Mutuals « 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 11, 2013

Credit unions and building societies changes

One of the consequences of a change of name by a credit union or building society to include “bank” is that APRA removes the entity from its credit union or building society lists to its bank list.

Since September 2011, 7 credit unions and 1 building society have transferred from APRA’s credit union and building society lists to its list of Australian-owned banks.

As a result, APRA has moved statistics for mutual banks from the CUBS statistics to its bank publications.

Here are the Australian-owned mutual banks

Defence Bank Limited
Heritage Bank Limited
mecu Limited (trading as bankmecu)
Police Bank Ltd
Police & Nurses Limited (trading as P&N Bank)
QT Mutual Bank Limited
Teachers Mutual Bank Limited
Victoria Teachers Limited (trading as Victoria Teachers Mutual Bank)

APRA is proposing to replace its current separate publications with Quarterly ADI Performance Statistics (QADIP) from late May.

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Posted 11th March 2013 by David Jacobson in Credit unions, Mutuals

December 31, 2012

CUBS and mutual bank stats

The Australian Prudential Regulation Authority (APRA) has released a discussion paper outlining proposals to change its statistical publications on authorised deposit-taking institutions (ADI).

APRA proposes to combine the quarterly bank and CUBS statistical publications into a quarterly ADI statistical publication which will incorporate statistics on capital adequacy, impaired facilities and credit union and building society liquidity.

The proposed combined publication will also include, for the first time, statistics for mutual banks or mutual ADIs .

Since September 2011, APRA has approved seven CUBS to use the word ‘bank’. As a consequence, these seven CUBS are now classified as banks in APRA’s statistical publication. Most credit unions and building societies are mutuals. The approval to use the word bank has therefore led to the emergence of ‘mutual banks’.

APRA proposes to publish selected aggregate statistics for mutual ADIs in the Quarterly ADI Performance Statistics. APRA proposes that a mutual (whether a bank, CUBS or ADI) will be defined as an institution where each member is issued one share and each member has one vote.

Mutual ADIs currently comprise mutual banks as well as all mutual CUBS. Almost all CUBS are mutual institutions. The small number of CUBS that do
not meet the definition of a mutual, would not be included in ‘mutual ADIs’.

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Posted 31st December 2012 by David Jacobson in Credit unions, Mutuals

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

KPMG mutuals review

KPMG’s 2012 survey has confirmed that mutuals are focussing on risk management (including Basel III) and changing regulation at the same time as dealing with cost pressures through increasing competition for customers and new technologies.

Our regulatory timeline is evidence of the constant change.Talk to your local Langes partner about how we can help you manage your risks.

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Posted 7th December 2012 by David Jacobson in Mutuals

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

October 22, 2012

Breach and complaint registers

In its October 2012 newsletter the Code Compliance Committee for the Mutual Banking Code of Practice commented on the diversity and quality of breach and complaint registers used across Code subscribers. The Committee commented that there appears to be no common industry practice or guidance in place about the importance of accurate and meaningful capture of breach and compliance data.

Recording and monitoring complaints and breaches is a critical part of any compliance framework.

The complaints handling process of Code subscribers must comply with clause 28 of the Code of Practice. The Australian Standard on Compliance Programs (AS 3806-2006) is a useful benchmark.

Recognising a complaint is an important training issue. These may be received at branches, by letter, by email, by feedback from your website or in call centres. However they are received they must be recorded to ensure the required response time deadlines are met.

Whether complaints and breaches are recorded in hard copy registers, in excel spreadsheets or in databases does not matter as long as the system is able to track when complaints are lodged, the nature of the complaint, when they are responded to and when they are resolved. The records must be accessible, be maintained and be monitored.

It’s what you do with the complaints you receive that is important. You have to tell your customers how their complaint will be dealt with (and when) as well as the ultimate resolution and keep them informed along the way. And complaints should be analysed internally to assess whether they are an indicator of a widespread problem, poor customer service or a potential breach of a law or Code.

Unresolved complaints become disputes which must be separately recorded and monitored, particularly if they are referred to External Dispute Resolution.

If complaints or disputes involve compliance issues there must be a process to assess them and what has been done to fix them.

You need to establish the appropriate links between your IDR procedures and your EDR Scheme (see ASIC RG 165)

If they are substantial breaches of an AFS Licence they need to be reported to ASIC within 10 business days.

Accordingly your compliance system needs to include reporting regularly to your Risk and Audit Committee on whether there have been any complaints, breaches or disputes and whether previous matters have been resolved or not.

This must be positive reporting: even if there has been no complaint, breach or dispute you must report that fact if that is the case.

Langes can help review your complaints process.

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Posted 22nd October 2012 by David Jacobson in Mutuals, Risk management

September 28, 2012

APRA Internal Capital Adequacy Assessment Process review for ADI’s

APRA has released for consultation draft Prudential Practice Guide CPG 110 Internal Capital Adequacy Assessment Process and supervisory review (CPG 110).

The Guide is part of APRA’s increasing emphasis on capital risk management as Basel III approaches commencement on 1 January 2013. (see here)

UPDATE 1 October: APRA has released a final set of prudential standards and reporting standards that give effect to major elements of the Basel III capital reforms in Australia.

The Guide supports compliance with Prudential Standard APS 110 Capital Adequacy (APS 110) which sets out requirements in relation to the capital adequacy of a regulated institution, including the need for a regulated institution to have an Internal Capital Adequacy Assessment Process (ICAAP), and establish a framework for supervisory review and adjustment of a regulated institution’s capital requirements.

Under the capital standards, the Board of a regulated institution has primary responsibility for the capital management of that institution. This obligation goes beyond the need to ensure compliance with regulatory capital requirements and requires the Board to ensure that each regulated institution holds capital resources commensurate with its risk profile.

Consistent with that overarching responsibility, the capital standards require each regulated institution to have an ICAAP that has been approved by its Board.

The Board is responsible for the risk appetite of a regulated institution and for ensuring that the institution has an appropriate risk management framework. Risk appetite is a fundamental part of both risk management and capital management.

APRA has not yet decided on the form of capital instruments that mutual ADIs can issue to comply with Basel III Common Equity Tier 1.

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Posted 28th September 2012 by David Jacobson in Mutuals, Risk management

September 11, 2012

Speaking about mutuals

Langes partner Rob Surman will speak about “The Compliance Framework” at the MAGPI (Mutuals Audit & Governance Professionals Institute) Conference on 18th October.

Shannon Adams, Ronen Atzmon and David Jacobson will attend the Abacus Convention on 23rd September.

We look forward to seeing you. Please say hello.

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Posted 11th September 2012 by David Jacobson in Mutuals