The Work Goes On
Volume 10, Number 7
July 29, 2020
Advocacy News You Can Use
All of us continue to deal with the disruption caused by the COVID-19 pandemic, with many engaged in what feels like acrobatics to make all the needed adjustments. Prudential regulators and policymakers likewise continue to work on relief measures and other changes designed to help us weather the crisis.
As we transition from dealing with the health crisis to the challenge of dealing with the institutional stress forthcoming, our challenge will be to ensure that our regulators continue to provide prudent flexibility and do not spring back and impose regulatory burden causing a major contraction in the sector that is already stressed by COVID-19 and recession.
Regulators are continuing to work on major issues. For Instance, the Financial Stability Board is working with the G20 on cross-border payment reforms, and the Financial Action Task Force is working on the digital transformation of anti-money laundering and counter terrorist financing regulations (AML/CFT).
The good news is that our message of proportionality is continuing to ring strong. Most recently, the Basel Committee included key language in its guidelines on Sound management of risks related to money laundering and financing of terrorism. Specifically, it included language that AML/CFT regulations need to be "proportional and risk-based, informed by banks’ own risk assessment of ML/FT risks." Even more significant was the guidance on financial inclusion that member/customer due diligence should not be ”so restrictive that it results in a denial of access by the general public to banking services, especially for people who are financially or socially disadvantaged." This is exactly the type of direction needed to make national-level regulators tailor regulations appropriately for credit unions—even as the work goes on.
Basel AML/CFT Guidance includes WOCCU Recommendations on Proportionality/Financial Inclusion
The Basel Committee on Banking Supervision today issued the updated version of its guidelines on Sound management of risks related to money laundering and financing of terrorism, with guides on the interaction and cooperation between prudential and anti-money laundering and combating the financing of terrorism (AML/CFT) supervisors.
The revisions set out principles and recommendations for information exchange and cooperation in relation to: (i) internal procedures or a bank/credit union; (ii) ongoing supervision and (iii) enforcement actions. Also, possible mechanisms to facilitate such cooperation in the jurisdictional and international context are provided. The guidelines are consistent and complimentary to those standards issued by the Financial Action Task Force (FATF).
WOCCU commented on this proposal in early 2020 urging reinforcement of the principles of proportionality and risk-based approaches to AML/CFT, noting that regulatory burdens often fall disproportionately on credit unions. That often prevents access to responsible and affordable credit for underserved communities.
The issuance by the Basel Committee includes language specific to AML/CFT burdens, stating they should be "proportional and risk-based, informed by banks’ own risk assessment of ML/FT risks." Further, with respect to Member/Customer Due diligence, the guidance notes that "It is important that the customer acceptance policy is not so restrictive that it results in a denial of access by the general public to banking services, especially for people who are financially or socially disadvantaged."
WOCCU welcomes this guidance, which should provide direction to national-level regulators to properly tailor AML/CFT requirements for credit unions which will in turn promote financial inclusion.
A copy of the newly issued guidance can be viewed here.
Why this matters to your credit union: Clear direction to national-level regulators to implement proportionality is the best way to ensure that regulations intended for large, internationally active banks are not unreasonably applied to credit unions (sometimes called “gold-plating”). This should result in reduced regulatory burden for credit unions. Further the financial inclusion language allows credit unions to more easily serve those rural and underserved communities.
FSB Writes G20 On Cross-Border Payments Reform
The Financial Stability Board (FSB) published a letter to the G20 from the FSB Chair, Randal K. Quarles, welcoming the report published by the Committee on Payments and Market Infrastructures (CPMI), which sets out building blocks for a roadmap to enhance cross-border payments.
The publication of the CPMI report marks the second of a three-stage process to develop a roadmap to enhance cross-border payments. It sets out the necessary elements to address the challenges of high costs, low speed, limited access and insufficient transparency of cross-border payments, highlighted by the first-stage FSB report published in April. We anticipate the FSB to publish a roadmap as a third and final stage.
A copy of the report can be viewed here.
Why this matters to your credit union: This demonstrates high-level attention on reforms to cross-border payments. Significant reforms to the payments systems will likely come from the work at hand, meaning eventual operational and business challenges for credit unions that have access to payments systems.
FSB and Basel Committee Move to Transition Away from LIBOR by End of 2021
The Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) published a report entitled, Supervisory issues associated with benchmark transition: Report to G20, which outlines supervisory recommendations on LIBOR transition. The report concludes that, “Continued reliance of global financial markets on LIBOR poses clear risks to global financial stability. Transition away from LIBOR by end-2021 requires significant commitment and sustained effort from both financial and non-financial institutions (FIs and non-FIs) across many jurisdictions.” The report also includes surveys initiated by the FSB, the BCBS and the International Association of Insurance Supervisors (IAIS) developed to address remaining challenges to the benchmark transition.
The report outlined three recommendations that support LIBOR transition in jurisdictions with LIBOR exposures:
- “Identification of transition risks and challenges – authorities and standard-setting bodies to issue public statements to promote awareness and engage with trade associations, and authorities to undertake regular surveys of LIBOR exposure and to request updates from financial institutions.
- Facilitation of LIBOR transition – authorities to establish a formal transition strategy supported by adequate resources and industry dialogue. Supervisory authorities should consider increasing the intensity of supervisory actions when the preparatory work of individual banks is unsatisfactory.
- Coordination – authorities to promote industry-wide coordination, maintain dialogue on the adoption of fallback language, consider identifying legislative solutions where necessary, and exchange information on best practices and challenges. The FSB and the standard-setting bodies will coordinate at the international level to identify key common metrics for monitoring transition progress.”
Why this matters to your credit union: For those who have loans linked to LIBOR, the transition can create numerous challenges from having to amend loan documents to how you manage risks associated with those loans. Understanding regulatory and legal expectations are key to managing the transition.
IASB Delays Standard on Classification of Liabilities
The International Accounting Standards Board (IASB) has issued an amendment to defer by one year the effective date of Classification of Liabilities as Current or Non-Current, which amends IAS 1, Presentation of Financial Statements. WOCCU supported this delay, in light of the COVID-19 pandemic. The proposal was issued in January 2020 for annual reporting periods beginning on or after January 1, 2022. The standard is now effective for annual reporting periods beginning on or after January 1, 2023.
WOCCU welcomes this delay as it should provide regulatory relief to credit unions during the COVID-19 pandemic.
Why this matters to your credit union: This is direct regulatory relief to allow additional time to comply with the classification of liabilities standard. The standard was adopted prior to the COVID-19 pandemic and this delay acknowledges the difficulties of making adjustments during the crisis.
Andrew T. Price, Esq.