Annual Report

Transcription

1 Annual Report

2 Mission We instill public confidence in Saskatchewan credit unions by guaranteeing deposits. As the primary prudential and solvency regulator, we promote responsible governance by credit unions and advocate their strength and stability. Values Values guide individual and organizational behaviour. The Corporation s values are reflected in its Code of Conduct which provides a common frame of reference for staff, management and the board in fulfilling the Corporation s mission and strategic focus. Co-operation: As part of the co-operative financial services system, we respect co-operative principles and support credit unions in enhancing their strength and development by working together. Honesty and Integrity: We perform our duties conscientiously with the highest level of honesty and professional integrity. Fairness: We approach issues and decisions with common sense, sound judgement, fairness and consistency. Responsible Regulation: We strike an appropriate regulatory balance that effectively protects depositors without unduly impairing credit unions ability to compete in the market. Leadership: We use our knowledge of the credit union system and the financial services industry to anticipate future trends and proactively respond to our environment. We demonstrate leadership provincially and nationally by advocating positive change that contributes to the strength and stability of the credit union system. Teamwork and Respect: We work as a team to achieve goals and progress towards our common vision. We recognize that people are the key to success. We consistently treat people with dignity, respect, fairness and the highest standards of ethics. We demonstrate co-operation when working with others, encouraging questions that generate innovative ideas and creative solutions. Credit Union Deposit Guarantee Corporation P.O. Box Albert Street Regina, Saskatchewan S4P 3G8 Phone: (306) Fax: (306) Website: cudgcweb@cudgc.sk.ca

3 TABLE OF CONTENTS.. Report from the Chair. 2 Report from the CEO. 3 Corporate Governance. 4 Corporate Governance Framework 4 Board of Directors. 5 Executive Management. 8 Code of Conduct. 9 Mandate. 10 Management Discussion and Analysis. 11 Strategic Focus Areas. 11 Operational Activities. 16 Enterprise Risk Management. 19 Financial Summary. 21 Management s Responsibility. 23 Independent Auditor s Report Financial Statements. 25 Legislative and Governance Model. 37 Profile of the Saskatchewan Credit Union System 39 System Performance. 41 Saskatchewan Credit Unions. 44

4 Report from the Chair I am pleased to report that 2014 was another successful year for Credit Union Deposit Guarantee Corporation of Saskatchewan. Credit unions continued to perform well despite significant economic, competitive and regulatory challenges. This allowed the Corporation to focus on fulfilling its mandate of protecting member deposits and supporting the strength and stability of the credit union system. We saw significant change in the Corporation s board this year, with both government appointees leaving. We welcomed Clare Isman to the board when Rae Haverstock retired from the Ministry of Finance. Susan Amrud joined the board when Rod Crook took on new responsibilities within the Ministry. I wish Rae and Rod well and thank them for their valuable insight and contributions over the years. Like many organizations, the Corporation has developed a heightened awareness of governance issues. Our board takes an active role, ensuring the Corporation has appropriate checks and balances in place. Our 2014 self-assessment results show that the group feels comfortable and confident in its role. It is a pleasure serving with people who are so engaged and diligent. It certainly makes the board s job easier knowing the Corporation is run by a strong, stable executive team backed by a highly motivated group of professionals. The Corporation is not a large organization, but it never fails to impress me. Saskatchewan is one of only a few jurisdictions that has maintained its fund at the target level and consistently meets its obligations to depositors without the need for government funding. I particularly appreciate the way the Corporation supports strong, stable credit unions by ensuring leaders are well-prepared for their evolving roles in a fast-changing financial service industry. I believe this proactive approach and unique relationship with credit unions contributes greatly to the success of the system as a whole. Although the Corporation has strong statutory powers, credit unions do not see their relationship with us as adversarial. The Corporation s oversight and monitoring of credit unions is very thorough and sophisticated, and credit unions have readily adapted to the high standards set by the Corporation over the years. Although Saskatchewan credit unions have always been proactive, there are challenges on the horizon. Keeping up with expensive technology and the burden of growing regulatory requirements challenges the province s smallest credit unions. We have seen significant consolidation over the years and this will continue as credit unions look to mergers to maintain profitability and efficiency in this tight market. In true co-operative fashion, many have found creative ways to overcome these barriers by working together. These efforts have met with great success to date. However, as the pace of change accelerates, this approach may not be sufficient. The Corporation continues to engage with boards and management to help them understand the issues and plan for a sustainable future. High on the Corporation s agenda in 2014 were several changes in federal policy, which raised a number of questions about what will happen when regulatory responsibility for provincial centrals moves from the federal to provincial government. This change will likely have significant implications for the Corporation as well as Saskatchewan credit unions. Although there are many unknowns at this point, the Corporation s strong working relationship with the Saskatchewan government and its peers across the country will put us in good stead as we participate in these fundamental discussions. These developments certainly complicate the work of the Corporation. It will be no easy feat to keep pace with changes in international standards while playing a role in the development of a new provincial regulatory framework. However, I am confident that the Corporation and Saskatchewan credit unions are up to the task. Working together we will ensure appropriate systems and structures are in place to support a strong, stable and independent Saskatchewan credit union system. Daniel Ish 2

5 Report from the CEO It was another strong year for the Corporation and Saskatchewan credit unions alike. Credit unions demonstrated sound performance with another year of record profitability in 2014, while the Corporation made great progress in its work. Despite the ongoing pressure of low interest rates, strong competition and increasing regulatory requirements, credit unions in this province continue to outperform their peers across the country. With the slowing of the provincial economy, growth moderated somewhat, but careful attention to cost containment kept credit unions efficient, competitive and profitable. I would like to acknowledge the tremendous progress credit unions have made in keeping pace with ever-increasing regulatory expectations. Most recently they successfully adjusted to new Basel III capital rules, continuing to hold capital well in excess of minimum regulatory standards. Although loan growth outpaced deposit growth in 2014, Saskatchewan credit unions remain among the most liquid in the country and are well-positioned to meet new industry-based liquidity requirements coming in This success makes the Corporation s job much easier, allowing us to focus on maintaining a regulatory regime that reflects the broader industry. In 2014 this included issuing guidance in the areas of corporate governance and residential mortgage underwriting as well as revising the tools and processes used to assess credit union risk, risk management practices and corporate governance. Internally we further evolved our enterprise risk management process and started work to update the software used to manage our relationships with credit unions. We also completed phase 1 of our records and information management project. The fact that the Corporation consistently meets its objectives is a tribute to our hard-working, dedicated staff. I say it often, but it is very true: our employees really are the Corporation s greatest asset. I am extremely proud of the work they do to ensure the Corporation remains an industry leader with a regulatory framework that allows us to hold credit unions to standards consistent with those placed on federally-regulated institutions. Perhaps the most significant development in 2014 was policy changes at the federal level that will see responsibility for regulating credit union centrals fall to the provinces. Unlike most provinces, Saskatchewan has no legal framework in place to accommodate this move. Since Centrals play a key role in liquidity management and are a gateway to the national payments system, the change raises several complex questions for the future of the credit union system and the role of the Corporation. We are actively engaged in provincial and national discussions on the topic with the goal of influencing an appropriate framework for Saskatchewan credit unions. This issue will receive significant focus in Although it brings a level of uncertainty, I am confident that the Corporation and Saskatchewan credit unions are well-positioned to make the necessary adjustments and continue to operate from a position of strength. Garth Melle 3

6 Corporate Governance Corporate Governance Framework Credit Union Deposit Guarantee Corporation guarantees the full repayment of deposits held in Saskatchewan credit unions. As the first deposit guarantor in Canada, the Corporation has successfully guaranteed member deposits since Strong governance practices are just one way the Corporation demonstrates the strength of its regulatory regime. The Corporation is directed and controlled according to a framework that identifies the four main roles in the governance process and outlines the relationship between board and management. Role Board Responsibilities Management Responsibilities Leader Setting corporate direction Steward Ensuring an effective control environment and allocation of resources Reporter Presenting a fair and objective picture of the organization to stakeholders Overseer Exercising effective control Participates in setting strategic direction and provides strategic oversight Functions independently from management Approves corporate objectives and performance targets Approves business plan and policy Selects and retains qualified and competent management Ensures adequate and effective risk management Ensures the effective allocation, use and protection of all resources, taking the Corporation s risks into account Approves policies for communicating effectively with stakeholders Sets the tone at the top Monitors operating and financial performance Ensures compliance with legislation and code of conduct Ensures it receives appropriate information Monitors the internal control and management systems Obtains independent verification Leads development of strategic options and implements strategy Presents continuous improvement initiatives Supports the board in implementing governance processes to guide the work of the board and its committees Develops and implements enterprise risk management strategies and processes Develops appropriate information for communicating with the board and stakeholders Develops an appropriate control environment including the governance approach, organizational structure, management style, communication style, and policies and procedures 4

7 Board of Directors Daniel Ish Lyn Kristoff Dean Walde Keith Nixon Susan Amrud Clare Isman Tim Ward The Corporation s board of directors governs the organization s business and affairs. The board sets strategic direction and ensures that the Corporation s efforts reinforce the strength and stability of Saskatchewan credit unions. The Credit Union Act, 1998 sets out the composition of the Corporation s board. It calls for representation from the Saskatchewan credit union system, the provincial government and the public. The board includes: three directors appointed by Credit Union Central of Saskatchewan (SaskCentral), two of whom must be independent of the credit union system the Chief Executive Officer of SaskCentral or nominee the Deputy Minister of Justice or nominee the Deputy Minister of Finance or nominee one director appointed by the Government of Saskatchewan, who is independent of the provincial government As of December 31, 2014 the following sat on the Corporation s board: Daniel Ish (Chair), SaskCentral independent appointee Former Dean of Law, University of Saskatchewan and Former Chief Adjudicator of the Indian Residential Schools Adjudication Secretariat (Canada) Appointed to board in 2010 Location: Saskatoon Lyn Kristoff (Vice-Chair), SaskCentral independent appointee Retired Vice-President, Finance and Corporate Controller, Saskatchewan Wheat Pool Appointed to board in 2008 Location: Regina Dean Walde, SaskCentral appointee Agricultural producer, former member of Saskatchewan Agricultural Council Appointed to board in 2013 Location: Neilburg, SK Keith Nixon, Chief Executive Officer, SaskCentral Chief Executive Officer, SaskCentral Appointed to board in 2012 Location: Regina Susan Amrud, Deputy Minister of Justice nominee Associate Deputy Minister, Ministry of Justice Appointed to board in 2014 Location: Regina Clare Isman, Deputy Minister of Finance nominee Deputy Minister of Finance Appointed to board in 2014 Location: Regina Tim Ward, Government of Saskatchewan independent appointee Retired Commercial Account Manager, Affinity Credit Union Appointed to board in 2011 Location: Saskatoon 5

8 Audit committee An audit committee oversees the integrity of the Corporation s financial reporting and controls. The committee reports regularly to the board about the Corporation s: financial reporting internal control systems relationship with auditors adherence to policy and regulatory requirements risk management and business continuity plans legal and ethical conduct The committee also preserves the independence of external and internal auditors, and ensures the Corporation applies appropriate due diligence in its controls, accountability and financial reporting. As of December 31, 2014 the following sat on the audit committee: Lyn Kristoff (Chair) Keith Nixon Tim Ward (replaced Rod Crook) Board and committee meeting attendance In 2014 the Corporation s board held five meetings, one of which was a strategic planning session. The audit committee met three times. Director attendance at meetings is outlined below. It includes directors who left (*) or joined the board mid-year. Board Name Meetings attended Ish 5/5 Kristoff 5/5 Walde 5/5 Nixon 5/5 Amrud 1/2 Crook* 3/3 Isman 2/2 Haverstock* 1/3 Ward 4/5 Audit Committee Name Meetings attended Kristoff 3/3 Nixon 3/3 Crook* 1/1 Ward 1/1 6

9 Board and committee remuneration Director remuneration is designed to recognize effort and dedication, and to provide reasonable compensation for time involved. The Corporation compensates directors fairly and consistent with rates in affiliated organizations. Directors claim honorarium and per diem allowances at their discretion. The two government directors and SaskCentral s CEO have chosen not to receive remuneration from the Corporation. In 2014 the Corporation paid director compensation in the amount of $68,314. This includes honorariums, per diems and other benefits as detailed below: Name Honorarium Per Diem Benefits Ish 15,000 8,000 1,247 Kristoff 7,500 8,025 1,042 Walde 7,500 6, Nixon Amrud Crook* Isman Haverstock* Ward 7,500 4, Totals 37,500 27,025 3,789 7

10 Executive Management Garth Melle C.A. Hatlelid Brent Schellenberg Linda Jacob The executive management team provides strategic vision, leadership and direction to the Corporation. The Corporation is led by: Garth Melle, Chief Executive Officer Garth has 38 years of credit union system experience, including credit union management and leadership roles in business development, product and service development, information technology and strategic initiatives. Garth was with the Corporation from 1992 to 1994 in loss prevention, returning in 1999 as Director of Operations. Garth has led the Corporation as Chief Executive Officer since C.A. Hatlelid, Vice-President Regulatory Policy and Prevention C.A. has 21 years of financial industry experience, including corporate finance, investment management, treasury, risk management, policy development and compliance. C.A. joined the Corporation in 2003, and has led the Regulatory Policy and Prevention team since Brent Schellenberg, Vice-President Risk-Based Supervision Brent has 31 years of credit union system experience. He has worked in corporate finance, investment management, risk management, policy development, loan portfolio management, sales leadership and information technology. Brent joined the Corporation in 2006, and has led the Risk-Based Supervision team since Linda Jacob, Vice-President Corporate Operations Linda has 38 years of credit union system experience in areas including information technology, project management, quality assurance, change management and training. Linda joined the Corporation in 2008 and has led the Corporate Operations team since

11 Code of Conduct All directors, executive, employees and contracted resources must adhere to the Corporation s Code of Conduct. The code outlines responsibilities and guides the conduct of professional duties. It is reviewed for relevance every two years and addresses the following: compliance with laws, regulations and proprietary rights integrity of corporate records and communication privacy and confidentiality of corporate information fair dealing with employees, suppliers and service suppliers corporate political, social and environmental responsibility freedom from workplace harassment, violence and solicitation protection and proper use of corporate assets reporting of dishonest or suspected dishonest activities conflicts of interest Each year, executive and employees of the Corporation acknowledge understanding of, and compliance with, the Code of Conduct. The Corporation reports annually to the board on compliance with the code. 9

12 Mandate Credit Union Deposit Guarantee Corporation is the principal regulatory authority for Saskatchewan credit unions. The Corporation instills confidence in credit unions by guaranteeing deposits and promoting responsible governance, strength and stability. The Corporation is responsible for guaranteeing the full repayment of deposits held in Saskatchewan credit unions. It also manages and maintains a guarantee fund consistent with industry standards. Other primary responsibilities include establishing and ensuring compliance with the Standards of Sound Business Practice (the Standards). The Corporation has authority to direct credit unions to take immediate action on any issue that may put depositors funds at risk. However it respects each credit union s right to govern its own affairs, focusing on regulating them rather than managing them. We take a co-operative and respectful approach to working with credit union boards, managers and employees. The Corporation depends on credit union skills, experience and risk management processes to provide an effective first level of deposit protection. We believe the most effective way to protect depositors is to contribute to the strength and stability of credit unions. This focus on prevention and the Corporation s unique relationship with credit unions contribute to the fact that no depositor has ever lost funds on deposit in a Saskatchewan credit union. Three Levels of Deposit Protection The Corporation s success is the result of three levels of protection for deposits: 1. Credit unions are required to operate in a prudent manner by following the Standards and regulatory guidance established by the Corporation. Regular monitoring ensures credit unions operate according to the Standards. The Corporation has legislated authority to direct credit unions to take action on any issue that poses potential risk to depositors funds 2. Credit unions are required to hold sufficient capital to support operations, including business risks. The capital reserves of Saskatchewan credit unions remain among the strongest in Canada. 3. The Corporation s Deposit Guarantee Fund is one of the strongest deposit guarantee funds in Canada. It is funded through an annual assessment paid by credit unions and earnings from investments. Standards of Sound Business Practice The Credit Union Act, 1998 empowers the Corporation to establish Standards of Sound Business Practice for Saskatchewan credit unions. The Standards are approved by the Corporation s board of directors and filed with Financial and Consumer Affairs Authority. The Standards set minimum requirements for effectively managing credit union operations, including controlling business risks. The Corporation develops directives and guidance to help credit unions implement the Standards. The intensity of supervision will depend on the nature, scope, complexity and risk profile of the credit union. The objectives of the Standards are to: establish principles and minimum requirements for corporate governance and the control environment that contribute to the sound and prudent operations of credit unions and the protection of deposits prescribe limits and restrictions for credit unions in the context of sound business practices to manage and control exposure to risk The Standards emphasize the careful and practical judgement that would be exercised by a reasonable person in the financial services industry, having regard to: the objectives of the credit union all risks to which the credit union is exposed the amount and nature of the credit union s capital the regulatory compliance obligations of the credit union In addition to establishing and communicating the Standards, the Corporation: monitors credit union performance relative to the Standards follows up with credit unions whose performance falls below the Standards intervenes directly with a credit union if necessary 10

13 Management Discussion and Analysis Strategic Focus Areas The Corporation s main focus is fulfilling its mandate of ensuring the strength and stability of the credit union system and protecting deposits. In an annual planning process, the Corporation s board and executive management use a corporate risk report and performance measurements to establish key areas of strategic focus. In 2014 the following remained as strategic focus areas: Deposit protection and regulatory excellence Prevention Corporate excellence Each year we identify several specific key initiatives critical to our continued success that require focused attention and dedicated resources. Strategic and operating plans for 2014 were built on prior years progress, and focused on areas within the corporate, regulatory and business environments that require attention. Deposit protection and regulatory excellence The Corporation strives for excellence in regulation and deposit protection by employing industry best practices to fulfill its mandate. We provide responsible regulatory administration, balancing the need for effective regulation with the realities of the competitive marketplace and credit union environment. The Corporation s expectations of credit unions reflect the broader regulatory environment. Credit unions are held to standards comparable with those placed on federally and internationally regulated institutions. This supports prudent regulation and helps Saskatchewan credit unions maintain their right to self-determination and self-regulation. The Corporation plays an active role in championing an effective regulatory framework for Saskatchewan credit unions. This includes maintaining strong working relationships with regulators in Saskatchewan and beyond. These relationships help the Corporation influence positive change, manage jurisdictional issues and gain efficiencies that minimize regulatory burden for credit unions. Corporate performance Goal: A comprehensive deposit protection regime supported by responsible, balanced regulation Objectives Targets 2014 Performance Instill confidence in the safety and security of Saskatchewan credit unions Manage risk to the Guarantee Fund Provide fair and consistent regulation 90% of those surveyed believe deposits are safe or very safe 90% of credit unions surveyed believe regulatory processes are fair 95% 93% Key Initiatives Standards of Sound Business Practice The Standards provide a framework for effective regulation of credit unions. To supplement the Standards, in 2014 the Corporation published regulatory guidance to further clarify expectations for corporate governance and residential mortgage underwriting. In 2015 the Corporation will continue to research and respond to national and international regulatory developments. This includes developing new liquidity requirements for Saskatchewan credit unions based on industry principles and the Basel III framework. These new standards will consider the quality and amount of liquidity held by credit unions. Consultation with credit unions is scheduled for fall The Corporation will also prepare for developments related to the capital conservation buffer, accounting standards and the regulatory oversight of provincial centrals. Comprehensive review of risk-based supervisory framework The Corporation has spent two years reviewing and revising its supervisory framework to bring it in line with evolving 11

14 industry practices. Work in 2014 focused on revising the tools and processes used to assess credit union risk, risk management practices and corporate governance. A second round of consultation with credit unions was part of the process. In 2015 the Corporation will implement the revised framework, and update the models and technical tools that accompany the framework. Goal: Corporate financial strength Objectives Targets 2014 Performance Meet deposit protection financial obligations Demonstrate fiscal responsibility 1.4% to 1.6% of total credit union deposits in the Guarantee Fund Financial results meet 2014 budget 1.57% $5.3 million (actual) vs. $5.6 million (budget) Key Initiative Maintain costs Financial strength is paramount to the Corporation s mandate. In 2014 we continued to demonstrate fiscal responsibility by working to maintain costs and realize operating efficiencies where possible. In 2015 we will continue this approach. By using system resources and sharing costs with partners where possible, the Corporation can achieve economies of scale and operating efficiencies. Looking forward Beginning in 2015 the Corporation will undertake a comprehensive appraisal of our supervisory review processes, ensuring they align with the new supervisory framework and strengthening our risk-based methodology. This will include examining our approach to monitoring credit union compliance with market code. We will also address the implications of changes at the federal level that will see regulation of provincial centrals migrate from the federal government to the provinces. As a key stakeholder, the Corporation will address the implications of this change and support development of appropriate responses to mitigate risks related to changes in the legislative framework. 12

15 Prevention The Corporation s key risk management strategy is prevention. By investing in preventive programs and services, the Corporation supports sound, prudent credit union operations. Our objective is to encourage credit unions to act proactively, minimizing the need for the Corporation to react through intervention or assistance from the Guarantee Fund. Strong, stable credit unions help the system to operate effectively and inspire depositor confidence. As part of its preventive focus, the Corporation actively shares its perspective on credit union performance individually, in aggregate, and in relation to the broader industry. Aimed at credit union boards, these efforts support informed decision making. Corporate performance Goal: Credit union strength and stability Objectives Targets 2014 Performance Invest in programs that reduce risk to the Guarantee Fund Promote sound governance and strategic management in credit unions Foster positive working relationships 90% of credit unions surveyed believe regulatory processes are fair Stakeholder satisfaction at 90% >90% of credit union assets with composite risk of low to moderate Consolidated credit union riskweighted capital >10.5% 93% 100% 99% 12.69% Key initiative Preventive strategy The Corporation regularly interacts with credit unions to help enhance their governance and business practices, ultimately reducing risk to depositors. Our director orientation workshops and annual peer group meetings are successful examples of this. In 2014 we continued to support credit union governance by delivering educational programming for credit union directors through our director workshops. Over 70% of directors from Saskatchewan credit unions have attended a director orientation workshop since In 2015 the Corporation plans to re-evaluate the content and delivery channels used for the workshops. The Corporation also hosted peer group meetings with Saskatchewan s 36 smallest credit unions, representing nearly 15% of system assets. Discussions focused primarily on emerging trends for liquidity as well as the financial and risk profile trends of small credit unions. Looking forward In 2015 the Corporation will continue to engage boards and management in discussions on emerging strategic, policy and regulatory issues to support their understanding of the Corporation s regulatory requirements, expectations and direction. Emphasis will be placed on consultation around the Standards and new liquidity requirements. We will sponsor and develop additional targeted programming based on the composite risk profile of credit unions as appropriate. 13

16 Corporate excellence The Corporation strives for excellence in all aspects of its business, including effective strategic and operational planning processes. Clear objectives and strategies guide day-to-day activities. A communications strategy supports open, ongoing dialogue with stakeholders, and balances those efforts with conscientious treatment of confidential information held by the Corporation. The Corporation maintains a governance framework that includes policies to guide decisions, and articulate the authority and accountability of board, management and staff. Sound decision making is further promoted by an enterprise risk management framework that identifies and assesses risks to the Corporation and the credit union system. The Corporation fosters a constructive work environment that recognizes the contribution individuals make to organizational goals, and promotes teamwork and collaboration. This culture encourages leadership at all levels and supports continuous development. The Corporation relies on a skilled, professional team that understands the environment and the industry, demonstrates leadership with stakeholders, and manages change in complex situations. Ongoing investments in professional development ensure employees continue to evolve and grow. Corporate performance Goal: Sound governance and business practices Objectives Targets 2014 Performance Demonstrate best practices in corporate governance and strategic management Fulfill responsibilities professionally and with the utmost integrity Foster a constructive work environment Board governance self-assessment rating at 85% Audit committee self-assessment rating at 85% Organizational Effectiveness Inventory rate at 80% Organizational Culture Inventory rating of constructive styles >50th percentile 92% 96% 89% All categories 75th percentile 14

17 Key initiatives People The Corporation s people are its greatest asset. We continue to support and encourage a constructive culture with high employee satisfaction. Leadership development is integrated into the Corporation s performance management practices. While overall staff satisfaction (as measured by an organizational effectiveness inventory) dipped slightly from 91% to 89%, our staff turnover rate improved to just 3%. In 2015 the Corporation will continue its efforts to enhance corporate culture and build leadership capacity. The results of annual organizational effectiveness and organizational culture inventories will help the organization monitor progress and identify priorities. Enterprise Risk Management (ERM) framework The Corporation continues to evolve its ERM framework. In 2014 we developed risk tolerances that define the maximum risk the organization is willing to take for each of the principal risks monitored. This work will continue in 2015 as we put the approved risk tolerances into practice and work to clearly define and report on them. Technology systems The Corporation uses a proprietary system to manage relationships with credit unions. Work to update the software used to meet this business need began in 2014 and will be implemented in Changes to liquidity requirements will necessitate further changes to information systems in The Corporation will conclude development and implementation of the tools required to support the enhanced supervisory framework. We will also research alternatives for receiving the reports credit unions submit. Records and information management In 2014 the Corporation completed phase 1 of this project. This included developing procedures and training for management, credit union file archiving and disposition, legal contracts, and offsite physical storage. A plan for phase 2 will be developed in Unclaimed balances In 2014 the audit committee approved the recommended approach for handling unclaimed balances. In 2015 the Corporation will develop and implement corporate policies and practices, including updated internal procedures. Credit unions will receive requirements for the submission of unclaimed funds, along with the processes for inquiring about or claiming funds held by the Corporation. The Corporation will also develop an electronic search function that will be incorporated into the public website. Looking forward The Corporation s board strives for excellence and employs governance practices that are aligned with industry standards. In 2015 the Corporation will continue to refine the ERM Framework, enhancing reporting to incorporate risk appetite statements and tolerances. An annual board self-assessment will be used to identify professional development opportunities and areas where governance practices might be enhanced. 15

18 Operational Activities The Corporation s key operational focus is to fulfill its mandate of protecting member deposits and ensuring the strength and stability of the credit union system. To accomplish this core work, the Corporation is structured into three divisions: Regulatory Policy and Prevention, Risk-Based Supervision, and Corporate Operations. Regulatory Policy and Prevention This division ensures an effective and responsible framework for the regulation of Saskatchewan credit unions. It develops regulatory policy, executes the Corporation s preventive strategy and oversees the Deposit Guarantee Fund (the Fund). A key focus for this division is maintaining relevant standards of sound business practice and providing supplemental regulatory guidance for credit unions. Success in this area is linked to a commitment to adopt industry-best regulatory approaches, as well as to consult with credit unions and other key stakeholders in a timely, meaningful way. Through peer group meetings, the Corporation regularly interacts with credit unions on a variety of issues of mutual interest to help leaders better understand the Corporation s expectations. The Corporation also develops and sponsors other preventive initiatives, such as director workshops or training in fraud prevention and deposit services. Managing the Fund is one of this division s main functions. This includes leadership, oversight, strategy and policies related to the Fund, the size of the Fund and the annual assessment charged to credit unions to sustain the Fund. This division is responsible for asset allocation, the appointment of a portfolio manager and performance monitoring. All investments are acquired in accordance with the priorities of: safety of principle sufficient liquidity to meet the Corporation s cash flow obligations reasonable return The Corporation s asset liability committee meets regularly to review the investment strategy, the portfolio and compliance with policy. The committee reports to the board quarterly and the board reviews the Corporation s investment policy annually. Any changes in fund policy must be approved by the board. Risk-Based Supervision Risk-Based Supervision is responsible for credit union monitoring, intervention and regulatory approvals. Credit union monitoring programs ensure a comprehensive and effective assessment of credit union performance. Credit union intervention programs respond to elevated risk and performance deficiencies to limit impact to the Fund. About 40% of the Corporation s staff is dedicated to this division. The supervisory process assesses credit union performance and risk management processes. This ensures credit unions meet regulatory expectations and operate within an effective control environment. In addition to scheduled supervisory reviews, this division has ongoing contact with all credit unions. Each credit union submits quarterly financial reports, yearly budgets and external audit reports. Depending on size and complexity, mid-year forecasts and monthly board reports may be requested. Monitoring results are used to generate a composite risk rating by credit union and in aggregate. Credit unions require regulatory approval from the Corporation when they seek an exception to regulatory policy limits or enter into certain types of transactions, such as substantial investments or mergers. In 2014 the Corporation assessed 18 requests for regulatory approval. Corporate Operations This division fulfills corporate support requirements including: governance enterprise risk management (ERM) performance measurement, planning and budgeting business process support and information technology business continuity and disaster recovery accounting and reporting communication support services relationships human resources audit and compliance 16

19 Governance The Corporation s governance framework includes policies and practices that guide decisions and articulate the authority and accountability of board, management and staff. Governance self-assessments help identify opportunities for director development and enhanced corporate governance practices. Enterprise risk management An ERM framework outlines the Corporation s principal risks, risk tolerances and the actions taken to effectively monitor and manage risks. Corporate Operations produces a yearly corporate risk report summarizing management s risk assessment, including a consolidated risk map, overviews of each principal risk, a summary of its status and action planned to mitigate any impact. Performance measurement, planning and budgeting Through an annual planning process, the Corporation s board and executive use the corporate risk report and corporate performance measurements to identify key areas of strategic focus. Changes in the environment are also integrated into the process. This helps establish goals, objectives and key initiatives. Progress is tracked and results of the Corporation s efforts are measured and reported regularly. Business process support and information technology Corporate Operations manages the work of vendors that support technology systems. The division continually reviews technology systems to ensure they meet the Corporation s needs. The Corporation and its vendors use industry standard technology and processes, and follow best practices in security, privacy and integration of data. Business continuity and disaster recovery The Corporation s business continuity plan (BCP) addresses the need to recover operations from an unforeseen, significant business disruption. It addresses the risks that affect the Corporation s staff, facilities and business operations. An important part of the business continuity plan is a disaster recovery program that addresses the recovery of technical systems that support business functions. The business continuity and disaster recovery plans are reviewed regularly. In 2014 the Corporation reviewed and updated its BCP and conducted a successful disaster recovery test of the document library. Accounting and reporting Corporate Operations oversees accounting and reporting processes, and manages the relationship with an accounting services supplier. This work includes review and approval of accounts payable and routine transaction processing, monthly reporting and account reconciliations, quarterly financial statements and budget variance analysis, corporate tax, and annual external financial statements and note disclosure. Communication The corporate communications strategy and policies facilitate open, ongoing dialogue with stakeholders, balanced with the need for conscientious treatment of confidential information entrusted to the Corporation. Each year the Corporation runs a campaign to promote awareness of the deposit guarantee. The campaign is highlighted during October to coincide with Credit Union Day activities. 17

20 Support services relationships Through a support services agreement, the Corporation has access to specialized services and expertise that allow staff to focus on core operations. Support is contracted in areas such as: internal audit accounting and reporting marketing and communications Looking forward In 2015 the Corporation will complete its human resource review, focusing on its rewards and recognition program along with recommendations to ensure compensation remains competitive. Follow up on a previous leadership development assessment will help the Corporation gauge progress and identify areas requiring further attention. A test of the business continuity program is also planned. corporate administration distribution services facilities strategic support research information technology telecommunications human resource processes Human resources Regular surveys and team building events help the Corporation maintain an engaged and enthusiastic workforce. The Corporation recognizes the importance of continuing education and technical knowledge in the development and retention of a skilled, professional team. Employees are supported in completing advanced educational qualifications, including degree programs and industry professional designations. In 2014 the Corporation completed the bulk of a comprehensive review of its human resources policies and practices, benefits, and compensation. Audit and compliance Each year management works with the internal auditor to identify and assess risks which are used to create an internal audit plan. Internal audit reviews and reports to the audit committee the results of the internal audit plan and the year-end compliance process. Corporate Operations acts as liaison for the external auditor. 18

21 Enterprise Risk Management During the normal course of business, the Corporation is exposed to a variety of risks inherent to operating in the financial services industry. Enterprise risk management helps identify, assess and mitigate those risks across the Corporation. An enterprise risk management program outlines the Corporation s principal risks and risk tolerances, along with actions taken to effectively manage and monitor risks. This drives development of goals, objectives and strategies that guide the organization s strategic and business plans. It also helps the Corporation establish priorities and allocate resources. Twice a year, management analyzes the current operating environment and updates the risk assessment. The board reviews the corporate risk report annually at year end. Enterprise level risk appetite statements To define the level of risk the Corporation is willing to assume to achieve its objectives, the following enterprise level risk appetite statements have been developed: We will only restrict credit union activities by creating and enforcing regulations and guidelines that will allow credit unions to take prudent risks during the course of their business. We regulate with an emphasis on preventing the need for payouts to depositors. We will maintain the Fund at a level sufficient to instill confidence in credit union depositors and other stakeholders. We avoid actions that would damage the Corporation or credit union system s reputation in the eyes of our stakeholders. We maintain our operations at a level that supports our mandate. We will spend what is needed, but only what is needed, to acquire the capacity to regulate prudently risk assessment The 2014 risk rating assessment reflects the stability within our environment, the province and the Saskatchewan credit union system. Aggregate credit union performance is strong considering economic challenges and continued low interest rates. These factors contributed to stability in the risk ratings. For 2014 the Corporation saw a change in the level of risk in only one area: inter-jurisdictional risk. This is the risk of board and management failing to plan, monitor and set strategic direction in response to international, federal and/or provincial legislative and regulatory matters that may impact the Corporation and credit unions. The likelihood of this risk increased slightly as a result of recent developments at the federal level, which raise questions about fundamental approaches to liquidity risk management, supplementary funding assistance, unlimited deposit protection and the sustainability of provincial regulation for credit unions. Although the Corporation is actively monitoring the issue, many aspects are beyond our control. Management has increased interaction with other key stakeholders provincially and federally to ensure the issues are well-understood, the Corporation s perspective is heard, and the Corporation s plans and priorities reflect these developments. 19

22 The Corporation tracks 20 individual risks divided into the following five principal categories: Risk Category Definition Direction of Risk Risk to Depositors Strategic Risk Regulatory Risk Operational Risk Financial Risk Risks to the strength and stability of Saskatchewan credit unions arising from a broad range of economic and environmental factors that may impact depositors confidence. Risks associated with the overall effectiveness of the board and management of the organization, including the ability to develop and execute appropriate business plans and strategies. Risks associated with the failure to comply with laws, rules, regulations, prescribed practices or ethical standards within which the Corporation is governed. Risks associated with the performance of business functions or processes within the Corporation. Risks may arise from deficiencies or breakdowns relative to the control environment, technology and information systems, human capital or communication methods. Risks associated with the Corporation s ability to meet financial obligations and prudently manage its fiscal responsibilities. Legend Increased Unchanged Decreased 20

23 Financial Summary Deposit Guarantee Fund One of the strongest funds in North America, the Deposit Guarantee Fund (the Fund) began with credit union contributions in Now sustained by investment interest and annual assessments paid by credit unions, the Fund covers the costs of the Corporation s deposit protection and regulatory responsibilities. Three levels of deposit protection protect the fund. A regulatory framework ensures credit unions operate prudently, adhering to the Standards and regulatory guidance provided by the Corporation. Locally, credit unions maintain strong capital reserves. The Fund is the last level of deposit protection. The target range for the fund is 1.4% to 1.6% of total deposits, plus the amount of any deficiencies in credit unions regulatory capital. The range is set based on a percentage of deposits held by Saskatchewan credit unions. The Corporation aims to establish a range that instills confidence, comfortably accommodates all anticipated risks to the Fund during normal business cycles, and provides a cushion for more difficult periods. The current fund target range reflects the fact that Saskatchewan credit unions remain strong and stable, and have successfully evolved their capital and risk management practices. It also balances the Corporation s obligation to depositors with the cost to Saskatchewan credit unions. At December 31, 2014 the balance of the Fund was $267 million or 1.57% of total deposits. This is well within the Corporation s target range of 1.4% to 1.6%. Guarantee Fund Balance (in $ millions) Guarantee Fund Balance (% of total credit union deposits plus capital deficiencies) Guarantee Fund Balance Top of target range Bottom of target range