On Brexit, Immigration and Payments: What's Next?
Volume 10, Number 2
February 26, 2020
Advocacy News You Can Use
I was recently on the phone with a colleague from Europe discussing the political winds and how that might affect policy decisions concerning regulation in the financial sector. He noted that Brexit, tighter immigration trends, the rise of nationalism and other events have really resulted in, at least in the EU, a strong sense by policymakers to favor smaller, local, community-based institutions. The results of this have been seen already in movements to support Small and Medium Enterprise (SME) lending in the EU and the UK, with an eye to providing affordable, sustainable finance. If these “political winds” prevail, credit unions will be nicely postured to help make a compelling case to policymakers why our local, community-based model has always worked and will continue to work going forward. Hopefully, this trend of supporting small businesses will help credit unions in the near future.
The second part of that conversation, however, turned to some of the potential risks we see forthcoming over the next year. One area in particular we focused on is the potential for disruption in the payments’ arena. Currently, the EU is considering mandating that financial institutions provide instant payment solutions for consumers—i.e. real-time, 24 hours a day, 365 days a year—with immediate funds availability. We have seen movements in this direction with the Fed Reserve Faster Payments initiative and companies such as Venmo providing this type of service. If real time payments are mandated, however, it could turn into a significant compliance and operational burden for credit unions—not to mention potentially expensive. Even more thought provoking is, if adopted, it will force the rest of the world to play catch up, much in the way the EU GDPR has shaped events on the Privacy front. As always, credit unions that are smaller and with fewer resources will be disproportionately affected. I am not sounding any alarm bells yet, but thinking through and asking myself, “what’s next?”
FSB Outlines Focus Areas to G20
The Financial Stability Board (FSB) outlines its focus areas for the Saudi Arabian G20 to include the following:
- LIBOR transition;
- So-called ‘stablecoins’;
- Cross-border payments;
- Non-bank financial intermediation (NBFI);
- Evaluating the post-crisis regulatory framework;
- Implementation Monitoring.
FSB notes that the global financial system is constantly facing new challenges. Technology is changing the nature of traditional finance; the non-bank sector has grown and requires deeper understanding and coordination among the supervisory and regulatory community.
A copy of its letter to the G20 can be viewed here.
Why this matters to your credit union: The G20 gives direction to the international standard setting bodies to address issues. The FSB’s input will carry great weight. This indicates FinTech, Cross-border Payments and evaluating the post-crisis regulatory framework will likely be on the top of regulator’s minds in the upcoming year. Look for changes in these areas.
FCA Responds to ISDA with Letter on Non-Representative LIBOR
In December 2019, the International Swaps and Derivatives Association (ISDA) responded to a November 2019 letter from the Financial Stability Board’s (FSB) Official Sector Steering Group (OSSG), asking the ISDA to add a pre-cessation trigger in company with the cessation trigger as standard language in the definitions for new derivatives. The OSSG believes “[t]his would help to reduce systemic risk and market fragmentation by ensuring that as much of the swaps market as possible falls back to alternative rates in a coordinated fashion.” The ISDA requested a statement from the Financial Conduct Authority (FCA) and the ICE Benchmark Administration stating “that the ’reasonable period’ during which a ’non-representative’ LIBOR would be published would be minimal (i.e., a number of months, not years) after the FCA announces that LIBOR is no longer representative.”
The letter from FCA responding to ISDA’s request included reference to relevant laws and how FCA “intends to apply them”. The FCA’s letter also clarified that its, “preference is for an orderly cessation of LIBOR in which its discontinuation is pre-announced, market participants have prepared for this, and publication of a non-representative LIBOR is avoided.” The FCA’s response to the ISDA can be found here. More information regarding the chronicle of events surrounding group responses regarding the pre-cessation trigger can be found here.
Why this matters to your credit union: The end of LIBOR can have a great impact on your credit union. Any loans tied to the index will likely need to be amended and IT systems will need to be reprogrammed to accommodate the change.
World Council Urges Basel Committee to Consider Credit Union Difference in AML/CFT Guidance
The Basel Committee on Banking Supervision (Basel Committee) is requesting feedback on their Consultative Document: Introduction of Guidelines on Interaction and Cooperation Between Prudential and AML/CFT Supervision (Consultative Document). The Basel Committee’s goal, it writes, is “[t[o] enhance the effectiveness of supervision on banks’ ML/FT risk management, the Committee proposes to provide further guidelines on interaction and cooperation between prudential supervision and anti-money laundering and countering financing of terrorism (AML/CFT) supervision.” World Council supported this objective, but urged the Basel Committee to not only consider the unique structure of credit unions when determining how to assess an institution’s money laundering and financing terrorism risks, but to give clear guidance to national-level regulators on how to appropriately and proportionately assess risk for credit unions. World Council further suggested that both prudential and AML/CFT supervisors outline a coordinated proportional approach to the enforcement, management and assessment of credit unions based on their unique organizational structure, as well as consideration for privacy concerns surrounding information sharing with supervisors, and confidentiality concerns with observers that may participate in colleges or other attendees participating on an ad hoc basis. WOCCU’s response to the Consultative Document can be found here.
Why this matters to your credit union: Coordination among regulators has the opportunity to provide for regulatory relief. AML/CFT is often cited as one of the highest regulatory burdens/costs in a credit union. Our concern is that new reporting or supervisory requirements often flow from increased bureaucracy.
IFRS for SMEs Under Review by IASB
The International Accounting Standards Board (IASB) is undergoing a comprehensive review for the purposes of updating the IFRS for SMEs Standard. This simplified accounting standard for small and medium entities is used by some jurisdictions as the basis for the requirements of implementing IFRS 9 for Financial Instruments and the expected loss calculations. Although the standard is intended for "publicly accountable entities," WOCCU has supported its use for credit unions as a means of simplifying the accounting and reporting requirements of IFRS 9 for credit unions. WOCCU intends to look at ways that the standard and approaches can be aligned with IFRS 9.
A copy of the consultation can be viewed here.
Why this matters to your credit union: Several jurisdictions use IFRS 9 for SMEs, which is a lighter touch on accounting than full IFRS 9. Numerous jurisdictions have considered IFRS for SMEs for credit unions but have rejected it due to language specifying that it is not appropriate for “publicly accountable” institutions. Credit unions sometimes are considered publicly accountable due to their ownership by members, although the term is likely more targeted toward larger publicly traded companies. Likewise, this has the potential for FASB to look at this treatment for smaller credit unions under CECL in the United States.
Financial Conduct Authority Chair Touts Need for Sustainable Community-Based Finance
On January 17, 2020, Financial Conduct Authority (FCA) Chair, Charles Randell, delivered a speech at the National Credit Union Forum in Penrith, England. Entitled, “Is this the decade of the credit union?”—Randell, a member of his local credit union in South London, encouraged the room to “be the leaders and advocates for growing and well-governed community-based lending and saving.” Randell emphasized the need for community-based financing, the responsibility of regulators to support their growth through regulation, and the obligation of credit unions to change in order to grow and expand.
Highlights of his speech included:
- Community-based lending as a key part of growing the supply of affordable credit.
- Acceleration of growth in credit union membership requires a transformation of the sector.
- Credit unions need governance equal to this transformational challenge, while continuing to protect consumers and prevent financial crime.
Notably, Randell articulated the visible growth of credit unions within the last decade, showing positive changes to increase available services. However, this growth may require credit unions to “offer a broader range of products and services.” He further suggested that “Treasury should consider if there is value in a review of credit union and society legislation” and “…any provisions that would enable credit unions to grow or provide new products and services would need to be accompanied by an appropriate and robust regulatory regime.” However, Randell placed the responsibility of growth on credit unions as well, by imploring them to invest in technology in order to improve risk management skills and technology systems to reach new members and provide new products and services. Randell’s full speech can be viewed here.
Why this matters to your credit union: Any time a regulator touts the advantages of community-based finance and credit unions, it is a win for our industry. Our model, although highly beneficial for consumers (and our members), is often not understood by policymakers.
Andrew T. Price, Esq.