May You Live in Interesting Times
Volume 12, Number 5
May 25, 2022
Advocacy News You Can Use
One of our stories in this telegraph covers an agreement recently reached in the European Union that reflects our recent success in advocating for proportional treatment for credit unions in the Digital Operational Resilience Act (DORA). DORA legislation is part of a larger Digital Finance Strategy that includes a Regulation on Markets in Crypto Assets (MiCA) and a proposal on distributed ledger technology (DLT).
Around the world, we are seeing legislation in this area move astonishingly quick. Many jurisdictions are motivated by protecting consumers, but also trying to keep pace with a quickly evolving industry. They also do not want to be left behind on the potential benefits of the new technology. Places such as Switzerland and Singapore are leading the way and are seen as standard bearers for providing clear and evolved frameworks that can allow crypto businesses to evolve and flourish. The Digital Finance Strategy in the EU shows their progress. The United States recently issued an executive order directing government agencies to form committees, research cryptocurrencies and work toward creating a regulatory framework for the crypto-asset market. The United Kingdom’s Financial Conduct Authority (FCA) is working hard as well, promising to put more resources into crypto. There are many other examples—and this doesn’t even mention the work being done by the international standard setters.
What is fascinating is that the legislative process is often inefficient by design. It is designed to build consensus among diverse parties and stakeholders. Complex parliamentary rules, committee meetings, institutional norms—all often allow the vetting of proposals before elected officials are required to vote on final passage and can often make the process brutally slow. There is an age-old adage that there are 1,000 more ways to kill a bill than there is to pass a bill.
So, what is interesting is that this normally slow legislative process is routinely being set aside where cryptocurrency regulation is concerned for the promise that all this technological innovation can bring. Perhaps there is an even more basic motivation in the prospect of getting rich quickly from this new, innovative technology. The good news is that in our first major advocacy victory with DORA, credit unions were considered, and the process accommodated our inclusion. These are certainly interesting times to be working in the financial services industry.
WOCCU/ENCU Applauds European Parliament Agreement on Digital Operational Resilience Act (DORA)
WOCCU/ENCU Advocated Proportional Treatment Included for Credit Unions
The European Council presidency and the European Parliament reached a provisional agreement on the Digital Operational Resilience Act (DORA), which will overhaul the regulations in Europe’s financial sector that set uniform requirements for the security of network and information systems, as well as critical third parties that provide ICT (Information Communication Technologies)-related services to them. This includes services such as cloud platforms and data analytics services.
World Council of Credit Unions, together with its partner, the European Network of Credit Unions, and its members from Croatia, Estonia, Ireland, Netherlands, N. Macedonia, Poland, Romania and Ukraine advocated for the proportional treatment of DORA regulations by urging the governing bodies to consider the size, nature, scale and complexity of their services, activities and operations.
The provisional agreement embraces the WOCCU/ENCU proportionality approach in several ways, but most importantly, by allowing Member States to establish rules for those entities exempt under Article 2(5) of Directive 2013/36/EU (i.e., CRD IV exempt entities).
“We thank the European Parliament for listening to our needs and tailoring rules that are appropriate for credit unions but also accomplish our mutual goal of protecting our members information from ICT breaches and ensuring the safe and sound operations of financial institutions”, said Andrew Price, WOCCU Sr. VP of Advocacy/General Counsel.
WOCCU/ENCU further thank the many people instrumental in shaping this agreement including: MEP Billy Kelleher (Ireland), MEP Mairead McGuinness (Ireland), the ENCU Member States (Croatia, Estonia, Ireland, Netherlands, N. Macedonia, Poland, Romania, and Ukraine) and the European Commission.
WOCCU/ENCU will continue to be engaged as the agreement obtains approval by the Council and the European Parliament before going through the formal adoption procedure.
Members of ENCU involved during this process include the following: representatives of the Irish League of Credit Unions (ILCU), National Association of Co-operative Savings and Credit Unions (NACSCU) of Poland, Federation of Romanian Credit Unions (FEDCAR), Estonian Union of Credit Cooperatives (EUCC), North Macedonia's FULM Savings House, and the Dutch Association of Cooperating Credit Unions (VSK).
Why this matters to your credit union: Without proportional treatment, credit unions in the EU would have been subject to costly, overburdensome regulations. This approach allows for a reasonable treatment for operational resilience regulations. Other countries may look to the approach taken by the EU as this is an evolving area of regulation. The approach taken by the EU should give direction to other jurisdictions looking to adopt their own regulations to treat credit unions with similar proportionality.
Central Banks Highlight Ways to Tackle Post-Pandemic Private Debt Build-up
A new report from the Committee on the Global Financial System (CGFS), a central bank forum for examining risks to financial stability, hosted by the Bank for International Settlements, highlights that the rise in private sector debt during the COVID-19 crisis was associated with borrowing by weaker businesses and rapid housing price growth. However, it finds that the importance of such debt vulnerabilities differs substantially across countries, depending on factors such as the strength of the economic recovery and the health of the financial system. The report suggests ways that policymakers can tackle debt vulnerabilities in the uncertain post-pandemic macroeconomic environment.
During the COVID-19 crisis, unprecedented policy support prevented debt risks from materializing. But misperceptions about the prospects for similar support in the future could lead lenders to underprice risk. Where risks are mounting, borrower-focused macroprudential tools, such as limits on debt service-to-income ratios, can help to stem the build-up. Where debt vulnerabilities are already high or might be exposed by the uncertain macroeconomic environment, policymakers should ensure that financial institutions' capital buffers remain sufficient to absorb potential losses.
Key findings from the report are as follows:
- Private sector borrowing played a key role in supporting economic activity during the pandemic, but higher debt could now pose a risk to financial stability and economic growth.
- Emerging vulnerabilities include higher debt among weaker businesses, booming housing markets and potential misperceptions about the prospects for exceptional policy support that might cause lenders to underprice risks in the future.
- A surge in private sector borrowing helped to moderate the severity of the COVID-19 economic downturn. Yet, it also shone a spotlight on the risks that high debt can pose to financial stability and macroeconomic performance.
A copy of the report can be viewed here.
Why this matters to your credit union: The report gives insight into approaches that regulators may take with credit unions in addressing risks that may arise on credit union balance sheets because of the pandemic.
European Council Takes Position on 2030 Policy Program ‘Path to the Digital Decade’
The European Council adopted its position on the 2030 Policy Program “Path to the Digital Decade,’ which is designed to “strengthen the EU’s digital leadership” through inclusive and sustainable digital policies. Once the European Parliament has confirmed its position, negotiations between Parliament and Council presidency can take place.
The objective of the mandate endeavors to create “concrete digital targets, including for industry which the Union as a whole must achieve by the end of the decade, and a novel form of governance with the member states through a mechanism of cooperation between the Commission and the member states to ensure that the Union jointly achieves its ambition.” The Council contributed a legal basis to the mandate by adding, with respect to governance, that member states and the Commission must cooperate biennially, but the ‘State of the Digital Decade’ report will remain an annual release. The Council also underscored its accord with the Commission Communication of March 2021 on the 2030 Digital Compass, highlighting the importance of fundamental rights.
More information on the 2030 policy program ‘Path to the Digital Decade’ is available here.
Why this matters to your credit union: The position shows the commitment by the EU to increase digitalization in the EU. Digitalization is key to the success of allowing credit unions to grow and survive in a technologically evolving world.
Andrew T. Price, Esq.