Australian credit unions and mutual building societies have spent the first part of their new financial year implementing two new significant pieces of consumer legislation — the consumer credit regime and the unfair contracts legislation.
Beginning July 1, 2010, the consumer credit regime requires all credit providers to be licensed and to comply with strict responsible lending requirements, including more rigorous requirements for assessing the borrower's capacity to repay and ensuring that loans are suitable for the borrower's needs. While there are some compliance requirements, credit unions and building societies are well placed to meet the new requirements because of their long-standing commitment to responsible lending recently outlined industry's self-regulatory Code of Practice. The new credit regime will, however, give better protection to consumers from irresponsible lenders, particularly those not previously regulated under the former credit legislation.
The unfair contracts legislation also commenced operation on July 1, 2010. The legislation overturns standard form contracts that have unfair contract terms penalizing consumers. Unfair terms include terms those causing a significant imbalance in the rights of the contracting parties and that are not reasonably necessary to protect the interests of the contracting party that benefits from them. For banks, building societies and credit unions, the major focus will be on fees charged in relation to transaction and loan accounts.
Competition in banking continues to be the dominant theme in an uncertain political environment following the Federal government election. Mutuals are calling on the government to support competition against the dominance of the four major Australian banks that have 90% of the market, including calling for a government guarantee scheme for retail deposits to be continued beyond its proposed review date of October 2011.
Source: Abacus - Australian Mutuals, www.abacus.org.au
On July 12, 2010, the Canadian government passed legislation to amend the Bank Act in order to allow for the establishment of federal credit unions. A federal charter will enable those credit unions that wish to do so to reach beyond provincial boundaries and pursue business strategies that are not constrained by provincial regulation.
The inclusion of a "federal credit union" option in the Bank Act has the effect of having all the provisions of the Bank Act apply to federal credit unions with the exception of those governance provisions that specifically apply to federal credit unions. As a result of this approach, the vast majority of the proposed amendments to the Bank Act pertain to issues of governance (i.e. the organization of the credit union, the membership, issuance of shares, etc). All other aspects of the regulatory environment that apply to banks, would apply to the federal credit union.
Canadian Central supports the enactment of this legislation as a useful first step towards the establishment of federal charters for credit unions.
Further information can be found in CUCC's Policy and Advocacy Report
Source: Credit Union Central, www.cucentral.com
On June 9, 2010, the Estonian Parliament has passed the amendments to the Credit Cooperative Law. After six years of lobbying, the amended legislation provides for:
- Added "common bond" principles as a basis for CU founding for the territorial principle has been the only one until today
- An option for credit unions to store and deliver the funds of public entities
- Fewer prescriptions to formulate the membership conditions; wider rights to decide those conditions by the credit union itself
- Less bureaucracy in approving memberships
- Legalized services to the non-members
- Longer sell-off terms for acquired assets
- Increased duration for long-term loans from 3 to 5, 10 years for mortgage loans
- Simplified merger procedures
Estonian credit unions are part of the European Network of Credit Unions.
Source: Estonian Union of Credit Cooperatives, http://www.hoiu-laenu.ee
While the European Commission continues to work relentlessly to find agreement on reforming financial supervision and deposit guarantee schemes, it is also increasing efforts to review consumer protection procedures in retail financial services. The commission is currently assessing the rationale behind certain commercial practices, including tying and bundling of products and its anti-competitive impact.
The European Network of Credit Unions (ENCU) has presented the commission with evidence of the advantages for members resulting from certain practices used by credit unions and will meet with the commission in October to further explain its views. View the ENCU comment letter
ENCU has presented the commission with evidence of the advantages for members resulting from certain practices used by credit unions, and together with the European Banking Industry Committee and the European Insurance Association, ENCU participates in stakeholder meetings organized by the commission to enhance understanding of credit unions' commercial practices.
Source: European Network of Credit Unions, www.creditunionnetwork.eu
Long-awaited legislative reforms are very near to implementation after a lengthy delay following the recent UK general election. May's election resulted in a coalition government between the Liberal Democrats and the Conservatives which in the past have both been supportive of credit unions. The reforms will free British credit unions from a long-obsolete framework giving way to much faster growth. A strong mutual financial services sector is part of the program for government.
Additionally, a review of prudential regulation for credit unions has closed and new, higher standards for capital adequacy and liquidity will be brought in to coincide with the new legislative framework. Both packages are expected in early 2011.
An election promise that brought Conservatives to power was abolition of the Financial Services Authority, the current banking and credit union regulator, and assigning financial regulation responsibilities to the Bank of England. The details of the new system are currently under review and the process is likely to take two years.
Source: ABCUL, www.abcul.coop
Ireland's Minister for Finance requested that the Registrar of Credit Unions, on behalf of the Financial Regulator, carry out a strategic review of the credit union sector. The overall purpose of the review is to develop proposals on a sustainable credit union operational model supported by an appropriate legislative and regulatory framework. This comprehensive review will start this summer and conclude in March 2011.
The strategic review will be carried out in two phases. The first phase will advise and inform the further work required during the second phase to develop proposals on the future strategic direction of the credit union sector.
Specifically, the first phase is designed to:
- Provide a detailed factual overview and expert assessment of the risk profile of the credit union sector as a whole , including specific proposals to strengthen the prudential soundness of credit unions; and
- Assess the adequacy and appropriateness of the external support mechanisms for the protection of member's savings, governance and competency in credit unions, the credit union operating model and the regulatory and legislative framework for credit unions in regards to the risk profile of the credit union sector
The first phase is due to be completed by December 31, 2010 and includes survey work.
The purpose of the second phase is to develop proposals on the future strategic direction of the credit union sector and the supporting regulatory and legislative framework. The work will be dteremined by:
- The work carried out during the first phase
- Consultation with all the stakeholders, and
- Best practice and expert advice
The review second phase is expected to begin in January 2011and is due to be completed by March 31, 2011.
Central Bank Reform Bill 2010
The Central Bank Reform Act 2010 was passed in July provides the statutory basis for merging the functions of the Central Bank and the Irish Financial Services Regulatory Authority ("IFSRA"), creates a single, fully-integrated Central Bank and leads to IFSRA's dissolution. The Central Bank will be responsible for the prudential supervision of regulated financial service providers, the way business is conducted, including protection of consumer interests, and the stability of the new financial system overall.
The act also makes amendments to section 35 of the Credit Union Act, 1997 (as amended) to deal with the issue of rescheduling of loans. An intensive lobbying campaign was carried out by the credit union movement seeking to reduce the onerous nature of the provisions as originally drafted. It is hoped that there may be room for further negotiation around the transitional arrangements for the introduction of these changes.
Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010
The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 ("the Act"), was signed into law on 19 July 2010.
The act deals with both the civil registration of same-sex partnerships (Civil Partnership) and the rights and duties of cohabiting couples. The act introduces very significant changes to the legal status of unmarried couples, both same-sex and opposite-sex, and also introduces various rights and obligations for cohabiting couples.
The act enables credit unions to accept a guarantee for a loan from an officer of the credit union for his/her Civil Partner.
Northern Ireland: Regulatory Reform
The Irish League of Credit Unions (ILCU) made a submission to the joint consultation paper on Proposals for Regulatory Reform of Credit Unions in Northern Ireland issued by the Department of Enterprise, Trade and Investment (Northern Ireland) [DETI(NI)] and Her Majesty's Treasury. The ILCU submission to this consultation paper can be found on the ILCU website: www.ilcu.ie. The next stage in this regulatory review process is the examination of the submissions received to the joint consultation paper and the publication by DETI(NI) and Treasury of their responses to this submissions.
A meeting was held on June 14, 2010 between representatives of the ILCU and the Minister of the Northern Ireland Assembly to discuss the recent developments in the review of the regulation and legislation of credit unions in Northern Ireland. Government supported the view that members of Northern Ireland's credit unions should receive the same levels of services from their credit unions as their counterparts in the Republic of Ireland. They also agreed that methods by which credit unions would be permitted to invest in their local communities should be examined.
It remains to be seen what impact disbanding the Financial Services Authority (FSA) and giving the Bank of England powers over macro prudential regulation will have on credit unions in Great Britain and the review of the regulatory structure for credit unions in Northern Ireland.
Source: ILCU, www.creditunion.ie
In June 2010, the Kenyan Minister for Cooperatives Development and Marketing has published the much awaited regulations for the savings and credit cooperatives (SACCOs). The regulations followed the SACCOs Societies Act passed in December 2008. An estimated 202 eligible SACCOs have until June 2011 to apply for licenses with the SACCO Societies Regulatory Authority (SASRA) but will have a four-year transition period from 2011 to 2014 to fully comply with the new prudential standards set out in the regulations.
SASRA is now fully operational. The immediate task for SASRA is to set up the operational systems and procedures for receipt and processing of license applications while ensuring that SACCOs are adequately informed of what is expected of them now and in the future. Regulatory compliance is currently the major concern for the SACCOs and much of the technical support will be required to ensure that SACCOs transition to prudential regulation smoothly.
Source: SASRA, www.sasra.go.ke
By December 1, 2010, all New Zealand credit unions are required to be registered as financial service providers. In order to do this credit unions first need to join one of the three approved dispute resolution schemes.
There has been liberalization of the proposed definition of financial planning within the Financial Advisors Act 2008. The new definition means that the budget and financial literacy endeavors of most credit unions will no longer be deemed financial planning and individuals providing the service will no longer be required to register as Authorized Financial Advisors.
Long overdue changes to the Friendly Societies & Credit Unions Act 1982 continue to be deferred; however an opportunity has arisen for changes that have previously been approved by the Cabinet to be implemented in an Omnibus Bill.
Source: NZACU, www.nzacu.org.nz
As the government is discussing amendments to the financial sector laws, including credit unions, the Superintendence of Banks is seeking to oversee the four largest credit unions in Panama. Instituto Panameño Autónomo Cooperativo (IPACOOP), the credit union regulator, has requested more technical resources from the government to effectively supervise credit unions. IPACOOP has the credit union support in developing a proposal aimed at designating IPACOOP as the institution that regulates and oversees all credit unions in Panama.
Source: COFEP, www.cofep.com
Singapore's 37 credit cooperatives are moving from self-regulation to a regulated environment, which will steer them toward a higher level of prudence and accountability. All credit unions have been required to re-register by June 30, 2010 to continue to provide financial services.
Source: SNCF, www.sncf.org.sg
Ukraine's credit unions have been some of the hardest hit by the global financial crisis. The local currency devalued by 50% and the consequent run on savings has caused financial institutions to scramble for liquidity. In 2009, the number of credit unions dropped from 828 to 729 due to insolvency and members' failure to pay off their loans. While the commercial banks received billions in government bailout, the State Commission for Regulation of Financial Services Markets of Ukraine has revoked licenses for several problem credit unions. Total credit union membership dropped from 2.6 to 2.3 million members and total assets decreased from 6 billion to 4.2 billion Ukrainian hryvnias at the end of the year.
Source: UNASCU, www.unascu.org.ua
President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law Number 111-203), commonly referred to as the "Dodd-Frank Act," into law on July 21, 2010. This law makes numerous changes to the laws and regulatory requirements affecting credit unions and virtually all other participants in the United States financial sector. Notably for credit unions, the Dodd-Frank Act will place government price controls on debit card interchange rates in the United States for the first time. The full impact of the interchange price controls and other provisions of the Dodd-Frank Act on credit unions will not be fully known until administrative agencies such as the Federal Reserve Board issue detailed regulations implementing the new law.
The Dodd-Frank Act also sets new rules for international "remittance transfers" which are likely to drive up the cost of most cross-border consumer electronic funds transfers initiated in the United States. Fortunately for U.S. credit unions, CUNA successfully convinced Congress to insert so-called "carvouts" and "safe harbors" into the law which should exempt most credit union transactions from the most onerous "remittance transfer" requirements.
In addition, the Dodd-Frank Act creates a new Consumer Financial Protection Bureau to oversee virtually all federal consumer protection regulations and policies on a consolidated basis. This approach adopts aspects of the "Twin Peaks" regulatory model-where one agency enforces safety and soundness regulations and a different agency is responsible for consumer protection regulations-which is used in countries such as Australia and the Netherlands. Most credit unions, however, will continue to be examined for consumer protection law compliance as well as safety and soundness by the National Credit Union Administration and/or state regulatory agencies.
The act also mandates new requirements for residential real estate lending and creates a Financial Stability Oversight Council which will be able to designate certain large financial companies as "systemically important" and require them to hold additional capital and reserves or restrict their business activities.
The Dodd-Frank Act — which is 848 pages long in the version published by the U.S. Government Printing Office — requires more than 300 administrative rulemakings to promulgate regulations implementing the act, and may also be subject to "technical corrections" legislation to fix the legislation's errors and unintended consequences. At least 30 of these rulemakings will affect credit unions, and the Dodd-Frank Act's true impact on U.S. credit unions will not be fully known until these regulations are issued in final form over the next two years or more. CUNA will continue to be involved in all aspects of the legislative and rulemaking process as Dodd-Frank Act implementation unfolds.
Source: CUNA, www.cuna.coop
On October 5-7, credit union regulators from the Caribbean region will gather in Montego Bay, Jamaica, for the first Caribbean credit union supervisors' workshop. The forum is organized by WOCCU and the IMF Caribbean Regional Technical Assistance Center. Participants will benefit from presentations and best practices in conducting on-site examinations, licensing and supervision of new credit unions, effective regulation and governance among many other topics. The workshop will include two and a half days of informative sessions and networking.
Fifteen African countries will gather December 1-3 for the third annual Regulators' Roundtable to be held in Lilongwe, Malawi. WOCCU, the Canadian Cooperative Association and the Irish League of Credit Unions Foundation are sponsoring this event co-hosted by the Malawi Union of Savings and Credit Co-operatives. The workshops' purpose is to gather senior officials from the ministry of finance, central banks, ministry of cooperatives and the savings and credit co-operative (SACCO) industry for a focused and practical discussion of how to legislate, regulate and supervise financial cooperatives.
Global and regional regulators' meetings are organized by WOCCU and the International Credit Union Regulators' Network each year to bring regulators together to discuss current and emerging issues, as well as the risks facing financial cooperatives. The global Regulators' Roundtable was held this past July in Las Vegas with credit union regulators from 12 countries.
Source: WOCCU, www.woccu.org
On July 26, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, reached a broad agreement on the overall design of the capital and liquidity reform package. They agreed on some small changes to the original proposals in particular with regards to the following:
Definition of capital
The definition of capital as set out in the December 2009 consultative package will be retained in its majority. Some amendments will however be included with regards to (i) the recognition of the minority interest, (ii) investments in other financial institutions, (iii) allowing IFRS treatment where different GAAP (e.g. certain software assets), and (iv) the treatment of significant investments in the common shares of unconsolidated financial institutions, mortgage servicing rights and deferred tax assets from timing differences.
When WOCCU commented to the initial consultative document it stressed in particular that credit unions' ownership shares should be considered tier one capital (if certain conditions are met). The Basel Committee had indicated that "Common Equity" means retained earning plus common shares or "the equivalent for non-joint stock companies". In its recent agreement, the Group of Governors did not modify this point.
Counterparty credit risk
The Group of Governors has decided to modify the treatment of counterparty credit risk, including the bond equivalent approach to calculating the credit valuation adjustment (CVA).
In its response to the initial Basel proposals, WOCCU suggested a definition of "unregulated financial intermediary" to ensure that credit unions would not fall under it. The Group of Governors has not addressed this point in its recent agreement.
Regulatory buffers/ forward looking provisioning
On these issues, the Group of Governors referred to the Basel Committee's additional work on that matter. A consultation on capital buffers is currently still ongoing (until September 30).
On the short term liquidity standard (liquidity coverage ratio), the Group of Governors decided to lower the run-off rate floors to 5% (stable) and 10% (less stable) from 7.5% and 15% respectively. In addition, on the initially proposed long term liquidity ratio (net stable funding ratio), the Group of Governors has agreed on a number of changes; among others, they decided that the Available Stable Funding Factor for stable and less stable retail and SME deposits should be raised from 85% and 70% to 90% and 80%, respectively. In addition, they are planning to provide for a longer transition period until January 1, 2018. Greater recognition of the stability of retail deposits is in accordance with the position that WOCCU put forward to the Basel Committee.
The details of the capital and liquidity reforms will be published later this year, together with a summary of the results of the Quantitative Impact Study. The Committee will finalize the regulatory buffers before the end of this year. The Governors and Heads of Supervision agreed to finalize the calibration and phase-in arrangements at their meeting in September 2010.
View the interim report: Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements. View the press release.
Source: WOCCU, www.woccu.org
WOCCU is reviewing the Basel Committee's recent proposals on counter-cyclical capital buffers and loss absorbency of regulatory capital. To share your views on these proposals contact Dave Grace at email@example.com by September 8 and September 27 respectively.
Source: WOCCU, www.woccu.org