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 regulations in the financial sector in Europe that sets uniform requirements for the security of network and information systems as well as critical third parties which provide ICT (Information Communication Technologies)- related services to them. This includes services such as cloud platforms and data analytics services.

The 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).

The European Network of Credit Unions (ENCU) and its members extended congratulations to Mairead McGuinness on her appointment as a Commissioner in charge of Financial Services, Financial Stability and Capital Markets. 

ENCU further welcomed the Commissioner's agenda for the future of the European financial sector noting its commitment to ensuring access to credit for ordinary Europeans and adequate protections for struggling borrowers amid the crisis.  Credit unions make an important contribution to the European social economy by supporting thousands of communities and more than 7 million European households with affordable financial services.

ENCU currently represents approximately 1,000 credit unions in the European Union (EU) with more than EUR 20 billion in total assets thrhough its member countries of Croatia, Estonia, Ireland, Republic of North Macedonia, Moldova, Netherlands, Poland, Romania, and Ukraine, 

A copy of the letter can be viewed here. 

The European Union adopted temporary banking rules in order to maximize the capacity of banks to lend money and support households and businesses to recover from the COVID-19 crisis.

The banking package targeted changes to the capital requirements regulation (CRR 2). These changes will allow credit institutions to fully play their role in managing the economic shock that stems from the COVID-19 pandemic by fostering credit flows.

More specifically, the targeted amendments concern:

• changes to the minimum amount of capital that banks are required to hold for non-performing loans (NPL) under the "prudential backstop". In particular, the preferential treatment of NPLs guaranteed by export credit agencies will be extended to other public sector guarantors in the context of measures aimed at mitigating the economic impact of the COVID-19 pandemic.

• the extension by two years of transitional arrangements related to the implementation of the international accounting standard IFRS 9. This will allow banks to mitigate the potential negative impact of a likely increase in banks' provisions for expected credit losses.

• the temporary reintroduction of a prudential filter for sovereign bond exposures which will mitigate the impact of the current volatility of financial markets on public debt.

• additional flexibility for supervisors to mitigate negative effects of the extreme market volatility observed during the COVID-19 pandemic, in particular by excluding "overshootings" that occurred in 2020 and 2021 in banks' internal models for market risks.

• targeted changes to the calculation of the leverage ratio (i.e. the ratio between banks' capital and its exposures) and a delay in the introduction of the leverage ratio buffer by one year to January 2023.

• transitional arrangements for exposures to national governments and central banks denominated in a currency of another member state, in order to support funding options in non-euro member states mitigating the consequences of the COVID-19 pandemic.

• the earlier introduction of some capital relief measure for banks under CRR 2, most notably with respect to preferential treatment of certain loans backed by pensions or salaries and their SMEs and infrastructure loans, thus encouraging the credit flow to pensioners, employees, businesses and infrastructure investments.

WOCCU praises these changes adopted by the European Union and urges national-level regulators in the EU to provide similar relief for those credit unions otherwise exempt from the Capital Requirments Directive (CRD V).

Amendments to the capital requirements regulation in response to the COVID-19 pandemic

World Council of Credit Unions (World Council), the European Network of Credit Unions (ENCU), and the European Union Credit Union Parliamentary Interest Group (EUCUPIG) in two separate letters called for regulatory relief to allow credit unions in the European Union to play a critical role in the response to the COVID-19 pandemic. Credit Unions have a history of providing critical services through disasters, emergencies and other disruptions by providing direct assistance to their members. 

With proper regulatory relief, credit unions have the ability to advance financial inclusion during the pandemic.   These community-based cooperatives provide services to households, SMEs and vulnerable groups that face a number of obstacles in accessing credit, particularly during this crisis.

This call for regulatory relief came in a series of letters with the ENCU letter signed by five Members of the European Parliament (MEPs) also members of the EUCUPIG::

• MEP Billy Kelleher (Co-Chair of EPCUIG - Ireland)
• MEP Paul Tang (Vice-Chair of EPCUIG – The Netherlands)
• MEP Frances Fitzgerald (Ireland)
• MEP Barry Andrews (Ireland)
• MEP Caroline Nagtegaal (The Netherlands)

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.

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.

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.

On August 26, 2019, the European Network of Credit Unions (ENCU) and the World Council of Credit Unions (WOCCU) sent letters to Ukraine's National Commission for the State Regulation of Financial Service Markets regarding the revised Regulations on Mandatory Standards and Requirements Limiting the Risk of Operations with Credit Union Financial Assets, and their relationship to the European Union Capital Requirements Directive (CRD IV). Both ENCU and WOCCU urged the Commission to adopt new regulatory norms and regulations that will help strengthen the credit union system.  If adopted the norms should pave the way for and amendment to the EU-Ukraine's Association Agreement incorporating a CRD-IV exemption for credit unions.  This exemption will bring credit unions in line with numerous other EU countries that provide a similar exemption, all of which will assist credit unions with their operations. 

Comment Letters:
ENCU Comment Letter: Regulations on Mandatory Standards and Requirements Limiting the Risk of Operations with Credit Union Financial Assets and Ukrainian Exemption from EU Basel III Capital Requirements Directive (CRD IV)

WOCCU Comment Letter: Regulations on Mandatory Standards and Requirements Limiting the Risk of Operations with Credit Union Financial Assets and Ukrainian Exemption from EU Basel III Capital Requirements Directive (CRD IV)

ENCU urged the European Commission to avoid duplication and overlap of the implementation of the Distance Marketing of Financial Services Directive, particularly when there are product specific directives or national-level rules governing similar conduct.  ENCU noted that often inconsistencies or additional processes required by competing regulations often lead to additional costs and expenses without any corresponding benefit to consumers. 

The comments came as part of the European Commission’s Evaluation of the EU Rules on Distance Marketing of Financial Services that sets out what information a consumer should receive about a financial service and its provider before conducting a distance contract.

A copy of the comment letter can be viewed here.

The European Network of Credit Unions urged the European Supervisory Authorities to use the increased communication and collaboration that will be gained as a result of the revised guidelines for the “AML Colleges” to reduce regulatory burden for credit unions. 

These comments came as part of the consultation process on the Draft joint guidelines on the cooperation and information exchange for the purposes of Directive (EU) 2015/849 between competent authorities supervising credit and financial institutions. The AML Colleges will be used to establish supervisory protocols when an institution crosses over multiple countries or jurisdictions for supervision regarding Anti-Money Laundering and Countering Financing of Terrorism.

ENCU noted that AML/CFT burdens are often disproportionately borne by credit unions as they do not have the economies of scale as larger institutions and are not-for-profit, member-owned cooperatives governed by a board of members who usually serve on a voluntary basis without receiving any remuneration for time and resources dedicated to the credit unions.

A copy of the comment letter can be viewed here.

The European Network of Credit Unions submitted its comment letter to the European Commission in response to its Consultative Document:  Fitness Check on Supervisory Reporting.  In its letter ENCU urged the European Commission to reduce regulatory burden by considering the size, complexity, and structure of credit unions when simplifying and streamlining the supervisory reporting requirements.

In particular ENCU recommended that the EC consider the differing rulebooks under which credit unions operate noting that many times those regulations are significantly more stringent than those operating under CRD IV and CRR.  Further, given that credit unions are not-for-profit, member owned institutions run by volunteer boards and volunteer employees, that compliance burdens and costs often fall disproportionately on credit unions.

ENCU urged the EC to tailor any changes with an eye towards easing the compliance burden and reducing any costs associated with such changes.

A copy of the letter can be viewed here.

The European Network of Credit Unions (ENCU) filed its comment letter on the European Commission's Consultative Document on Transparency and Fees in Cross-Border Transactions in the EU.  In its comments ENCU urged the EC to consider the disproportionate impact that the proposed regulations may have on smaller credit unions, noting that it may result in certain under-served markets being alienated.  Further it noted that credit unions, being member owned, not-for profit organizations will always seek the most efficient pricing for their members.

A copy of the letter can be viewed here.

In its letter ENCU stated that national-level legal frameworks for loan secondary markets strike the appropriate balance for the Member State and opposed EU-level intervention.  Further, that such intervention could unduly disadvantage credit unions who are often second-lien creditors.

Regarding new out-of-court “accelerated loan security” mechanisms, ENCU supported carving out consumer loans from this approach but also urged the Commission not to make loans to small businesses subject to this regime.  ENCU argued that small-business owners are typically physical person consumers who are self-employed and have usually either borrowed as a physical person (such as in the case of a sole trader) or have personally guaranteed loans to their small business if they have incorporated the small business as a legal entity, meaning that social equity grounds militating against applying an accelerated loan security instrument to consumer loans also apply to loans made to small businesses.

A copy of the letter can be viewed here.

The European Network of Credit Unions (ENCU) filed its comment letter on the European Banking Authority’s (EBA) guidelines on methods for calculating contributions to Deposit Guarantee Schemes (DGS) in the European Union.  Michael Edwards, vice president and general counsel of ENCU made several suggestions on the guidelines as follows:

• Encouraged the continuation of the ability of national competent authorities to have continued discretion to exclude and adjust the core risk indicators for sectors, such as the credit union sector, based on the legal characteristics and reporting requirements of those sectors, noting that the EBA’s DGS methodology would likely impose excessive reporting requirements on credit unions without continued national discretion in this area
• Urged the EBA to establish DGS levy guidance that takes into account the value of an institution’s covered deposits relative to the DGS funds’ total CD liabilities or total reserves, and sets higher marginal rates of DGS levies on systemically important institutions such as G-SIBs and O-SIIs;
• Urged the EBA to recognize all private-sector Institutional Protection Schemes (IPS) in its DGS levy guidelines where the IPS has a history of providing support to its member institutions, whether or not the IPS in question is recognized officially by their national competent authority; and 
• Opposed the use of Return on Assets (RoA) as a core individual risk indicator because credit unions, as not-for-profit cooperatives, do not seek to maximise RoA. Credit unions generally also have lower RoAs than large banks because of their financial inclusion mission, lower percentage of fee income (as opposed to interest income) as a share of total income in a low interest rate environment, and their smaller economies of scale. 

A copy of the comment letter can be viewed here.