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December 4, 2013

Changes to Mutual Banking Code of Practice

The Customer Owned Banking Association (COBA) has announced its agreement to sixteen recommendations in the Report by its independent consultant in its review of the Mutual Banking Code of Practice (MBCOP).

In addition, the MBCOP will be renamed “The Customer Owned Banking Code of Practice.”

The changes to the Code to take into account regulatory changes in the last 3 years. The changes include:

  • Responsible lending
  • Credit limit increase offers
  • Reverse mortgage loans
  • Third party service providers
  • Stopping of direct debits
  • Members with special needs
  • Governance arrangements

The new Code is scheduled to take effect from 1 January 2014.

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Posted 4th December 2013 by David Jacobson in Legal, Mutuals

October 30, 2013

Mutuals: the prudential regulator’s view

One of the themes of Mutuals 2013 has been regulatory risks.

So the views of the APRA chair John Laker in his final speech to mutuals in that position were worth hearing.

Some of the points he made in his formal speech and the subsequent panel discussion were:

  • In denying APRA has an agenda to exit small ADIs he said: "We want...a vibrant and healthy mutual ADI sector made up of well-capitalised and well-managed mutuals that can "punch their weight" in a tough competitive environment. A sector that also provides room for smaller ADIs that have found their competitive niche. At the same time we do not shirk from difficult conversations with a Board of an ADI whose strategy and performance have left the ADI in the position where its members' best interests would be served through its orderly exit from the industry."
  • In rejecting the proposition that it is APRA's role to create a level playing field for mutual ADIs he said "there is only one class of ADI and all are treated equally. There are no first class and second class ADIs. But the prudential system is not designed to create a level playing field."

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Posted 30th October 2013 by David Jacobson in Legal, Mutuals

October 21, 2013

A new form of capital: mutual equity interests

APRA has published draft amendments to APS 111 which allow for the issue of mutual equity interests by a mutually owned ADI.

APRA is proposing to allow mutual ADIs to issue Additional Tier 1 or Tier 2 capital instruments that could convert to Common Equity Tier 1 capital if the non-viability provisions are triggered.

Unlike listed public companies, conversion into ordinary shares is not possible for mutuals.

The conditions for the instrument will include the requirement for mutual equity interests to provide no voting rights (other than as required under the Corporations Act) and to limit both the claim of mutual equity interest holders on any surplus of a failed mutual ADI and the amounts that can be paid by way of dividends to these holders.

The proposal is open for consultation until 15 November 2013.

Langes will be working with clients to see how they can take advantage of the changes.

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Posted 21st October 2013 by David Jacobson in Credit unions, Legal, Mutuals

October 14, 2013

Limits on payments of termination benefits to directors

In Queensland Police Credit Union Ltd [2013] QSC 273 the Supreme Court of Queensland decided that payments made in 2010 and 2012 to 3 retiring directors without member approval under deeds made in September 2009 did not breach section 200B of the Corporations Act. Section 200B of the Corporations Act commenced on 24 November 2009.

Section 200B limits retirement benefits for directors and managers to their “average annual base salary”, unless members approve.

But Judge McMurdo left open the question of whether the Board had the power under the Credit Union's Constitution to agree to pay retirement benefits (in recognition of past services) without member approval.

Judge McMurdo observed:

" The applicant’s Constitution contains no provision by which the directors were authorised specifically to approve remuneration of a kind which could not be approved under cl 17 or, if it be different, a termination benefit. The board is given a general power, by cl 14.1, to manage the applicant’s business and to exercise all of the powers of the applicant except any powers that the Corporations Law or the Constitution expressly allocates to the general meeting. Although that provision was not discussed in the course of the applicant’s submissions, it may be the applicant’s position that this was the source of the power of the directors to cause the applicant to contract in terms of the Deeds. But that is not an obvious source of such a power. It is far from clear that the Constitution should be read as providing for some of the directors’ emoluments to be decided by a general meeting whilst leaving others, such as these termination benefits, to the board. The better view is that the Constitution permits the remuneration of directors but only by cl 17. If that is correct, then the provisions for termination benefits, within these Deeds, were made without the applicant’s authority and the recipients of the payments, who secured the benefit of these Deeds whilst themselves directors, would be obliged to repay the moneys. ...

Ultimately, it is unnecessary for me to express a concluded view upon whether the agreements for these termination payments were made with the authority of the applicant. That question was not fully argued and the declaration which is sought is in relation to a different issue, which is whether the payments contravened s 200B of the Act. That issue can be determined without a conclusion that the payments were otherwise duly made."

Comment: Directors and managers need to decide whether, under their Constitution, member approval is required for payment of retirement benefits unless such a payment can be made from the annual remuneration that has already been approved by members.

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Posted 14th October 2013 by David Jacobson in Credit unions, Legal

September 2, 2013

ASIC decides policy on demutualisation rules

ASIC has issued its report on its policy for considering requests from individual credit unions to switch off the demutualisation approval procedure rules.

It has decided that its policy should remain unchanged, except for one refinement.

REP 369 confirms that ASIC will, where the rule permits it to, issue a written notice to cease the effect of all, or any part of, the rules only where a credit union’s circumstances raise potential prudential concerns and the Australian Prudential Regulation Authority (APRA) considers it necessary for a proposed transaction to occur expeditiously.

ASIC will, however, consider allowing the rules to be switched off where the rules are only triggered because a party to a transaction is a former credit union that has been permitted by APRA to become a ‘mutual bank’ under the Banking Act 1959.


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Posted 2nd September 2013 by David Jacobson in Credit unions, Legal

April 29, 2013

Use of “banking” by credit unions and building societies

The Australian Prudential Regulation Authority (APRA) has released for comment draft revised guidelines on implementation of section 66 of the Banking Act.

Sections 66 and 66A of the Banking Act place restrictions on the use of certain terms, for example ‘bank’, ‘banker’, ‘building society’ and ‘credit union’, when used in relation to a financial business.

The changes include:

  • that credit unions and building societies may use the expressions ‘banker’ and ‘banking’ in marketing and branding material to describe their banking services, but may not use the term ‘bank’.
  • that credit unions and building societies may not use the expressions the terms ‘banker’ and ‘banking’ as part of a registered corporate, business or trading name, or as part of an internet domain name by a credit union or building society; and
  • that ADIs with a mutual structure may use the phrase ‘mutual banking’.

Credit unions and building societies seeking to operate as a bank
APRA will, unless there are special circumstances, grant an ADI that wishes to operate as a bank and that holds at least $50 million in Tier 1 capital an individual consent to use or assume the expressions ‘bank’, ‘banker’ and ‘banking’ on an unrestricted basis. Unrestricted consent allows the ADI to use the expressions ‘bank’, ‘banker’ and ‘banking’ in its company name and trading or business names and to describe or to advertise its business.

However, in circumstances where the ADI has previously operated as a credit union or building society, APRA will impose transitional conditions upon the grant of such consent.

APRA’s policy is that an ADI cannot simultaneously:

  • operate as a bank with unrestricted consent to use the restricted expressions ‘bank’, ‘banker’ and ‘banking’; and
  • operate as a credit union or building society .

Further, an ADI that was previously a credit union or building society and that now operates as a bank will be required to take appropriate steps to ensure that members, depositors, other customers and the general public are clearly aware that it is now operating as a bank. APRA may, for instance, grant unrestricted consent to use the restricted expressions ‘bank’, ‘banker’ and ‘banking’ on the condition that the ADI use the word ‘bank’ in its corporate, trading or business name for a finite period.

Langes can advise credit unions and building societies on the implications of the proposed changes.

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Posted 29th April 2013 by David Jacobson in Credit unions, Legal, Mutuals

March 27, 2013

The characteristics of quality corporate governance of financial institutions

I recently spoke to a group of mutuals on the topic of director liability.

I discussed the James Hardie and Centro cases but instead of focussing on penalties for breaches I looked at risk management and linked it to the business judgement rule: can a director be held liable for every unforeseen business risk? What do directors need to do personally and as a Board?

In the end it is a question of what directors of financial institutions do to manage other people's money and how they control the risks. Are your customers the focus of everything you do?

In a recent speech APRA Chair John Laker identified the following factors in the boards of successful financial institutions:

  • professionalism of the board: does the board have the financial industry experience and understanding of market complexities to ensure they can perform their fundamental role of independent and objective oversight?
  • risk governance: does the board have the ability to accurately identify and understand the risks inherent in their business and ensure there are robust structures for managing and reporting on these risks?
  • risk appetite: Has the board clearly defined the degree of risks they are prepared to assume in pursuing their strategic and business objectives? Does the risk management function have the authority and independence to challenge the business areas; are there clear risk management lines of reporting to the board?
  • the flow of information to the board: does the board receive timely, relevant and comprehensive risk information? Is there too much information or too little? Do the reports provide an enterprise-wide perspective? Does information reach the board late and/or distorted? Is the information sufficient to give the board a holistic view of the risk exposures of their institution? Are there defined warning triggers?
  • A values and risk culture: Is there a culture which drives people to do the right thing even when no one is looking. Is it consistent with the risk appetite of the board or with the personal values they expect of their staff?


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Posted 27th March 2013 by David Jacobson in Legal, Risk management

February 5, 2013

IT changes and compliance

The American Banker article Top 10 Community Bank IT initiatives discusses a range of IT projects from 10 US community banks ranging in asset size from $130 million to $5.8 billion (Thanks to Matthew Findlay for the article link).

The money quote: "We are a community sized bank; we don't have a huge amount of staff or a huge budget to go out and do these things," he says. "If you think about the compliance, the marketing, the client support, all of those people had to be on the same page."

Projects such as estatements, mobile banking, electronic communication with customers and process redesigns all need compliance input to ensure that any changes satisfy regulatory requirements.

Besides ensuring that the internal departments are aligned and co-ordinated it is essential that there is governance of the IT project: this starts with a contract setting out the cost and benchmarks to ensure that the project is completed on time and within budget and meets its goals.

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Posted 5th February 2013 by David Jacobson in Legal, Web/Tech

December 7, 2012

ASIC’s financial institution audit priorities

ASIC's Audit inspection program report for 2011–12 specifically comments on financial institution audits.

ASIC's review highlighted findings common to all industries, such as not obtaining sufficient appropriate evidence to support audit procedures conducted in relation to assessing impairment, the application of professional scepticism, the performance of substantive analytical reviews, and relying on the work of others.

Key findings specific to the audit of banks and credit unions include:
(a) insufficient and inappropriate audit evidence obtained to support the valuation of significant financial assets, such as trading derivatives, trading securities and available-for-sale securities. In particular, ASIC found instances where the auditor’s substantive procedures were inadequate and the auditor placed inappropriate reliance on controls and external confirmations to validate the valuation assertion;
(b) insufficient testing to assess the adequacy of provisions for loan losses. In designing a disaggregated substantive analytical procedure, one auditor used an aggregated threshold for testing, and did not clearly identify a threshold for investigating differences or sufficiently corroborate variations identified; and
(c) insufficient testing of the reported net interest margin, including the inappropriate application of substantive analytical procedures or reliance on the audited entity’s controls without detailed substantive testing where the balance was material.

ASIC says these findings do not necessarily mean that there were deficiencies in the systems of any of the regulated entities concerned.

ASIC says its reviews of audits of banks, credit unions and insurance companies found that sampling procedures were often inappropriate. For example, there was often insufficient evidence that the auditor considered whether the sample selected was representative of the whole population or whether sampling was undertaken in accordance with the firm’s policy.

ASIC also commented on the adequacy and timeliness of auditors reporting suspected contraventions under s311 and 601HG of the Corporations Act, reporting under s990K, and reporting under the national credit legislation.

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Posted 7th December 2012 by David Jacobson in Legal, Mutuals, Risk management

December 5, 2012

Mutual Banking Code Annual Report 2011-12

The Code Compliance Committee of the Mutual Banking Code of Practice has released its 2011-2012 Annual Report.

Most individual code breaches reported in 2011- 2012 related to the following five categories, representing 66% of the total number of reported breaches:

  • ‘Privacy and confidentiality’ (96 breaches or 26%);
  • ‘Key Commitments’ (42 breaches or 12%);
  • ‘Dispute resolution’ (42 breaches or 12%);
  • ‘Direct Debits’ (28 breaches or 8%);
  • ‘Training (28 breaches or 8%)
  • According to the CCC, "breaches associated with privacy and confidentiality matters appear to be associated with human, system and administration errors. They do not appear to be systemic, nor significant, in nature. ...

    Some of the breaches of the Code self reported by Mutuals concerning privacy obligations include:

    • staff issuing a receipt with account details (including account balance) to a person not associated
      with the account;
    • a credit account enquiry completed for a loan when no signed consent form or evidence of verbal
      consent was noted;
    • a member was not adequately indentified when using the the call centre for an account enquiry."

    Mutuals reported that they handled 10,401 complaints from members through their internal dispute resolution systems, 64% of which were resolved in favour of the member or by mutual agreement: 84% of these complaints were related to service provision (32%), transactions (32%), ATM failure (10%) and charges (9%).

    Mutuals received 2,137 hardship applications from members of which 1,683 or 79% were granted some assistance. Of these granted applications, 419 or 20% were resolved by the provision of long term relief.

    It's worth comparing those statistics for mutuals with the statistics for banks in 2011-12 Annual Report of the Code Compliance Monitoring Committee of the Code of Banking Practice.

    Banks also reported significantly increased breach numbers in the areas of Privacy and Confidentiality, Debt Collection and Financial Difficulty.

    Overall, the banks reported 206,472 formal requests made for financial difficulty assistance during the reporting period of which 149,484 (69%) resulted in some type of formal assistance being granted. The CCMC has identified that some banks record only hardship applications seeking a variation to the credit contract (as defined under the National Consumer Credit Protection Act (2009) - the NCCP Act). Other banks additionally record requests for a short term suspension of payments as a request for assistance, even if the customer is not in arrears.

    Banks also reported breaches created by technology breakdowns or programming issues: the CCMC observed that "the number of significant code breaches related to technology demonstrates that issues in this area can affect large numbers of people and result in significant resources being devoted to remediate the issues".

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    Posted 5th December 2012 by David Jacobson in Legal, Mutuals
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