Regulations That Help?

Volume 12, Number 3
March 30, 2022

Advocacy News You Can Use

It is not often as a trade association that you see regulations that can actually help your members. So, it is with some trepidation that I applaud the Financial Action Task Force’s (FATF) push to strengthen the beneficial ownership standards. Obtaining beneficial ownership information often presents numerous challenges for credit unions at account opening.  Understanding a corporate structure and working to figure out who the beneficial owner is for purposes of AML/CFT can be a complicated and difficult task when, many times, records are shoddy, the governance can be complicated or involve family members or other relationships that are not clear. These difficulties can result in the inability of a credit union to serve a small business or prevent access to responsible and affordable credit.

So, it is encouraging that FATF is strengthening the standards by placing a greater emphasis on countries having a public authority or administrative body that functions as a beneficial ownership registry (or alternative mechanism) that can provide efficient access by credit unions to adequate, accurate and up-to-date beneficial ownership information.. The burden of performing complicated background work to determine beneficial ownership will rest with the government and the corporate entity. If implemented properly, FATF’s enhanced standards will allow credit unions to use and benefit from this system. It should greatly reduce the work at account opening and hopefully reduce abuses within legal entities as well. 

Don’t get me wrong, there is a long way to go, and the implementation may thwart the ultimate benefits of the new standards. But the direction taken by FATF should be applauded for helping to reduce regulatory burden.

WOCCU Urges G20 to Help Credit Unions Advance Financial Inclusion

World Council of Credit Unions (World Council) urged the G20 to continue its commitment to financial inclusion and its objective to reduce inequalities and promote inclusive growth. Specifically, World Council asked the G20 to direct the international standard setting bodes to work closely with national-level regulators to fully adopt proportional tailoring of regulations for the purposes of advancing financial inclusion.

National-level regulators are often reticent to tailor international norms and standards for fear that a deviation may subject them to criticism from other nations or fear of an unintended consequence of right-sizing regulations. The result is that credit unions are often prevented from serving underserved or marginalized populations, thus leading to financial exclusion.

The collective international credit union movement is urging the G20 to take action to enhance its embrace of financial inclusion and work with the many challenges faced by national-level regulators in achieving financial inclusion vis-à-vis proportionality. Proportionality, if applied appropriately, can significantly advance the G20’s goals of promoting financial inclusion by fostering responsible finance through increased access to formal and affordable financial services.

The G20 this year is headed by the Presidency in Bali, Indonesia with a Leaders’ Declaration expected to be issued at the 2022 G20 Bali Summit in November. 

A copy of the letter can be viewed here.

Why this matters to your credit union: Proportionality, if implemented properly, can help reduce your credit union’s regulatory burden and help your credit union serve its members and grow. Regulations designed for larger, internationally-active banks often do not make sense for the credit union cooperative model and can impair the ability to serve underserved or marginalized populations. The focus with the G20 can ensure that regulators properly tailor international standards for credit unions.     

WOCCU Applauds FATF Strengthening of Beneficial Ownership Standards

The Financial Action Task Force made amendments to FATF Recommendation 24 and its Interpretive Note to strengthen the international standards on beneficial ownership of legal persons to ensure greater transparency about the ultimate ownership and control of legal persons. This not only will mitigate the risks of their misuse but will require countries to have a public authority or body function as a beneficial ownership registry (or alternative mechanism) that can provide efficient access to adequate, accurate and up-to-date beneficial ownership information by competent authorities.

If implemented properly, these changes have the potential to reduce the regulatory burden for credit unions at account opening, when performing due diligence for purposes of their AML/CFT requirements. Obtaining beneficial ownership information often presents numerous challenges for credit unions and at times can prevent access to legitimate financial transactions or services.

Further, the rules will address the significant misuses of legal persons for money laundering, terrorist financing and proliferation financing in many jurisdictions. 

WOCCU has consistently called for such a database to be maintained by national authorities that credit unions can rely on when performing their AML/CFT obligations. 

A copy of the release by FATF can be viewed here.

Why this matters to your credit union: If this standard is properly followed by national-level regulators, it should reduce the regulatory burden for credit unions when performing their AML/CFT functions at account opening and during ongoing monitoring of business accounts. It will further make it easier to serve small business accounts.  

FSB Releases Report on FinTech’s Impact During the COVID-19 Pandemic

On March 21, 2022, the Financial Stability Board (FSB) released a report entitled, FinTech and Market Structure in the COVID-19 Pandemic: Implications for financial stability. The key takeaway of the report credited the COVID-19 pandemic for the acceleration of digitization of retail financial services. The report also discussed individual engagement with “innovative financial service providers and traditional financial incumbents;” the expansion of BigTechs and larger FinTechs into financial services and the data gaps they present; and whether the benefits of digital acceleration during the pandemic will become structural or will “revert back” to pre-pandemic levels as the current conditions go back to normal.

While the FSB commented that the arrival of BigTech and FinTech firms in the market could result in the improvement of cost efficiencies and broaden financial inclusion benefits for underserved groups, some concern was expressed over the risk that BigTech and FinTech firms may achieve market dominance. The report further laid out steps authorities have made during the pandemic to establish policy actions related to financial stability, competition, data privacy and governance issues. It also stressed “the importance of cooperation between regulatory and supervisory authorities, including those charged with overseeing the bank and non-bank sectors, and where relevant, with competition and data protection authorities.”

More information on the FSB’s report is available here.

See also, BIS Releases Commentary Crediting Covid-19 for the Acceleration of Digitalization of Payments.

Why this matters to your credit union: The role of FinTech in the acceleration of digitization post COVID-19 has the potential to disrupt traditional financial services. The acceleration also has the potential to help credit unions in their service to members. Paying attention to these trends will help credit unions make strategic decisions on its operations.

Basel Committee Releases Newsletter on COVID-19 Related Credit Risk Issues

On March 2, 2022, the Basel Committee on Banking Supervision issued a newsletter on COVID-19 related credit risk issues they believe will be helpful to support the day-to-day activities of banks and supervisors. The newsletter addresses: the Committee’s intention to continue to assess credit risk and asset quality by maintaining their monitoring of bank practices, in addition to administering necessary provisions; observations from supervisors regarding policies and practices across banks' credit risk governance and credit risk models; and challenges to assessing the creditworthiness of borrowers due to the COVID-19 pandemic.

The Committee highlighted that the key applicable elements of risk include risks related to supervisory concerns that residual support measures may mask creditworthiness and therefore borrowers’ “future debt servicing capacity;" supervisory fears over whether bank provisions are capturing risk; uncertainty that supervisors feel around the adequacy of governance or boards to assess unlikeliness to pay (UTP), in addition to “incorporating public support measures in data reporting;” and supervisory observations that banks are applying “sizeable judgment-based adjustments to their internal ratings-based (IRB) approach and provisioning models, reflecting the pandemic environment,” as well as their belief that bank controls and governance that support model adjustments need improvement.

The Committee will continue to focus on the following credit risk topics in 2022:

  • “particular asset classes (e.g., residential real estate, commercial real estate and leveraged lending) that may be generating supervisory concerns in specific regions;
  • indicators and triggers for UTP assessments, particularly for loans subject to moratoriums;
  • controls and governance around credit risk models and model adjustments in the pandemic environment; and
  • the use and incorporation of data over the COVID-19 period, particularly whether and how it should inform future credit model development, testing and validation.”

More information on the Basel Committee’s newsletter is available here.

Why this matters to your credit union: The Basel Committee’s focus on particular risk items provides insights into the focus that regulators will place on various items during an examination or during supervision. It also provides insight into potential future regulatory changes.

Andrew T. Price, Esq.
Sr. VP of Advocacy
World Council of Credit Unions (WOCCU)
99 M St., SE, Washington, DC 20003 USA
Office: +1-202-843-0704 | Mobile: +1-850-776-5699 |

twitter  Follow me on Twitter

Previous Editions