ENCU responded to the European Bank Authority’s consultation regarding their Draft Implementing Technical Standards (ITS) on Disclosure and Reporting of MREL and TLAC. The draft ITS consisted of the EBA’s proposals for MREL/TLAC templates and tables that implement disclosure and reporting requirements. The EBA hopes to “optimise efficiency by institutions when complying with their disclosure and reporting obligations, to facilitate the use of information by authorities and market participants, and to promote market discipline.” The EBA requested feedback on the necessity, discrepancies, and clarity of specified tables and templates. ENCU emphasized its support for the EBA’s efforts to “to maximise efficiency by institutions when complying with their disclosure and reporting obligations, and to facilitate the use of information by authorities and market participants.” ENCU’s comments on this draft ITS can be found here.
In anticipation of a February 22-23rd meeting in Riyadh, Saudi Arabia, the Financial Stability Board (FSB) Chair, Randal K. Quarles, drafted a letter to G20 Finance Ministers and Central Bank Governors regarding challenges and changes to the global financial system in the areas of technology, supervisory and regulatory coordination to benefit the non-bank sector, market fragmentation, and other issues surrounding supervisory and regulatory issues. The FSB will contribute to the Saudi Arabian G20 by working on issues such as the LIBOR transition, technology, stablecoins, cross-border payments, non-bank financial intermediation, evaluation of post crisis regulatory framework, and implementation monitoring. For more information on Quarles’ letter and FSB’s G20 strategy can be found here.
The European Banking Authority (EBA) issued a public consultation on its draft Guidelines regarding revised money laundering and terrorist financing (ML/FT) risk factors. “This update takes into account changes to the EU Anti Money Laundering and Counter Terrorism Financing (AML/CFT) legal framework and new ML/TF risks, including those identified by the EBA’s implementation reviews.” The Guidelines provide factors for institutions to consider when assessing ML/FT risks, guidance on how to adjust due diligence measures to mitigate ML/FT risks once they’re identified, and support supervision efforts to assess a competency of financial institutions risk assessments and AML/CFT policies and procedures. Some of the key changes to the EBA’s guidance includes enhanced due diligence for high-risk third countries, as well as guidance on crowdfunding, corporate finance, PISPs and AISPs and currency exchange activities. The EBA’s press release on this consultation can be found here.
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.
The Basel Committee on Banking Supervision (Basel Committee) released a consultation 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 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 organization 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.
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.
On January 17, 2020, Financial Conduct Authority (FCA) Chair, Charles Randell, delivered a speech at the National Credit Union Forum in Penrith. 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 to meet growth and expansion.
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 that’s equal to this transformation 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.
The European Banking Authority (EBA) released two public consultations on the Implementing Technical Standard (ITS) for financial institutions’ public disclosure and on supervisory reporting for CRR2. The Draft [ITS] on public disclosures by institutions of the information referred to in Titles II and III of Part Eight of Regulation (EU) No 575/2013 was developed to create uniform disclosure formats under the regulation, as well as update EBA’s policies on the Pillar 3 disclosures, “in order to foster the role of institutions’ disclosures in promoting market discipline through… the development of a comprehensive implementing technical standard (ITS) on disclosure.” The European Network of Credit Unions (ENCU) applauded the EBA’s priority to honor Basel 3’s proportionate approach to small and non-complex institutions by decreasing the number or required disclosures and allowing them to focus only on key metrics. ENCU, however, urged the EBA to provide more detailed guidance within their templates, tables and accompanying instructions regarding which disclosures specifically apply to small and non-complex institutions. For more information on the Draft ITS on supervisory reporting for CRR2 and backstop regulation, check out our blog post here. ENCU's response to the EBA's Draft Implementing Technical Standard for Financial Institutions' Public Disclosure can be found here.
The Draft [ITS] on public disclosures by institutions of the information referred to in Titles II and III of Part Eight of Regulation (EU) No 575/2013 can be downloaded here.
The European Banking Authority (EBA) solicited comment on their Draft Implementing Technical Standards on supervisory reporting requirements for institutions under Regulation (EU) No 575/2013 (Draft ITS), which addresses “institutions’ compliance with prudential requirements as put forward by the CRR and related technical standards as well as additional financial information required by supervisors to perform their supervisory tasks.” Additionally, the EBA the Draft ITS revised reporting modules to adhere to two amendments to the CRR made in 2019 regarding liquidity, leverage and large exposures; and amending the’ backstop regulation’ “which sets out uniform minimum levels of coverage to ensure that institutions have sufficient loss coverage for future non-performing exposures (NPEs)” The European Network of Credit Unions (ENCU) stated its support for the EBA’s updates and revisions to its Draft ITS, and the incorporation of proportionality in the reporting requirements, however, ENCU urged EBA to encourage finalization of the Basel standards using proportionality in the reporting requirements. This consultation ran parallel with the EBA’s consultation on ITS on public disclosures; and for more information on ENCU’s response to this consultation, please see our blog post here. ENCU's response to the EBA Consultation on Draft Implementing Technical Standards on Supervisory Reporting can be viewed here.
The Draft [ITS] on supervisory reporting requirements for institutions under Regulation (EU) No 575/2013, can be downloaded here.
The European Network of Credit Unions (ENCU) responded to the European Banking Authority's public consultation regarding specific supervisory reporting requirements for market risk. These requirements are the initial elements of the Capital Requirements Regulation's (CRR2) launch of the Fundamental Review of the Trading Book. The consultation serves to "include proposals for a thresholds template, providing insights into the size of institutions’ trading books and the volume of their business subject to market risk, and a summary template, reflecting the own funds requirements under the ‘Alternative Standardised Approach’ for market risk (MKR-ASA)." In a comment letter, ENCU responded directly to the EBA’s Draft Implementing Technical Standards on specific reporting requirements for market risk, and stated its support their Draft Standards, but urged the EBA to finalize these standards with consideration for credit unions by implementing proportional requirements that recognize the limited resources of smaller financial institutions. ENCU’s comment letter can be viewed here.
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 operation 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 prospectus regulation and MiFID will regulate the larger crowdfunding operations, however, crowdfunding supported by reward and/or donations are not within the scope of the framework.
“The text sets outs 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).”
WOCCU will continue to monitor this issue as it is submitted for endorsement to the EU ambassadors and the proposed regulation is adopted. Additional information on the Presidency and Parliaments’ preliminary crowdfunding rules can be found here.
In response to feedback received to the consultation regarding proposed changes to the consolidated Basel framework, the Basel Committee on Banking Supervision (Basel Committee) published a finalized version of the framework available in a new section of their website found here. The Basel Framework includes 14 standards divided into chapters based on definitive topics. The framework also addresses inconsistencies and ambiguities found in the draft version of the Basel requirements, which prompted the Basel Committee’s consultation that the current version of the framework now acknowledges. 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. WOCCU notes that the final Consolidated Basel Framework does make some technical changes, however, the substantive framework as adopted remains intact. Notably, the standard includes the WOCCU advocated direction on proportionality for national-level regulators.
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 supervisor 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.
The ESA’s hope to address long standing compliance failures attributed to cross border AML/CFT crimes that were able to occur due to a failure in communication between AML/CFT supervisors. The guidelines aim to establish a “formal cooperation framework” between supervisors in various Member States in order to maintain effective supervision of firms operating on a cross-border basis. Included is this framework, is an outline for establishing AML/CFT colleges when a firm operates in more than three Member States. Additional information on the ESA joint guidelines and a copy of the guidelines can be found here.
The European Council (The Council) adopted anti-money laundering and counter terrorism financing conclusions in response to their 2019-2024 strategic agenda aimed at strengthening terrorism and cross border crime preventions, and improving cooperation and information sharing. The “Council urges for the swift transposition of all AML legislation into national law and for the strengthening of their effective implementation.” Furthermore, The Council has invited the European Commission (EC) to take action on the existing AML regulatory framework by considering:
- “ways of ensuring a more robust and effective cooperation between the relevant authorities and bodies involved in anti-money laundering and terrorist financing, including through addressing impediments on exchange of information between them;
- whether some aspects could be better addressed through a regulation;
- possibilities, advantages and disadvantages of conferring certain supervisory responsibilities and powers to an EU body.”
WOCCU will continue to monitor The Council and the EC’s AML/CFT regulatory enhancements and any action or input the EC may provide. The “Council conclusions on strategic priorities on anti-money laundering and countering the financing of terrorism”, can be found here.
In a comment letter to the Financial Action Task Force (FATF) regarding their Draft Guidance on Digital Identity, WOCCU urged (FATF) to implement further guidance to national-level regulators to focus on an effective system that avoids imposing overly burdensome requirements and provide some flexibility for the unique structure of credit unions and cooperative financial institutions. WOCCU responded to four questions posed by FATF regarding the role of digital identity in relation to money laundering and terrorist financing, financial inclusion, due diligence and transaction monitoring, and record keeping requirements. WOCCU concurs with FATFs risk-based approach to digital identify for customer due diligence as well as their endeavors to support financial inclusion, however, WOCCU emphasized the need to implement " guidance directing supervisors to consider some high level principles such as whether an institution has cross-border operations, the asset size, the institutions interconnectedness with the financial system, the degree to which they report to multiple prudential supervisors, the mix of business activities, the average level of transactions that occur in any account and that further corresponds to the size, and the complexity and risk of a financial institution."
WOCCU's comment letter to FATF regarding their draft guidance on digital identity can be found here.
The Basel Committee on Banking Supervision (Basel Committee) and the Basel Consultative Group (BCG) issued a joint statement supporting the use of proportionality in implementing the Basel Framework. WOCCU applauds this joint statement as it has been urging further guidance directing national-level authorities to tailor Basel standards to the size, complexity and risk of a credit union or other community-based mutual depository institutions. National-level regulators often tend to use the highest standard which often times are not appropriate or are excessive for credit unions. This joint statement reinforces the need to use the built-in proportionality contained in the Framework and not use the Basel Framework as a floor.
A copy of the joint statement can be viewed here.
The Basel Committee on Banking Supervision (BCBS) has published their consultation, Introduction of Guidelines on Interaction and Cooperation Between Prudential and AML/CFT Supervision, in order to amend their previously published guidelines entitled, Sound Management of Risks Related to Money Laundering and Financing Terrorism. The guideline aims to outline methods to implement mechanisms that will facilitate cooperation between prudential and AML/CFT supervisors, including: recommendations and principles for information exchange on authorization procedures of banks, on-going supervision, and enforcement actions. “The proposed changes to the Sound management of risks related to money laundering and financing of terrorism include a new provision in "The role of supervisors" section that recommends establishing an effective cooperative system and a supplementing annex with specific recommendations and descriptive examples to facilitate supervisory cooperation.”
WOCCU is analyzing this proposal to ensure that the role of credit unions is adequately contemplated in the guidelines and that appropriate direction to national-level regulators to consider proportionality when implementing the guidelines is provided. BCBS is accepting comments on the consultation until February 6, 2020; the document can be found here.
Financial Action Task Force Issues Guidance on Best Practices on Beneficial Ownership for Legal PersonsNovember 08, 2019
The Financial Action Task Force (FATF) has released its guidance on Best Practices on Beneficial Ownership for Legal Persons. It their executive summary, FATF states that: "The results of FATF Mutual Evaluations indicate that jurisdictions find it challenging to achieve a satisfactory level of transparency regarding the beneficial ownership of legal persons." The guidance seeks to provide solutions to the implementation of FATF Recommendations on AML/CFT. According to the Guidance, "countries should use one or more of mechanisms (the Registry Approach, the Company Approach and the Existing Information Approach) to ensure that information on the beneficial ownership of a company is obtained by that company and available at a specified location in their country; or can be otherwise determined in a timely manner by a competent authority."
The guidance also seeks to address the favorable use of a multi-pronged approach to Beneficial Ownership; the keys to an effective system; latest developments and case examples; and suggestions for "ensuring authorities can access getting information on beneficial ownership of overseas entities".
The guidance can be found here.
The areas of focus for the consultation are:
- Specific money laundering / terrorist financing risks that arise from the use of digital identity systems for CDD, other than those already mentioned in Section IV of the guidance;
- The role of digital ID systems in ongoing due diligence or transaction monitoring;
- How digital ID systems can support financial inclusion;
- The use of digital ID systems for CDD and whether it raises distinct issues for implementing FATF record-keeping requirements.
WOCCU urged the International Association of Deposit Insurers (IADI) to consider credit unions when establishing their public policy objectives. These comments were submitted in response to the IADI’s draft Guidance Paper, ‘Public Policy Objectives for Deposit Insurance Systems’. WOCCU stressed the contributions credit unions have made to financial inclusion through the support of the under-banked communities within their respective jurisdictions and asserted that a proportional approach to deposit insurance PPOs will aid in upholding IADI’s primary principals. WOCCU supported IADI’s primary principles of deposit insurance which are to protect depositors and contribute to financial system stability. Comment Letter to IADI on ‘Public Policy Objects for Deposit Insurance Systems’ can be viewed here.
The European Commission has opened a public consultation regarding the next stages in their implementation of final Basel III reforms in the EU. The EC aims to use the consultation as a means to shape the next wave of banking regulation proposals for next year. According to the EC, “the Commission services aim to gather stakeholders’ views on specific topics in the areas of credit risk, operational risk, market risk, credit valuation adjustment risk, securities financing transactions as well as in relation to the output floor.” The EC expects the solicited comments will ensure “convergent and consistent supervisory practices across the Union and alleviating the administrative burden.”
WOCCU looks forward to responding to the EC’s questionnaire by the January 3, 2020 deadline, and will ensure that the critical issues that affect credit unions are represented.
On October 10, 2019, the Council of the EU's Economic and Financial Affairs Council (ECOFIN), met to discuss key issues including anti money laundering matters and reforms. The Economic and Financial Affairs Council is set to adopt conclusions on the implementation of the anti-money laundering (AML) action plan that was presented last December. The Commission, in addressing shortcomings of the current AML policies, is pushing agreed upon reforms including: the 5th revision of the AML directive; new CRD5 capital requirements for banks and the revised European system of financial supervision; enhancing the cooperation and exchange of information between competent authorities; and further harmonizing AML rules by converting the current AML directive into concrete regulations, in addition to giving an EU body specific AML supervisory tasks.
The 5th directive on AML and terrorist financing compels the identification of third country jurisdictions with strategic deficiencies in the management of anti-money laundering and counterterrorist financing regimes, and that pose significant threats to the EU financial system. Accordingly, Ministers discussed a methodology for constructing this list and plan to release a new draft list in the form of a delegated act. The “Commission non-paper on key elements of a refined methodology for identifying high-risk third countries for AML purposes” can be found here. WOCCU and ENCU will monitor these issues closely as they move to the process to determine any adverse impact on credit unions.
In response to a growing demand for climate-friendly investments, the Bank for International Settlements (BIS) launched an open-ended green bond fund for central bank investments. This green bond fund initiative will aid central banks in managing their reserves by incorporating environmental sustainability objectives.
The open-ended fund promotes green finance by pooling BIS client assets through a fund and creating “sizeable climate-friendly investments” using best market practices. An advisory committee composed of a global group of central banks was created in support of the fund. “The initiative is part of the BIS's broader commitment to supporting environmentally responsible finance and investment practices, in line with the Bank's participation in the Central Banks and Supervisors.”
The Network for Greening the Financial System, First Comprehensive Report, was published in April 2019, by eight central banks and supervisors who established a Network of Central Banks and Supervisors for Greening the Financial System (NGFS). The report states that NGFS members acknowledge that “climate-related risks are a source of financial risk. It is therefore within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks.” NGFS now includes 34 central banks and supervisors, and five observers, including BIS; and recently, the Basel Committee agreed to join NGFS as an observer, indicating the relevance and importance of environmental finance issues for years to come.
Last week, Ursula Von der Leyen, the new European Commission President, announced the new term of College of Commissioners. The most notable new Commissioner is Valdis Dombrovskis from Latvia who will serve as one three new Executive Vice-Presidents of the European Commission, as well as coordinate the work on "An Economy That Works For People". He will be the Commissioner for financial services, which is supported by the Dictorate-General for Financial Stability, Financial Services and Capital Markets Union. President-elect Ursula von der Leyen addressed the role of Executive Vice-President Dombrovskis, stating, "We have a unique social market economy. It is the source of our prosperity and social fairness. This is all the more important when we face a twin transition: climate and digital. Valdis Dombrovskis will lead our work to bring together the social and the market in our economy."
Dombrovskis' key priorities that will impact credit unions in the EU are outlined in President-elect Von der Leyen's Mission Letter, and include:
- Completing the Banking Union by finalizing the common backstop to the Single Resolution Fund;
- Agreeing on a European Deposit Insurance Scheme;
- Speeding up the work towards a Capital Market Union;
- Improving cross-border investments, improve the supervisory system and better harmonize insolvency and tax proceedings;
- Developing a green financing strategy to direct investment and financing to the transition to a climate-neutral economy;
- Devising a FinTech Strategy to support new digital technologies in the financial system;
- Developing a new private-public fund specializing in initial public offerings for SMEs;
- Developing a comprehensive approach to combat money laundering and the financing of terrorist activities;
- Ensuring a common approach with the Member States on cryptocurrencies; and
- Developing proposals to improve European resilience against sanctions by third countries, and to ensure that EU sanctions are properly enforced.
In July 2019, the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published a study of the application of proportionality under Pillar 2 of the Basel framework. Sixteen jurisdictions were surveyed to examine their application of proportionality and how they implemented Pillar 2 principles. FSI stated that the key aim of the survey was, "to determine whether and, and if so, how supervisory authorities apply proportionality in tailoring risk management expectations and supervisory practices according to the size, complexity and risk profile of regulated entities."
The Basel Committee on Banking Supervision created a three pillar approach to the oversight of international banks, designating Pillar 1 to outline risk-based capital (RBC) rules, which are subject to supervisory review pursuant to Pillar 2 regulatory requirements and disclosure requirements set forth in Pillar 3. Pillar 2 requires an assessment of risk profile through a cumulative set of risk management requirements coupled with risk-based supervision (RBS).
FSI's "Proportionality Under Pillar 2 of the Basel Framework", can be found here.