Co-op Money credit union members working on 'step-in rights' project against backdrop of more expensive than expected new Oracle Flexcube banking system

By Gareth Vaughan

Some of the country's credit unions are working on a project to give them "step-in rights" for delivery of key services, enabling them to operate independently if necessary, in what's being compared to the Reserve Bank enforcing its outsourcing policy on the big four Australian owned banks.

Interest.co.nz understands Simon Jensen, a partner at law firm Buddle Findlay and a financial sector regulation specialist, is working with Co-op Money members, with the Reserve Bank's approval, on a plan for step-in rights including for their Oracle Flexcube core banking system - which is overseen by Co-op Money - should they be required. Co-op Money is the trading name for the industry association for member owned credit unions, the New Zealand Association of Credit Unions (NZACU).

It was suggested to interest.co.nz that what the credit unions are working to achieve is similar to the operational independence the Reserve Bank says ANZ NZ, ASB, BNZ and Westpac NZ must have from their Australian parents. The basic concept is financial institutions should be able to run independently, if required, from their parents or sister institutions and key service suppliers.

The work comes against a tumultuous backdrop for the credit union sector. As first reported by interest.co.nz in July, Co-op Money is at the centre of the stormy times. The credit unions working on step-in rights are its members, some of whom have adopted the new Oracle Flexcube core banking system that's costing more than expected and taking longer than expected to implement.

Two credit unions, Westforce Credit Union and NZ's biggest credit union First Credit Union, have stopped taking Co-op Money's business services amid a fallout over strategic direction causing a loss of revenue for Co-op Money, which posted a $2.5 million annual loss this yearbreached the minimum solvency capital level it's required to hold by the Reserve Bank, and sold its insurance operations. Meanwhile, First Credit Union is seeking repayment for the $5.4 million worth of base capital notes it holds in NZACU. 

Against this backdrop Co-op Money commissioned an independent financial assessment from an accounting firm it won't publicly name, but interest.co.nz believes was KPMG, which highlighted a number of issues impacting its financial performance, liquidity and capital base. Co-op Money CEO Henry Lynch left in April after nearly eight years in the role with chief operating officer Jonathan Lee stepping up to become CEO. Co-op Money is chaired by Massey University's Claire Matthews, who is also a director of member NZCU Baywide, one of NZ's biggest credit unions.

Step-in rights

Tania Dickie, CEO of NZCU South, said NZCU South adopted the Oracle system in April this year at a cost of $2.5 million after 17 months of extremely focused, hard work. She told interest.co.nz NZCU South is part of the discussions over step-in rights.

"We are participating in this activity and understand It is best practice of all banks to have step-in rights in place for delivery of key services. Therefore, this is not a unique activity for credit unions to be undertaking," Dickie said.

NZCU Baywide CEO Gavin Earle said NZCU Baywide is also participating in this work, along with other credit unions. Earle said it's "standard practice for the main banks to have such arrangements in place for key services to ensure continuity."

Asked about work on step-in rights for Co-op Money members, Lee would only say "anything of that nature would be confidential." Jensen said he can't speak without his client's approval, which he couldn't obtain. And a Reserve Bank spokeswoman wouldn't comment.

Such step-in rights could enable one party, being the beneficiary, to step into the shoes of another party in relation to the rights and obligations of a contract.

In May this year BNZ experienced major weekend service losses caused by problems at its parent National Australia Bank in Melbourne. At the time the Reserve Bank said major banks should have systems in place to prevent this from happening once they've implemented its new outsourcing policy, which has a deadline of September 2022.

Co-op Money says member credit unions represent about 190,000 members, hold assets of about $1.7 billion, have more than 80 branches, and employ some 480 staff. Co-op Money is both an industry representative and lobbyist for its members like the New Zealand Bankers' Association is for banks, and provides them a range of services such as core banking, data processing and support, debit card facilities and insurance products, plus a treasury function. The services are funded by credit union members investing in Co-op Money base capital notes.

Co-op Money's members, which are non-bank deposit takers licensed by the Reserve Bank, include Aotearoa Credit Union, First Credit Union, Fisher & Paykel Credit Union, NZ Firefighters Credit Union, NZCU Auckland, NZCU Baywide, NZCU Central, NZCU Employees, NZCU South, and NZCU Steelsands. Associate members are Heretaunga Building Society, Nelson Building Society, and Wairarapa Building Society. 

Aotearoa Credit Union's woes

Aotearoa Credit Union, NZ Firefighters Credit Union, NZCU Baywide and NZCU South are the only Co-op Money members to have implemented the Oracle system so far. However, NZCU Auckland is scheduled to do so on December 2.

Aotearoa says it lost more than $2 million in its September financial year, and is in breach of both its Trust Deed and Reserve Bank regulations with a capital ratio of just 3.86% versus its required minimum of 11%. Aotearoa's supervisor, Covenant Trustee Services, declared an Event of Default under its Trust Deed on October 16, and reserved its right to appoint a receiver at any time. However, Aotearoa is looking to either transfer its members and business to another credit union, or raise the about $2 million of capital it requires to continue on a standalone basis.

 Aotearoa was the first of several credit unions to transfer to the Oracle Flexcube core banking system from a 30-year old FACTS system. Aotearoa blames its loss on losing customers as a result of "teething difficulties" associated with its August 2017 transfer to the Oracle system, which meant it was unable to serve customers as quickly as previously. These difficulties resulted in management reports being produced that proved to be "less reliable" than what was previously produced, causing Aotearoa to "underestimate the extent of its loss," the credit union said.

Aotearoa's $2.05 million September 2018 year loss comes on top of a $804,939 September 2017 year loss, which was also blamed on the move to the Oracle system. Meanwhile as reported by interest.co.nz last month, Aotearoa previously estimated its annual operating loss at $1.75 million. Aotearoa CEO Wyn Osborne hasn't respond to messages left for him seeking comment this week.

Lee said Aotearoa is "engaged in working with [a] credit union" on a possible transfer of engagement. Asked if he's optimistic a transfer can be arranged, or that Aotearoa can raise the capital it needs to prevent receivership, Lee said "we are all very focused on this outcome."

'Cost more than we thought'

In terms of the Oracle Flexcube system, Lee said Aotearoa was in a unique position both with its business model and being the first participant. Interest.co.nz has been told implementing the Oracle system across Co-op Money's members was expected to cost about $4.5 million but is likely to cost in the vicinity of $12 million. Lee wouldn't comment on this. In July Matthews told interest.co.nz the move to the new system was running about six months behind initial estimates, which was "pretty good" given the old FACTS system has been in use for 30-odd years, meaning there was a lot to work through.

"The project has also cost more than we thought, being a combination of requiring more work than initially thought plus a number of enhancements that we decided on as we progressed with the build. Whilst, as you say this is common with IT projects, it's more than we would have liked but nowhere near like some of the other IT projects in the news," Matthews said in July.

Lee said the Oracle programme of work is funded by Co-op Money and its member credit union participants. In NZCU Baywide's annual report Earle said NZCU Baywide's total implementation cost was $2.8 million following an intensive project spanning two years.

"While this was over initial budget, it was not a surprise to us given the complexity and enormity of this undertaking, which some experts liken to trying to change the tyre on your car while driving down the motorway at 100kms per hour! This investment is very good value when compared to the costs of other core banking system conversions we have seen in New Zealand," said Earle.

Asked by interest.co.nz what NZCU Baywide had expected the shift to the Oracle system to cost, Earle said; "Our total implementation cost of $2.8 million represents significant value for our members in obtaining a new core banking system with the modern architecture that we required to replace our old legacy platform."

For its June year, NZCU Baywide posted a $1.009 million profit, down from $1.211 million the previous year. Total assets increased to $381 million from $313 million.

As for NZCU South, Dickie said its $2.5 million was "an expected cost."

"We knew at CU South from previous investigations into a transfer to a tier one core banking platform that the costs would be significant. I do not know if you are aware but to change a core banking system is a once in a 20 year, lifetime, project. It is also considered the equivalent of a having a heart and lung transplant. These costs were within our estimated price range. These included costs to Co-op Money and our own costs to deliver to the project," said Dickie.

Twelve staff worked full-time on NZCU South's internal project team. 

"We are very happy with the new platform and its functionality, performance and benefits delivered to date. We believe we have had a successful project delivery and are now working on future functionality to improve both member experience and operational efficiency," Dickie said.

Additionally she said NZCU South, centred in the South Island, is not considering a transfer of engagements with the Auckland-based Aotearoa. Earle said he was unable to comment on who Aotearoa might be in discussions with.

In its June year NZCU South lost $923,000 versus a profit of $461,000 the previous year. Total assets fell to $131 million from $137 million.

'A valuable role'

Meanwhile, Lee said credit unions play "a really valuable role" in the NZ banking sector fulfilling a much needed service for their members. 

"It would be nice to focus on some of this great work our members do day-in and day out," said Lee.

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12 Comments

Would be nice to know the actual customer numbers and assets of the credit unions using oracle and those using other systems of COOP stats of 190,000 members and $1.7 billion in assets or is it confidential?

First Credit Union by itself is over 40% of the entire credit union industry in NZ - being asset size and member numbers- so use that calculation as a base. Take away West force CU as well and Coop Money has probably only half of the CU market. You also need to take the breathless PR releases from Coop Money with a pinch of salt - they occasionally add in hundreds of others ATM's as part of them (I think they only 70 of their own??) and also add in building society assets at times.

was expected to cost about $4.5 million but is likely to cost in the vicinity of $12 million
&
Whilst, as you say this is common with IT projects, it's more than we would have liked but nowhere near like some of the other IT projects in the news...

Rubbish!

stop the project and start again!

Clearly the project was a disaster from the beginning - and as always confirmed when a press release is ssuued midstream announcing the departure of Henry Lynch an "innovative and visionary CEO" (Can't remember who said it, but once your CEO starts having "visions", send him/her to a doctor!). First Credit Union was their biggest customer but went elsewhere - and they continued to purchase Oracle. The second biggest customer, NZCU South is nowhere near the size of First. NZCU Baywide have only 20K members or so - so on a system based on revenue via transaction the coop Directors were negligent to continue. It is only a matter of time before the Coop Money Directors will need to publicly answer and pay for what they have done.

It would be good to investigate what thought and processes the NZCU credit unions put into choosing the Oracle system, how it was was assessed and what business cases each NZCU credit union carried out to proceed. If the NZCU credit unions did not do this then their directors will also need to be held account for the over runs.

Looks like a claim on the insurers for Director liability will be on the cards....

I think you will find all of the little credit unions merely followed what Co-op Money told them. There would have been very little investigation of their own and would have been told basically there was no choice cos Co-op money had to do it so they had to contribute.

Well done to First Credit Union... hopefully you can get value for your base capital notes.... eventually. You are big enough and substantially better off on your own anyway.

Did all the little ones pay for their share of Oracle by themselves or did they have a "sugar daddy"? No such thing as a free lunch.

Good question.. the only big one left is Baywide... who have ultimately bullied everyone thus far... so... hate to think what their share is.

Why talk to Gavin Earle - he wasn't truthful with you was he concerning Westfore Credit Unions base capital notes when he said NZCU Baywide did not ask Westforce to resign from coop money membership. Suggest RBNZ and FMA might have more to say - step in rights I think imposed - not asked for. Talk to Claire Matthews and Jonathan Lee - ask if they making profits yet each month - are they running out of money? Also ask about a meeting credit unions had with RBNZ FMA and Trustees and what they said to credit unions. Maybe some of the credit unions now willing to talk about that meeting??

I wonder what came of Henry lynch. Maybe Gareth Vaughn should interview him and get his opinion as the architect of this debacle. And at the same time ask about co op insurance.

I tried. If you've seen my earlier stories you'll have  seen he wouldn't talk to me. As also previously reported Co-op Insurance has been sold.

I see absolutely nothing wrong with the Reserve Bank taking this sensible approach to ensure my money is safe and secure. Believe me, the Reserve Bank diligently look at my employers operational independence from our Australian parent company, and quite rightly so.

As a customer, I see my credit union listed as one of those to have implemented the Oracle system, I am pleased to say there has been no disruption whatsoever, which surely means something is going right?

Good grief, as a customer I’m frankly disgusted by these comments. These are obviously written by disgruntled angry individuals from inside the credit union movement, which I’m guessing is a repugnant political beast. Therefore, it’s probably prudent the Reserve Bank take a keen interest. Please show some decorum and wash your dirty laundry in private, as a customer I find this lack of professionalism is really concerning, is this how the people looking after my saving behave! This is not something we would tolerate in the mainstream financial sector.

Any prudent board would want to see some sort of protection for itself when is outsourced what is effectively its operating model. Step in rights, or something of that ilk would be part of prudent management, and I wonder which directors did actually do a proper risk based due diligence on their outsourcing arrangement.

It’s just part of crisis management or BCP. Nothing to do with a regulators outsourcing policy which is all about the statutory manager having those rights.

If directors have not asked the question, then they have been derelict in their duty.

That said, it is irrelevant what the system is, so one hopes first has the same outsourced step in rights as well