Credit Union Governance Issues Extend Beyond Borders
LAS VEGAS -- Governance took center stage during a session that featured three international regulators: Deposit Insurance Corporate of Ontario President/CEO Andy Poprawa, NCUA Board Member Gigi Hyland and Australian Prudential Regulatory Authority Executive General Manager Brandon Khoo.
Credit unions in Canada are trending toward nominating committees that carefully vet applications and recommend board candidates to members, Poprawa said. He thinks the trend will continue, and it speaks to some of the issues faced by Canadian and U.S. credit unions, which sometimes struggle to find board members who possess the right skill sets, experience and expertise. It's even more difficult for small credit unions, which may not have enough people qualified within their memberships to fill their boards, he said.
Current legislation proposed in Canada's Parliament would require board member vetting, including interviews with regulators, who would also review governance effectiveness along with financial reports.
Education is usually the solution. If board members are trained to "understand what they are supposed to do and why," a credit union's chances of governance compliance is high, he said.
Canada also recently passed legislation requiring all credit unions boards to set term limits in their bylaws for relevant positions, including committees. "Fifty-seven three-year terms is not appropriate," he said.
WOCCU's network of international regulators identified governance as a primary issue for credit unions globally in terms of risk, he added, and the group planned to meet after the conference to discuss potential global regulatory standards for the financial cooperatives.
"You'll hear more about that in the future," Poprawa said.
Regulatory requirements for board members don't yet exist in the U.S. or Australia, but governance is also an issue in those countries.
Hyland said the NCUA issued proposed rules earlier this year that would establish federal fiduciary standards for directors, even for state-chartered credit unions. The goal is to ensure directors truly understand financial reports, she said.
Australian boards can appoint directors from outside their membership if the board lacks expertise in a particular discipline, Khoo said. The issue of how to maintain the member/owner director structure while ensuring proper expertise is a challenge, he said.
Canada's central credit unions have experienced similar challenges to U.S. corporate credit unions, Poprawa said. Canada used to have 10 regional central credit unions, but now there are only three.
Like in the U.S., central credit unions were formed in Canada in a time when the financial cooperatives were smaller and more homogenous, he said. As Canadian credit unions have matured and evolved, they have become less reliant on centrals.
Another similarity between Canadian and U.S. wholesale systems is the risk associated with aggregation. "That really requires strong oversight, because when you pool your resources together and make the wrong investments, you could have issues," Poprawa said.
Regarding the issue of supplemental capital for credit unions, Khoo said Australian credit unions have been permitted to issue capital instruments since 1992. He said credit unions are limited in the type of instruments they can issue, and have "had a challenge to find the proper Tier 1 instrument."
Poprawa said Canada introduced additional membership shares a few years ago. Now, in addition to the standard reserved membership shares that count as member capital, members can buy additional shares. Ownership of shares doesn't change the one member, one vote structure, he said, and it provides the credit union with access to additional capital when it needs it. Canadian credit unions are also permitted to issue corporate debut under special circumstances and are allowed to issue preferred shares or investment shares but only to members. "The question now is when the credit union fails, what happens to those shares," he said. "We have had some members lose money. It does require some market discipline."