Credit Unions – A New Regulatory Regime
The Credit Union and Co-operation with Overseas Regulators Act 20121 (the “Act”) was enacted in December 2012. The Act will be introduced on a phased basis with certain sections and schedules commenced by the Minister for Finance on 19 December 2012. The Act has major implications on how credit unions operate with a very significant increase in the level of regulatory requirements.
Prior to the introduction of these requirements, the Central Bank of Ireland (“CBI”) is expected to undertake a regulatory impact analysis having regard to international best practice and enter into a consultation process in accordance with its Consultation Protocol2 for Credit Unions.
The Act requires credit unions to establish and maintain a range of new measures including:
- a Strategic Plan;
- regulatory policies and procedures (for example: a business continuity plan; and outsourcing policy; a conflicts of interest policy; governance arrangements; remuneration policies; and a code of conduct);
- investment related policies and procedures (for example: a lending policy; liquidity and management policies; reserve management policies; and investment policies);
- a compliance monitoring programme; and
- risk management processes (for example: a risk management framework; an internal audit function; and a risk management system).
Initially it is not envisaged that the CBI will review the documented regime put into effect, but will require each credit union to provide an annual compliance statement. This annual compliance confirmation needs to be made by the board of each credit union, whereby they will be required to certify to the CBI, in writing, that the credit union is in “compliance with the requirements of this Part and any other regulations prescribed under it by the Bank including regulations setting out the form and content of that statement.”
It is not sufficient that credit unions just have these policies and procedures documented. They must be aligned to the credit union’s business model and be embedded into their systems and controls environment.
The Act also requires credit unions to enhance their organisational framework to include a board oversight committee; nomination committee; credit union manager; compliance officer; risk manager; internal audit function; credit officer; and company secretary.
Fitness and probity
In December 2012, the CBI issued a consultation paper on the fitness and probity (“F&P”) regime applicable to credit unions with responses due by 1 March 2013.
It is proposed that the F&P regime will come into force from 1 July 2013 and be aimed at individuals holding senior positions and significant influence roles within a credit union i.e. chairman; management; board members, management; compliance; risk; money laundering reporting officer; and supervisory positions. Similar to the F&P regime for other regulated sectors, these individuals will need to evidence they are competent and capable with appropriate skills, experience, knowledge and integrity to carry out their respective roles. A comprehensive due diligence project will need to be undertaken by the credit union or an appointed third party service provider.
Central Bank of Ireland
The CBI is responsible for regulating and supervising the credit union sector. It is expected that the CBI will commence issuing guidance on regulatory requirements following discussions with the Irish League of Credit Unions and the Department of Finance, which are expected to commence during quarter one of 2013. There will be consultation periods prior to the introduction of these regulations. We are recommending to our credit union clients that they engage at an early stage of the consultation process in order to highlight any issues they have with the draft guidelines/regulatory codes.
Credit unions should be aware that their sector is high on the CBI’s agenda and has been set out in its Strategic Plan 2013 – 2015 whereby it states:
“Another key focus of the Bank over this strategic period will be the restructuring and resolution of the credit union sector.”
Following a thematic inspection of a credit union’s compliance with its obligations under the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, the CBI issued a fine of €21,000. The fine related to failures surrounding the Community Credit Union’s anti-money laundering/counter terrorist financing framework. This fine was quite lenient in comparison to other fines issued in this area previously by the CBI but should be viewed by the credit union sector as a mark of intention from the CBI. Sanctions of this kind should be considered in the context of their extremely negative publicity as well as the direct financial implications.
Against the new requirements shortly coming on-stream under the Act, the CBI is pushing for greater powers under the Central Bank (Supervision and Enforcement) Bill which provides for an increase in the CBI’s powers of enforcement to €10,000,000 for a corporate body or 10% of turnover (whichever is highest) and €1,000,000 for a natural person.
Action to be taken
We are advising our credit union clients to carry out an assessment to identify new policies and procedures and other measures required and then consider the steps necessary to put relevant measures in place. As a guide we have highlighted some of the documentation required and what operational measures need to be implemented to comply with this new regime at Appendix I of this memorandum.
How Maples can help
As a leading international law firm, Maples and Calder has vast experience in dealing with regulatory matters, drafting and review of regulatory policies, processes and procedures and advising clients on interpreting legislation, regulatory codes and how to prepare for regulatory inspections.
We can assist in carrying out this assessment; advising what documentation is required; developing tailored solutions; and assisting credit unions during the implementation phase of the Act.
Many of the requirements of the Act are entirely new and extremely onerous. The clear objective is to bring the credit union sector firmly in line with the new order of enhanced regulation.
The CBI has indicated it will police this sector extremely diligently and, where required, apply all of its formidable enforcement strength.
It is imperative that credit unions come to terms with this new regulatory regime.
1 Aspects of the Central Bank (Supervision and Enforcement) Bill were inserted into the Act and passed on 19 December 2012 to facilitate the memorandum of understanding with IOSCO.
2 The Consultation Protocol for Credit Unions was published by the Central Bank in November 2012 and is located on its website.