Sound lending practices an issue for credit unions, report warns

Poor quality underwriting and a failure to understand the principles of sound lending remain significant problems within Irish credit unions, an external report on the sector has warned.

The peer review, compiled by the International Credit Union Regulators' Network (ICURN) and published on Wednesday, broadly praises the oversight of the Central Bank but makes a number of recommendations as to future improvements.

There are 383 registered credit unions in Ireland providing services to over three million customers with total assets amounting to €14.3 billion.

As with the broader financial community credit unions were shaken by recession prompting widespread structural reform and greater oversight from the Central Bank, the effectiveness of which is the subject of the report at hand.

The Central Bank assumed responsibility for the regulation and supervision of financial service providers, including credit unions, in 2010.

Its ambitions were set out in its strategic plan for 2013 to 2015 and resolved, among other things, to address weak and non-viable credit unions in order to protect members’ savings and maintain financial viability.

It also set its sights on developing a legislative and regulatory framework and to bring about longer term restructuring.

Against this backdrop, the ICURN conducted its peer review, welcomed by the Central Bank which is now developing an “action plan” focusing on certain aspects highlighted in the report.

ICURN is an independent, international network of credit unions from over 30 countries including Ireland.

Central to its focus were the issues of resourcing and risk awareness. “The Central Bank should consider refocusing its attention, and scarce resources, on key risks, particularly credit risks, that have real potential to cause material damage to its objectives,” the report noted.

“Poor-quality underwriting and a failure to understand and apply the principles of sound lending have been, and remain, significant problems for many Irish credit unions.”

Achieving permanent improvement in those areas, however, would take “considerable time” and resources would be essential.

It said it was “concerned at the sheer volume and (unavoidable) complexity of many of the requirements with which credit union boards of directors and management must now apply and comply”.

In this regard, it continued, communication must remain central, “in particular the level of engagement with individual credit unions should be enhanced to ensure the many changes to the regulatory framework and approach are absorbed and embedded.”

Further, the report suggested certain element of the Prism framework - the Probability Risk and Impact System supervisory model introduced in 2012 - could be modified or even omitted without material detriment to supervision.

“For example, relieving supervisors of the requirement to comply with a governance and compliance framework best suited to the supervision of much larger and more complex financial institutions.”

Maximum benefit would result from allowing supervisors more time to devote to “hands-on” supervisory activities, it said.

Broadly, the ICURN is positive of the Central Bank’s performance saying it has “effectively undertaken the demanding task of introducing a comprehensive regulatory structure of credit unions”.

Responding in a statement, Anne-Marie McKiernan, registrar of credit unions, said the external review of its performance was important.

“We welcome the suggestion of the ICURN team in relation to enhancing our performance as an effective regulator,” she said.

“We are developing an action plan to enhance our current practices in the areas referred to in the ICURN teams’ recommendations, including communications and guidance issues, and aspects of our supervisory approach.”