Credit unions and caisses populaires are provincially regulated deposit-taking financial institutions. They operate on co-operative principles, are member owned, and are permitted to conduct business primarily with their members. They are incorporated and regulated under the Credit Unions and Caisses Populaires Act, 1994 (the Act).
The Financial Services Regulatory Authority of Ontario (FSRA) is responsible for regulating Ontario credit unions and caisses populaires and ensuring their compliance with the provisions of the Act. The Act establishes requirements for consumer protection, corporate governance, the sale of securities, capital, liquidity, business powers and exposure to interest rate risk.
Overview of Ontario's credit union sector
Ontario's credit union sector is mature, with some operating for over 100 years. In the last 30 years, there has been a steady decline in the number of credit unions in Ontario due to ongoing mergers and acquisitions―although the sector's total assets have increased.
Consumers have the option to conduct their banking at a number of different financial institutions, including banks and credit unions, both online and in person. This means there is stiff competition to gain new clients.
Financial institutions are sophisticated corporations that require a lot of resources to operate. New entrants to the credit union sector face very high barriers to entry and many challenges along the way. In their first few years of operation, credit unions and caisses populaires require a substantial amount of funding. Senior management also needs to have a significant amount of experience, knowledge and expertise to succeed.
The ongoing consolidation trend in this sector poses a threat to new entrants that must be considered in their proposed business plans. To be successful, potential new entrants need to identify a unique niche or sub-segment of the credit union market that is either not being served, or is underserved, by other financial institutions. This also needs to be translated into a viable business plan.
The request to incorporate and register a new credit union or caisse populaire must, at a minimum, contain the following information:
- A cover letter that explains the intent to incorporate and register a new credit union or caisse populaire.
- Results from a feasibility study.
- A business plan and pro-forma financial statements, including stress test scenarios (i.e. most likely, worst case, best case), five-year projections, regulatory capital and product mix.
- Proposed articles of incorporation and proposed by-laws.
- Proposed offering statement to raise the required level of capital, as applicable.
- Required application fees, as outlined in FSRA's schedule of required fees.
For more information on the application process, please email FSRA at CreditUnionTransactions@fsrao.ca.
Preparing the application for incorporation
A large part of the work in preparing an application for incorporation lies in developing the business plan and policies necessary to successfully operate a credit union or caisse populaire, and satisfy the requirements outlined above.
This work is divided into three phases:
FSRA recommends that the first board of directors be closely involved in all three phases as outlined below. This will ensure they gain the specific knowledge that is necessary to successfully operate a credit union or caisse populaire.
1. Feasibility phase
The feasibility phase determines the type and volume of demand for a new credit union's or caisse populaire's services, and the commitment of the community to its development. This includes commitments to:
- Support the credit union or caisse populaire by using its services.
- Risk money for supplying capital, which will bear the cost of any losses.
- Provide unpaid volunteers who will participate in the credit union's or caisse populaire's board and committees, and possibly work at the credit union.
This phase typically includes a survey of the community, the development of plans, and the making of preliminary financial assumptions.
2. Business plan phase
Once feasibility is established, a detailed business plan must be developed for the next five to 10 years, with particular emphasis on the first five years of operation. This business plan should be based on the feasibility study. The projections and other metrics in the plan should be measured within the context of attainability, using comparisons to statistics from similar credit unions and to norms (such as margins and rate projections in the financial marketplace).
The business plan should also include a thorough assessment of the target market, stress testing scenarios, a technology plan, a media plan and an exit plan. The exit plan is a significant component of the business plan, as it needs to address the scenario of what will happen if the credit union's or caisse populaire's business plan does not succeed.
The initial business plan will need to be updated annually. This will ensure the credit union or caissse populaire has a continuous plan for its ongoing operation. It will also be useful for measuring the credit union's or caisse populaire's performance by its board, members, and industry regulators.
3. Policy development phase
The Act requires every credit union and caisse populaire to:
- Have policies covering lending and investment, interest rate risk management, governance and certain prescribed minimum standards.
- Comply with the standards of sound business practices that have been established by FSRA.
- Have satisfactory policies in a number of other operational areas.
- Follow the requirements for consumer protection that are set out under the Act.
Incorporating a new credit union or caisse populaire is a significant endeavour that requires up to two years of time and effort, plus a significant investment of resources.
Before preparing an application, potential applicants are advised to contact the Transaction and Events team in the Credit Union and Prudential branch by email at CreditUnionTransactions@fsrao.ca. They can provide a complete overview of the requirements, information on how to submit an application and other important information on starting a new credit union.
Potential applicants should also refer to sections 12 through 23 of the Act for additional information.