The Compliance & Risk Functions In Credit Unions What Supervisors need to know? Michael Mullen ILCU Learning Advisor

Objectives By the end of this session participants will be able to: Understand the rationale behind the suggested new Compliance & Risk Functions in credit unions Understand the credit unions obligations in relation to compliance & risk management Better evaluate the Boards oversight of its compliance and risk management responsibilities

Supervisory Committee Responsibilities [The] Supervisory Committee … shall have the general duty of overseeing the performance by the directors of their functions

Which include: Setting strategy & producing a strategic plan Implementing the plan, monitoring and updating it (annually) Operating a comprehensive decision making process Ensuring an effective management team is in place Ensuring all officers have the skill knowledge and competence Annual review of the manager (Ensuing a review of all staff) Putting in place a management team to include, risk management & compliance officer Ensuing appropriate succession plans Exercising appropriate oversight of management Reviewing and approving all elements of the risk management plan and putting in place a risk management process

Which include (Continued): Ensuring an effective management team is in place Ensuring compliance with all requirements imposed by the CU Act and other relevant legislation Removing officers where there is a failure to perform duties Ensuring each director takes training Submitting accounts Paying a dividend Performing an annual comprehensive review of its performance Approving, reviewing and updating all plans, policies and procedures of the credit union, to include the following mandatory policies………..

Which include (Policies): Lending Shares Liquidity Management Reserve Management Investment Remuneration Record Management IT and BCP Asset Liability Management Risk Management Conflict of Interest Standard of Conduct and Ethical Behaviour…….. and a Compliance Plan

Which include (Continued): Oh! …….and such otter matters as the Bank may prescribe!

Supervisors (BOC) role then is to ensure the Board does all of the above. And someone said the role was being watered down! A dilution of responsibility?

New Risk Management Obligations Reviewing and approving all elements of the risk management system on a regular basis, in particular: Assessing its appropriateness Taking into account any changes to its strategic plan, resources or external circumstances Tasking measures to address any deficiencies in the risk management system Section 55 (1) (l) Putting in place a risk management policy Section 51(1) (o) xv Implementing a risk management process Section 51 (3) Approving the appointment of a person to be the risk management officer with the necessary authority, resources and experience to manage the risk management function within the credit union. Section 55 (5) )

Definition of Risk Management the governance arrangements systems and controls to allow the credit union to identify, assess, measure, monitor, report and manage the risks which it is, or might reasonably be, exposed to Section 76B (2)

Risks Credit Liquidity Operational Market Interest Rate Reputation IT Accounting Legal Compliance Identify Risks

Measure Risks … Increasing Impact Increasing Likelihood High Likelihood High Impact High Likelihood Low Impact Low Likelihood Low Impact Low Likelihood High Impact 1 5 5

Control Risks 1.Avoid the Risk 2.Reduce the Risk 3.Spread the Risk 4.Assume the Risk 5.Transfer the Risk All about policies!

New Compliance Obligations Ensuring compliance with all requirements imposed on the credit union by or under the Credit Union Acts 1997 to 2012 or any other financial services legislation; Section 55 (1) (m) Credit Union Bill Putting in place a compliance plan and policies Section (51) (1) (o) ix Approving the appointment of a person to be the compliance officer with the necessary authority, resources and experience to manage the compliance function within the credit union. Section 55 (5) )

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

Scope of Compliance 1. Credit Union Act 2. Credit Union Own Policies 3. Regulatory Requirements 4. Governance Structures 5. Statutory Requirements Credit Union

Compliance Plan Roles & Responsibilities Identify all Statutory & Regulatory Obligations Adherence to Risk Management Plan Oversee & Monitor Compliance Controls Setting up a Compliance Culture Training & Communication of Compliance issues New Product/Service Approval Investigations & Complaints Handling Communications with Board / Supervisors / Regulators

Annual Compliance Statement Signed by all directors Within two months of annual report

Practical Implementation Size matters: Type 1: Outsourced (several credit unions sharing the one officer) Credit Union Compliance Specialist Credit Union 1 Credit Union 2 Credit Union 3 Credit Union Risk Management Specialist Credit Union 1 Credit Union 2 Credit Union 3

Practical Implementation Size matters: Type 2: Job share Compliance function Risk Management function

Practical Implementation Size matters: Type 3:Dedicated Officers Manager Risk Management Officer Compliance Officer

Why Comply? Good compliance is good business… Damage to Reputation Potential Prosecution Regulatory Sanction Internal Strife Lost Members

Regulatory Compliance Sanctions: A caution or reprimand A direction to refund any sum charged by the credit union A fine up to 5 million, (but not such an amount that would cause the credit union to cease business) A direction disqualifying a person from being concerned in the management of a regulated financial provider A detection to cease committing the contravention An order to pay the Central Banks costs

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

Thank you