The financial crisis of 2008 represented a nadir for U.S. regulators. The rapid disintegration of many large banks revealed, among other things, that despite their claims, regulators were not on top of the situation. They hadn’t stringently examined the risks banks were taking or explored the rules behind compensation for CEOs.
Canadian regulators have taken notice. To make sure they don’t get painted with the same brush now or in future, in 2012 the Credit Union Prudential Supervisors Association (CUPSA) was formed “to cooperatively pursue effective regulation and supervision of the credit union and caisse populaire sector in Canada.”
In this environment, various credit union associations are actively reviewing rules – and upcoming changes will call for financial services cooperatives to adapt. As they do, many are checking out B.C. credit unions to see what they can learn. The reason? Since September, B.C. has been working with a new tool: the Governance Guideline protocol. The Guideline, produced by B.C.’s Financial Institutions Commission (FICOM), covers the regulating body’s expectations for board-member composition, competencies and roles. It describes the function of CEOs and outlines some procedures for risk management. As well, it sets standards for accountability and disclosure to credit union members.
The good news is that the province’s credit union networks appear to be up to par or in the process of getting there by September 2015, the date set for compliance. FICOM’s Deputy Superintendent Doug McLean says that he believes the work of meeting the Governance Guideline is going well, as evidenced by the positive comments his staff has received from the credit unions they supervise.
Part of the reason, say the regulator and the credit unions, is that the process of developing the Guideline was collaborative rather than combative. It started with an industry taskforce struck by FICOM Superintendent Carolyn Rogers to examine corporate governance issues. Its work, along with policies developed by other regulators, helped form the foundation of the principles developed by FICOM staff. A second factor of success is that while compliance is mandatory, the Guideline describing the new directives is approachable: it doesn’t read like a series of prescriptive rules and regulations. As well, it can be scaled to apply to both large and small credit unions, says McLean.
One size doesn’t fit all
“We point out in the Governance Guideline that this is not one size fits all,” McLean says. “There are principles defined within the guidelines which we believe all credit unions can achieve – from a small occupational credit union to a large geographical credit union like Vancity.”
How individual credit unions are faring in doing that also is a matter of perspective. In interviews with both large and small credit unions, Enterprise found that while the larger ones say they have pretty much arrived at the place called compliance, smaller ones say getting there is anything but easy. At Vancity, Corporate Secretary Karen Hoffman says the country’s largest credit union is comfortable where it stands, noting “on most counts we feel we are meeting the guidelines today. If you look at our annual report to our members, you’ll see that we go far beyond what most other institutions would share with their shareholders or members. We got into quite a lot of detail with things that our members have told us are important.”
Of interest to members are factors such as Vancity’s performance as a good corporate citizen, including everything from its carbonfootprint reduction goals to its targets and results for member service in each of its branches.
That’s not to say improvements can’t be made at Vancity, which has more than 495,000 members and about $17 billion in assets. “We still have areas like transparency where we are pushing beyond the minimum requirements of the guidelines that we think are relevant and important to us,” says Hoffman. “One example is disclosing the total amount of compensation paid to Vancity’s CEO.” Previously, Vancity has reported the pay in terms of a multiple of the average rate of pay for Vancity employees. That left the reader to do the math. Going forward, she says, “We will have to be a bit more specific in disclosing it.”
What Vancity has disclosed in the past has also relied on what has been traditional for the industry. “We want to [make changes] in concert with the rest of the industry and these guidelines allow for this to happen in an orderly way,” she says.
Recruitment a challenge
For B.C.’s smaller credit unions, however, progress on meeting the guidelines presents a cloudier picture. One director, who declined to be identified, says the suggested standard for recruiting directors with more expertise – accountants and lawyers, for example – is a challenge for smaller credit unions. In little cities and towns, there is a finite number of these professionals, who, not surprisingly, are also being wooed by other organizations.
“There are principles defined within the guidelines which we believe all credit unions can achieve – from a small occupational credit union to a large geographical credit union like Vancity”
—Doug McLean, FICOM Deputy Superintendent
“You are not going to have the same kind of draw that Vancity does,” the director says. “Vancity, year after year, always has [lots more] people running for directors’ positions than there are jobs. You go to a smaller credit union, they have to twist arms to get people to serve. You have a handful of people to recruit and a lineup of people around the block to recruit them.” In the end, there could be a better route, the director says. “It may be more important to get someone who is interested and engaged than someone with an accounting designation.”
For another director, the greatest compliance effort revolves around risk. Accountant Theresa Dergousoff serves on the board of southeastern B.C.-based-Grand Forks District Savings Credit Union, which has 8,800 members and about $200 million in assets. As a member of the industry taskforce, she says the guidelines have generally been well received. Changing the term limits for committee chairs is achievable within a reasonable time frame. Grand Forks has scheduled this summer – when the board’s schedule is less hectic – to deal with that issue.
Defining risk calls for cooperation
Dergousoff welcomes the opportunity to explore risk management. “We need to get it more onto our agenda, more top of mind and get better reporting on that,” she says, adding that the Governance Guideline “will help us instead of [making the subject seem like] a ‘have-to-do.’” At the same time, she sees risk procedures as one area where the regulator is showing its weakness in that it has failed to come up with possible working definitions smaller credit unions can use.
“There is a difficulty in coming up with things like defining risk appetite and defining risk tolerance,” she says. “Regulators need to step up their game as well. If they want us to do this and then we do something that we interpret to be correct and they say otherwise, then they need to tell us what their view is. So far, they’ve said, ‘Oh well – you guys just have to do it and we are not going to interfere in that part of your business.’”
Dergousoff believes the potential for solving these issues rides on a major strength of credit unions – the ability to work together. “Credit unions can take a role in this,” she points out. “We can come up with some common definitions and common templates for risk appetite statements because whether I’m here in Grand Forks or in St. John, New Brunswick, the overall governance model is really no different.”
Dergousoff also says that credit unions can band together to advance the cause of risk assessment and management, much as they have done with procurement using the Solution Centre, which allows credit unions to share couriers and other suppliers. “Say you are from Nelson and we are from Grand Forks and we can’t afford our own chief risk officer or internal auditor. We [could] hire someone together and provide those services to our credit unions,” she says. “We know how to cooperate and this is the next level that we need to go to.”
Bill Wellburn, chair of the $12.6-billion Coast Capital Savings Credit Union, says risk management remains a priority at Coast. “When you look back at credit unions that have run into problems, it’s generally around risk – either being unaware of it or not planning to address it,” he says. “It’s something we at Coast Capital have been focusing on for a number of years. We recognize there are an awful lot of factors [involving risks that] credit union boards need to be cognizant of.”
Board renewal an issue
Wellburn also feels board renewal might be an issue when trying to meet the Governance Guideline standard. “In the old days, you’d just put up your hand up at the AGM if you were interested in serving on the board,” says Wellburn, who has been a director since 1992. “We have moved now as an industry to much larger organizations that require a number of skill sets on the board if governance is to be effective.”
He understands the challenge that small credit unions face in complying with regulation, “but if you want your organization to be around in the years before us, there is a lot to be said for getting on board with the guidelines.”
Where to start ?
Other directors who prefer not to be named say many smaller credit unions are unsure where to start in complying with the Guideline. How do you prioritize which guidelines are the most important or which ones you should implement first? “Can you mostly do it or do you have to do the whole thing all of the time?” says one.
John de Leeuw, CEO of Ladysmith & District Credit Union, which has two branches on Vancouver Island and $130 million in assets, says there is a world of difference between the risks that smaller credit unions faced in the past and the ones they face today. “Years ago, the challenges facing a small credit union’s survival would have been financial,” he says, referring to competing for deposits and wooing mortgage business. “It appears to me and my board . . . that the greatest challenge today is a level of governance that is expected and the ability to recruit and retain qualified directors.”
He feels that expectations placed on directors today are far more demanding than was the case 20 years ago, as is the amount of work required to ensure directors are on top of credit union activities. While large credit unions today routinely pay directors $70,000 to $80,000 and more,” he says, “the average rate our directors made last year was $4,000.”
Chris Catliff, CEO of BlueShore Financial, says he is supportive of FICOM’s work and that his organization was 90 to 95 per cent there before the guidelines came out. One area where BlueShore needs to do some “touchup” is in risk appetite. The Governance Guideline stresses that the goal for credit unions is not simply to reduce all forms of risk but to seek a prudent balance.
“It’s an annual discussion,” says Catliff, whose credit union has $2.8 billion in assets under administration. “We [used to look at] risk management through the prism that all risk reduction is good. So that is an interesting change.”
BlueShore will be doing more in terms of transparency although he points out that compensation revelations can have a downside and have already led to salary wars in some jurisdictions. Compliance has other costs, too. Catliff is concerned that his board may have to shift gears and develop strategies to compete with other financial institutions that don’t have to follow the same rules as credit unions.
While credit unions didn’t create the problems of the financial crisis, they are the recipients of rules and regulations that followed in its wake, he says. “I just want the focus to be not solely on that.” ◊