July 2013 | Issue 14
Australia: Credit Unions Pursue Capital Options in Basel III Framework
Australia's banking regulator, the Australian Prudential Regulatory Authority (APRA), is consulting with the Customer Owned Banking Association about accommodating credit unions, building societies and mutual banks in the new Basel III capital regime that commenced in Australia on Jan. 1, 2013. APRA has indicated it is willing to amend the framework to facilitate mutual Additional Tier 1 and Tier 2 instruments.
APRA is expected to finalize its implementation of the first stage of the Basel III liquidity framework, exempting most mutuals from the new Liquidity Coverage Ratio commencing in 2015. Mutuals will continue to be subject to the simpler Minimum Liquidity Holdings regime. Mutuals have not been exempted from new Basel III disclosure requirements on remuneration and composition of capital. These new disclosure requirements commence for the first reporting period after June 30, 2013.
Source: COBA – Customer Owned Banking Association, www.customerownedbanking.asn.au
Canada: Beneficial Income Tax Rate Eliminated
Canadian credit unions will be paying more income tax. A surprise March 2013 announcement by the Canadian government hiked the credit union federal tax rate from 11% to 15%. This reversed a 40-year-old policy that ensured credit unions were taxed at a lower rate than their big bank competitors. The announcement targeted only credit unions — no other businesses face tax increases.
Credit unions first became taxable in 1972. Since then, they have enjoyed the preferred small business tax rate in recognition of their co-operative capital structure and that they are the small business of the financial services sector.
An active lobby campaign was launched to explain why taxing credit union more is poor public policy. As the tax rate increase will be phased in over five years, advocacy efforts are focused on creating offsetting concessions that will restore the competitive balance before the full tax impact is felt. See Credit Union Central of Canada's website for further information: www.cucentral.ca/SitePages/PolicyAndAdvocacy/Tax.aspx.
Source: Credit Union Central of Canada, www.cucentral.com
El Salvador: Consumer Protection Reform
El Salvador has recently adopted two new laws intended to improve consumer protection:
The law against usury: This law is intended to prevent predatory practices, such as charging excessive rates of interest, by establishing maximum loan interest rates that natural or legal individuals can be charged.
- Consumer Protection Reform Act: The Consumer Protection Reform Act's most significant impact on credit unions will be its limits on permissible fees that financial institutions can charge consumers; for example, the new law will eliminate the authority for credit unions to charge processing and other administrative fees related to loans.
Source: FEDECACES, www.fedecaces.com
Great Britain: "Twin Peaks" Regulation and CU Expansion Project
From April 2013, credit union regulation — as that of financial services generally — was taken over by the newly created "twin peaks" regime. The Financial Services Authority (FSA) was abolished and its responsibilities split between two new regulators. The Prudential Regulation Authority (PRA) — a subsidiary of the Bank of England — took over responsibility for prudential regulation and supervision while the Financial Conduct Authority (FCA) assumed responsibility for regulation and supervision of firm conduct and consumer protection. In addition, responsibility for the regulation of consumer credit is to be brought under the auspices of the FCA from where it currently resides at the Office of Fair Trading (OFT) beginning in April 2014. This new regime is still in its very early stages and it remains to be seen how it will affect credit union operations though it is likely that regulatory burden will continue to increase.
The British Government's efforts to expand the credit union sector continue apace with the awarding to the Association of British Credit Unions Limited (ABCUL) of a £38 million contract to deliver the Credit Union Expansion Project, which aims to double the credit union sector's size by 2015 and establish a shared business model and central services organisation for credit unions. This should enable more credit unions to compete effectively with commercial banks and other financial services companies. The Government also plans to increase the credit union interest rate cap from 2% per month to 3% per month beginning in April 2014 to allow credit unions to expand their ability to provide lower-cost alternatives to the high-cost credit offered by payday lenders.
Source: Association of British Credit Unions, Ltd., www.abcul.org
Ireland: New Credit Union Legislation Takes Effect
New legislation for Republic of Ireland credit unions entitled the Credit Union and Co-operation with Overseas Regulators Act 2012 was enacted at the end of December 2012. The Act is being phased-in as follows:
August 2013 — Commencement of fitness & probity requirements, administrative sanctions and the right of credit unions to appeal certain decisions of the Central Bank to the Irish Financial Services Appeals Tribunal.
- October 2013 — Commencement of sections mainly in relation to new governance and prudential requirements for credit unions, e.g., the roles and responsibilities of key positions in credit unions including the board of directors, chair, manager, board committees and board oversight committee. These also include requirements relating to risk management, compliance and internal audit.
- March 2014 — Commencement of miscellaneous parts including the submission by a credit union of an annual compliance statement to the Bank.
- Q2 2014 — Commencement of other prudential measures will begin in Q2 2014, allowing for consultation between the Central Bank and credit unions prior to implementation. These measures will amend existing provisions in relation to savings, borrowing, lending, investments, reserves and liquidity.
A consultation paper on legislative reform for Northern Ireland credit unions was also published in June 2013. This paper's aim is to introduce legislation in Northern Ireland similar to that adopted for British credit unions in 2012. The new credit union bill will likely be brought before the Northern Ireland Assembly in September 2013.
Source: Irish League of Credit Unions, www.creditunion.ie
Kenya: SACCO Sub-Sector Enters Final Phase of Transitional Period
June 2013 marked the third anniversary since the SACCO Societies Regulatory Authority (SASRA) started implementation of a comprehensive prudential regulatory framework for savings and credit cooperative organizations (SACCOs) in Kenya to be regulated as depository institutions. There is now only one year remaining (June 2014) until mandatory compliance with these prudential standards, especially the standards for capital adequacy ratios and full provisioning for loan losses. SASRA has to date licensed 130 deposit-taking SACCO societies from the potential 215 that applied for their license under the new regulatory framework. A significant number of the licensed SACCOs are on course to compliance, but SASRA has commenced intensive engagements with the sub-sector to enhance compliance by June 2014 and minimize adverse consequences.
SASRA's three years' experience indicates that inadequate management and technical capacity of the SACCO industry as the number one challenge to regulatory compliance. Arising from the capacity development programmes that SASRA and industry stakeholders have been implementing, plans are at advanced stage to partner with training and educational institutions like Co-operative University College of Kenya (CUCK). The goal is to take a long-term view to capacity development for the SACCO subsector through training and accreditation programmes for directors and technical staff.
SASRA is also working on several policy and regulatory changes necessary to enhance financial stability of the SACCO sub-sector while enhancing the industry's competitiveness in provision of affordable financial services. These includes legal provisions for central liquidity mechanism for licensed SACCO societies, dealing with transitional challenges by June 2014, participation of SACCO societies in credit information sharing mechanism through the existing credit reference bureaus and powers to issues regulatory guidelines among others.
Source: SACCO Societies Regulatory Authority, www.sasra.go.ke
Peru: Dueling Credit Union Bills in Congress
In Peru, there have been two bills submitted to Congress that could affect Peru's credit unions. One of the bills addresses regulation of cooperatives specifically, and the other bill would amend Peru's state financial system supervision law.
Both bills would create a deposit insurance fund for credit unions that would be segregated from the savings guarantee schemes for other financial institutions. The primary difference between the two bills is whether credit unions should continue to be supervised primarily by the Federación Nacional de Cooperativas de Ahorro y Crédito del Perú (FENACREP) under delegated authority from the state, or whether primary supervision of credit unions should be transferred to Peru's banking superintendency as the bill to amend Peru's state financial system supervision law proposes.
Source: FENACREP, www.fenacrep.org
Poland: Savings Guarantee System Expanded to Include Credit Unions
On May 15, 2013, the president of Poland signed the Amendment to the Law on credit unions of April 19, 2013. The main reason for this amendment was to introduce the state-run deposit guarantee scheme to all deposits in the Polish credit unions. With this amendment, Polish credit unions have now access to the State Banking Guarantee Fund, which provides the coverage for up to €100,000 per member.
However, there are many possible unconstitutional elements of this new Law and, therefore, a group of concerned senators have already submitted this Amendment Law to the Constitutional Court. Nevertheless, this Law will come into force on June 20, 2013.
Polish credit unions welcome access to the Banking Guarantee Fund but are not in agreement with the many provisions that will limit the growth of the credit union system that are included in this new Amendment Law.
Source: National Association of Co-operative Savings and Credit Unions, www.skok.pl
United States: Credit Unions Fight to Protect Tax Status, Weigh Interest Rate Risk Proposal
Credit unions in the United States are exempt from federal income taxes. Recently, however, leaders in Congress have announced their intention to fundamentally reform the U.S. tax code, which could put the status of the credit union tax exemption in jeopardy. The Credit Union National Association (CUNA) is currently leading a national grassroots advocacy campaign, "Don't Tax My Credit Union," to get credit union members to advocate for the tax status to members of Congress. In just the first month, more than 200,000 contacts have been made.
Credit unions are also weighing a recent National Credit Union Administration (NCUA) proposal intended to mitigate interest rate risk. The NCUA proposed rule would, if finalized as proposed, make derivatives transactions such as interest rate swaps and caps available to well-managed federally insured credit unions with more than US$250 million in assets. While it generally supports the ability of credit unions to enter into these transactions, CUNA has expressed concerns about various aspects of the proposed rule such as the proposed requirement that credit unions entering into these transactions pay NCUA an additional supervisory fee. CUNA is concerned that this proposal could cause NCUA to commonly assess fees for activities it considers risky.
Source: Credit Union National Association, www.cuna.org