Credit unions may be given the option to nationalize. What challenges will they face?
For many years, a number of credit unions across the country have sought the opportunity to operate across provincial borders in order to help increase their footprint and fund strategic growth. Now the federal government has proposed Bill C-9, allowing credit unions to operate federally, reaching new markets and giving Canadians more choice in financial services.
Bill C-9 proposes to amend the Bank Act, providing a framework for credit unions to incorporate and operate across all provincial borders. But what does this mean for credit unions looking to expand and how easy will this be?
A Federal Charter: What Will It Take?
Presuming that Bill C-9 becomes law, there will be expenses and administrative requirements attached to converting from a provincial to a national credit union.
Primary among these requirements will be an application of incorporation to the Office of the Superintendent of Financial Institutions (OFSI).
Apart from provincial and national central credit unions, credit unions are not currently supervised by the OSFI. Federal credit unions will have to meet the basic requirements of a bank charter. What are some of the requirements that will need to be met?
- The application process for a charter, and the adjustments required to qualify for a charter, can be time and labour intensive and complex. Credit union executives should seek the expertise of people who have worked with bank charters and issues in these areas to help ensure that their applications are in the best possible state for consideration.
- Governance structures at the board of directors and management levels should be considered and any changes addressed. While credit unions have existing governance policies and practices in such areas as risk management and compliance management, many of these may need updating and formalization to comply with OSFI requirements.
- Information technology governance and systems are additional areas of consideration due to the possibility that a local credit union may have to convert its systems to be able to service a national customer and branch network. A key objective for credit unions in expanding cross-provincially is the ability to leverage growth opportunities through consolidation or organic growth. From a systems perspective, however, growth can also bring challenges in the form of the scalability of existing systems or the capacity of current systems to deal with an increasingly complex business model as a result of new product or service offerings. The costs of conversion and the issues of software legacy and licensing can be substantial should a conversion be required.
There are other issues as well, such as establishing a national branch network, but suffice to say that a national expansion would be a large and ambitious project. These issues may seem daunting at first blush; however, this is a well-trodden path. The process is well established and with the right approach and expertise, the experience need not be a painful one.
Changing Banking Landscape?
The reasons for change have existed for many years. The growth and consolidation of the credit union system reached a point where some credit unions believed that the provincial restriction was becoming a competitive disadvantage. There is some surprise in credit union circles that the federal government decided to make this change through the Bank Act instead of the Cooperative Credit Associations Act. However, the creation of a federal credit union option in the Bank Act means that most of its provisions would also apply to federal credit unions.
Responding to the announcement, the Canadian Bankers Association said it "welcomes new competition into the marketplace, but at the same time it is essential that any new type of national financial institution operate on a level playing field with other players in the marketplace." This response begs the question, how much will this development change the competitive balance in the Canadian financial services sector?
- It is easy to make too much of the competitive fallout from Bill C-9. After all, hundreds of credit unions have been operating branches in Canadian communities for decades—competing side by side with banks. Many credit union branches exist in communities deemed too small to support a profitable bank branch, which eliminates the prospect of competition altogether.
- There is limited overlap in the services offered by banks and credit unions. Credit unions tend to be strong in personal deposit accounts and loans, such as residential mortgages, as well as services to small business.
- It is unlikely that we will see a stampede of credit unions applying for a federal charter. Not only will it be costly and administratively cumbersome for a credit union to expand nationally, but most credit unions will also want to preserve their identity as community-based organizations. They will move cautiously onto a national stage.
In fact, there are three types of credit unions that we believe would be most interested in considering the federal option:
- A small group of the largest credit unions with the size and scale to go national
- Some mid-sized credit unions that may benefit from expanding across provincial borders
- Credit unions sharing the same affiliation or serving like-minded communities in more than one province that could benefit from economies of scale.
Bill C-9 represents the evolution of the Canadian financial services industry. It undoubtedly means more to credit unions and the credit union movement in the long term than it should mean to any competing faction in the short term. With those broader horizons will come a lot of hard work, which credit unions have anticipated. It may be time to roll up the sleeves.
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