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June 17, 2013

Review of demutualisation approval procedure rules

ASIC has released Consultation Paper 210 Demutualisation approval procedure rules: Minimum member participation requirement (CP 210) seeking feedback on its approach to considering requests from credit unions to revoke demutualisation approval procedure rules.

Demutualisation approval procedure rules giving ASIC the power of revocation are contained in some credit unions’ constitutions and apply when the credit union is seeking member approval of certain types of transactions that will affect the mutuality of the credit union. However in certain circumstances the rules have proved over-restrictive.

The rules apply in addition to RG 147 requirements and the demutualisation disclosure procedures set out in Part 5 of Schedule 4 of the Corporations Act.

ASIC is considering whether a requirement for 25% of all members of a credit union to vote in a preliminary postal ballot on specified proposals is set at an appropriate level.

ASIC is also considering whether there are any circumstances in which it would be appropriate for ASIC to consider removing or changing the required percentage.

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Posted 17th June 2013 by David Jacobson in Credit unions, Mutuals

May 21, 2013

Credit union register

From time to time we are asked what a credit union’s current name is, or, more usually, who did it merge with?

Although APRA has a list of current credit unions the Australian Credit Union Archives has a helpful PDF list of past current unions available in their Register of Australian Credit Unions.

There is also a search engine.

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Posted 21st May 2013 by David Jacobson in Credit unions

Comparing capital requirements

I recently attended a talk by BOQ CEO Stuart Grimshaw. He argued that regional banks were at a structural disadvantage against the 4 largest banks.

He pointed to the 4 banks' annual combined profit of more than $24billion; yet smaller ADI's had to provide up to 3 times as much capital for housing loans.

Whilst he acknowledged that mutuals had the same disadvantage, he avoided putting regional banks and credit unions in the same category (after all BOQ has assets of $42bn).

Separately, APRA is yet to respond to submissions from mutuals for capital instruments that would meet the Basel III capital requirements.


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

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

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

Fee free mobile deposits

Wells Fargo has released Mobile Deposit in the Wells Fargo Mobile app.

What a great idea! No need to go to a branch or even an ATM.

Its Deposit Usage guidelines include the following:

  • Mobile Deposit users are required to retain the original paper items in a secure place. We also recommend you write on the front of the check: "Mobile deposit on DATE” (where DATE is the full date you deposited the check by Mobile Deposit).
  • Mobile Deposit users are required to retain the original paper items, for a minimum of five (5) calendar days, but no longer than fourteen (14) calendar days, after they have been transmitted to the Bank
  • After the retention period, the original paper items are required to securely and irretrievably destroy the original paper items so they are not deposited again.

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Posted 11th March 2013 by David Jacobson in Web/Tech

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 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
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