10 Reasons Why NCUA Should Not Regulate Succession Planning


WFC 18 | NCUA Succession Planning

In the January 2022 NCUA board meeting, it was voted that a proposed rule on succession planning was approved. In this episode of With Flying Colors, Mark Treichel is flying SOLO with a quick take on why NCUA should not regulate succession planning. Regulatory burden is at an all-time high, and there is no reason for this regulation. Listen here to know exactly why!

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10 Reasons Why NCUA Should Not Regulate Succession Planning


I have got a quick take on succession planning or the proposed NCUA Succession Planning Rule. I'm going to provide ten reasons why a succession planning regulation is a bad idea. In January of 2022, at its NCUA board meeting, the board voted to approve a proposed rule on succession planning by a vote of 2 to 1, with the Board Member Rodney Hood voting against the proposal.


According to NCUA, succession planning is the process through which an organization identifies, develops, and retains key personnel to ensure its viability and continued effective performance. NCUA goes on to say that succession planning also allows an organization to prepare for the unexpected, therefore minimizing service disruptions during management transitions. As an editorial comment on that, in several years at NCUA, I don't recall a lot of service disruptions related to succession planning. As a matter of fact, I can't think of any.


One of the biggest proponents of this proposed rule is Chairman Todd Harper, who issued a statement audit after the board meeting, which included what I'm about to share with you. Todd said, “Moreover, succession planning is recognized as vital to the long-term success of any institution, including credit unions. A board's failure to plan for the transition of its management could potentially come with high costs, including the potential for the unanticipated merger of the credit union upon the departure of key personnel.”


Put another way, Todd said, “Succession planning helps to safeguard credit union members' choice of financial institution.” What does the proposed rule require, you might ask? The board of directors of the credit union or an appropriate committee picked by the board of directors would be required to review and approve a written succession plan regarding the specified federal credit unions and officials.


Notice I said, “Federal credit union.” This proposed rule does not apply to state charters. The succession plan must add a minimum, identify the credit union's key positions, necessary competencies, skillsets for those positions, and strategies to identify alternatives to fill vacancies. The board also must review the succession plan in accordance with the schedule established by the board, but no less than annually. In addition, the proposed rule would amend 701.4B3, which sets forth certain educational requirements for federal credit union directors and require that directors have a working familiarity with the federal credit union succession plan.


Relative to succession planning efforts, this proposed rule is intended to strengthen current succession planning efforts at credit unions and to require others that do not yet have such planning to commence their succession planning processes. The proposed rule is also consistent with the guidance issued by other banking agencies to address succession planning. Notice I said, “Guidance at other agencies,” not “Regulations at other agencies.”

A succession planning regulation is inappropriate, especially if there are other things that you could regulate before regulating succession planning.

Guidance Over Regulation

My top ten reasons why NCUA does not need a succession planning rule. Number one, I did a poll on this on LinkedIn. There is a book that I'm going to do a story on called The Wisdom of Crowds. I sought out the opinions of crowds, and the crowds clearly favored guidance over regulations. Seventy-two percent of the many voters on my poll indicated they preferred guidance over regulation. Now, 22% said, “No regulation, no guidance. Let's have neither.” Quite frankly, that is where I think NCUA should be. Although, I'm sure they will either land on regulation or guidance. Lastly, only 6% of those who voted felt that there was a regulation required for succession planning.


Other Banking Agencies Do Not Have Regulations On Succession Planning

Number two, I mentioned that the rule says that other agencies have guidance. Other banking agencies do not have a regulation on succession planning, and NCUA admits this in their proposed regulation by stating, “The proposed rule is also consistent with the guidance issued by other banking agencies to address succession planning.” Bank of America doesn't have a regulation that requires this. Do they have a policy? I would bet that they do, but if it is not required of big banks, why do you require it of small credit unions? They have enough regulatory burden going on and don't need another regulation from NCUA.


It Is A Solution In Search Of A Problem

Number three, the proposed regulation is a solution in search of a problem. It is flawed to think that succession planning, regulation, guidance, or policy will have a material impact on slowing mergers. That is not reality. It is easy to say in a proposed regulation, and in my opinion, it is flawed logic.


No Enterprise Risk Management Regulation, No Succession Planning Regulation

Number four, if NCUA does not have an enterprise risk management regulation, it doesn't need a succession planning regulation. Think about it. That is a far more appropriate topic to regulate. Quite frankly, maybe you don't need either, but a succession planning regulation to me is inappropriate, especially if there are other things that you could regulate before regulating succession planning. I'm going to have an episode on enterprise risk management coming up with a special guest. Watch for that soon. Lack of Written Succession Planning Is Not Unsafe or Unsound.


Lack of Written Succession Planning Is Not Unsafe or Unsound

Number five, lack of written succession planning is not unsafe and unsound. NCUA, focus your regulations on things that create unsafe and unsound conditions in credit unions. In my opinion, there is nothing unsafe and unsound about not having a succession planning policy in place.


Benefits Can Be Achieved By Guidance

Number six, the benefits of succession planning can be achieved by guidance. If it is good enough for the banks to have guidance, credit unions can handle this issue with guidance. NCUA issues a plethora of letters to credit unions each year, many of which are still active. You can find them on NCUA’s website. Quite frankly, why not guidance? I would push for guidance if I was 1 of the 3 board members or 1 of the 2 who voted, “Yes.” I would be changing my vote to no and pushing this with guidance.

WFC 18 | NCUA Succession Planning
NCUA Succession Planning: Relative to succession planning efforts, this proposed rule is intended to strengthen current succession planning efforts at credit unions and to require others that do not yet have such planning to commence their succession planning processes.

Guidance Is Nimble

Guidance is nimble and can be achieved more easily than having a vote of the NCUA board. The NCUA board chairman controls guidance. They have the ability to issue that guidance on their own. They can seek the input of staff, the input of credit unions, and the input of other board members, but they can do it without having to have a formal board vote. It is more nimble that way. It can be changed more frequently. If you put guidance out and want to tweak it the next year, it is easier and takes less time and burden from NCUA. It creates less of a regulatory burden for credit unions.


Lacks Clarity Regarding Key Positions

Number eight, the proposed rule lacks clarity regarding key positions in a credit union succession plan. Which positions are required to be part of it? Where do you draw the line? NCUA gives no guidance relative to that. If there is going to be a regulation or guidance, there should be more information relative to which positions should be included.


If You Can’t Apply It To Everybody, Don’t Apply To

Number nine, if it is not required for state-chartered credit unions, don't require it for federal chartered credit unions. State charters already have a competitive advantage relative to filling a membership. Why create a regulation that only applies to federal credit unions? It doesn't make sense to me. If you can't apply it to everybody, don't apply it to anybody.


Flawed Succession Planning Can Be A Demotivator

Number ten, studies show that flawed succession planning can be a demotivator. For example, if your position is not defined as a key position, or if you do not get accepted to enjoy the benefits of a succession planning program, it can create morale problems at lower levels. I indicated that NCUA does not say who needs to be included. Let's say you have a policy, and you include all vice presidents but not all managers. Your managers may not feel that they should have been excluded from participating in this program.


If you think you can come up with a policy that is going to help in this regard, and if it is not done right and carefully, you are going to find that it creates more problems than it solves. I don't think regulation in this arena makes any sense at all. NCUA sought comment on this regulation. The comment is closed in April 2022. It will be interesting to see what happens with this. My bet is that it will not get finalized as a regulation. I have a belief that maybe the two Republican board members will join forces and lead to this being issued as guidance.


CUNA and NAFQ both wrote letters to NCUA saying that they believed it would be better to have guidance. The things that I have referenced here like the CUNA letter, the NAFQ letter, the proposed regulation Chairman Harper's statement on this, and my blog post on LinkedIn about the top reasons why NCUA does not need succession planning rule. I will include it in my show notes. I appreciate your time, and I hope to have you here reading again soon. Thank you.



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