10 September 2019 Speech
In the decade to 2030, you may operate in a financial landscape that bears little resemblance to today. A more assertive, values-driven and powerful consumer base, future technological disruption and innovation, new ways of working and continued influence of the regulatory regime may define a financial ecosystem much different to that we see today. To harness the opportunities associated with this change, you will need to leverage your significant public trust, engage with operational and strategic challenges with the correct level of urgency and articulate a clear and compelling vision for your role in the financial system.
I am delighted to join you today for your Autumn Conference and want to thank Lisa Stapleton, your CEO, and your Chair, Des Morrissey, for the invitation to address you. As it is my first time attending your conference, I should introduce myself. Since July 2018, I have been Director of Credit Institutions Supervision at the Central Bank of Ireland. I am a career supervisor and my remit incorporates the supervision of domestic retail and commercial banks (with the exception of investment banks) in Ireland and also credit unions. I am the Central Bank’s alternate member of the ECB Supervisory Board, which supervises Europe’s banks as part of the Single Supervisory Mechanism. I am also a member of the Central Bank’s Senior Leadership Team.
From a personal perspective, I should start by saying that I am incredibly respectful of the credit union movement, its cooperative ethos and the commitment of the volunteers who you work with. I have been a member of a credit union for most of my adult life and I understand the tangible role it plays in households, communities and the financial sector. I take my responsibilities in respect of the sector very seriously. Working with Patrick Casey, the Registrar of Credit Unions, and his team, we are live to the range of opportunities and challenges that you face.
As I will discuss later, the credit union member centric ethos and trust you enjoy can serve you well in addressing these challenges. Strength of governance and clarity regarding risk appetite and realistic business strategies are necessary to meet evolving member expectations.
In my career, I have supervised across a range of financial sectors and I am struck by the level of engagement the Central Bank has with credit unions in comparison with other regulated sectors. It underlines the importance we place generally on credit union well-being. Indeed, I see continued constructive engagement between the sector and its regulator as a key part of your preparation for the future.
For our part, I believe the Registry of Credit Unions has been clear regarding its vision for the sector of “Strong Credit Unions in Safe Hands”. That vision underpins the Central Bank’s statutory responsibility to ensure the protection by each credit union of the funds of its members and the maintenance of the financial stability and well-being of credit unions generally.
My comments today will have a number of parts.
I will start by making some general comments in relation to how we supervise the financial system. I will mention briefly the last decade, before sharing some thoughts on the future of the financial system, which is already rapidly evolving, out to 2030, in as far as that can be predicted, mentioning how that might affect the credit union sector. Finally, I will outline some of the things you can expect from the Central Bank in the next decade.
The Central Bank of Ireland’s vision for the financial system
With the theme of your conference being “Vision 2030” it is appropriate for me to start by outlining the Central Bank of Ireland’s mission, that is, serving the public interest by safeguarding monetary and financial stability and working to ensure that the financial system is operating in the best interests of consumers and the wider economy.
Our ambition for the financial system is that it is resilient and trustworthy and that it sustainably services the needs of the economy and its consumers, and is one in which firms and individual adhere to a culture of fairness and high standards
The parts of the financial sector within my responsibilities, banks and credit unions have, in the main, different supervisory and regulatory frameworks1. These are proportionate to the nature, scale and complexity of the businesses. Proportionality is a cornerstone of our supervisory approach. And while the specifics, in the main, are different, in carrying out our work we apply the same lens and a consistency in how we supervise. Our approach involves assertive, analytical and risk-based supervision and robust enforcement.
So when we say that our ambition for the financial system is that it serves the needs of the economy and its customers over the long term, it means that we care deeply about four things:
- Firstly, firms must have sufficient financial resources, including under a plausible but severe stress;
- Secondly, firms must have business models which can generate capital, the prudential safety net, over the long term;
- Thirdly, firms are well-governed, have appropriate cultures, effective risk management and control arrangements in place, which are commensurate with their size, scale and complexity; and
- Fourthly, firms can recover if they get into difficulty, and if they cannot, are resolvable in an orderly manner without significant externalities or taxpayer costs.
These four factors are to the forefront of my mind every day.
Whether we are assessing elevated risk levels in a particular credit union, meeting a bank proposing to establish in Ireland, assessing the financial or operational resilience of an Irish retail bank or engaging with European colleagues on the supervision of Europe’s banks, the principles remain the same.
The alignment between this ambition for the financial system and the Registry of Credit Unions vision of “Strong Credit Unions in Safe Hands”, as referenced earlier, should be clear.
The last decade
Your sector has been through a decade of significant change and you must prepare for another decade of change. In the last decade, external factors, changes in consumer preferences, the necessary consolidation of the sector and changes to the regulatory framework were influential in changing the nature of credit unions in Ireland.
In the recent past, mergers have had a transformational effect and will continue to have such an impact. Membership, business locations, and financial position and performance have evolved.
It is our view that restructuring has undoubtedly made the sector safer.
Our supervisory work (Central Bank of Ireland, 2019) highlights that credit unions that have completed transfers are delivering marginally higher lending growth and improved cost to income metrics compared to peers, setting themselves up for the future. In relation to governance, we have also noted improvements in some areas. Earlier this year we articulated that it was encouraging to see evidence of improvements in governance frameworks in some credit unions (Central Bank of Ireland, 2019). However, we have also expressed concern that fundamental issues across governance, credit, operational and business model risks still persist in too many credit unions, including those over €100M in asset size. These basic shortcomings are concerning, particularly given the need to evolve the business model to meet the changing desires and needs of your members.
In the last decade, there has also been significant re-shaping of the regulatory framework. I am confident that regulatory reforms of recent years (underpinned by our supervisory proportionality and regulatory responsiveness) provide substantially better protection for your members. The changes allow you to better serve households, communities and the economy in the long run.
The benefits to your members have been the greatest where the sector has engaged with the regulator in a constructive way.
The financial system to 2030
The theme of the conference is timely and the focus on the future is encouraging.
With that in mind, let me move on to the future of the financial system.
It is difficult to predict with certainty how Irish society will conduct its financial transactions in 10 years’ time. However, I believe that there are enough signs to suggest that, for financial services, the next decade will be one of significant change.
The expectations of your members (and potential members) will change, the financial system will change and broader society will change.
The pace of change is, of course, to be determined. Some changes will be incremental and evolutionary and other will come with the haste of revolution, bringing unpredictability and a re-imagination of the system. You will have to respond to both types.
While opinions differ on the global social trends for the next decade (ESPAS, 2015), the following are certain:
- An ageing population
- Changing societal demographics
- Revolutions in the way we work (Carney, 2018), shaped by a more diverse pool of leaders and decision makers
- Response to the climate emergency, energy scarcity, and competition for resources
- Technological advancement
- An increasing focus on well-being as a policy objective and a greater influence of more nuanced indicators of economic success
- Changing power and interdependence in the international order and continued fragility in the geopolitical situation; and, of course
- Regulation will continue to play a meaningful role in protecting the public interest as the implementation of the international and European regulatory reforms that were introduced over the last decade are embedded.
Given these social changes, the financial system will change too. I would be surprised if many of these topics will not feature on your agenda as you chart your course to 2030.
The most material change in the financial system in next decade might well be the continued shifting power balance from large firms to the consumer, with the growing influence of the next generation of financial consumer.
Younger generations of financial consumers are more informed, more sceptical, more agile, more selective and more values-driven than ever before. They have higher expectations of the financial system, both in terms of product offering but also in terms of the conduct of financial firms. While we see a lot of inertia in the financial services market currently, particularly for the most significant financial products (mortgages and insurance), demographic shift may change this, and thus change the marketplace in which you operate.
As Generation Y and Generation Z (Pew Research, 2019) become increasingly influential, providers will need to continue to respond. These generations are willing to shift to alternative providers if their needs are not met. They are reading and contributing to online conversations, leaving reviews, sharing experiences, experimenting with different models of service provision and highlighting errors or inadequate service online. They are willing to embrace innovation which delivers improvements to their customer experience and which delivers uninterrupted service. When buying products, they look through to the values of the provider, both as articulated but also as embodied by actions. These generations have strikingly different expectations to much of your current core membership.
We are all familiar with challenger products and firms which have achieved significant market penetration in a short period of time. They have done so by accurately profiling the needs of potential customers. This has been one catalyst for financial disintermediation. Consumers are increasingly happy to shop around for different aspects of their financial needs. Challengers have brought effective solutions to everyday tasks, with convenience and user experience as key selling points. Technology has further engaged and empowered many consumers and served to redress some of the information asymmetry in financial services.
In decades past when people spoke about power in the financial sector, they thought of large powerful banks and insurers. Firms are now asking their customers for their trust. The power balance is shifting. Dysfunction and misconduct have impacted on people’s perceptions of the financial system as a whole so we can expect trust to play an increasing role in financial decision-making alongside things like product offering, price and delivery mechanism (EY, 2016).
As a regulator and a supervisor, I see more empowered, more informed, more sceptical financial consumers as positive thing.
Over the next decade also, the climate emergency and diminishing biodiversity will dominate our lives. As Greta Thunberg has noted to parliamentarians consistently over the last year, unless “permanent and unprecedented changes in all aspects of society have taken place” in the next decade, an irreversible chain reaction will have been set in place (Thunberg, 2019).
The financial sector, including the credit union sector, must play its part.
Before finishing this section, it is worth saying also that financial crises, as we have seen, recur. We have articulated before that there is evidence that this is somewhat attributable to the pro-cyclical approach to regulation. Regulation is often weakened in a damaging way at the top of the cycle, at precisely the moment that it needs to be strongest. It would be remiss of all actors in the financial system to let memories fade in this respect and roll-back effective regulation.
The role of the credit union
As we move from a transaction-based to a relationship-based economy and growing influence of the consumer, credit unions are ideally positioned to take advantage of this due to the nature of their relationship with members. While others try to form value-based relationships with their increasingly value-seeking customers, you already have this.
Your member-centric principles and purpose, and your culture, is underpinned by the type of values that people are being increasingly drawn to. This member centricity along with your members’ inherent trust in you, are the source of your competitive difference.
Translating this difference into product and service propositions your members truly value is fundamental to your sustainability and success.
Delivering sustainability will mean aligning your vision to your operational capabilities. In a rapidly changing market with increasing digitisation, quicker decision making and shifting borrowing patterns, you will have to understand member expectations and the product and services they require to serve their needs over the long term.
While we recognise the importance of the credit union sector from a financial inclusion perspective, we also recognise that the challenges you face. The pace of change requires ongoing and significant investment to keep up. Aligned to that, the specific challenges facing credit unions – common bond considerations, financial performance, size and scale challenges, single funding source, aging membership, your capabilities and competencies, and generational wealth transfer, to name but a few, mean that the scale of business model challenge cannot be underestimated.
Currently, there is a lack of sectoral clarity for the vision for credit unions and related business model or models. It is not for me to suggest your vision to you, but clearly it will continue to be impacted by internal factors (evolving member expectations) and external developments (both technological, social and macroeconomic).
Future success will be dependent on the ability to flexibly respond to these challenges.
Failure to engage is not an option in terms of longer-term sustainability.
You will need to be clear on your competence and capabilities as you plan for the next decade. Most importantly, a clear risk appetite and clearly articulated risk tolerances must guide your business planning and decision making. While change is an essential feature of business, change without clarity about the level of risk you are prepared to accept, can lead to dysfunctional outcomes. A strong risk appetite framework means understanding not only the risks being run, but also understanding what drives those risks. An effective operational and strategic approach to risk is an essential strength necessary to successfully address current challenges. Furthermore on risk, it is important to stress that risk management and risk mitigation are ongoing processes. They are certainly not once-off exercises to be completed following a supervisory engagement.
You will be familiar with our published guidance on business model strategy (Central Bank, 2018). The paper addresses, from a risk perspective, many of the strategic challenges you face today and into the near future. It provides a structured approach to considering your strategic challenges and determining a preferred strategy, grounded in risk appetite, operational capacity, and governance capabilities.
We increasingly see credit unions seeking to pursue traditional full-service banking models. At the same time, the banks whose activities you may be targeting for competition, are themselves reviewing how to deal with increased competition from other providers, often with lower costs and greater agility.
A successful business model is one which is sustainable and vibrant. It has growth potential in short and long term lending, with cash flow and payback patterns aligned to the nature of your funding. It places a key focus on return on assets. It provides your members with products and services they value and it does so in a cost efficient way.
I suggest to you that a clear vision is fundamental to a successful strategy.
Often, successful small firms define themselves more by what they don’t do, and then rigorously focus on being exceptional at what they do. This may be worth reflecting on.
Such firms often develop and implement highly effective marketing strategies. They excel at delivering in specific areas. They understand that they have limited resources and focus these on operational agility in delivering their products and services to their customers.
For many of you, it may be that you need to discover what is it people are looking for from you and become exceptionally good at delivering on this. Trying to deliver on the full span and scope of consumer’s financial services needs may not be within your competence, capabilities or resources. In fact trying to do so could divert you away from your core business. This requires strong leadership and realistic assessment of where your efforts can be most impactful.
Responding to change drivers in an agile way is an important organisational competence. In other countries, credit union-owned, commercially-focussed, shared service networks are a characteristic of successful and sustainable credit union business models. When successfully developed and delivered on, shared services can support business model strategies, realise scale and scope economies, deploy technologies, improve operational effectiveness and enhance risk management capabilities.
Indeed, a defining characteristic of business models today is they are increasingly reliant on outsourcing. Many activities, once performed in-house, are being outsourced. The day of the self-reliant firm is waning. Your own business model increasingly reflects this reliance on outsourcing in areas such as electronic payments, risk, compliance and internal audit functions etc.
Outsourced business models can amplify strategic risks and operational complexity. Such models have unique risk characteristics, many of which we have highlighted in our recent discussion paper on outsourcing (Central Bank, 2018). The paper sets out minimum expectations of all firms, including credit unions.
When considering your pathway to 2030, I urge you to consider the potential future scenarios that may evolve, and factor the insights gained into your business model strategies. Scenario modelling is one of the methods used by your peers internationally as an input to their strategic thinking and planning. This will inform the consideration of the agility and resilience you will need for the future. This is the one area where you might collaborate.
Brexit also looms large, in particular a hard Brexit. I imagine your planning has already stressed your financials for plausible shocks especially the ability of members to repay their loans.
By virtue of individual size, and the nature of the common bond, the challenges faced by the broader financial system are perhaps more acute for you. The difference, and your strength, is your ethos and consumer centricity.
I mentioned the climate emergency earlier. Your members and prospective members will be looking at ways to address this in their own lives (such as retrofitting their houses (Energy Ireland, 2018)) and this may be an opportunity for you to support them.
There are undoubtedly significant challenges to be faced between now and 2030. I am confident that credit unions can respond to those challenges effectively through improved governance standards, their member-centric culture and effective collaboration to deliver necessary change.
In the Central Bank you will continue to find an engaged and constructive stakeholder in that journey, consistent with our statutory mandate.
What you should expect from the Central Bank between now and 2030
A challenge for all of us in the coming decade will be delivering high standards in an environment of unpredictability and uncertainty. In order to meet that challenge, a clear plan, while acknowledging the need to be agile and flexible is crucial.
The Central Bank has put in place a Strategic Plan for the period out to 2021. It sets out our short-term work programme and gives a clear picture of our priorities and our statutory objectives. It was released late last year following a public consultation. It is structured around five strategic themes:
- Strengthening resilience: That the financial system is better able to withstand external shocks and future crises.
- Brexit: That the risks posed to the economy, financial system, regulatory environment and consumer protection by the impact of Brexit are mitigated.
- Strengthening consumer protection: That thebest interests of consumers are protected and confidence and trust in the financial system is enhanced through effective regulation of firms and markets.
- Engaging and influencing: That we engage with and listen to the public and stakeholders to inform our work. We help build trust in, and understanding of, the Central Bank and we strategically influence and shape key decisions and policies in Europe and internationally.
- Enhancing our organisational capability: Our culture, resources and capabilities support the effective and efficient delivery of our mandate whilst maintaining the highest standards of governance and risk management.
On technology, we too are upping our game. We are using advanced analytical tools to observe trends in the financial system, to better mine data to challenge you more effectively on your risk assessments and to ensure that the significant amounts of data coming to us is giving us the insights we need to fulfil our mandate. You should not expect your supervisors to be replaced by artificial intelligence and cyborgs, certainly in the short term, but you can expect our supervisory judgement to be informed by the better insights available from the most modern technology.
Our Innovation Hub, launched in April 2018, has provided a direct and dedicated point of contact for firms developing or implementing innovations in financial services based on new technologies (Central Bank, 2018). This allows us to enhance our sight of ongoing and upcoming developments in FinTech and make better, more informed, policy. The direct engagement model allows industry and innovators to access the right area of the regulator at the right time. They can get a deeper understanding of regulatory and supervisory expectations. Feedback has been overwhelmingly positive.
On climate, we are committed to playing our part. We have joined the Central Banks and Supervisors Network for the Greening of the Financial System (Banque de France, 2018) and both former Governor Lane (Lane, 2019), and Deputy Governor Donnery (Donnery, 2019) have given clear articulations of our view and our work in this area.
Earlier this year we announced the pathway to full industry payment for the costs of financial regulation (Central Bank, 2019). For the credit union sector, this pathway is considerably less steep than any other industry sector both in terms of the timeline, but also the percentage cost of regulation to be serviced, 50% rather than 100%, recognising the unique role you play in society2. We will consult again before proposing any other change.
As part of this move, it is important for the Central Bank to continue to be transparent in relation to its costs.3 We are committed to transparency and predictability in relation to transition towards firms paying the full cost of financial regulation.
To conclude – You might have expected that I would say that in 2030 I see the credit union movement looking like this, or that in 2030 there will be that number of credit unions. We do not have such a position. Our priority will continue to be strong, sustainable credit unions in safe hands. We will not prescribe the shape or size of the sector. That has always been and will continue to be a matter for you, for your members and for the communities you serve. We will continue to be guided by our statutory mandate towards credit unions and in particular the protection by credit unions of their members’ funds.
Over the next decade, our commitment to the credit union sector is to continue to be robust, constructive, and transparent.
You will know from our engagement in recent years that you can expect our supervisors to be thorough and rigorous. This will not change.
They will implement the rules unapologetically, they will embody the Central Bank’s public service responsibilities and they will exercise proportionate supervisory judgement. They will engage constructively with you and your teams.
For my part, I would like to see the sector have a clear vision for itself, have harnessed the trust placed in it by the public into a sustainable business model and have maintained a constructive relationship with the regulator.
Let me finish there. I wish you every success with the remainder of your conference and into the future.
I would like to thank Steven Cull, Frank Brosnan, Patrick Casey and Ed Sibley for their insights and assistance in preparing these remarks.
Central Bank of Ireland (2019), Thematic review of restructuring in the credit union sector.
Central Bank of Ireland (2019). Supervisory Commentary.
European Strategy and Policy Analysis System (2015). Global Trends to 2030: Can the EU meet the challenges ahead?
Carney, Mark “The future of work” , Speech at 2018 Whitaker Lecture, Central Bank of Ireland, 14 September 2018.
Pew Research Centre, 2019. “Defining generations: Where Millennials end and Generation Z begins” (January 14 2019)
Thunberg, Greta ‘You did not act in time’: Greta Thunberg’s full speech to MPs Speech at Houses of Parliament, 23 April 2019.
Dagher, Jihad. “Regulatory Cycles: Revisiting the Political Economy of Financial Crises” IMF Working Paper, 2018.
Central Bank of Ireland (2018), Business Model Strategy: Guidance for Credit Unions
Central Bank of Ireland (2018). Outsourcing – Finding and issues for discussion
Energy Ireland (2018). Meeting the Climate Change challenge.
Central Bank of Ireland (2018). Innovation Hub 2018 update
Banque de France, 2018 “Central Banks and Supervisors Network for Greening the Financial System”
Lane, Philip R, 2019. “Climate Change and the Irish Financial System” Economic Letter Vol 2019, No. 1
Donnery, Sharon, 2019 “Risks and opportunities from climate change” Address to Department of Finance and Sustainable Nation Ireland Conference, 16 May 2019.
Central Bank of Ireland (2019) “Funding the cost of Financial Regulation”.
1 There is already some cross-over as you seek to expand your range of services, particularly as regards European legislation. PSD II, the Mortgage Credit Directive, the Insurance Distribution Directive and other regulatory protections are influential and will become more influential in coming years.
2 We have committed that credit union recovery rates from 2022 onwards will be subject to review and a public consultation to guide strategy once 50% recovery rates have been achieved.
3 The Central Bank publishes granular information in relation to its operations. Further information available on our website, including travel expenses, payments for goods and services and full details on our strategy for industry funding.