosnan. That is to drive forward better-developed proposals. We also approve suitable proposals - we approved members’ payment current account services - and we are also developing a package of guidance on our expectations in a range of areas. These measures will, we believe, be particularly beneficial for smaller credit unions, for whom it is more costly and difficult to tackle the many issues involved.

Overall, it is worrying that sectoral engagement on changing lending limits appears to have polarised to mortgages, rather than on a diverse lending portfolio. We have not yet seen any investigations of other short and medium-term lending proposals that would build on the existing capabilities and balance sheet management of the sector.

There is important additional proposed business model development in the area of funding for social housing. As we have indicated publicly previously, we will shortly consult with the sector regarding changes to investment regulations to accommodate investments in social housing and other investment classes subject to term limits.

Regarding CUAC’s 2016 review, we welcomed the establishment of and participated in the group and we look forward to contributing to the implementation group, where we are represented. Our submission to the review highlighted our view on major issues including tiered regulation and long-term lending, as I referred to earlier, and on common bond considerations. Regarding the CUAC recommendation on consultation and engagement, we welcome the focus on enhanced engagement between the registry and the sector. That is already a central part of our business model support role that I covered earlier.

Overall, it has been a challenging period for credit unions, and I want to acknowledge the constructive engagement of individual credit unions, representative bodies and other stakeholders, as we work to improve the sector’s current and future state. The most important challenges are to meet current regulatory requirements – which are there to safeguard members’ funds - and to drive forward clear development plans while retaining the sector’s important voluntary ethos and community spirit.