Global Regulatory Update

World Council's twice yearly electronic newsletter of regulatory issues throughout the world

December 2013 | Issue 15

Australia: Government Finalizes the Financial System Inquiry

The Australian government is about to finalise the Terms of Reference and members of a wide-ranging Financial System Inquiry (FSI) — the first such inquiry in almost two decades. Australian credit unions, building societies and customer-owned banks have called on the government to ensure there is an explicit focus on the major banks and the implicit government guarantee they enjoy, along with greater recognition of the customer-owned model.

The FSI will publish an interim report by September 2014, which is likely to include draft recommendations, before delivering a final report by November 2014. One of the matters likely to be considered by the FSI is whether to support the previous government's proposed levy on deposits.

Under the previous government's proposal, the levy was due to commence on January 1, 2016 and would be set at 0.05 per cent on deposits of up to AUD 250,000. An early Regulation Impact Statement by the Australian Treasury on the proposal notes that the levy "will have a higher proportionate impact" on small banking institutions such as credit unions.

Australia's Customer Owned Banking Association (COBA) is in the final stages of consultations with the Australian Prudential Regulation Authority (APRA) on amendments to the prudential standards to facilitate the issuance of supplementary capital instruments by customer-owned banking institutions under the Basel III framework. The proposal covers Additional Tier 1 and Tier 2 capital instruments but not the primary issuance of Common Equity Tier 1 instruments.

Source: Customer Owned Banking Association (COBA),


Canada: Consultations on a New Customer Code

In early December, the Canadian government launched a consultation to develop a comprehensive financial consumer code. The government's objective is to develop a financial consumer protection framework that is more adaptable to changes in the financial marketplace, products and technology. The government is considering adopting standards and principles that would set out general expectations and offer a degree of flexibility in implementation. These could then be supplemented by rules that would provide more detailed requirements.

Although the Code is intended to apply to federally regulated institutions — credit unions are provincially regulated — it is expected that provincial governments may follow suit and eventually establish similar Codes in their own jurisdiction.

The Canadian credit union system also continues advocacy efforts to replace the preferred small business tax rate that was eliminated in March 2013 with a tax credit intended to reward credit unions who grow their retained earnings.

Source: Credit Union Central of Canada (CUCC),


Great Britain: Regulatory Reform Phase-In Continues in While Credit Union Support Continues to Grow

In 2013, British credit unions reached the historic milestones of 1 million members and GBP 1 billion in total assets while undergoing many regulatory changes.

Most significantly, Great Britain began implementation of the "twin peaks" financial regulatory model—meaning that the consumer protection regulatory function and the prudential safety and soundness regulatory function are handled by two separate agencies—in April 2013 with the establishment of the Prudential Regulation Authority (PRA) under the Bank of England and the independent Financial Conduct Authority (FCA) overseeing consumer protection. Britain is continuing the phase-in of this new regulatory framework and in April 2014 consumer credit regulation will be brought under the FCA's jurisdiction as well. In addition, the smallest credit unions need to reach a minimum 3% capital-assets ratio by September 2014.

During the phase-in of these new rules, the British government's support for the credit union sector's development continues with ABCUL and its subsidiary service company, Cornerstone Mutual Services, implementing the government's Credit Union Expansion Project with funding of up to GBP 38 million. The new Archbishop of Canterbury and others British policymakers have cited expansion of credit unions as part of the solution to the growth of payday lending in Britain, and credit unions are exploring how best to harness this support to help ensure that credit unions become the responsible alternative for savings and loans for a broad range of society.

The British credit union sector celebrates its 50th anniversary in 2014.

Source: Association of British Credit Unions, Ltd. (ABCUL),


Ireland: Implementation of 2012 Credit Union Law in RoI; N.Ireland Legislative Consultation

In the Republic of Ireland, implementation of many provisions of the Credit Union and Cooperation with Overseas Regulators Act, 2012 ("the 2012 Act") continued in 2013 on a phased basis.

On August 1, 2013, measures took effect giving credit unions the right to appeal decisions of the Central Bank of Ireland to the Irish Financial Services Appeals Tribunal, imposing new administrative sanctions for regulatory non-compliance, and ending the application of some banking laws to credit unions. Also taking effect in August were Fitness & Probity requirements for credit unions with more than EUR 10 million in assets; under these rules, the Central Bank of Ireland must approve the credit union's board chair and manager as "fit and proper" individuals.

More provisions took effect on October 11, 2013, including provisions relating to risk management, compliance, and internal audits, as well as a new governance framework setting forth the roles and responsibilities of key positions in credit unions including the board of directors, chair, manager, board committees, and board oversight committee.

In Northern Ireland, the government in June 2013 published a consultation paper on legislative reform for credit unions. The consultation paper and the proposed legislation are based on recent legislative reforms for credit unions in Great Britain and would address matters including the abolition of the age of membership (i.e., minors to be given full membership rights), providing members copies of the credit union's rules, expansion of the common bond, removal of restrictions on non-qualifying members, group membership, interest-bearing shares, attachment of shares (such as to satisfy a judgment against a member who is delinquent on his or her loans), and increasing the maximum interest rate that credit unions can charge from 1% per month to 3% per month. The Northern Ireland Assembly will likely consider the draft legislation in 2014.

Source: Irish League of Credit Unions (ILCU),


Kenya: SACCO Assets Grow as Regulatory Transition Date Grows Near

The overall performance of the savings and credit cooperative organization ("SACCO") industry over the last three years is impressive given the demands of the new Sacco prudential supervision regime being phased-in. The industry registered an average growth in total assets of 15% annually to move from KES 216 billion in 2010 to KES 293 billion in 2012. SACCO societies licensed to accept deposits account for over 76% of the KES 293 billion in assets, underscoring the importance of deposit taking SACCO business in the growth and competitiveness of the SACCOS industry.

Details can be found in the SACCO Societies Regulatory Authority (SASRA) SACCO Supervision 2012 report on

SASRA has also joined the Kenya Joint Financial Regulators Forum; the forum includes all Kenyan financial services regulatory agencies and acts to help coordinate Kenyan financial regulatory policy.

The transition period for the prudential regulatory framework introduced in 2010 for the SACCO societies in Kenya comes to an end in June 2014. By this date the deposit taking SACCO societies that were conducting deposit taking SACCO business before June 2010 should be fully compliant with capital adequacy and other prudential requirements. SASRA has commenced engagements with the SACCO industry to minimize adverse effects from non-compliance. To date 133 SACCO societies, or 60% of the 215 SACCOs that applied for license under the new regulatory framework, have been licensed to accept deposits.

Source: SACCO Societies Regulatory Authority,


Macedonia: New Rules on Credit Risk, Liquidity, and Foreclosures

The Macedonian government has recently issued new Decisions on credit risk management, foreclosed real estate, and liquidity risk management.

This Decision on credit risk sets rules on loan classification, methods for determining and the amount of impairment and special reserves for loan losses, and supervisory standards for delinquent loans. The credit risk Decision is intended to liberalize financial institutions' lending procedures while also increasing the amount of institutions' special reserves for loan losses.

The Decision on accounting and regulatory treatment of foreclosed assets is intended to encourage the banking sector to sell foreclosed assets faster than before.

The Decision on liquidity risk management sets rules for establishing a liquidity risk management system, maintaining an adequate liquidity level, and liquidity reporting to the National Bank of the Republic of Macedonia. Notably, this Decision reduces financial institutions' liquidity requirements in order to help increase the availability of credit.

Source: FULM Savings House (FULM),


New Zealand: New Disclosure,Licensure, and Lending Requirements

New Zealand's regulatory requirements affecting credit unions continue to increase, with three core pieces of new legislation at various stages of before Parliament or implementation.

Credit unions have been subject to prudential oversight by the Reserve Bank of New Zealand since 2008 but will now have to be licenced by the Reserve Bank through a new process. In addition, credit union directors and senior managers will need to meet Fitness & Probity suitability requirements starting next year.

New Zealand's securities laws are also currently in the process of a major overhaul, including substantive changes to disclosure requirements for credit unions' debt security issuances. This consultation provides credit unions with an opportunity to improve upon the existing, complex disclosure obligations in order to authorize shorter, clearer disclosures for their relatively simple products.

Credit contract reforms being considered by Parliament will also introduce new lending compliance requirements such as responsible lending obligations, revised lending disclosure requirements, and a much needed overhaul of repossession procedures. In general, credit unions welcome these reforms as they have the potential to provide consumers with much better protection from predatory lenders.

Source: New Zealand Association of Credit Unions (NZACU),


Poland: New Credit Union Act Taking Effect

The Polish credit union regulatory environment is changing as a result of the Credit Unions Act of 2013 and related regulatory changes, including new capital ratio requirements and deposit guarantees.

November 29, 2013, all deposits in credit unions became guaranteed by the Banking Guarantee Fund up to 100,000 euro. Previously the same level of protection was assured by a private insurance scheme established by the credit unions. On January 27, 2014, the Act's requirement that all credit unions to have a capital adequacy ratio of at least 5% will become effective.

In addition, debate is ongoing regarding the amount of credit unions' regulatory operating fee assessments. Currently the operating fee assessment is 0.0216 % of total assets; 90% of the proceeds of the operating fee goes to the Polish Financial Supervision Authority to cover the cost of its credit union examinations and supervisory activities, and 10% of the operating fee proceeds go to the National Association of Cooperative Savings and Credit Unions (NACSCU) to help cover the costs of NACSCU's self-regulatory activities. One proposal would raise the operating fee assessment rate to 0.024% of total assets and eliminate NACSCU's 10% share of the fee's proceeds.

Source: National Association of Co-operative Savings and Credit Unions (NACSCU),


United States: Housing Finance Reform and Risk-Based Capital

The U.S. Congress is currently considering how to change the way the government is involved in mortgages and housing finance. Currently, Government Sponsored Enterprises (GSEs), including Fannie Mae and Freddie Mac, purchase many U.S. mortgages and package them into mortgage-backed securities which are sold to investors on the secondary market. Access to mortgage securitization is a key issue for credit unions because the prevalence of 30-year fixed-rate mortgages in the U.S. — which creates interest rate risk for credit unions holding these mortgages in portfolio — and because of credit unions' smaller economies of scale compared to the large banks that dominate the U.S. mortgage market. Fannie and Freddie securitized or held 46.7% of all outstanding U.S. mortgage debt as of 2010.

The Senate Banking Committee has been very active this year on the issue and held more than a dozen hearings on housing finance reform. The Credit Union National Association (CUNA) has been involved in the Committee's discussions, providing advice and testifying at hearings in July and November.

CUNA expects the National Credit Union Administration (NCUA) to take up a risk-based net worth (i.e. regulatory capital) proposal in early 2014. NCUA has not yet released the proposal but credit unions are concerned about what the proposal may look like and whether its risk-based criteria will be based on Basel III. CUNA believes that the current system for risk-based net worth standards is flawed, but credit unions have adjusted accordingly and are doing well under this regime. CUNA will be closely monitoring this issue in 2014.

Source: Credit Union National Association (CUNA),