A culture of non-compliance ? Worrying trends in governance and compliance

Public scrutiny must be concerned with how credit unions are performing. In the past 3 years, within the top 50 credit unions there are 14 known cases of serious regulatory compliance issues arising relating to credit union governance and management. Many of these have been reported on in the media.

"The league and the regulator have been at loggerheads for a while now. Mr Logue has repeatedly publicly questioned corporate governance practices at credit unions. The league has hit back that the regulator has been loath to publicly criticise the banks." Irish Independent March 24th 2007

Since inception the Financial Regulator has consistently highlighted credit union governance and compliance as a major problem within the sector. Writing in its most recent report it said : “During 2006 considerable progress was made in developing the system for the regulation of credit unions with a view to building compliance."

This is an indictment of the failure of self-regulation and supervision to ensure compliance.

It is widely known that many credit unions have adopted a lassez faire approach to compliance with the very standards they themselves agreed to adhere to. The ILCU itself depends on compliance with these standards as part of its role in operating its stabilisation fund.

Many consider this fund has been used to bail out bad boards and that the ILCU has failed to tackle maverick operations that threaten to undermine financial stability. It appears that some credit union boards and management have become quite skilled in practicing "optional" compliance with the law over the years. This is frequently manifested in their claims that credit unions are over-regulated, the law is too prescriptive and hindering their development. They reason that they can ignore the law as it is "out of date".

It seems non-compliance is embedded within the way things are done in many credit unions. Credit union leaders object to increasing regulatory enforcement by claiming it is unfair as its members are governed by volunteers - unpaid directors. They argue for a lighter touch and fairness for volunteers. This misses the point as it ignores the fact that directors whether they are paid or not have legal obligations to ensure compliance with the law and regulations.

The Regulator is correct to continue to highlight compliance and governance as a key areas of concern.

Credit Union Governance - Fiduciary Care

Captive of the "Savers Mandate"

Many observers have been concerned at governance of credit union for some time. In most cases it seems that the member once elected to the board continues to represent the members interests and disregards the credit union as a separate entity. The concept of fiduciary responsibility requires directors act in the best interests of the company at all times.

Yet with Irish credit unions this does not appear to be the case. Frequently voluntary director thinking confuses the role of the board with the interests of the member as a customer. If the purpose of the company is to provide affordable financial services to its customers this should not lead to confusion between the expectation of the individual as a customer and their expectation as an owner (member).

But, the majority of credit unions are run with only purpose in mind and that is to pay a dividend to members at year end. In short they have become captive of the savers mandate which is a phenomena known to students of credit unions worldwide. This acts as a trap into which unwary boards fall time after time. With a sole focus on dividend rate almost everything else becomes irrelevant. Strategy and business planning is short term and amounts to governance by dividend declaration at year end. Immediately after which, the process restarts targeting the next dividend payout date.

This cycle is embedded to such a degree that in many cases credit unions have exploited a local market dominance in providing affordable credit to those who cannot easily access credit elsewhere. Some credit union lending rates have remained stubbornly high which has resulted in a borrowers subsidy to savers. It is an aberration of credit union philosophy and has resulted from the twin effects of (a) loan to asset degradation and (b) aging savers bias on credit union boards.

Since 2000, the key loan to total asset ratio has collapsed from c64% to below 46% in 2007. Despite a booming personal credit demand, credit unions have failed to lend and in particular have failed to increase the loan size. Their members have deserted them preferring to borrow elsewhere at cheaper rates, more convenience and better features. The effect on income has been startling given that at the same time members increased savings, attracted by high dividends and accounts that did not deduct government tax at source on dividends.

Irish Credit Unions The Poor Man's Bank

A self-fulfilling metaphor ?

The metaphor of the "poor man's bank" is one that is sticking it seems to Irish credit unions. But this is not what credit unions are and is not where they come from. They were never poor man's banks unless working class are considered poor. It seems that poor man's bank is a metaphor resulting from an anti-poverty ideology espoused by some credit union leaders. Providing affordable credit to those less fortunate and on the margins is an eminently worthy purpose but it is not the overriding purpose of credit unions.

Initially credit unions were established by ordinary working class people who had a real social need and that was access to affordable credit. The banks at the time weren't interested and "buying on the tick" was the only access to credit most people had. The working class could also afford to save a little. By pooling small amounts of savings it was possible to borrow larger amounts from another. Thus the co-operative peoples owned banking model took root.

It was a revolutionary idea that across the world has had many manifestations. Each one of its time uniquely delivering affordable credit within a certain stage of the socio-economic development of a nation.

This was so for the Irish credit union movement which grew to be one of the greatest social movements in Irish modern history. That is until the late 90's when the pace of change of Irish society took off and left credit unions behind.

Now the generation of working class who started with credit unions are solidly middle class and no longer borrowing from their credit unions. A new generation of Irish save and borrow from those who offer the best rates and most convenience. Credit unions are having to compete in an open market and no longer are the only providers of affordable credit. Stress lines are appearing in the fabric of the movement as volunteering and community participation depletes in the face of individualism. Greater complexity, regulation and supervision, increased public and media scrutiny demands higher levels of governance,management, compliance and professionalism of financial institutions. The public expect the best standards of health care of voluntary hospitals and likewise expect the best standards of governance and management of credit unions.

The future is full of challenge. What is required is leadership that understands that a "Peoples Bank" is a far more powerful metaphor than a "Poor Mans Bank" and re-invigorates credit unions for a modern Irish society.