The policy landscape in Australia is going through significant change with heightened scrutiny on banking competition and scandals at Australian major banks. In its most recent budget, the Australian Government announced several banking-related measures aimed at increasing competition and executive accountability.
One of the budget measures introduces a levy on major banks to reduce the unfair funding cost advantage enjoyed by the biggest banks in Australia. The levy expects to raise over AUD 1 billion a year from the major banks.
The Government is also looking to legislate a new Banking Executive Accountability Regime that will increase penalties and heighten expectations on all Australian Deposit-taking Institutions (ADIs) and their executives. This new regime responds to a lack of individual accountability at Australia’s major banks. The Customer Owned Banking Association (COBA) is working to ensure that these new rules do not overly burden Australian mutuals.
The Government has also released a draft bill to allow any Australian Prudential Regulation Authority (APRA)-regulated ADI engaged in the business of banking to use the restricted terms ‘bank’, ‘banking’ and ‘banker’ without requiring the regulator’s approval. The Government has also commenced a review into competition in financial services, following on from the Financial System Inquiry’s recommendation to examine the state of competition in the sector.
The APRA has also been busy releasing a consultation paper on a directly issued Common Equity Tier 1 (the same Basel III category as retained earnings) capital instrument for mutual ADIs, following several years of work with the mutual sector. APRA has also introduced further macro-prudential measures, in addition to its investor lending cap, such as limiting interest-only mortgage lending to clamp down on lending practices.
Brazil saw several initiatives passed during 2017 leading to new safety and soundness requirements for Brazilian credit unions. In June 2017, the Central Bank of Brazil adopted Resolution nº 4.588 to regulate most financial institutions’ internal audit activity. These rules establish requirements for the independent and impartial evaluation of the quality and effectiveness of the institution's internal controls, as well as risk management and corporate governance systems and processes.
Also in June, provisional measure nº 784 was adopted to deal with the administrative enforcement actions by the Central Bank of Brazil and the Securities and Exchange Commission. The new rules establish infractions, penalties, coercive measures and alternative means of dispute settlement applicable to financial institutions, as well as other institutions supervised by the Central Bank of Brazil and members of the Brazilian Payment System.
The Central Bank in February 2017 also adopted Resolution nº 4.557 on risk-based capital and other risk management programs. Large and medium-sized financial institutions must implement a continuous and integrated risk management structure and continuous capital management structure. This resolution consolidates all the norms that deal with risk and capital management.
Finally, in January 2017 the Central Bank of Brazil adopted Resolution nº 4.553 to achieve a more proportional application of prudential regulation. Under this approach credit unions and other financial institutions will be subject to regulatory burdens that are scaled to the institution’s asset size.
Credit Union use of the Terms “Bank, Banking and Banker”
Canada has recently begun a public debate on credit unions using the terms “Bank”, “Banking”, and “Banker”. Early in 2017, the federal bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), announced it would strictly enforce Bank Act provisions that restrict the use of the terms “bank, banker and banking” by non-bank institutions in Canada. This OSFI initiative would have meant provincially regulated credit unions would no longer be able to use those terms to describe their services even though they have employed those words for decades. Credit unions would have faced severe difficulties marketing to members, and compliance costs were expected to be over CAN 80 million.
In response, the Canadian Credit Union Association (CCUA) and the credit union system lobbied the federal government to reverse its decision. In August the federal Department of Finance announced it would consult with Canadians on the acceptable us of “bank words” by non-bank institutions. OSFI also announced it would suspend enforcement of the provisions pending the outcome of the consultation.
Since then, CCUA has been working to ensure a broad, system-wide response to the consultation and ensure the government hears from credit unions and others in support of common sense use of these terms.
Federal Depositor Preference Consultation
The Department of Finance has also been consulting with stakeholders on implementing a depositor preference framework for federally regulated Canadian financial institutions. Depositor preference is a form of depositor protection that would supplement deposit insurance by moving depositors’ (or a subset of depositors’) claims ahead of other senior unsecured creditors in an insolvency situation. Consequently, preferred depositors would receive increased protection from risk of loss. The federal government is considering addressing funding and depositor protection advantages held by the large domestic systemically important banks (D-SIBs) in addition to the recent introduction of a “bail-in” regime in Canada.
CCUA has responded to the consultation with qualified support for an introduction of a General Depositor Preference that would see preferred treatment for all deposit liabilities of a bank irrespective of deposit insurance eligibility, the deposit insurance limit or location. However, CCUA has argued that, during a crisis, depositor preference would be unlikely to stem deposit outflows at smaller institutions because risk aversion will drive the flight of deposits to D-SIBs where the expected loss given default is, for practical purposes, zero. CCUA has instead argued that the introduction of a depositor preference should be paired with an increase of deposit insurance coverage (currently CAN 100,000 at the federal level) and the establishment of fixed percentage coverage for deposits above the new, higher threshold amount. This would give depositors at smaller institutions greater comfort that they are truly protected in the event of a liquidity event or insolvency at a smaller institution.
OSFI Guideline on Mortgage Underwriting
The Canadian government continues its efforts to cool housing markets and reduce risks associated with the mortgage lending in hot markets such as the Vancouver and Toronto metropolitan areas. OFSI has issued a public consultation regarding its proposed Guideline B-20 which should change the agency’s regulatory approach to “Residential Mortgage Underwriting Practices and Procedures.” The guideline targets federally regulated financial institutions (including federal cooperative financial institutions); however, B-20 may also be taken up at the provincial level because provincial credit union supervisors often look to OSFI for best practices. Among other things, the draft guideline proposes to:
- Require a strict qualifying stress test for uninsured (low equity ratio) mortgages.
- Require loan-to-value adjustments based on local market conditions.
- Prohibit co-lending arrangements that seek to skirt regulatory requirements.
CCUA has responded to the consultation arguing that the proposed stress tests are punitive and will negatively impact first-time homebuyers, as well as those living in rural and remote areas, and will put downward pressure on markets that are not overheated. CCUA’s submission also noted that many of the new elements proposed in the B-20 revisions will require credit unions to engage in far greater data gathering and analysis to comply and this will impose proportionately higher compliance costs on small credit unions relative to the large banks.
The Association of British Credit Unions Ltd. (ABCUL) continues to engage with the Bank of England-Prudential Regulation Authority to seek a more flexible and/or lower minimum capital requirement for the largest and more complex credit unions. From September 2018, the minimum requirement for this cohort will rise to 8% with an additional 2% capital buffer, and a number of fast-growing credit unions and already established credit unions are likely to find difficulty in reaching this capital target without significantly scaling back their growth plans or providing less favourable rates to members.
ABCUL is also engaging the Financial Conduct Authority and HM Treasury to discuss the impact of new, restrictive interpretations of the Credit Unions Act on the ability for credit unions to innovate and develop new products and services, such as payments services, that are in the interests of credit union members and their own long-term sustainability. ABCUL hopes to secure a more flexible view on the existing Act but may need to pursue legislative reform.
Finally, ABCUL continues to prepare for Brexit’s impact on financial services regulation in the UK. Following the UK General Election in June, there is now significantly increased political uncertainty as well as a slowed pace in the UK’s Brexit negotiations with Brussels. Opening salvos in the exit negotiations do not suggest an easy outcome, with a lack of compromise on both sides. Meanwhile, the City of London is increasingly anxious to see progress on transitional arrangements to avoid a regulatory “cliff edge” that will occur if no deal can be reached with Brussels before the Brexit deadline of March 2019.
The Central Bank of Ireland published a consultation paper in May 2017 proposing changes to credit unions’ investment rules in the Republic of Ireland. The proposed changes include the addition of three new classes of permissible investments, including bonds issued by Supranational entities, corporate bonds other than subordinated bonds issued by other financial institutions, and investments in social housing projects.
While the Irish League of Credit Unions (ILCU) welcomes the proposal to allow credit unions in invest in social housing, we believe the other investment classes will give credit unions limited additional investment return compared to their existing investment authorities. Furthermore the proposed restrictions on subordinated bank bonds, if finalized, will effectively eliminate any meaningful investments by credit unions in bank bonds.
Ireland is also adopting a new centralised system for collecting personal and credit information on consumer loans as required by of the Republic of Ireland’s European/International Monetary Fund Programme of Financial Support established during the global financial crisis. This Central Credit Register, which is maintained by the Central Bank of Ireland, was launched on June 30, 2017 and credit institutions including credit unions are now obliged to transfer data in relation to loans over EUR 500 to the Register. From early 2018 credit unions will be obliged to consult the Register for loans above EUR 2,000 to review a member’s credit history to assist in making decisions about loan applications.
In Northern Ireland, the European Union’s (EU) 4th Anti-Money Laundering Directive has been transposed into national law with effect from June 26, 2017. In addition, despite Brexit, the UK Government has indicated an intention to transpose the EU’s General Data Protection Regulations (GDPR) into UK law through a new Bill in the third quarter of 2017. The issue of Brexit is also one of concern for our Northern Ireland credit unions, particularly those on the border who may have cross-border members and employees. In the current environment there is significant uncertainly as to the likely impact this will have on credit unions in Northern Ireland particularly if there is a return to a controlled border between Northern Ireland and the Republic of Ireland.
Source: Irish League of Credit Unions
Macedonia has experienced several changes to its credit union rulebook this year regarding capital requirements and expected loan loss accounting. In June 2017, the National Bank of the Republic of Macedonia published a new "Decision on the Methodology for Recording and Valuation of the Accounting Items and for the Preparation of the Financial Statements", which implements the International Financial Reporting 9 (IFRS 9) standard. The new rule goes into effect January 1, 2018.
In addition, the National Bank of the Republic of Macedonia also adopted a new methodology for risk-based capital that is based on Basel III and includes a new leverage ratio requirement. The purpose of introducing this standard was to protect against excessive use of leverage by banks.
Source: FULM Savings House
In the Netherlands, credit co-operatives that mediate between lending and borrowing members, like crowdfunding platforms, are supervised by the Authority for the Financial Markets (AFM). There are 54 loan and equity based crowdfunding platforms now registered, including 3 credit unions.
Recently AFM has evaluated the requirements for crowdfunding platforms and concluded that crowdfunding’s investment risks may not be properly understood. Based on this assessment, the agency is proposing to amend it rules to require earlier disclosures to investors as well as making defaults public. The AFM is also working closely with its European fellow supervisors on this issue because crowdfunding is a potentially cross-border activity.
New Credit Union Bill Introduced
Amendments to modernize New Zealands 35-year-old Friendly Societies & Credit Unions Act have been introduced before Parliament, after many years of lobbying by Co-op Money NZ, in the form of the Friendly Societies and Credit Unions (Regulatory Improvements) Amendment Bill. The amendments will be a significant step forward in helping New Zealand’s credit unions grow.
The Bill aims to remove unnecessary compliance costs, bring credit unions into alignment with other financial service providers in New Zealand, and maintain credit unions’ mutuality and the requirement of a common bond between members.
To achieve these aims, the Bill includes measures to—
- Simplify the statutory objects of an association of credit unions to cover generally the conduct of activities for the benefit of its members and as authorized by its rules;
- Provide for the incorporation of credit unions;
- Enable credit unions and associations of credit unions to have all the powers of a natural person;
- Permit credit unions to provide financing to small and medium enterprises that are owned by or otherwise closely associated with a natural-person member of the credit union; and
- Reduce the minimum number of credit union members needed for an association of credit unions to be validly constituted from 7 to 2.
Passing of the Bill through Parliament is not expected until after New Zealand’s national elections are held in September 2017.
Laws governing how financial advice is provided in New Zealand are also set for significant changes over the next two years, as the current regime has proved confusing and unwieldy to advisers and the public alike. The Financial Services Legislation Amendment Bill was introduced to Parliament in August 2017 and is expected to take effect in May 2019.
The key planned changes to the current regime are:
- Licensing requirements: Anyone (or any robo-advice platform) providing financial advice will need to operate under a licence granted by the Financial Markets Authority;
- New adviser designations are being introduced and the old ones scrapped;
- A new Code of Conduct is being developed and all financial advisers will be required to comply with this Code;
- Disclosure obligations: Enhanced disclosure requirements will be set to ensure consumers receive core information such as remuneration (including commissions) at the time most relevant to their decision making;
- Compliance and enforcement: Financial advice providers will be subject to the Financial Markets Conduct Act's civil and criminal liability for breaches; and
- A minimum level of contacts with New Zealand will be required for a financial institution to be registered on the Financial Service Providers Register.
There will be transitional licensing measures to be implemented for a period of two years to allow existing financial advisers to prepare for the new regime.
Source: Co-op Money NZ
In January 2017, Poland’s parliament adopted the Law on Small Credit Unions to establish proportional supervisory requirements and adequacy principles for small credit unions. This law defines small credit union as institutions with fewer than 10,000 members and less than PLN 20 million in assets (approximately USD 5.5 million by mid-year). The law also introduced a streamlined reporting system and a requirement for supervisors to use less burdensome supervisory measures if there is no need to use more stringent measures. The Small Credit Unions Law was introduced as a result of the Constitutional Court ruling of July 31, 2015 which called for introducing amendments in the existing law on credit unions to reflect proportionality in the regulation and supervision of small credit unions.
In June 2017, The Ordinance of Ministry of Finance on Reporting of Credit Unions and the National Association of Cooperative Savings and Credit Unions of 28 June 2017 introduced e-reporting by credit unions to their supervisor instead of using paper accounting documents for call reports. The e-reporting system has been offered to credit unions at no cost by the Regulator which developed it with a proper identification technology. The new system starts in January 2018.
Finally, public consultations started on July 17, 2017 on the new proposed Ordinance of Ministry of Finance on Special Rules of Accounting for Credit Unions, which will interpret the Law on Small Credit Unions.
In the United States, 2017 so far has been a year of political disruption resulting largely from the inauguration of Donald J. Trump as President of the United States. The Credit Union National Association (CUNA) and the American credit union system, however, have been well prepared to navigate through this period of uncertainty.
American credit unions secured major victories early in the year on Capitol Hill and in the courts. Specifically, the US Congress increased appropriations for key funds that help credit unions serve underserved communities and a federal court dismissed a lawsuit brought by banking trade associations that sought to overturn new regulations making it easier for credit unions to make loans to small and medium-sized businesses.
With the encouragement of the CUNA, the National Credit Union Administration (NCUA) (the US credit union prudential regulator) continues to make progress toward reducing supervisory burden. NCUA also has taken steps to reduce its budget through a significant reorganization and has recently proposed closing the Temporary Corporate Credit Union Stabilization Fund, established in 2009 as a response to the global financial crisis, which will likely include providing rebates to credit unions.
Even though the United States has a new President, a quirk in the law has allowed Richard Cordray, an appointee of former president Barack Obama, to remain Director of the Consumer Financial Protection Bureau (CFPB), complicating efforts to reduce credit unions’ regulatory burden. Nevertheless, the CFPB has recently made a beneficial change for credit unions that engage in lower levels of mortgage lending by increasing the de minimis reporting thresholds associated with the Home Mortgage Disclosure Act. Although Director Cordray is expected to resign soon to run for governor or Ohio, the Bureau is expected to finalize a new rule governing short term, small dollar loans prior to his departure from the agency.
Finally, the Trump administration and Congress remain interested in advancing comprehensive tax reform legislation. The political viability of this effort remains in doubt; nevertheless, CUNA has continued to engage the administration and Congressional tax writers regarding the need to preserve credit unions’ exemption from federal corporate income taxation. These policymakers have indicated that credit unions’ tax-exempt status is not in jeopardy.