On Sept. 6, the Australian Prudential Regulatory Authority released a discussion paper outlining its proposed approach to the accelerated implementation of Basel III in Australia. The proposal, now open for public comment, is focused on strengthening the capital framework for all authorized deposit-taking institutions, including credit unions. The Regulatory Authority intends to implement the Basel III capital requirements beginning Jan. 1, 2013.
In July 2010, the Canadian Parliament adopted legislation allowing the establishment of federal credit unions. This past spring, the federal government issued a proposed policy direction for the regulations that will take up issues of demutualization, securities and notice and disclosure on continuance. A draft of the regulations is expected later this year.
The federal government also this spring released the 2012 Federal Review of Financial Institutions Legislation consultative document. As expected, the proposed amendments to the legislative framework governing federal financial institutions are mostly technical in nature and have minimal impact on credit unions. Draft legislation is expected later this year.
The Canadian Credit Union System Clearing Group has been reconstituted under the responsibility of a group clearing joint venture management committee comprised of members of the clearing centrals (Central 1, Credit Union Central Alberta Ltd., Manitoba Central and SaskCentral). Accordingly, Canadian Central has transferred its role as group clearer to Central 1 Credit Union, which will act as the credit union system's connection point to the Canadian Payments Association and assume legal responsibility for settlement of the clearing group's payments items at the Bank of Canada.
Source: Credit Union Central of Canada, www.cucentral.com
The European Commission's proposal for a reviewed Capital Requirements Directive (CRD IV), transposing the Basel III standards into European Union (EU) law, introduces a number of significant changes to the regulatory requirements for banks. Increased capital requirements, more stringent rules on the quality of capital, the introduction of a short-term liquidity ratio and a leverage ratio (to be set at the discretion of supervisors) are expected to heavily affect future European bank operations.
While credit unions remain exempt from the CRD IV, it is highly likely that national regulators will use the EU rules as an example when revising prudential requirements for credit unions at national levels. The European Network of Credit Unions is therefore pleased that, according to the commission's draft, capital instruments issued by a financial cooperative can in the future be recognized as core Tier 1 capital if an institution is able to refuse or limit instrument redemption, and if the rights to the reserves and entitlements to the institution's assets are limited in instances of liquidation. The proposal further attaches a 25% multiplying factor for liabilities resulting from deposits that have to be maintained in the context of common task-sharing within cooperative network structures, thereby taking into account cooperatives' model of managing liquidity on a group basis.
Source: European Network of Credit Unions, www.creditunionnetwork.eu
A legislative reform order that will amend Great Britain's 1979 Credit Union Act was re-laid before parliament at the end of July. The reform is expected to be in place by early 2012 and will allow credit unions to provide services to community groups, attract investment from local businesses and extend services to new groups, including housing association tenants and employees.
Credit unions will also be able to pay interest on savings, instead of a dividend, making saving more attractive. Subject to a final scrutiny by parliamentary committees, the legislative reforms are expected to be in place by early 2012.
Elsewhere, the results of a feasibility study that will determine if the government makes a £73 million investment in the modernization and expansion of credit union services into the country's post office branches is expected this autumn. This could mean funding for a central services system and could allow a link-up between credit unions and the postal network, serving the needs of customers of both enterprises.
Source: Association of British Credit Unions, Ltd., www.abcul.org
By Sept. 30, Ireland's Commission on Credit Unions will provide an interim report to the Minister for Finance that will contain recommendations regarding the most effective regulatory structure and a strategy for the future evolution of the country's credit union sector. Established by the Ireland's government, the commission has focused on a strengthened regulatory framework, including more effective governance and regulatory requirements and recommendations for legislative changes. The commission will present its final report by March 31, 2012.
With regard to the particular nature of the credit union sector, the commission will as a priority examine the strategy to underpin its immediate solvency and viability, which has been prepared under the EU/IMF Program of Support for Ireland, and make recommendations to the finance minister regarding any relevant proposals for restructuring as they arise.
Transference of the regulatory responsibilities for Northern Ireland's credit unions from DETI(NI) to the U.K.'s Financial Services Authority (FSA), is in process. The transfer had been recommended by both the Enterprise, Trade and Investment Committee of the Northern Ireland Assembly and Her Majesty's Treasury following both bodies' reviews of the role and potential of credit unions in Northern Ireland and the legislative and regulatory framework within which they exist.
The regulatory transfer's next stage is FSA's publication of a consultation paper outlining proposals for the regulatory rules that apply to credit unions following the transfer to FSA regulation. The legislation to affect the regulation transfer and a timeline setting out the transfer process is expected to appear within the FSA consultation paper. The consultation paper's publication date has not yet been determined.
Source: Irish League of Credit Unions, www.creditunion.ie
June 2011 marked the deadline for Kenya's savings and credit cooperative societies (SACCOs) to submit applications for licensure. More than 90% of the 219 SACCOs conducting deposit-taking or quasi-banking business have submitted license applications with the SACCO Societies Regulatory Authority (SASRA). Prudential regulations introduced last year have been well received by SACCOs based on the number of license applications received. However, remaining challenges include capital adequacy and loan portfolio quality standards, which a number of SACCOs are still struggling to satisfy. SACCOs have until 2014 to fully comply with the new prudential standards set out in the regulations.
Of the 200 license applicants, SASRA has licensed 73 SACCOs, while 52 additional institutions have been issued letters of intent because they meet the minimum licensing requirements as stipulated in the SACCO Societies (deposit-taking SACCO business) regulations. The remaining applications require greater in-depth analysis in order for SASRA to make informed decisions on their ability to satisfy the licensing requirements. WOCCU, under the support of Financial Sector Deepening Kenya, will assist SASRA through technical training and supervising select audit firms in the due-diligence exercise.
Thirteen SACCOs informed SASRA of their inability to comply, hence stopping the quasi-banking business and concentrating only on back-office operations. The remaining six SACCOs that did not apply for a license were directed to cease any and all deposit-taking business.
SASRA is now in the second phase of implementing the new regulatory framework, which entails prudential supervision of the licensed SACCOs. This includes offsite analysis of the prudential reports and onsite inspection of the licensed SACCOs to ensure adherence to the operational and prudential standards. In this regard, SASRA is developing requisite technical capacity through training attachments at the Central Bank of Kenya. In addition, SASRA is exploring technical support from credit union regulatory experts in developing supervisory methodologies. In order to ensure efficiency in prudential reporting by the licensed SACCOs, SASRA is currently testing an electronic submission of reports through an in-house developed application.
June 2011 also marked the first anniversary since the commencement of prudential regulation for SACCOs in Kenya under the SACCO Societies Regulatory Authority.
Source: SACCO Societies Regulatory Authority, www.sasra.go.ke
In early 2011, credit unions were introduced to New Zealand's Financial Markets Authority (FMA) taking over the regulatory function that was previously carried out by the Securities Commission and has now taken on increased surveillance responsibilities. While the FMA's main objective is to promote and facilitate the development of fair, efficient and transparent financial markets, one of its first roles was to require all financial advisers or their employing companies to be registered and act with care, diligence and skill when providing financial advice. Credit unions are regulated by the Reserve Bank of New Zealand as non-bank deposit takers.
New Zealand has a "twin peaks" financial markets regulatory structure. The FMA is one of the peaks, the Reserve Bank of New Zealand is the other peak, and the pair has prudential powers over the banking sector, including finance companies and credit unions. The FMA's role is to enforce securities, financial reporting and company law as they apply to financial services and securities markets. The FMA also regulates securities exchanges, financial advisers and brokers, trustees and issuers.
The Friendly Societies and Credit Union Act 1982, through which credit unions are registered, is undergoing significant reforms, with an outcome expected in early 2012. Several significant regulatory reforms have affected New Zealand credit unions in recent years. The Reserve Bank of New Zealand has introduced regulations that have created a "non-bank-deposit-taker" regime within which the country's credit unions have been captured. The regulations enforced thus far include credit rating requirements, risk management program implementation, capital ratio requirements, related party and quantitative liquidity thresholds.
Source: New Zealand Association of Credit Unions, www.nzacu.org.nz
On July 21, 2011, a new U.S. federal agency, the Consumer Financial Protection Bureau officially opened its doors. The bureau, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, is tasked with implementing and enforcing federal consumer financial protection laws. Although the CFPB has supervisory authority over financial institutions with respect to consumer protection-related matters, the National Credit Union Administration (NCUA) remains the independent federal regulator of credit unions.
Rulemaking under the Dodd-Frank Act also continues, with several proposed and final rules recently released. On July 20, 2011, the Federal Reserve Board issued its highly anticipated final rule regulating interchange fees. The rule, effective on Oct. 1, 2011, caps the fee a financial institution may charge for electronic debit transactions in accordance with a specific formula and exempts financial institutions with less than US$10 billion in assets Several other proposed rules implementing the provisions of the Dodd-Frank Act were recently released for comment, including a proposed regulation to implement the Truth in Lending Act's ability-to-repay mortgage lending requirements, and a proposed credit risk retention rule requiring mortgage securitizers to retain a 5% economic risk in the aggregate credit risk of the assets collateralizing an issuance of an asset-backed security under certain circumstances.
NCUA is currently accepting public comments regarding its proposed credit union service organizations (CUSOs) regulation, which would expand NCUA's regulatory authority over CUSOs. The proposed regulation would require CUSOs that credit unions lend to or invest in to prepare quarterly financial statements, to obtain an annual audit and to provide an annual report to NCUA and state regulators, as appropriate, all in conformance with GAAP or GAAS. Under the existing rule, credit unions investing in or lending to CUSOs must allow NCUA to have access to all the CUSOs' books and records. Additionally, the rule would subject non-exempt state-chartered credit union CUSOs to the same rules as federal credit union CUSOs, and subsidiary CUSOs would be subject to the same regulations as their parent CUSOs. CUNA has filed a comment letter opposing or suggesting modifications to many of the provisions of the proposed regulation.
Source: Credit Union National Association, www.cuna.org
On Sept. 16, the International Credit Union Regulators' Network (ICURN), an independent organization of financial cooperative supervisory authorities for which World Council of Credit Unions acts as secretariat, released the Guiding Principles for the Effective Prudential Supervision of Cooperative Financial Institutions. Taking into account financial cooperatives' unique nature and using the Basel Committee's Core Principles for Effective Banking Supervision as a guide, the ICURN document incorporates 21 principles conducive to developing an effective global supervisory system for credit unions, caisses populaires, savings and credit co-operatives, savings and credit associations and other financial cooperatives. ICURN members will convene June 18-20, 2012, for the annual Regulators' Roundtable in Toronto, Canada.
On Aug. 1, the Task Force on Financial Consumer Protection, led by the Organization for Economic Co-operation and Development, published the Draft High-Level Principles on Financial Consumer Protection for public consultation. The principles are designed to assist governments and regulators in the G-20 and other countries to enhance financial consumer protection. Once finalized, these principles will be applicable across all financial service sectors. A final draft will be submitted at the G-20 Finance and Central Bank Governors meeting on Oct. 14, 2011. More info
On July 19, the Basel Committee on Banking Supervision issued a consultative document entitled Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement. The assessment methodology is an indicator-based approach that comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity. Additional loss absorbency requirements will be met with a progressive Common Equity Tier 1 capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. To provide a disincentive for banks facing the highest charge to materially increase their global systemic importance in the future, an additional 1% loss absorbency will be applied in such circumstances. The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, effective Jan. 1, 2019. More info
On July 1, the Financial Stability Board launched a Peer Review of Deposit Insurance Systems. Using the Core Principles for Effective Deposit Insurance Systems as a benchmark, the peer review will examine existing deposit insurance systems and the planned changes. It will also draw lessons about the effectiveness of system reforms in response to the crisis. Responses that were submitted by Aug. 26 will be analyzed and discussed later this year, and the peer review report will be published in early 2012. Read WOCCU's comment letter on the deposit insurance systems peer review.