ALEXANDRIA, Va.–The NCUA has put out for 60-day comment a revised proposal that would require succession planning for all federally insured credit unions. The proposed rule defers to state regulators in cases where there are conflicting rules for state-chartered credit unions.
One change from the initial succession planning rules put forth by the agency in 2022 is the inclusion of a template aimed at easing the burden on smaller credit unions.
The vote was 2-1, with NCUA Chairman Todd Harper and Board Member Tanya Otsuka voting in favor.
According to staff presenting to the board during the July meeting—who said approximately one-third of credit union mergers are driven by the lack of a succession plan—changes in the proposal to the succession planning reflect suggestions from those who provided responses.
‘High Costs’
“Failure by a credit union board to plan for vacancies in elected and appointed positions, as well as the transition of its management can come with high costs,” staff told the board. “A FICU runs the risk of creating a leadership vacuum. It can disrupt operations potentially jeopardizing the credit union’s ability to adequately manage liquidity risk, address cyber security threats, or ensure continued compliance with consumer protection, Bank Secrecy and other critical responsibilities.”
Staff noted NCUA does currently assess succession planning as part of the CAMELS system’s management component, but there is no requirement that FICUs implement a formal, written succession plan.
The Specifics
In addition to what’s outlined above, the proposed rule:
- The succession plan would be required to cover members of the board, members of the supervisory committee, management officials and assistant management officials, senior executive officers and any other credit union personnel the board of directors deems critical given the size, complexity and risk of operations.
- The succession plan would also be required to address the members of the credit committee and loan officers where such officials are involved in the daily review of loans
- The succession plan would be required to address the FICU’s strategy for recruiting candidates.
- The strategy must consider how the selection of diversity among the employees covered by the succession plan collectively and individually promote the safe and sound operation of the credit union.
- The board of directors would be required to review the succession plan in accordance with the schedule it establishes, but no less than annually, and recognizes that circumstances might require changes to the planning. In strategic plans it would be expected that the board would be informed of changes and the rationale for the changes and that it document them in its meeting minutes.
- The proposed rule would require that directors have a working familiarity with the succession plan no later than six months after appointment.
- The expectation of the proposal for a federally insured credit union to develop a succession plan that is consistent with its size and its complexity.
Template Provided
As an aid, the proposed rule includes a sample template for a succession plan that may be appropriate for some smaller federally insured credit unions, “though all federally insured credit unions would benefit from it,” staff told the board.
Harper: ‘Succession’ Begins with ‘Success’
In his comments, NCUA Chairman Todd Harper said he agreed with one CU leader who told him the “costs associated with this rulemaking are a burden worth bearing.”
Harper said that through the examination process NCUA found that roughly one-in-four credit unions either lacked a succession plan or had an inadequate succession plan, and the only way the agency can require a CU to have such a plan at present it through a document of resolution.
“It isn't surprising that the term succession planning includes the word success in the first seven letters of the phrase,” said Harper. “Regardless of the economic environment, the consolidation of credit unions has been a constant over several decades. One reason…so many mergers are occurring is the absence of effective succession planning especially in smaller credit unions.”
Feedback Encouraged
Harper encouraged feedback on the succession plan template the agency has created, saying he recognizes that even with the template CUs will still incur costs as the result of any succession planning requirement, but the template is designed to reduce those costs.
“NCUA expects a credit union would develop a succession plan that is consistent with its size and complexity,” said Harper. “Therefore, smaller institutions may have a simple succession plan that addresses a few key leadership positions, while larger more complex institutions would have more extensive plans for a variety of critical roles.”
Otsuka: Risks to CUs, Risks to Insurance Fund
Board Member Tonya Otsuka echoed many of the points made by Harper, one of the goals of the rule is to help ensure the continuity of small credit unions.
“Small credit unions are often left with little choice but to merge when their leadership retires or leaves, because of the difficulties associated with finding new talent on short notice,” said Otsuka. “I think this is where this rule can play a role. The lack of leadership and the lack of thoughtfulness results in serious financial and operational problems, which hurts members and puts the viability of the entire institution at risk, and that can also put the share insurance fund at risk.”
Also Seeking Feedback
Otsuka said she is also interested in seeking comments on the revised version, including from MDI credit unions, as the composition of their leadership team is a criteria in being designated as an MDI.