1. Compliance for Credit Union Staff & Volunteers Republic of Ireland
Michael Mullen
Trainer Notes:
A technique for beginning a presentation is “INTRO”, (Interest, Need, Timing, Range & Objectives)
Interest
Ask a question, or make a provocative statement, or state a startling fact, or mention something from the recent press.
Need
What is compliance - why now?
Timing
The Presentation should take about 2 ½ hrs with Questions taking another 10 mins.
Range
Verbally go through the content;… “we will look at the new regulatory environment, the increasing importance of compliance, the role of the regulators and the major legislative requirements. Finally we look about how a credit union can manage its compliance risks and develop a culture of compliance .
Objectives
May use the next slide now.
Trainers Guide - July 2005

2. Objectives By the end of this session participants will be able to:
Place compliance in the context of fiduciary, ethical, regulatory and statutory responsibility
Know the major laws and regulations applicable to credit unions
Understand the nature of compliance risk
Appreciate the steps required to ensure compliance within the credit union
Read out the above objectives of the presentation and explain that by the end of the session participants should have a good understanding of each.
Trainers Note:
For this presentation you will need:
Course book
Laptop, projector & screen
Trainers Guide - July 2005

3. Challenges for credit unions
Increasing CU business complexity
Greater Regulatory scrutiny
New positive obligation on the Financial Regulator to report any contravention or breeches of Legislation uncovered by it
Increasing Accounting standards
Additional reporting requirements on the auditors of regulated financial entities
Increased Compliance focus
Increased personal exposure
Greater Public concerns about Governance & Ethics
The above challenges have meant that many businesses, and particularly those in heavily regulated environments, have had to readdress and re-examine their corporate governance, internal control and compliance procedures.
This will also means closer scrutiny on the professional competence, skill & experience of auditors (Supervisors).
Trainers Guide - July 2005

4. Introduction Why Regulate?
Ensuring the financial stability and solvency of financial providers
Ensuring financial providers treat their consumers fairly
Providing consumers with a right of redress
Ensuring competition between financial providers.
The above objectives are achieved through:
Prudential Supervision
Consumer Director
Financial Services Ombudsman
Competition Authority
Trainers Guide - July 2005

5. Introduction Role of Regulator Authorisation
Conduct of Business & Consumer Protection
Supervision & Inspection
Sanctions
See recent Ombudsman ruling in Guide (page 4) on Loans outside common bond.
His decision overruled Rule 44 (6), placing right of Consumer above Rule.
Trainers Guide - July 2005

6. Definition of Compliance
“the risk of legal or regulatory sanction,
material financial loss, or loss to reputation
a credit union may suffer as a result of its failure to comply with laws, regulations, rules, related self regulatory standards and codes of conduct applicable to its activities”*
* Adapted from Basel Committee on Banking Supervision, April 2005
Comply with all laws, regulations, rules and codes.
Trainers Guide - July 2005

7. Why Comply? Good compliance is good business… Damage to Reputation
Potential Prosecution
Regulatory Sanction
Internal Strife
Lost Members
Reputation being the most costly.
All the others can hurt the credit union and at its most extreme perhaps close down a credit union.
But damage to the Reputation of the credit union movement could effect the entire movement.
(as a movement we are only as strong as our weakest link)
Trainers Guide - July 2005

8. Could it happen here?
Former Enron CEO Jeff Skilling is escorted into the Houston federal courthouse after surrendering to the FBI yesterday.
He is the highest-ranking executive of
the collapsed energy conglomerate to be arrested.
Skilling was sentenced to 24 years in prison and ordered to pay $45 million dollars in compensation

9. Role of Compliance Identify all Regulatory Obligations
Set-up Compliance Manual
Oversee & Monitor Compliance Controls
Training & Communication of Compliance issues
New Product/Service Approval
Investigations & Complaints Handling
Communications with Board / Supervisors / Regulators
This course suggests the need for a “compliance function”. (Probably a Compliance Committee, although larger CU’s might warrant a compliance officer)
In the new regulatory environment compliance is of sufficient importance to warrant such resources.
The Supervisors are an internal audit function (not a compliance function). Most FI’s would have both.
Supervisors are re-active and highlight failings. A compliance function is proactive and develops systems to avert failings.
Some of the responsibilities of this proposed compliance function are listed here.
Trainers Guide - July 2005

10. Scope of Compliance ILCU Rules & CU Act 2. Credit Union 5. Statutory
compliance is concerned with the CU Act, policies and procedures, governance, regulatory issues, laws and codes. It is in these areas therefore that compliance monitoring needs to address.
Credit Union Rules encode the most important legislative instrument for CU’s, The Credit Union Act
Credit Union Policies & Procedures demonstrate the internal control process within the CU
Regulatory Requirements; including consumer Codes, prudential supervision and Guidance
Governance Structures, particularly individual Director accountability
Statutory Requirements; all the other laws of the land; i.e. Employment Law , Health & Safety, etc.
Credit Union
2. Credit Union
Policies
5. Statutory
Requirements
3. Regulatory
Requirements
4. Governance
Structures
Trainers Guide - July 2005

11. 1. Compliance with the Credit Union Rules
The Credit Union Act
The ILCU and Self-Regulation
The Rule Book
How well do you know the Rule Book?
The ILCU represents how the movement regulates itself. Because of difficulties in other industries in regulating themselves this form of regulation fell out of favour and led to the Financial Regulator being set up with substantial powers.
One important role of ILCU is to support CU’s in the new regulatory regime. Provide economies of scale and support services, advice & training. The League also maintains the SPS fund and trough the Standard Rules help with Compliance with the Credit Union Act.
Activity :
In pairs attempt the Rule book quiz. Answers are at the back – tell them after 5-7 minutes.
Trainers Guide - July 2005

12. 1. Credit Union Rules Checklist
Do you have copies of the standard rules
Are they given to all new directors?
....and staff?
Are they being complied with?
Follow on from multiple choice questions (answers at back of manual)
Trainers Guide - July 2005

13. 1. Compliance with Credit Union Policies
What policies do you need?
Format of a policy:
Reason, Responsibility, Restrictions, Review
Are you complying with policies?
Activity
In groups identify the key policies which need to be in place?
Remember the risks we identified earlier - that’s the answer. The Regulator has stressed Credit, Investments, Money Laundering, IT and Continuity of Business.
Is the risk properly identified in policy, have responsibilities and accountability been laid out in the policy, what are the control and monitoring mechanisms, are they updated regularly.
Reason for polices:
to protect the credit union or its individuals working within the credit union
as a form of risk management
to ensure consistency of treatment of all
as a way of controlling the running of the credit union- much easier to monitor progress/issues when a written policy exists
Trainers Guide - July 2005

14. 2. Compliance with Credit Union Policies
Do policies exist for all key risk areas?
Do they adequately cover the risk?
Have they been communicated?
Are they being complied with?
Note: it is not the supervisors role to write policy or indeed rewrite existing policy.
Communication primarily through procedures, which might include training, manuals, and the key question; does everyone who needs to know, know? That’s easily audited - ask them!
And finally any breeches of policy, how are they dealt with, is enough significance attached? Do breeches indicate more serious systemic weaknesses?
Trainers Guide - July 2005

15. 3. Regulatory Compliance
A Consumer Director
Consumer Protection General Principles
Prudential Regulation
The Power to investigate, and if found guilty, sanction regulated entities for “subscribed contraventions”, that is breeches of laws, regulations, codes or guidelines issued by the Regulator.
Each gives more teeth to the Regulator and places greater obligations on the credit union.
Consumer Director - creating greater awareness by members of their rights and power.
Ombudsman - (since Aug 05) requires a written complaints handling procedure, timely responses (30 - days), significant sanctions (up to €250K), 3 months in prison for “obstruction” of ombudsman. Cu’s have already felt impact of this - note case in Clare of award to Son when Daughter had drawn down mothers funds incorrectly.
Not only the regulator, but auditors and other advisors to credit unions, are under increasing (sometimes personnel) obligations to report breeches uncovered by them. (Regulator made 33 such disclosures last year including 1 for AML in a CU)
Sanctions have not been tested yet – but it is only a matter of time, (fines up to €5 million.)
A Financial Services Ombudsman
Additional reporting requirements on auditors
Trainers Guide - July 2005

16. Compliance Requirement
Compliance Ratios
Ratio
Calculation
Compliance Requirement
Capital
(Statutory Res + Gen Res + Surplus brought forward + other reserves) / (Total assets – liquid assets)
Ratio to be determined
Liquidity
Liquid Assets / Total Liabilities
Asset Quality
From Loans arrears: Provision (53+Wks) / net loans (53+ Wks)
100% or greater
Lending over 5 yrs
(Loans (5-10 yrs) + Loans over 10 yrs) / All Loans
Less then 20%
Lending over 10 yrs
Loans over 10 yrs / All Loans
Less then 10%
Large Exposures
For each of top five borrowers:
Gross Amt before provision / Total assets
Greater of €39k or 1.5% of assets
Large Accounts
For each of top five savers:
Amount / Total Assets
Greater of €200K or 1% of total assets
Statutory Reserve
(Stat Res this yr end – stat Res last yr end) / YTD surplus deficit
10% or more
Trainers Guide - July 2005

17. Financial Ombudsman
Investigation, mediation & adjudication of complaints
Free independent service to consumers
Covers complaints less than 6 years old & not subject to ongoing legal proceedings
Requires formal complaints handling procedures
Can award compensation up to €250,000
Credit unions covered by Ombudsman scheme since August 2005
CU’s have 30 days in which to reply to an ombudsman request.
CU’s have 25 days in which to ask for a review of a decision if unhappy with it.
Obstruction of the ombudsman is an offence punishable with a €2,000 fine and/or imprisonment up to 3 months.
Trainers Guide - July 2005

18. Regulatory Checklist Regulatory Compliance - Minimum Requirements
Policies in all key areas
Prudential Returns, with particular emphasis on compliance ratios
Compliance with Registrar issued Guidance Notes
Compliance with Ombudsman Scheme
Compliance with CBFSAI
Trainers Guide - July 2005

19. 4. Governance Compliance
Fitness & Probity
Fiduciary Responsibility
Volunteer Code / Code of Ethics
Compliance of Culture
Compliance Reporting
Ultimately Compliance is about good Governance, indeed in a heavily regulated environment the two terms are almost interchangeable.
Good governance is about following the rules (the act), identification and monitoring of risk through policy in all key areas and regulatory compliance. But most of all it’s about the people who steer the ship, are they captains or ship mates?
So compliance with good governance is about the people on the board, are they fit & proper, have they the experience and skills for the role, do they show the commitment required for the job, are board meetings conducted in a manner which takes into account the gravity of the position? Supervisors may want to check minutes and reports of the committee of management and other sub-committees for compliance, and assessing regularity and completeness.
Their responsibilities move beyond the rule of law, but are grounded in principles, fiduciary responsibilities and the common law duty of care.
A Volunteer code including a code of ethics gives meat to these principles.
Does the CU promote a culture of compliance? Does it have a dedicated function, do supervisors have the resources to fulfil their role, is Supervisor involvement encouraged or merely tolerated. How are compliance concerns dealt with, whistle blowers charter?
Note Regulator Guidance on Reporting of compliance concerns.
League is here to help!
If in doubt contact the League.
Trainers Guide - July 2005

20. Compliance Structure Board of Directors Identify Areas & Agree Policy
Report to Board
Level of Compliance
Board of Directors
Identify Areas &
Agree Policy
Ensure Procedures
& Training
Investigation &
Compliant Handling
Monitoring &
Controls
Compliance Committee
Audit
Liaison with
Regulators
Compliance
Manual
Written Policy
This shows how Compliance can be structured within your credit union.
Ultimate responsibility lies with the board of Directors, however each person who works for the credit union is individually responsible for their own actions.
The Board may consider putting in place a Compliance Committee (or compliance officer) who oversees the compliance program within the credit union. This Compliance function should:
Identify risks and ensure policy is in place
ensure procedures are put in place, and if needed, training is given
Monitor & control risks through audit
Deal with lapses in controls or systems through investigation and deal with member complaints that impact on compliance issues
But ultimately the MLRO reports to the board, who have responsibility for AML. The board must therefore ensure that the MLRO reports regularly to the board as to the operation of the credit unions AML regime. (Details of the suggested format of this report are included in the sample money laundering policy which accompanies the Resource Kit.) MLRO’s should not discuss individual ml cases with the board.
Trainers Guide - July 2005

21. Compliance Responsibilities
Directors responsible for:
Overseeing compliance risk
Effective management of compliance risk
Establishing & communicating compliance policy
Compliance function:
Must be independent
Must have adequate recourses
Assist board in managing compliance risks
Subject to internal audit
If outsourced, must be subject to adequate oversight
Directors, not the compliance function is ultimately responsible (familiar message!)
Can enlist the help of compliance function to help manage risk and establish policy
Compliance function can work in other areas but independence needs to be watched
Compliance function has to be sufficiently senior, avoid conflicts, care with remuneration/bonuses, access to all staff and documents
Trainers Guide - July 2005

22. Compliance Reporting Role of Supervisory Committee
Need for Compliance Committee
Guidance on Voluntary Disclosure (July 2006)
Internal Reporting
Role of League
Supervisors = internal audit, but do not get into the operational side of compliance. Supervisors should check for compliance with policies and procedures; check for compliance with relevant Acts, secondary legislation and rules; and check minutes and reports of the committee of management and other sub-committees for compliance, and assessing regularity and completeness.
Need for a committee (or officer) independent and dedicated to compliance function, with authority to act independently, with access to records, and resources to monitor & investigate. Proactive and focused on stopping non compliance before it happens.
Note Regulator Guidance on Reporting of compliance concerns (See Page )
Annual Compliance report (and statement) from the board
League is here to help!
If in doubt contact the League.
Trainers Guide - July 2005

23. Governance Checklist Governance Compliance - Minimum Requirements
Independent Risk/Compliance Committee
Active Nominating Committee
Competent Directors & Staff
Conflict of Interests Register
Volunteer Code of Practice and Code of Ethics
Credit Union Board who insist on Compliance reports
Active Supervisory Committee
Trainers Guide - July 2005

24. 5. Other Legislation Anti Money Laundering requirements
Insurance Compliance
Investments Compliance
Data Protection Law
Competition Law
Health & Safety Law
Employment Law
Equal Status Legislation
Taxation Law
Each has its own codes and each is another days training!
We will cover each of these items next…
Trainers Guide - July 2005

25. Money Laundering Checklist
Money Laundering Compliance - Minimum Requirements
Appoint MLRO
Written Money Laundering Policy
Member Identification Procedures
Record Retention
Clear Reporting Structures
Compulsory Training (Annually)
Provisions are strict but well documented
Basically 4 requirements:
ID members
Keep Records
Report Suspicions
Train
Trainers Guide - July 2005

26. Insurance Checklist Insurance Compliance - Minimum Requirements
Appoint Designated Person
Follow Consumer Protection Code; e.g.
General Principles
Terms of Business & Reason Why letters
Section 30 Receipts
Written Complaints Procedure
Premium Handling
Maintenance of Books & Compliance file
Follow Minimum Competency Requirements
New compliance Manual based on the CPC will be issued by ILCU this fall, previous manual is defunct since Aug
MCR’s will be highlighted by League in September, recommending QFA (through the LIA) for all Insurance Staff
Trainers Guide - July 2005

27. Investments Checklist
Investments Compliance - Minimum Requirements
Investments are within Authorized Orders
Written Investments Policy
Investment Committee
League issued it Central Treasury Trust under Davy’s in Recommended as a safe, credit union specific, managed investment fund for credit unions.
Trainers Guide - July 2005

28. Data Protection Checklist
Data Protection Compliance - Minimum Requirements
Register with DP Commissioner
Written Data Protection Policy
Comply with 8 Data Protection Principles
Ensure rights of access to members
Training
Look out for this one, particularly as members become more aware of their rights to access.
Already providing to be dynamite in terms of employee rights to information as part of grievance or disciplinary actions against their employers!
Trainers Guide - July 2005

29. Health & Safety Checklist
Health & Safety Compliance - Minimum Requirements
Perform Risk & Hazard Assessment
Prepare Safety Statement
Safety Management Structure
Training
Safety Representative
Bullying & Harassment is now seen as a H&S issue
Other issues particularly relevant to credit unions might include:
Manual Handling of Coins
Document Storage (Fire Safety)
Security & Raid awareness
Rights to free eye tests for VDU workers
Trainers Guide - July 2005

30. HR Checklist Employment Law Compliance - Minimum Requirements
Contracts of Employment
Recruitment & Selection Procedures
Discipline & Grievance Procedures
Leave & Absence Procedures
Bullying & Harassment Policy
Equal Status Policy
Training
Top 5 HR Queries received by League:
Contracts
Recruitment & Selection
Discipline & Dismissal
Salary & Pay Agreements
Absence
Trainers Guide - July 2005

31. Tax Checklist Taxation Law Compliance - Minimum Requirements
DIRT Procedures
Recording of Tax Identification Numbers
Record Tax numbers – but not on computer!
Trainers Guide - July 2005

32. Summary You should now be able to:
Place compliance in the context of fiduciary, ethical, regulatory and statutory responsibility
Know the major laws and regulations applicable to credit unions
Understand the nature of compliance risk
Appreciate the steps required to ensure compliance within the credit union
Trainers Guide - July 2005

33. ?
Any Questions
Trainers Guide - July 2005

35. Risk Management Credit Compliance Liquidity Legal Operational Risks
Market
Interest
Rate
Reputation IT
Accounting
Legal
Compliance

36. Increasing Likelihood
Risk Management A
High Likelihood
High Impact
High C
High Likelihood
Low Impact …
Increasing Likelihood D
Low Likelihood
Low Impact B
Low Likelihood
High Impact
Rate the following risks as you perceive them on the table (See Guides Page )
Money Laundering
Health & Safety
Insurance Compliance
Employment Law
Data Protection
Credit Union Act
Investment Compliance
Taxation Law
Low
Low High
Increasing Impact
Trainers Guide - July 2005

37. Increasing Likelihood
Risk Management
Money Laundering
Credit Union Act
Insurance
Investments
Employment Law
High C A …
Chance of Occurring
Increasing Likelihood
Data Protection
Competition Law
Taxation Law
Health & Safety D B
Low
Low High
Increasing Impact
Severity
Trainers Guide - July 2005