Ms Anne Marie McKiernan:

I thank the committee for the invitation to attend. I am accompanied by the deputy registrar, Ms Elaine Byrne. As members will know, our statutory mandate at the registry is to protect credit union members' funds and maintain the financial stability and well-being of credit unions generally.

I welcome the opportunity to discuss the current challenges facing the sector and our regulatory and supervisory approach in this regard. I acknowledge the important role the credit unions play within communities and the financial sector more broadly. Our actions are taken to ensure the sector will survive and thrive and have the capability to adapt to the changing environment and meet the needs of members in a modern and progressive way. In my statement, I will focus on three main areas: the current position of, and main challenges for, the credit union sector; the standards the Central Bank requires of credit unions so they will protect members' funds and remain stable; and the requirements for the growth and development of the sector.

With regard to the profile of the sector, for a number of years credit unions have been dealing with the effects of the financial crisis, fundamental change and structural factors. Recent legislation and regulatory actions have been designed to better position the sector for the future. The prudential decisions that we in the registry have taken are to ensure credit unions will be more robust and, therefore, better able to serve their members' needs in the future. The decisions included restrictions on inappropriate lending, stronger liquidity and reserves requirements, and emphasis on improved provisioning levels. In addition, we used extensive on-site engagement with credit unions to focus on strategic planning, governance, risk management and controls, and remediation of priority actions.

Today there are 339 active credit unions, with a total asset base of €15 billion. When we speak of the sector, it is important to remember we are dealing with a large number of independent entities varying in size and resilience. The majority of credit unions have assets worth under €25 million. Some 170 credit unions have an average individual asset size of just over €12 million. It is these small credit unions that often face particular challenges given their limited capacity to invest in new products and delivery channels, which would best position them to attract and retain younger active members. Some 37 credit unions have average asset values of over €100 million, and they account for just over 40% of sector assets. It is for these entities that our supervisory expectations are highest.

The biggest challenge facing the sector is the fall in income from core lending. Loans to members have decreased to €4 billion from €7 billion in 2008, while total interest income has fallen by 40%. The key indicator of sector growth potential, which is the loan–asset ratio, has almost halved, to 28%, since 2008. Nearly 200 credit unions are below the average. The reasons for this include the impact of both the crisis – especially the fall in household and small business borrowing – and underlying structural factors. These structural issues include the ageing membership base of the sector and the difficulties many credit unions face in changing their business offerings to attract younger borrowers by offering the services they want via the channels they expect. This often requires technology investment that smaller credit unions, in particular, struggle to deliver.

Investment income helped to offset some of the declining loan income, but this is now under pressure in the low-yield environment. At the same time, the cost-income ratios are rising. Together, all these factors present an important challenge to the viability of credit unions. While many are reasonably well provisioned and have adequate reserves, we are concerned about current loan arrears, which remain significant at 13.5%, on average. A number of credit unions have arrears of almost one third of their loan books.

I acknowledge the scale of the challenges that credit unions across Ireland have dealt with over the past decade and the efforts undertaken by their management, boards, members and volunteers to deal with the impact of both the crisis and its aftermath.

Many credit unions took appropriately conservative responses, such as increased provisioning, cutting dividends and adopting new regulations, to steer through the difficult period but further strong efforts and strong leadership at the sectoral level are now required to address the financial weaknesses and, in particular, the structural challenges.

Turning to the standards required for the stability of the sector, the Commission on Credit Unions in 2012 recommended the introduction of a strengthened regulatory framework for credit unions. The Credit Union and Co-operation with Overseas Regulators Act 2012 significantly reformed the governance and risk management requirements of the sector in a manner proportionate to the nature, scale and complexity of the Irish credit union sector. Our on-site engagement is focused on implementing these requirements in a proportionate way. In May 2014, we summarised our findings from on-site engagements in a published report. We found significant weaknesses in governance and risk management standards and practices, as well as a fundamental business model weakness in many credit unions. That report set out our minimum supervisory expectations for credit unions, which reflect our statutory requirement to safeguard members' funds.

This year, an external review of the Central Bank's performance of its regulatory functions in respect of credit unions, which is required by law, was also conducted. The review determined that the Central Bank effectively performed its regulatory and supervisory functions and that our supervisory practices were commensurate with the complexity, size and risk profile of the sector. It also made recommendations for enhancement and we have adapted our inspections and engagement model to target supervision in a proportionate way. We have minimum standards expected of all credit unions and higher standards expected of larger and more complex entities. We continue to focus our efforts on strengthening the regulatory framework in a proportionate way.

Concerns have been raised about some of our proposed new regulations, especially the cap on individual savings of €100,000. We have considered all of the arguments put forward but we remain convinced that this cap is the right decision for the sector at this time. It ensures that members' savings in a credit union will be fully protected in the event of a resolution, which will also help to protect the stability of the sector by avoiding the potential negative impact of any credit union member losing any of his or her savings. It is our responsibility as regulator to take measures at the sector-wide level in order to minimise risks or vulnerabilities, especially at a time when the sector is going through a major restructuring and facing significant challenges.

One of the arguments put forward against the cap is that it will limit the ability of credit unions to develop their business models. This is difficult to accept, given the fact that the figures show that savings of over €100,000 represent only 1% of total savings. We note that, at the sector-wide level, credit unions are holding extensive deposits - €11 billion - relative to their lending of €4 billion and many have self-imposed deposit caps well below our proposed limit. However, we have indicated to the sector that, where there is a clear business case and sufficient safeguards in place to protect members' funds, we will permit credit unions to retain existing savings over €100,000 and, in exceptional cases, take in new savings of over that limit.

Turning to the sector's future sustainability, our vision is for a thriving credit union sector that provides choice in the financial system while carrying out its important role at community level and meeting our regulatory requirements. To get from where we are now to where we need to be will be difficult but we have set out four main requirements: further restructuring; a further drive for new, younger, active borrowers; a marked increase in core lending; and business model development in a multi-step, well-managed way.

Restructuring, as acknowledged by the Commission on Credit Unions, is necessary to address the viability and operational challenges that continue to face many credit unions. There has been solid progress in recent years, which has been significantly facilitated by the restructuring board. However, more needs to be done to provide the capacity to tackle structural weaknesses. We have worked closely with credit unions and their representative bodies to resolve a number of non-viable credit unions that could not demonstrate their ability to safeguard their members' funds adequately. We have done so with minimal disruption to services, no loss of funds to any member and via solutions within the sector itself. The drive to attract and retain active borrowers is the cornerstone of the sector's future. I urge the sector to consider further how to leverage its community advantages and its trusted brand to become more relevant to a new generation of borrowing members while pricing appropriately for risks and services.

Regarding business model development, there has been some criticism that the Central Bank is holding back the development of new business lines or that regulation is too restrictive. I wish to respond to these points. At the registry, we have not seen often enough from credit unions well-structured, viable and sustainable plans for development that also address the current operational and financial challenges that must be dealt with to move forward successfully. Our focus is always to ensure that proposed developments are carefully assessed, properly costed and consider risk and potential return. The prudent approach is a multi-step development of the business model, as this would best protect stability and members' funds.

Where credit unions set out a clear path on how they wish to develop, we consider any amendment to the regulations that may be appropriate. A recent example is the change to our forthcoming regulations to include explicit reference to "projects of a public nature", which would include, but not be limited to, social housing. We are fully committed to using all of the powers within our regulatory remit to help credit unions to help themselves and, thereby, their members. In this regard, we recently undertook a review of lending restrictions across the sector. Our review was to bring a renewed focus on improving standards of credit risk management and controls across credit unions. We have been able to lift restrictions at 55 credit unions where they prioritised improvements in their credit risk systems and met our requirements. Unfortunately, we also rejected 20 cases where credit unions had still to undertake further work in that regard.

It has been a challenging period for the credit union sector. I wish to acknowledge the constructive and positive engagement of individual credit unions, their representative bodies and other key stakeholders as we work to improve the resilience and future prospects of the sector. The sector has benefited from many conservative actions in recent years through increased provisioning, cutting dividends, adopting regulatory requirements and entering into mergers that provide better long-term prospects for many members. The most important challenge remaining is to drive sustainable, appropriate and prudent development of the sector while retaining the important voluntary ethos and community spirit. I thank the committee for its attention.