Legal « Credit Union and Mutual Law Blog

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

November 29, 2012

National Co-operative Laws Regulations

Following the passage by the NSW Parliament of the Co-operatives (Adoption of National Law) Act 2012, NSW Fair Trading has released the draft Co-operatives National Regulations for comment.

The Co-operatives National Regulations contain the uniform matters for regulation across all states and territories, including the different financial reporting requirements for small co-operatives.

Background

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Posted 29th November 2012 by David Jacobson in Legal, Mutuals

September 17, 2012

LCollect is not part of Langes+

It has come to our attention that some financial services providers have been under the impression that the mercantile agency LCollect is part of Langes+. Although associated with former partners of the law firm, LCollect operated separately from the firm, and there has been no business relationship between Langes+ and LCollect since 2011.

At Langes+ we undertake mortgage enforcement and debt collection work in all States and Territories, acting on direct instructions from clients. Please call your usual Langes+ Relationship Partner, Shannon Adams on 08 8168 9601 or Josh Annese on 08 8168 9604 if you’d like more information about our mortgage enforcement and debt collection services.

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Posted 17th September 2012 by David Jacobson in Legal

July 19, 2012

National co-operative laws update

The New South Wales Parliament has passed the Co-operatives (Adoption of National Law) Act 2012 which includes the Co-operatives National Law which is a template for uniform national laws for co-operatives.

Once passed in all states, larger co-operatives wishing to carry on business across a state or territory border will be able to do so without registering in each jurisdiction. Smaller co-operatives will benefit from the introduction of simplified financial reporting to members and removing the obligation to lodge publicly available accounts.

The Co-operatives National Law will implement modern principles of corporate governance and accountability similar to requirements for other corporate entities.

Now that the law is passed in NSW, other States and Territories must pass the same or consistent law in their own jurisdictions within 12 months.

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Posted 19th July 2012 by David Jacobson in Legal, Mutuals

Income tax treatment of Tier 2 capital under Basel III

Treasury has released a discussion paper on the implementation of the Government’s proposal to ensure that on commencement of the Basel III capital reforms on 1 January 2013, eligible Tier 2 capital instruments, issued on or after that date, by ADIs can be treated as debt for income tax purposes so that funding costs would be tax deductible.

It is proposed that the Income Tax Assessment Regulations 1997 be amended so that the inclusion of a loss absorbency clause as required by APRA does not preclude Tier 2 instruments from being classified as debt interests for tax purposes.

Assuming that the Basel III Tier 2 capital is akin to Lower Tier 2 capital, eligible notes would have to have the following features under the proposed changes, consistent with the current drafting of regulation 974‐135D of the ITAR 1997:
• have a maximum term of 30 years;
• distributions are cumulative and compounding;
• be classified as an accounting liability; and
• satisfies the Tier 2 capital loss absorbency requirement.

Currently the minimum standards that an instrument must comply with to be included in an ADI’s regulatory Tier 2 capital include:
• subordination to all but Common Equity Tier 1 and Additional Tier 1 capital;
• no guarantee on amounts paid in or payable;
• a minimum term of five years;
• no acceleration of repayments, except under certain circumstances;
• a loss absorbency clause that is triggered at the point of non‐viability; and
• a pre‐determined payment schedule.

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Posted 19th July 2012 by David Jacobson in Credit unions, Legal

June 18, 2012

Mutual Banking Code compliance report: direct debits

The Mutual Banking Code of Practice Code Compliance Committee has issued a report on compliance with Section 20.1 of the Code under which mutuals are required to stop or cancel a direct debit facility linked to a member’s transaction account promptly upon request by that member.

The CCC identified that the majority (70%) of disclosure documents reviewed in relation to direct debits provided the correct information to members about the cancellation process, in line with Code obligations.

However, in comparison to the last review in 2010, the results of the shadow shopping exercise showed no change or improvement in the verbal advice provided by Mutuals’ in relation to direct debit cancellation. The CCC once again found that only four out of 10 Mutuals surveyed were fully compliant.

Subject to size of the Mutual, complexity of the business and the number of direct debit cancellation applications received, the report also lists recommendations that Mutuals may wish to consider to improve their compliance in this area:

•develop a compliance checklist outlining direct debit obligations for use by relevant business units (an example is provided in Appendix A of the report),
•develop a standard form for members to complete when they wish to stop or cancel a direct debit arrangement which can be downloaded from the website,
•review direct debit information contained in disclosure documents to ensure its accuracy,
•review the website (if one exists) to ensure the search function responds to simple keyword searches concerning direct debits and hyperlinks connect to the correct documents,
•educate relevant staff about the Mutual’s key obligations and processes required to stop or cancel a direct debit facility,
•educate staff about the impact of incorrect advice, particularly upon members experiencing financial hardship, and
•monitor compliance with Code obligations in this area by undertaking their own shadow shopping exercises.

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Posted 18th June 2012 by David Jacobson in Credit unions, Legal, Mutuals