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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

June 14, 2012

Draft regulation: Reduced input tax credits for credit unions

Treasury has released an exposure draft regulation to amend the GST law to ensure that credit unions do not lose access to a reduced input tax credit for credit union services when they rebrand as banks.

The draft regulation proposes to expand the definition of ‘credit union’ to also include APRA-listed banks that were APRA-listed credit unions as at 1 July 2011 and retains mutuality.

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Posted 14th June 2012 by David Jacobson in Credit unions, Legal

June 4, 2012

Proposed Financial Industry Levies 2012‑13

Treasury has issued a Consultation Paper on Proposed Financial Industry Levies for 2012‑13 to seek industry views on the proposed APRA financial industry levies to apply for the 2012-13 financial year.

The paper discusses potential impacts of the proposal on each industry sector and institution regulated by the Australian Prudential Regulation Authority (APRA). The paper also provides a summary of the costs associated with the implementation of the SuperStream measures, which were announced on 16 December 2010 as part of the Government’s Stronger Super Reforms.

In respect of ADIs (incliding credit unions,building societies and mutual banks) the minimum contribution is to be increased and the levy will increase by 3%.

The following industry statistics quoted in the paper are interesting and tell the story of the creation of mutual banks as well as CUBS mergers and an increase in the assets of credit unions.

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Posted 4th June 2012 by David Jacobson in Credit unions, Mutuals

May 9, 2012

GST — reduced input tax credits for credit unions reinstated despite rebranding

The 2012-2013 Commonwealth Budget papers contain an announcement that the Government will amend the GST law to restore access to a reduced input tax credit (RITC) for credit unions who rebrand as ‘banks’, with effect from 1 July 2011.

This measure will reinstate the existing concession by allowing a RITC for acquisitions from an entity wholly owned by credit unions or rebranded credit unions by a credit union or rebranded credit union.

The measure will apply to entities who were approved credit unions by the Australian Prudential Regulation Authority as at 1 July 2011 and subsequently change their branding to include the title ‘bank’, but otherwise do not change their corporate structure.

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Posted 9th May 2012 by David Jacobson in Credit unions, Legal

April 2, 2012

APRA implementation of Basel III capital reforms

The Australian Prudential Regulation Authority (APRA) has released for consultation draft Prudential Standards and Response to Submissions paper outlining its proposed implementation of the Basel III capital reforms in Australia.

The package consists of:

  • Draft Prudential Standard APS 001 Definitions
  • Draft Prudential Standard APS 110 Capital Adequacy
  • Draft Prudential Standard APS 111 Capital Adequacy: Measurement of Capital
  • Draft Prudential Standard APS 160 Capital Adequacy: Basel III Transitional Arrangements
  • Draft Prudential Standard APS 222 Associations with Related Entities

APRA's letter to ADIs in relation to interim arrangements for Additional Tier 1 and Tier 2 capital instruments for ADIs wishing to issue capital instruments before the final standards come into effect on 1 January 2013 explains that:

  • Subject to APRA’s approval, an Additional Tier 1 and Tier 2 capital instrument issued from 30 March 2012 in compliance with the draft APS 111 may be fully recognised in the relevant category of capital until its first call date. If APRA determines that the instrument complies with the final APS 111, it will continue to be recognised in the relevant category of capital.
  • Where an instrument issued under the draft APS 111 is assessed as not complying with the final APS 111, it must be derecognised in the relevant category of capital from its first call date (or, where there is no call date within a reasonable period, another appropriate date as determined by APRA). These instruments will not be covered by the transitional arrangements set out in draft Prudential Standard APS 160 Basel III Transitional Arrangements (APS 160) and will not be included in the base amount defined in that standard. However, instruments issued in accordance with APRA's letter of 27 May 2011 will, subject to APRA's approval, be eligible for the transitional arrangements set out in draft APS 160.

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Posted 2nd April 2012 by David Jacobson in Legal

March 22, 2012

APRA report on progress of remuneration requirements implementation

APRA has published the results of its review of APRA-regulated institutions' progress on implementation of its prudential requirements in relation to remuneration.

APRA's comments include:

  • all of the Boards it met with "had well-established Remuneration Committees, with reasonably clear and robust governance arrangements. In most cases, the Chair of the Board attended meetings (either as a full or ex-officio member) was also pleasing to see a strong linkage between the Remuneration Committee and the Board Risk Committee: the most common model observed was for there to be at least two directors who sat on both committees (and often the Chair of the Risk Committee was a member of the Remuneration Committee)....
    We were pleased to see considerable evidence that, as appropriate, Remuneration Committees sought advice from external sources, independent of that obtained by management."
  • there was a "strong focus on the remuneration outcomes of the most senior executives. In a limited number of cases, there still seemed to be a degree of tension between the role of the CEO in determining the remuneration arrangements and awards for his/her senior executive team, and the requirement in the Prudential Standard that these arrangements be determined by the Board. While the CEO will rightly be a source of advice and input on these matters, ultimately it is the Board’s responsibility to determine both the structure of, and actual outcomes from, the remuneration arrangements of senior executives."
  • there were "some inconsistencies across the institutions in the extent of Board approval of the remuneration of material risk-takers below the senior executive level...Further, the remuneration arrangements of relevant staff of a related body corporate which provides material services to the regulated institution may also be subject to the requirements of the Prudential Standards."
  • "Most of the Remuneration Committees we met with have established performance assessment arrangements based on a scorecard approach, in which various quantifiable objectives and benchmarks are used to assess performance. However, the application of these scorecard-based approaches varied widely. Some scorecards contained fairly high level metrics only, with a high degree of judgement applied by the Remuneration Committee to convert key performance indicators (KPIs) into actual rewards....APRA does not advocate either of these approaches in their entirety, believing instead that good performance assessment requires both clarity of objectives to provide a sound basis for performance measurement, and the application of experienced judgement to reflect those aspects of performance which cannot be measured using readily quantifiable KPIs...We are wary of totally ‘mechanical’ or formulaic approaches to performance-based remuneration, which rely completely on the use of quantitative risk measures as a means of meeting the requirements within the Prudential Standard...Equally, we are wary of highly subjective approaches – they lack a sound basis on which to establish performance expectations or measure the adequacy of results, and rely too heavily on the judgement of the Remuneration Committee to ensure remuneration outcomes are appropriate."


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Posted 22nd March 2012 by admin in Risk management

March 14, 2012

Credit card chargebacks

The Banking Code Compliance Monitoring Committee has release the final report of its Inquiry regarding credit card chargebacks.

Under the Code of Banking Practice, banks are required to disclose certain information and follow certain procedures relating to credit card chargebacks.

The Committee found that the banks received in excess of 90,000 chargeback requests in March 2011, the sample month.

It identified the following areas of improvement:

  • card holders were often given open ended timescales without an acknowledgement that a chargeback right may be lost if a referral is not made within a specific timeframe
  • advice regarding time referral limits was at times inconsistent with those given in the credit card terms and conditions

It also recommended that:

  • Where a dispute form is used, this should be easily available online and contact centre staff should be made aware of its use .
  • Banks might consider the inclusion of wording on chargebacks in their monthly statements templates.

The Mutual Banking Code of Practice requires mutuals to assist their customers in respect of chargebacks.

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Posted 14th March 2012 by David Jacobson in Legal

Effect of company tax reduction on medium credit unions

The Government's proposed company tax reduction (see here) will have a flow on effect for medium credit unions, whose notional taxable income is between $50,000 and $150,000.

The 45 per cent rate that applies to the taxable income of recognised medium credit unions reflects the current 30 per cent corporate tax rate. If the corporate tax rate is reduced to 29 per cent, the medium credit union rate will be reduced to 43.5 per cent.

This reduction applies for the 2013-14 income year and for subsequent income years. However, if a recognised medium credit union is a small business entity, the reduction also applies in the 2012-13 income year.

UPDATE 10 May 2012: This proposal has been abandoned

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Posted 14th March 2012 by admin in Credit unions, Legal
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