THE POLICY PROPOSAL DOCUMENT FOR THE CREDIT UNION ACT

Transcription

1 THE POLICY PROPOSAL DOCUMENT FOR THE CREDIT UNION ACT November, 2009

2 THE POLICY PROPOSAL DOCUMENT FOR THE CREDIT UNION ACT THE CENTRAL BANK OF TRINIDAD AND TOBAGO TABLE OF CONTENTS 1.0 INTRODUCTION Background Vision of the Legislative Framework Framework for Developing the Policy Proposal Document Objectives of the Central Bank under the Credit Union Act DEFINITIONS THE SUPERVISORY SYSTEM Components of the regulatory framework Scope of Responsibilities Regulations and Guidelines Secrecy and Sharing of Information THE BUSINESS OF A CREDIT UNION Non-financial Activities REGISTRATION AND OPERATING CERTIFICATE Registration Operating Certificate-Existing Credit Unions Operating Certificates - New Credit Unions Application to vary or expand the classes of business Restriction and Revocation of an Operating Certificate Investigation of a Society GOVERNANCE PRINCIPLES FOR CREDIT UNIONS... 24

3 6.1 General Comment Governance by the Board of Directors Responsibility of the Board Committees External Auditor SHARES AND DEPOSITS Withdrawable Shares Permanent Shares Deposits Member Statements Dormant Accounts Insurance Protection of Deposits and Shares CAPITAL Institutional Capital BORROWINGS LIQUIDITY LOANS Delinquent Loans: INVESTMENTS Substantial Investments PROHIBITED TRANSACTIONS Related Parties Real Estate Credit Exposures Branches Dividends Page 3 of 68

4 13.6 Exceptions to the Restriction on Dividend Payments and other Distributions from Equity during the Transition Period REGULATION AND SUPERVISION General Powers of the Central Bank On-site Examinations and Off-site Monitoring Information Requirements Audited Financial Statements Preventive and Corrective Measures Directions Direction for removal Winding up of a Credit Union Voluntary Liquidation Order of Distribution Upon Winding-up Mergers and Transfers Offences and Penalties Appeals SECONDARY BODIES EXEMPTED SOCIETIES PRUDENTIAL CRITERIA TRANSITION PERIOD FIRST SCHEDULE: BUSINESS OF A CREDIT UNION SECOND SCHEDULE APPENDIX I APPENDIX II APPENDIX III Page 4 of 68

5 EXECUTIVE SUMMARY In July 2005 Cabinet agreed that the supervision of the financial activities of all credit unions should be integrated, under the aegis of the Central Bank of Trinidad and Tobago, with the supervision of insurance companies, pension funds and financial institutions licensed under the Financial Institutions Act Chapter 79:09. Cabinet also agreed that the Co-operative Societies Act, Chap. 81:03 (CSA) should be amended to remove the supervision of the financial activities of credit unions from the mandate of the Commissioner for Co-operative Development. The Central Bank intends to fulfill its mandate through the establishment of a Credit Union Act (CUA). Given the co-operative nature and democratic systems of governance of credit unions, it would be inappropriate to seek to regulate them under legislation intended for commercial banks or other types of financial institutions. Rather, the requirement is for specific legislation that recognizes the special characteristics of credit unions. This Policy Proposal Document forms an important part of the groundwork for the creation of such legislation. It is intended to serve as a basis for discussion and consultation with key stakeholders, with a view to developing the best possible legislation for the credit union sector. It represents the distillation of a wide range of views expressed by individual credit unions and other key actors in the credit union sector during the course of consultations on the Policy Proposal Document. The positions put forward in this Policy Proposal Document were informed by a number of other sources including: the White Paper on Reform of the Financial System of Trinidad and Tobago; the draft Credit Union Supervision Act (CUSA) of August 15, 2003 that was presented to and approved by Cabinet in 2003; the CSA; World Council of Credit Unions (WOCCU) Model Law 2 nd Edition; the FIA and various drafts of the Financial Institutions Bill (FI Bill) and new Financial Institutions Act 2008 (FIA 2008); annual reports of credit unions; meetings held with several representatives of the movement and the Ministry of Labour and Small and Micro Enterprise Development, international credit union consultants and the legislation of some Caribbean countries and other jurisdictions. The proposals have been organized into four main categories: the supervisory system; certification and on-going supervision; prudential criteria and the supervised entity. Highlights of the proposals within each category are summarized below. Proposals related to the supervisory system would: Define the Regulatory Framework Enable the Central Bank to share information with other supervisory agencies; Enable the Central Bank to determine the safety and soundness of credit unions; Help to maintain public confidence in, and promote the stability of the financial system of Trinidad and Tobago. Page 5 of 68

6 Proposals related to the certification and on-going supervision would: Require a credit union to be registered under the CSA and to obtain an operating certificate from the Central Bank to conduct the business of a credit union; Outline the business of a credit union, where the business includes the provision of financial services as listed in the First Schedule. Require board members and members of committees that the credit union will be required by law to establish and officers to meet fit and proper criteria; Promote governance principles for credit unions by requiring mandatory term limits for board members and additional committees such as Investment and Risk Management Committees, where the complexity of the operations and risk profile of the credit union may require such; Require the submission of audited financial statements and other information as deemed necessary; Establish enforcement powers to enable the Central Bank to issue directions to credit unions to become compliant with the CUA and to cease from engaging in unsound practices. Proposals related to prudential criteria would: Require credit unions to maintain a minimum level of institutional capital of eight (8) percent of total assets. Restrict the payment of dividends where a credit union has not met the required level of institutional capital; Restrict credit unions to borrowings of 8% of total assets with the option (subject to certain conditions) to borrow up to a maximum of 10 percent of total assets; Limit a credit union s credit exposure to a single entity, individual member or related party or parties, either individually or collectively, to twenty-five (25) percent of institutional capital; Limit a credit union s equity investment in an individual entity to less than 20 percent of the shares of that entity, except for a locally regulated financial entity; Limit investment by a credit union in the equity of other entities in aggregate to a maximum of twenty (20) percent of the credit union s institutional capital; Require credit unions to maintain a minimum liquid assets ratio of fifteen (15) percent in relation to total liabilities inclusive of members withdrawable shares. Restrict a credit union s real estate holdings to 5% of its total assets except for owner occupied property i.e. real estate necessary for conducting its business or housing its officers or employees. Restrict a credit union s real estate holdings acquired either directly or indirectly for the satisfaction of debts due, to a maximum period of five years from the date of acquisition. Page 6 of 68

7 Proposals related to the supervised entity would: Establish an optional category of permanent shares which would form part of the capital of the credit union ; Allow member shares and deposits to be withdrawable on demand or subject to a required period of notice; Specify conditions under which a credit union can make loans to its elected officers; Permit a credit union to voluntarily wind-up its business affairs with the approval of the Central Bank; Provide for the regulation of Secondary Bodies. Proposals related to the remaining matters would: Retain within the purview of the Commissioner the power of registration, the power to de-register credit unions that have been wound up by the Central Bank, as well as jurisdiction over all constitutional matters that relate to registration, by-laws and the resolution of disputes; Authorize the Central Bank to impose civil money penalties on credit unions for breaching certain sections of the CUA and to specify criminal penalties; Establish the right of credit unions to appeal the imposition of civil money penalties and certain other regulatory decisions of the Central Bank to a Judge in chambers; Allow a transition period ranging from six (6) months to five (5) years for existing credit unions to become compliant with the CUA. Allow the Central Bank to issues guidelines that govern sound business, governance and risk management practices of credit unions. Page 7 of 68

8 1.0 INTRODUCTION 1.1 Background The White Paper on the Reform of the Financial System of Trinidad and Tobago outlined several policy recommendations for the supervision of the credit union sector. In keeping with these recommendations, the Ministry of Finance embarked on efforts to upgrade the legislation for credit unions and a decision was taken to transfer supervision of the sector from the Commissioner for Cooperative Development (the Commissioner) to the Central Bank of Trinidad and Tobago (the Central Bank). The following outlines the sequence of decisions leading to Cabinet s approval for the creation of a separate Act to regulate the financial activities of credit unions: Cabinet Minute No. 59 of 2004 considered by Cabinet on January 8, 2004 and confirmed on January 15, 2004: Cabinet accepted the draft legislative framework proposed by a Consultant for the supervision and regulation of the financial operations of credit unions. The framework proposed that supervision of credit unions should be undertaken by a new body known as the Credit Union Supervisory Authority. Cabinet Minute No of 2004 considered by Cabinet on December 2, 2004 and confirmed on December 9, 2004: Cabinet agreed to bring credit unions with an asset base of $100 million and above, as well as those undertaking business of a banking nature as defined by the CUA, under the supervision of the Central Bank. The result would be that the financial operations of credit unions would be regulated by two distinct bodies, the Credit Union Supervisory Authority and the Central Bank. This decision was taken in the context of the dynamism of the credit union sector since 2000, and ongoing innovation in the range and complexity of products and services offered. The larger credit unions were seen to be moving in the direction of providing a full suite of financial services to their members and engaging in speculative investments or non-financial business such as real estate. Cabinet Minute No of 2005 considered by Cabinet on July 7, 2005 and confirmed on July 14, 2005: Cabinet agreed that: the supervision of the financial activities of all credit unions should be assumed by the Central Bank of Trinidad and Tobago and integrated with the supervision of financial institutions licensed under the FIA, insurance companies and pension funds; that the draft legislative framework which was approved by Minute No. 59 of January 2004 be amended for the point above; Page 8 of 68

9 the Co-operative Societies Act, Chap. 81:03 be amended to remove the supervision of the financial activities of credit unions from the mandate of the Commissioner. 1.2 Vision of the Legislative Framework Credit unions are currently regulated under a legislative framework that governs the cooperative sector as a whole. In the proposed new framework credit unions will be governed under two Acts. The CUA will focus on prudential matters with specific emphasis on safety and soundness of credit unions and will be administered by the Central Bank. The CSA will cover the registration, membership, education and development of credit unions. This Act will continue to be administered by the Commissioner. Appendix II outlines the revised roles of the Commissioner with regards to credit unions under the CSA. Appendix III outlines the relevant sections of the CSA and Regulations that will be dis-applied as they relate to credit unions. An important aim of the new legislation is to ensure that, in terms of their safety and soundness, credit unions in Trinidad and Tobago are on equal footing with not only other domestic financial institutions but also with their counterparts in the most advanced international jurisdictions. As cooperative societies, credit unions value volunteerism, democracy, member equality and participation, co-operation, education and training of members, and the sustainable development of communities. In framing new legislation it is important not to lose sight of these characteristics which set credit unions apart and in fact make them unique within the financial sector. The process of framing the CUA must take cognizance of institutional context and local realities. In determining appropriate prudential criteria, governance standards and overall regulatory requirements, the Central Bank will keep in mind the institutional profile of the domestic credit union sector. In particular, the Central Bank is aware of the large size disparities and varying risk profiles among local credit unions, as well as differences in the levels of complexity of their operations. In light of consultations with stakeholders on the Policy Proposal Document, the Honourable Minister of Finance will recommend approval of the following: the Policy Proposal Document; the Draft Credit Union Bill and Regulations The Draft Credit Union Bill will be circulated to the credit union sector for consultation. It is also important that the legislative framework for credit unions remain responsive to the rapid changes taking place in the financial services industry both globally and domestically. With this in mind the Central Bank proposes to undertake periodic reviews of the legislation in consultation with the credit union sector. Page 9 of 68

10 1.3 Framework for Developing the Policy Proposal Document The positions put forward in this Policy Proposal Document were informed by the consultation process with the credit union sector and by inputs from the following sources: (i) The White Paper on Reform of the Financial System of Trinidad and Tobago (ii) The Note to Cabinet 1767 of June 17, 2005 (iii) The Credit Union Supervision Act (CUSA) dated August (iv) The Draft Credit Union (Financial Supervision) Act and Regulations, 2005 (v) The Co-operative Societies Act, Chapter 81:03 (vi) The Policy for Co-operative Societies- Towards the 21 st Century (vii) International Labour Organisation (ILO) recommendations 193 and 127 (viii) World Council of Credit Unions (WOCCU) Model Law 2 nd Edition (ix) The FIA Chapter 79:09, various drafts of the FI Bill and the FIA 2008 (x) The Companies Act 1995 (xi) Annual Reports of a cross section of credit unions (xii) Ongoing collaboration with the Ministry of Labour and Small and Micro Enterprise Development and the Ministry of Finance (xiii) Meetings held with the Co-operative Credit Union League of Trinidad and Tobago Limited, the Association of Co-operative Credit Union Presidents of Trinidad and Tobago, Central Financing Facility, Trinidad and Tobago Credit Union Stabilization Fund Co-operative Society Limited and officers of various credit unions (xiv) Research conducted on other jurisdictions: the Caribbean, Canada, USA, Ireland, Malawi and Australia Page 10 of 68

11 1.4 Objectives of the Central Bank under the Credit Union Act 1) to determine the safety and soundness of credit unions and protect members deposits and shares from undue loss; 2) to supervise credit unions to determine whether they are in sound financial condition and in compliance with the Act; and 3) to maintain confidence in, and promote the stability of credit unions and by extension the financial system of Trinidad and Tobago; The Governor shall keep the Minister of Finance informed of all developments which relate to the supervision of credit unions in Trinidad and Tobago. Page 11 of 68

12 2.0 DEFINITIONS Credit exposure a) the amount at risk arising from the extension of credit by a credit union or arising from investments including equities, guarantees, participations and acceptance, made by a credit union and is stated as the maximum loss that a credit union might suffer if a counterparty fails to meet an obligation; and b) contingent liabilities arising in the normal course of business, and which would arise from the drawing down in full of undrawn advised facilities, whether revocable or irrevocable, conditional or unconditional, that the credit union has committed itself to provide; Credit Union is a society which has as its main objects the promotion of thrift and the creation of a source of credit for its members and which is registered under the Cooperative Societies Act, Chapter 81:03. Commissioner for means the Commissioner appointed pursuant to the Civil Co-operative Service Act, Chapter 21:03 Development Deposit Entity Gross Revenue a sum of money paid to a credit union, whether or not evidenced by any entry in a record of the person receiving the sum of money, on terms under which the sum of money will be repaid or transferred to another account, with or without interest or a premium, either on demand or at a time or in circumstances agreed to by or on behalf of the depositor and that credit union; means a body corporate, wherever incorporated, a society with limited liability, a trust, a partnership, a fund or an unincorporated organization. Total revenue received before any deductions or allowances Institutional Capital Components of a credit union s institutional capital are the institutional capital reserves, retained earnings, permanent shares where applicable and any other form of capital so designated by the Central Bank Liquid assets Member the total amount of funds that are in the form of cash or any other instrument or investment that can quickly be converted into cash without significant losses includes a person or society joining in the application for the registration of a society and a person or society admitted to membership after registration, in accordance with the by-laws of that society and holding at least one share of the society Page 12 of 68

13 Minister means the member of the Cabinet to whom responsibility for Finance is assigned Officer Permanent Share Related party a) the Chairman, President, Secretary, Treasurer, manager, a member of the board of the credit union, a member of any committee that the credit union will be required by law to establish and any other individual designated as an officer by the by-laws of a credit union or resolution of the credit union s members; and b) any other individual who performs functions for the credit union similar to those performed by a person referred to in paragraph (a), whether or not the individual is formally designated as an officer. a share issued by a credit union to its members only that may not be purchased by the credit union and may not be redeemed by a member except where provided for upon the winding up of the credit union. (i) an officer of the credit union; (ii) a relative of a person defined above. Relative in respect of any person means the spouse, including a cohabitant as defined in the Cohabitational Relationships Act, parent, brother, sister, children, including the children of a cohabitational relationship, adopted children and stepchildren of the person; (iii) an entity that is controlled by a person above (iv) an entity in which a person mentioned above has a substantial investment, and a person or a member of a class of persons designated by the Central Bank as the related party of a credit union. (v) a person with a significant interest i.e. holding 10% or more of the shares of the credit union; Substantial Investment means an interest held or investment by a credit union in any entity which will be equal to or greater than twenty (20) percent of the voting securities of or equity interests in the entity. Society means as a society registered or deemed to have been registered under the Co-operative Societies Act Chapter 81:03. Page 13 of 68

14 3.0 THE SUPERVISORY SYSTEM The Central Bank has responsibility for overseeing the activities of commercial banks, non-bank financial institutions, insurance companies and pension funds. The growing importance of credit unions as providers of financial services and the increasingly large volume of funds being intermediated by this sector have been significant influences on the Government s decision to bring the financial activities of credit unions within the regulatory purview of the Central Bank. 3.1 Components of the regulatory framework i) The Credit Union Act ii) The Credit Union Regulations iii) The Central Bank Act iv) Guidelines 3.2 Scope of Responsibilities The enabling legislation for the financial regulation of credit unions is the CUA, which the Central Bank will be responsible for administering. The Central Bank also has a broader regulatory and policy-making mandate deriving from its own governing legislation, the Central Bank Act (CBA). The provisions of the CUA will therefore take precedence over all other Acts that govern credit unions with respect to financial matters with the exception of the CBA. Operationally, the Central Bank s powers under the CUA will be administered by the Inspector of Financial Institutions appointed by the President under section 7 of the FIA In regulating and supervising the financial activities of the credit union sector the Central Bank will: (a) Outline the business of a credit union; (b) Issue Operating Certificates to existing credit unions and process applications and issue Operating Certificates to new credit unions. (c) Restrict or revoke Operating Certificates; (d) Issue regulations and guidelines; (e) Set the prudential criteria that credit unions are required to meet; (f) Obtain information (including regular statutory filings and financial statements) in such format and at such frequency as the Bank from time to time may require; (g) Carry out assessments of the risk profile and of the safety and soundness of each credit union through the following; 1. Conduct on-site examinations of credit unions; Page 14 of 68

15 2. Conduct off-site supervision, which involves the continuous monitoring of the financial position and performance of credit unions and assessment of the credit union s compliance with the CUA and its Regulations through analysis of reports and information gathered. The Central Bank can also require credit unions to take action to comply with the provisions of the CUA or to discontinue any unsound or unsafe practice 3.3 Regulations and Guidelines Regulations are subsidiary requirements of legislation that have the force of law. Regulations under the CUA may cover any area under the Act such as the prudential criteria including permitted investments. The Central Bank also uses guidelines relevant to provisions in the CUA, to facilitate compliance with the law, addressing areas such as management practices, governance principles for credit unions, prudential criteria, risk management and internal controls. Proposal: a) The Minister, in consultation with the Central Bank, may make or amend regulations under the CUA by order subject to negative resolution of Parliament; b) Regulations or amendments to regulations will be published in the Gazette and at least one daily newspaper for the information of all credit unions as well as the general public; c) The Central Bank may issue guidelines relevant to any provision of the CUA. Examples of guidelines which have already been issued by the Central Bank, and which are intended to be applicable to credit unions, are those on:- Combating Money Laundering and Terrorist Financing Prudent Person Approach to Investment and Lending Fit and Proper The foregoing guidelines and others can be found on the website of the Central Bank at The Central Bank will conduct roll-out sessions to familiarize the credit union sector with the application of the guidelines. In preparing regulations and guidelines that will affect the credit union sector the Central Bank will consult with the credit union sector and the Commissioner. One such example will be the development of a Governance Principles for Credit Unions Guideline. Page 15 of 68

16 3.4 Secrecy and Sharing of Information Sub-sections (1) and (2) of section 56 of the CBA will be amended to require directors, officers and employees of the Central Bank to preserve secrecy with regard to all matters relating to the affairs of individual credit unions and any of their members. However, the Central Bank may find it necessary or prudent under certain circumstances to share information about a credit union or the sector with the Commissioner and other local or foreign regulators and will have the power to do so on a confidential basis. Proposal: a) The Central Bank may enter into a Memorandum of Understanding governing information sharing arrangements with another regulator. b) The Central Bank may also share information with law enforcement authorities as required for purposes such as combating money laundering and the financing of terrorism under the Proceeds of Crime Act, 2000 and the Anti-Terrorism Act, Rationale: The sharing of information with other local regulatory authorities, e.g. the Commissioner for Co-operative Development and the Securities and Exchange Commission (the SEC) or foreign regulators is essential to the effective supervision of financial entities by the Central Bank. This is especially true in cases where the action of another regulator is likely to have an adverse effect on the operations of a credit union. In such cases, the Central Bank should be able to take appropriate pre-emptive action, if necessary. 4.0 THE BUSINESS OF A CREDIT UNION The International Labour Organisation defines a cooperative as an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. A credit union is a society which has as its main objects the promotion of thrift and the creation of a source of credit for its members only and which is registered under the Cooperative Societies Act, Chapter 81:03. The First Schedule represents the classes of business in which a credit union can engage. The promotion of thrift as a primary object of a credit union at a minimum would include the issuance of shares and deposit taking as listed in the First Schedule, as a form of savings. The creation of a source of credit as a primary object should involve the investment of such funds in loans to Page 16 of 68

17 members or investment instruments. At a minimum this would therefore include Loans** or Investments** 1 as listed on the First Schedule. It is recognized that other types of co-operatives may grant loans and issue shares to members. The distinguishing characteristics of a credit union are that they can also accept deposits from their members 2 and must annually elect a Credit and a Supervisory Committee 3. Consequently, those other types of co-operatives whose objects allow them to grant loans and issue shares will not be restricted from carrying out these activities. Proposals: a) No society that holds the distinguishing characteristics of a credit union shall carry on any of the classes of business specified in the First Schedule unless it is granted an Operating Certificate by the Central Bank. b) It is reasonable to expect that over time credit unions may wish to expand the range of services they provide in order to meet their members changing needs and to remain competitive as providers of financial services. To accommodate these changes the First Schedule will be subject to amendment by order of the Minister on the recommendation of the Central Bank. c) Prior to the Central Bank granting approval for a credit union to conduct any of the activities listed in the First Schedule, it will be the responsibility of the credit union to meet the requirements of any other legislation, where applicable, for the conduct of these activities. 4.1 Non-financial Activities In addition to the classes of business listed in the First Schedule, credit unions may engage in non-financial activities up to a certain limit of assets and revenues. Nonfinancial activities encompass the provision of non-financial services and investing in real estate. These activities, for example travel agency services and property development can pose operational and other types of risk for the credit union and are therefore subject to certain limits. Proposals: a) Credit unions can conduct non-financial activities without breaching ANY of the following conditions: i) the credit union must be in compliance with all prudential criteria as set out in the Act and Regulations; 1 **Loans and Investments as listed in the First Schedule represent the basic activities that the credit union should be conducting 2 CSA Regulation 50 3 (e) 3 CSA Regulation 50 3 (c) Page 17 of 68

18 ii) iii) iv) the assets of the non-financial activities must be less than or equal to 5.0% of the credit union s asset base; the gross revenue generated from the non-financial activities must be less than or equal to 10.0% of the gross revenue of the credit union; reporting to the Central Bank on non-financial activities must be on a quarterly basis and be part of the annual audit for separate and distinct reporting to the AGM; Where members of a credit union wish to engage in non-financial activities that exceed the limitations set out above, these activities must be segregated from the business of the credit union. Therefore the credit union has the option of establishing non-financial cooperatives or any other form of business enterprise in order to do so as outlined in Model A or Model B below: Model A Two legally distinct cooperatives, one of which is the credit union and the other a separate cooperative which may be established to provide non-financial services. Both entities may be owned by the same members and operate under the same governance system. The nonfinancial cooperative would be funded with limits through the following methods: (a) Over a number of years, funds from net surplus may be allocated to a special fund for start-up purposes for both the funding and disposition, provided all conditions for the distribution of surplus and all prudential requirements are met. (b) On an ongoing basis and with the members agreement, transfer of all or a portion of surplus to the non-financial cooperative provided all conditions for the distribution of surplus and all prudential requirements are met. Therefore operating expenses for non-financial services should not be reflected as an expense in the books of the credit union. (c) After start-up, a loan from the credit union to the non-financial cooperative in accordance with the credit union s established lending policies and procedures and within established prudential limits There would be no limit on the value of funds that can be repatriated from the nonfinancial cooperative to the credit union. Model B Credit unions acquiring ownership interest in an entity, with each credit union maintaining an equity shareholding of less than 20% in the entity but not greater than 20% of each credit union s institutional capital. The minimum number of credit unions that could have ownership interest in the entity would be subject to legislative amendments to be determined. Page 18 of 68

19 Rationale: The sector requested that credit unions as cooperatives should be able to provide nonfinancial services to their members and assist members in whatever areas they requested. However, it should be emphasized that the inclusion of non-financial activities on a credit union s balance sheet can negatively impact it due to various factors including contagion risk from another sector, lack of expertise and understanding of the activity or lack of demand for the product. Therefore the Central Bank sees it fit to limit a credit union s involvement in such activities. 5.0 REGISTRATION AND OPERATING CERTIFICATE 5.1 Registration A society will be required to be registered as a credit union under the CSA. The Commissioner will be responsible for registration and de-registration of credit unions and will have jurisdiction over all constitutional matters pertaining to registration and by-laws. Credit unions will not be required to include any provisions of a financial nature in their by-laws. Credit unions wishing to do so may include any provisions of the CUA and the Regulations in their by-laws and it will be the responsibility of the credit union to ensure that any inclusions will be accurate.where there is a conflict between provisions in the bye-laws and the CUA, the CUA will take precedence. Also falling within the purview of the CSA will be the resolution of disputes between a credit union and its members and such constitutional matters relating to credit unions as the minimum required membership for the formation or continuation of a credit union, the rights of members, the election of officials, the conduct of annual general meetings and ensuring adherence to cooperative principles. 5.2 Operating Certificate-Existing Credit Unions Proposals: a) Immediately upon passage of the CUA each existing active credit union is permitted to continue to conduct its existing classes of business and will be issued an Operating Certificate. b) The Central Bank will use the records of the Commissioner for Co-operative Development as the basis for preparation of the Operating Certificates. c) Operating Certificates will not be issued to those credit unions that are in the process of being de-registered by the Commissioner. Page 19 of 68

20 d) Operating Certificates will not be issued to those credit unions that have been inactive within the period of 12 months prior to the passage of the Act. e) Each credit union that has been issued an Operating Certificate by the Central Bank will be required to display the Operating Certificate at its registered office and a copy at all branches. These certificates must be displayed in a prominent place, accessible to the public. 5.3 Profile of the Credit Union Proposals: a) The following information- which is currently required under the existing credit union legislation, the CSA- must be submitted to the Central Bank within thirty days of the coming into force of the CUA. : i) A copy of the credit union s Registration Certificate; ii) iii) iv) A copy of the credit union s by-laws in existence upon passage of the Act; A list of the current officers of the credit union; The credit union s Annual Budget; v) Copies of the three most recent audited financial statements or annual reports. b) Within a reasonable period of time following the thirty day period, the Central Bank may publish a list of the credit unions that have submitted the above information in a daily newspaper indicating their compliance with this section. c) The Central Bank will, for a period not exceeding 6 months, make all reasonable efforts to contact those credit unions that are non-compliant via registered mail at their registered offices or by any other reasonable means. The Central Bank will inform the non-compliant credit unions that they will be liable to prosecution or to the cancellation of their Operating Certificates where the required information is not provided within a stipulated timeframe. d) Upon expiration of the stipulated timeframe, the Central Bank may take any enforcement action as it sees fit under the Act inclusive of cancellation of the Operating Certificate; Page 20 of 68

21 5.4 Operating Certificates - New Credit Unions Proposals: a) A new credit union will be required to obtain an Operating Certificate from the Central Bank to conduct the classes of business listed in the First Schedule before commencing operations. b) The Central Bank reserves the right of approval of the classes of business for which a new credit union applies based on an assessment of the application and the risk characteristics and complexity of the products or services to be provided. c) A period not exceeding thirty-six (36) months will be allowed for new credit unions to meet the required level of institutional capital d) The credit union will be required to apply to the Commissioner for registration. During the registration process the credit union shall apply to the Central Bank for an Operating Certificate and its application must be accompanied by:- i) a copy of the credit union s application for a Registration Certificate; ii) a copy of the credit union s proposed by-laws; iii) a three-year Business Plan demonstrating financial viability and the ability to satisfy the prudential standards under the CUA; the business plan will include, among other things, projections of deposits and shares, loans, capital level and growth in assets and membership; iv) a copy of the credit union s proposed investment and credit policies including procedures for dealing with loan delinquency. v) verification of the credit union s administrative and managerial capacity to conduct the proposed lines of business vi) such further information as the Central Bank may require. f) Where the Commissioner registers a credit union, that credit union shall provide the Central Bank with the following documents so as to complete the process for the issuance of an Operating Certificate: a certified copy of the Registration Certificate; and a copy of the credit union s by-laws and proof of approval by the Commissioner. g) As an important condition for granting an Operating Certificate, the credit union will be required to provide to the Central Bank, no later than six weeks following the date of its registration, a list of the elected directors and other officers of the credit union and a statement signed by the President that the elected officers satisfy the fit and proper criteria h) The determination that a person satisfies the fit and proper criteria is to be made by the credit union itself and is subject to review by the Central Bank. Page 21 of 68

22 i) Each credit union that has been issued an Operating Certificate by the Central Bank will be required to display the Operating Certificate at its registered office and a copy at all branches. These certificates must be displayed in a prominent place, accessible to the public. 5.5 Application to vary or expand the classes of business Credit unions that are issued Operating Certificates and subject to supervision must clearly define their permitted activities. The Central Bank will have the right to vary or expand classes of business and to set criteria and reject applicants that do not comply with requirements of the Act. Proposals: a) Any variation or expansion in the classes of business will require approval from the Central Bank. b) A credit union that has been issued an Operating Certificate will not be permitted to vary or expand its existing range of business activities as outlined in the First Schedule, without being in compliance with the CUA. c) The Central Bank may vary the institutional capital and other prudential requirements and may also subject the credit union to additional criteria as a condition of such approval to expand the classes of business. d) Where the Central Bank refuses to vary or expand the classes of business, it will provide reasons in writing and credit unions will have the right of appeal to a Judge in chambers. 5.6 Restriction and Revocation of an Operating Certificate Proposals: a) The Board of the Central Bank may restrict the operations of a credit union under certain circumstances, such as where the credit union has failed to comply with an obligation under the CUA or violated a direction. The Board of the Central Bank will inform the board of a credit union when its Operating Certificate is being restricted and when the restrictions have been removed. Notice to members and the general public will also be published in the Gazette and in a daily newspaper. b) The Operating Certificate may be restricted by the imposition of conditions deemed necessary for the protection of members deposits and shares, including but not limited to: i) Requiring the credit union to take specified corrective action; Page 22 of 68

23 ii) iii) Limiting the granting of loans, the acceptance of deposits and the issuance of withdrawable shares; Limiting any other business activities in which the credit union may be engaged. c) In other circumstances, such as where the credit union remains in violation of a direction or has ceased carrying on the business of a credit union, the Board of the Central Bank may revoke its Operating Certificate. The Board of the Central Bank must inform the board of a credit union when its Operating Certificate is being revoked. Notice to members and the general public will also be published in the Gazette and in a daily newspaper. d) Where the Operating Certificate has been revoked, the Board of the Central Bank take steps to wind up the credit union s operations. e) The Commissioner will de-register a credit union which has been wound up in keeping with a decision by the Central Bank. f) The credit union will continue to be liable for any obligations incurred or assumed prior to the revocation of an Operating Certificate. Subsequent to the revocation however, the credit union shall not continue to incur obligations towards members except where expressly authorized by the Central Bank. g) The Board of the Central Bank may revoke the Operating Certificate of a credit union if within the period of 12 months of the issuance of the Operating Certificate, the credit union has failed to conduct the business of a credit union. h) The Board of the Central Bank may also revoke the Operating Certificate of a credit union if it has commenced the business of a credit union but has subsequently not conducted that business for a continuous period of more than six months. 5.7 Investigation of a Society Proposals: a) Where the Central Bank has reason to believe that a society is conducting the business of a credit union without being in possession of a valid Operating Certificate issued under the CUA, the Central Bank will commence investigations into the operations of that society and may require information from, inquire into and examine the affairs of that society. b) The Central Bank may take any action that it sees fit to ensure that the society discontinues the activity in question, including, without limitation, the issuance of a directive. Page 23 of 68

24 c) It shall be an offence for a society to conduct the business of a credit union unless granted a valid Operating Certificate under the CUA. The process of investigation will be detailed in Regulations. 6.0 GOVERNANCE PRINCIPLES FOR CREDIT UNIONS 6.1 General Comment Governance principles for credit unions refer to the framework by which the Board and management of credit unions are held responsible and accountable for the operations they oversee. These responsibilities of the Board and management include achieving an appropriate governing structure of the credit union, preserving the continuity of future credit union operations, creating balance within the organization and remaining accountable for their actions. Good governance principles therefore, require that the relationships among management, the Board, members, regulators and other stakeholders are transparent, fair and well balanced. The governance system must be suited to the complexity and sophistication of credit unions, which have become more sophisticated in their investments, and are facing more pressure from their membership for new products and services as well as securing satisfactory returns on their deposits and shares. 6.2 Governance by the Board of Directors The following provisions will be introduced in order to promote good governance principles by credit unions: Proposal: a) Credit union members will decide if multiple directorships are allowed. A person nominated for directorship of a credit union must declare whether he/she is a director in any other credit union to the Nomination Committee where applicable and at the Annual General Meeting; Rationale: Conflicts of interest can arise where a director serves on the board of more than one credit union. Directors can be hampered by ties to other credit unions, which can discount the independence, intelligence and fortitude of those serving on the boards of multiple credit unions. The full disclosure of such arrangements to the membership of the respective entities allows the members to be aware of these potential conflicts. Page 24 of 68

25 Proposal: b) Individual board members will be allowed to serve a maximum of two consecutive terms, with each term being no longer than three (3) years, and with the possibility of re-election after a one-year waiting period. Where a credit union would be out of compliance with this provision, it would be required to remedy this situation within eighteen (18) months of the Act coming into effect. Rationale: A system of constantly changing executive reinforces the fact that the entity is not about any one person but a collection of individuals that are allowed an equal opportunity for participation in setting policies and making decisions in the credit union. It is important that board members continue to generate new ideas and remain productive during their tenure on the board. Credit unions must therefore be cautious to prevent individuals from becoming entrenched in such positions to the extent that it hinders the generation of progressive business sense and ultimately the growth of the entity. Members democratic right to elect persons of their choice from the membership to serve on the board is retained and confirms the co-operative principles within the movement. It is noted that the prescribed limit of two terms is consistent with the limit that is now applied by those credit unions that have limits in their bye laws. Proposal: c) Given the importance of the Board of Directors in the governance of credit unions, Board members should have certain minimum qualifications for the role. Accordingly, a Board member must:- i) be an individual no less than 18 years old; ii) be of sound mind and not have been found by any court to be of unsound mind; iii) be a member of the credit union; iv) never have been convicted by a court for an offence involving violence, fraud, or any form of dishonesty; v) never have been adjudicated bankrupt by a court in any jurisdiction; vi) never have been a director, officer or manager of a credit union whose Operating Certificate was revoked during his tenure in office, unless the revocation was due to voluntary winding up or voluntary amalgamation with another credit union; vii) have sufficient knowledge and understanding of the business and overall financial operations of a credit union; viii) meet the fit and proper criteria. Page 25 of 68

26 Proposal: d) Members of the Board and statutory committees and officers must meet and, where relevant, maintain the following Fit and Proper criteria: i) honesty, integrity, fairness and reputation; ii) competence, diligence, capability, soundness of judgment; iii) financial soundness, that is, the member should demonstrate prudence in the management of his own financial affairs; iv) with regard to the previous conduct, business activities and financial matters of the person, there is no evidence that he has: i) committed an offence involving fraud, violence or other dishonesty; ii) been delinquent in meeting payment obligations; iii) engaged in business practices that appear to be deceitful, oppressive or improper (whether lawful or not) or which otherwise reflect discredit on his method of conducting business; iv) an employment record which shows that he carried out an act of impropriety in the handling of his employer s business; v) engaged in or been associated with any other business practices or otherwise conducted himself in such a way as to cast doubt on his competence and soundness of judgment. e) The responsibility for establishing the fitness and propriety of persons covered by this provision, and for determining the process by which this is done, will rest with the credit union but will be subject to review by the Central Bank Rationale: Board members are expected to have a minimum level of integrity and competence to serve their credit union. The proposed legislation ensures that the power to determine fitness and propriety of persons to serve on the board and committees of credit unions is retained by the membership. 6.3 Responsibility of the Board The Board of credit unions has a fiduciary responsibility to the members. Accordingly, the directors should be held to a high standard of care. With the onus of greater transparency in business and more information being provided, it is appropriate that legislation stipulate the minimum duties and responsibilities of directors and management. Page 26 of 68