Lessons from Australia: How Climate-related Risks Impact Regulations
Volume 10, Number 1
January 29, 2020
Advocacy News You Can Use
As I write this month’s Telegraph, our hearts and prayers go out to our friends and colleagues in Australia as they struggle through the devastating fires currently affecting the continent. Climate-related events such as these are no doubt weighing not only our minds, but on those of our respective policy makers in the financial sector. In particular, these events will undoubtedly play a role in the emerging policies surrounding sustainable finance.
The EU is considering an Action Plan for early 2020. The Basel Committee on Banking Supervision (Basel Committee) is closely monitoring the work of the Network for Greening the Financial System and the role that climate-related events play when it comes to financial risk. What this means for credit unions is that we are likely to see evolving policy changes that affect:
- a framework for green mortgages;
- legislation on reporting;
- labels for retail products and related investment products;
- prudential standards that may affect underwriting and other operational matters; and
- incorporation of climate-related items into stress testing for investments and others.
The outlook for sustainable finance will likely involve mandates requiring regulators to consider sustainability and climate change as a part of all relevant regulations in the future. Voicing the needs of our member credit unions will be vital as these changes occur to make sure the credit union cooperative model is fully considered when making these policy changes.
Basel Committee Finalizes the Consolidated Basel Framework
In December 2019, the Basel Committee published a finalized version of the Basel Framework available in a new section of their website found here. This finalized Basel Framework brings together all of the global standards adopted by the Basel Committee through 14 various standards and is now divided into chapters based on definitive topics. The finalized framework adopted a few amendments to address inconsistencies and ambiguities that arose from the adoption of the various standards. An overview of the Basel Framework can be found here and the full text of the “Launch of the consolidated Basel Framework” can be found here.
Why this matters to your credit union: The final standard means that focus will now shift almost entirely to national level implementation of the standard. How a specific country implements it by either adopting in whole or deviating from the standard is up to the policymakers in each country. What is important is that the standard contains WOCCU-advocated direction on proportionality for national-level regulators, which means your country should adopt a standard that is appropriately tailored for the size, risk and complexity of a credit union and adequately considers the cooperative model.
AML/CFT Cooperation Guidelines Include ENCU Supported Recommendations
The European Supervisory Authorities (ESA), comprised of the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA), published joint guidelines on information exchange and cooperation between the authorities regarding anti-money laundering and counter financing of terrorism (AML/CFT). “The Guidelines are broadly based on, and consistent with, the framework of colleges of prudential supervisors of banks, but the scope of these Guidelines is much wider and encompasses all financial sectors in a proportionate manner.” This is the first time colleges of AML/CFT supervisors have been established in the EU for this purpose.
The European Network of Credit Unions commented on these guidelines and encouraged prudential regulators to utilize the improved communication with an eye towards reducing regulatory burden on credit unions. ENCU is pleased to see that many of the adopted guidelines, including the mapping guidelines, were adopted with proportionality in mind and should not significantly increase regulatory burdens on credit unions. Further, the framework should increase the effectiveness of AML/CFT supervision. Additional information on the ESA joint guidelines and a copy of the guidelines can be found here.
Why this matters to your credit union: The sophistication of AML/CFT regulation and supervision (and in the United States Bank Secrecy Act (BSA) requirements) continues to grow and become more sophisticated. This usually translates into increased regulatory burden for credit unions. However, with this piece of regulation in the EU, we see how regulators can learn to cooperate and share information among themselves, and do so without increasing regulatory burdens on credit unions.
Preliminary Agreement on Rules for Crowdfunding
Finland’s presidency of the European Council and Parliament reached a preliminary political agreement on a crowdfunding framework, which upon finalization of the technical work, will be submitted to the EU ambassadors for endorsement. The framework was constructed to make it easier for crowdfunding platforms to operate on a cross-border basis “by harmonising the minimum requirements when operating in their home market and other EU countries," as well as the implementation of investor protection rules that aim to improve legal certainty while considering compliance costs for providers. The preliminary framework agreement will encompass crowdfunding campaigns up to EUR 5 million over a 12-month period.
The regulation will impact larger crowdfunding operations but crowdfunding supported by reward and/or donations are not within the scope of the framework. The text sets out common prudential information and transparency requirements. It also includes specific requirements for non-sophisticated investors. At the same time, the rules for EU crowdfunding businesses will be tailored depending on whether they provide their funding in the form of a loan or an investment (through shares and bonds issued by the company that raises funds). Additional information on the Presidency and Parliaments’ preliminary crowdfunding rules can be found here.
Why this matters to your credit union: WOCCU has continued to provide input on this regulation to the EU to ensure that “crowdfunding” regulations encompass the concept of mobilizing deposits in a regulated cooperative institution or credit union. We are particularly concerned with the potential impact on the Netherlands, whose unique framework could fall under this regulation. While the concept of pooling resources to make a loan or invest in a business may have some similarity to that of a cooperative business, the entities engaged in this are quite different and a regulated credit union should not be subject to crowdfunding regulations when engaging in financial transactions.
Andrew T. Price, Esq.