Drop the Mic…
Volume 13, Number 9
September 27, 2023
Advocacy News You Can Use
The G20 endorsed proportionality. That’s it. Drop the mic. A bit dramatic, but from an advocacy standpoint it’s a home run. The leaders of the world’s most influential economies stated that they endorse the proportional mechanisms built into the sustainability standards. They clearly expressed that countries should take into account the flexibility within the rules based on country-specific circumstances while implementing the standards. Over the years, WOCCU has advocated for this decisive direction to national level supervisors. This internationally agreed upon language can be used by credit unions to make sure the pending (and in some places already adopted) sustainability standards for managing climate risks and other sustainable disclosures are tailored for the size, risk, and complexity. This is precisely how our industry can make sure that rules work in favor of credit unions.
There is still work to do, and I realize it will not always be easy to make sure that national level authorities understand the direction that they have received, but, it is nice to see that proportionality continues to be a winning argument and one that is now embraced at the highest levels.
There is other beneficial language in the Leaders’ Declaration on financial inclusion, on payments, and on AML/CFT. I urge you to read our summary, it will give you insight into how requirements will change in the future. The inclusion of the African Union into the G20 (likely to become the G21) is another significant development I believe will be influential over the next several years. That is a large omission from the previous representation that is now being corrected. Africa will now have a needed voice at the table and will likely begin to show its influence in the years to come.
WOCCU Applauds G20 for Embracing Proportionality in Leaders’ Declaration
Sustainability and climate-related disclosures among the issues addressed that will impact credit unions
Leaders of The G20 agreed September 9 to a joint declaration that embraces a proportional approach to the newly finalized standards on sustainability and climate-related disclosures published by the International Sustainability Standards Board (ISSB), while addressing a number of other issues that will impact credit union regulations moving forward.
Issued at this year’s summit in New Delhi, India, with a theme of ”We are One Earth, One Family, and we share One Future”, the Leaders’ Declaration also gives direction on financial inclusion, payments, cryptocurrency, artificial intelligence, anti-money laundering, digitization and gender equality to many of the international standard setting bodies whose guidance is ultimately used by national-level supervisors and authorities to establish regulatory rulebooks for credit unions.
“The embrace of proportionality at the level of the G20, as it relates to the sustainable and climate-related disclosures, will allow credit unions to have rules tailored for their size, risk and unique cooperative structure. This does not mean an exemption, but instead allows the important role of credit unions in transforming their communities to be highlighted and not overrun by complicated rules designed for large, internationally active banks”, said Andrew Price, World Council of Credit Unions' (WOCCU) Senior Vice President of International Advocacy and General Counsel.
WOCCU continually advocates at all levels to illustrate the link between the proportionality of regulations and the greater opportunity for financial inclusion, notably that proportionality expands the ability of community-based cooperatives like credit unions to serve people outside the financial system. This year’s efforts included direct meetings with several of the international standard setters, as well as participation in the public policy making and rulemaking process.
The Leaders’ Declaration this year also embraced critical policy positions on financial inclusion—namely the endorsement of the G20 2023 Financial Inclusion Action Plan. It further embraces digitization and supporting a digital public infrastructure to accomplish greater financial inclusion.
Why this matters to your credit union: The G20 gives direction to the international standard setting bodies. These internationally agreed upon directions will shape the regulations over the coming years. The direction on financial inclusion is beneficial for credit unions as it values enabling and regulatory frameworks that support cooperative financial institutions in accomplishing financial inclusion. Likewise, the application of proportionality for sustainable finance disclosures will help with the implementation of those regulations.
FSB identifies frictions from data frameworks that pose challenges to enhancing cross-border payments
The Financial Stability Board (FSB) published its stocktake of international data standards relevant to cross-border payments. The stocktake looks at national and regional data frameworks relevant to the functioning, regulation and supervision of cross-border payment arrangements. It takes forward one of the priority actions under the G20 Cross-border Payments Roadmap, to enhance the interaction between data frameworks and cross-border payments. The report:
- Identifies frictions that pose challenges to improving the cost, speed, transparency and access of cross-border payments;
- Highlights fragmentation in data frameworks as a main contributor to increased cost and inability to automate cross-border payments;
- Notes that by early 2024, the FSB will develop recommendations, for public consultation, for promoting alignment and interoperability across data frameworks applicable to cross-border payments.
The stocktake was conducted to identify issues relating to cross-border use of data by national authorities and by the private sector in cross-border payment arrangements. The report identifies a number of frictions from data frameworks that pose significant challenges to improving the cost, speed, transparency and access of cross-border payments. These include uncertainty among payment providers on how to balance the various obligations under different data frameworks, such as obligations related to data privacy and to anti-money laundering and combating the financing of terrorism (AML/CFT); and challenges arising from restrictions on the flow of data across borders, which could make it more difficult to identify fraud, comply with AML/CFT and other regulatory obligations, as well as manage risk on an enterprise-wide basis. A certain degree of friction from data frameworks may be an unavoidable and acceptable consequence of regulations aimed at preserving the security of transactions, meeting AML/CFT objectives and protecting the privacy of citizens. However, the extent of fragmentation in data frameworks across jurisdictions was considered a main contributor to increased cost and inability to automate payments.
Work is already underway in the FSB to follow-up on this stocktake and address these issues. In particular, the FSB is developing recommendations to promote alignment and interoperability across data frameworks applicable to cross-border payments. To inform its work, the FSB will engage with industry, data privacy experts, financial regulators and data protection agencies to develop case studies to assess the impact of selected frictions on cross-border payments and identify where action should be prioritised.
Why this matters to your credit union: Significant work continues to move forward by international standard setting bodies on achieving faster, cheaper, more transparent and inclusive cross border payments. This stocktake is a good read to see the progress made to date, as well as to provide insights on how the payments landscape will be shaped in the future. The Basel Committee’s focus on credit risk will portend potential regulatory changes and supervisory expectations. Their observation on the difficulties in assessing credit quality during this economic time will mean heightened attention by supervisory authorities for credit unions.
FSB Chair writes to G20 Leaders ahead of the New Delhi Summit
The Financial Stability Board (FSB) today published two letters from its Chair, Klaas Knot, to G20 Leaders ahead of their Summit in New Delhi on 9-10 September, noting the following key points:
- FSB Chair warns that the higher interest rates that have been necessary to address inflation, alongside a slowing growth outlook, could impair the capacity of borrowers to service historically high levels of debt.
- Work to address financial stability risks associated with leverage in the non-bank financial intermediation (NBFI) sector will be a major focus of FSB policy work in 2024.
- A separate letter calls for continued support from Leaders as work to enhance cross-border payments shifts towards implementing practical projects in partnership with the private sector.
The first letter outlines the work the FSB has undertaken under the Leadership of India’s G20 Presidency to address existing vulnerabilities in the financial system and enhance the resilience of the financial system to structural change.
The letter notes the challenging backdrop of strong and persistent inflation and slowing growth, and warns that rising interest rates could impair the capacity of borrowers to service the historically high stock of global debt. He calls on authorities to closely monitor asset quality in those sectors most sensitive to higher interest rates, such as real estate. The letter highlights concerns over the build-up of leverage in the NBFI sector, described in a report being delivered to the Summit, and notes that addressing these risks will be a major focus of NBFI policy work next year.
The March banking-sector turmoil constituted a test of the financial reforms put in place following the 2008 crisis. It exposed vulnerabilities in individual institutions relating to poor liquidity and interest rate risk management and governance, and reinforced the need for strong and effective supervision and The FSB and the Basel Committee on Banking Supervision (BCBS) are examining the implications of these issues to identify lessons and adjust policy frameworks where needed. The FSB remains convinced that the international resolution framework developed by the FSB in the aftermath of the 2008 Global Financial Crisis is fit for purpose, but we have identified a number of implementation challenges that need to be addressed. To this end, the FSB will soon publish a report on preliminary lessons learned for resolution and policy priorities going forward.
The letter outlines the FSB’s work to address the financial stability implications of two secular trends – digitalisation and climate change. In response to the former, the FSB delivered to the G20 in July a set of recommendations for the regulation, supervision and oversight both of crypto-assets and markets and of global stablecoin arrangements. The FSB is now working with standard-setting bodies and international organisations to ensure that these recommendations are implemented globally. Recognising that crypto-assets raise both financial stability and macroeconomic risks, the FSB and IMF are delivering to the Summit a Synthesis Paper that brings together the risks identified by each institution and how they interact. The paper also includes a roadmap for future work.
Accelerating digitalisation across the financial system has improved efficiencies but also raised operational resilience challenges. For instance, the interconnectedness of the global financial system makes it possible that an incident at one financial institution, or at one of its third-party service providers, could have spill-over effects across borders and sectors. To address these risks the FSB issued in April recommendations to achieve greater convergence in cyber incident reporting frameworks. The FSB has also consulted on a policy toolkit that financial institutions and financial authorities can use to enhance their third-party risk management and oversight. The toolkit will be finalised in December.
In response to climate risks, the FSB is coordinating closely with standard-setting bodies and international organisations to implement the four building blocks of its Roadmap on Climate-related Financial Risks. An important milestone has been the publication of the International Sustainability Standards Board (ISSB)’s disclosure standards, which have been endorsed by the International Organization of Securities Commissions (IOSCO). The ISSB standards will strengthen the comparability, consistency and decision-usefulness of climate-related financial disclosures around the world. These standards can be seen as a culmination of the work of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD), which has made a major global contribution since its creation in 2015.
A second letter provides to G20 Leaders an update on the G20 Cross-border Payments Roadmap. The first phase – the initial set of actions set out in the 2020 Roadmap – has now largely been completed. This year, in the second phase, the authorities and standard setters have focused their efforts on concrete projects that will make a difference across various parts of the cross-border landscape and on developing further the partnership with the private sector to work to achieve the Roadmap goals. The letter underscores the need for continued further political support and sustained effort by the public and private sectors in order to meet the G20 targets by 2027 to make cross-border payments cheaper, faster, more inclusive and more transparent. Leadership from the G20 has energised the public and private sectors and provided the political impetus, without which change will not happen.
A copy of the press release can be viewed here.
Why this matters to your credit union: While this letter was issued in advance of the Leaders’ Declaration, it provides an excellent summary of where the Financial Stability Board stands on payments and various other issues such as virtual assets, climate risks, digitalization and others. It provides insight into future regulatory issues.
Andrew T. Price, Esq.