Baby Steps
Volume 11, Number 11
November 24, 2021
Advocacy News You Can Use
Proportionality is alive and well. This is great news for credit unions because it means regulators are seeing the importance of tailoring regulations to allow credit unions to properly serve their members. We saw this most recently with the Financial Action Task Force (FATF) issuing its High-Level Synopsis of the Stocktake of the Unintended Consequences of the FATF Standards. The key passage in this report states that the failure to use the proportionality that is central to the risk-based approach can lead to or compound financial exclusion.
This is an important position from an international standard setting body. First, it acknowledges that more work needs to be done with national-level regulators to undertake that hard work of tailoring regulations. Perhaps more importantly, it highlights the important role that credit unions can play in serving excluded or marginalized populations if regulatory frameworks are properly permissive. This is precisely the focus of much of WOCCU’s International Advocacy efforts.
We hope this serves as a template for other international standard setters to follow. While almost all include proportionality in their frameworks, taking the next steps to focus on how the failure to implement proportionality leads to financial exclusion is just as important. Ryan Donovan, EVP and Chief Advocacy Officer at CUNA often says that advocacy is a process and not an event. Perhaps these are baby steps in the process, but it seems like a giant leap.
FATF Identifies Lack of Proportionality as Barrier to Financial Inclusion
FATF recently published its High-Level Synopsis of the Stocktake of the Unintended Consequences of the FATF Standards. WOCCU commented on this consultation, urging focus on the link between proportionality and financial inclusion, and further commenting on De-Risking, as all those issues relate to national-level implementation of AML/CFT requirements, which are often costly and burdensome for smaller community-based financial institutions, such as credit unions.
In their synopsis and recommendations, FATF included the following language:
“In general, the misapplication of the FATF Standards, and in particular the failure to use the proportionality that is central to the risk-based approach, can lead to or compound financial exclusion.”
WOCCU applauds the acknowledgment and focus on proportionality as it relates to AML/CFT requirements. WOCCU noted in its comment letter that a failure by national-level regulators to apply a risk-based and proportional approach to regulation, especially when given instruction to do so, threatens the ability of financial institutions, such as credit unions, which provide necessary services to underserved communities.
FATF noted in its synopsis that the failure to properly apply FATF Standards, and in particular, the failure to use the proportionality that is central to the risk-based approach . For example, the risk-based tools within the Standards (such as exemptions and simplifications) are underutilized by the countries needing them the most to expand financial inclusion. Secondly, the FATF’s Standards, evaluation and other activities do not adequately encourage authorities, the private sector and assessment teams to understand the impact of financial exclusion on ML/TF risks.
FATF also noted the problem of De-risking which is “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with FATF’s risk-based approach.” De-risking can result in increased costs of payments, and concentration for correspondent banking and remittance services, and prevent credit unions from having access to affordable and necessary financial services.
FATF reiterated its commitment to continue to work on what more can be done to mitigate these unintended consequences. This may entail additional guidance, best practices, training and possible revisions to FATF’s Methodology, Procedures and Standards, as well as continuing engagement on FATF’s work with key external stakeholders.
A copy of the Synopsis can be viewed here.
Why this matters to your credit union: FATF’s link between the failure to engage in proportionality and financial exclusion means that more work will be done to properly tailor rules for the size, risk, and complexity of the institution regulated. This could lead to regulatory frameworks more suited to credit unions.
IFRS Establishes International Sustainability Standards Board with Basel Committee’s Support
The International Financial Reporting Standards (IFRS) Foundation announced that it is establishing the International Sustainability Standards Board (ISSB). The purpose of the ISSB is “to develop global standards to improve the consistency, comparability and reliability of sustainability reporting.” The Basel Committee on Banking Supervision (Basel Committee) declared its endorsement for the ISSB; stated support for “the development of a consistent approach across sectors and minimising regulatory fragmentation”; and promised to “work on the Pillar 3 framework to promote a common disclosure baseline for climate-related financial risks across internationally active banks”.
The Basel Committee believes the ISSB’s mission coincides with its Pillar 3 goals related to climate-related financial risks and plans to analyze Pillar 3 to bolster these risks for a common disclosure baseline traversing all internationally active banks. In coordination with the IFRS Foundation, the Basel Committee intends on advance their analogous objectives by working with other international forums, such as the Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) “to ensure the prerequisites for a high-quality and globally consistent disclosure framework for climate-related financial risks are in place.”
More information on the Basel Committee’s collaboration with the ISSB can be found here.
Why this matters to your credit union: The establishment of a separate board focused solely on sustainability demonstrates the significant focus on sustainable reporting requirements that will evolve over the next several years. This follows the G20 focus on having the world meet climate goals as agreed upon by the various nations. This will ultimately lead to adjustments for credit unions in many areas of their operations, including investments, products, governance and others.
FATF Acknowledges Burden of AML/CFT Requirements on the Advancement of Financial Inclusion
The Financial Action Task Force released its “Cross-Border Payments Survey Results on Implementation of the FATF Standards” in response to a survey created to identify conflicts between AML/CFT rules and implementation, and cross-border payments. According to FATF, “The survey results highlight, among others, that lack of risk-based approach and inconsistent implementation of the AML/CFT requirements increases cost, reduces speed, limits access and reduces transparency.”
World Council commented on to this survey, and to our avail, FATF report included our assertion that AML/CFT requirements often are not tailored to smaller credit unions and are prohibitive of allowing credit unions into the payments systems. They recognized that “…some jurisdictions restrict the type of customer or product that can be considered lower risk, and whether SDD can be applied, without consideration of ML/TF risks posed in individual situations…”
FATF further acknowledged our concerns that AML/CFT requirements present many problems for credit unions in the payments space, including CDD/Member Due Diligence requirements, verifying the identity of beneficial owners, receiving and sharing customer and transaction information, and the difficulties of having correspondent banking relationships. “CDD requirements, including documentation required should be tailored to the type of client and exercised using a risk-based approach instead of a prescriptive approach. In this scenario, the costs remain disproportionately high to the level of risk posed by, for example, low value transactions (and customers) in certain regions. It can also exclude access for those without the ability to provide certain documents or information, usually the ones at most need of financial inclusion.
WOCCU will continue to monitor improvements to AML/CFT and cross-border reconciliations.
Why this matters to your credit union: The identification that regulatory burden often prevents credit unions from participating in necessary financial services should lead to adjustments in regulations that support the credit union operating model.
FSB Says Market Participants Should Act Urgently to Prepare for End of Year LIBOR Cessation
In the FSB Statement to Support Preparations for LIBOR Cessation, the Financial Stability Board (FSB) strongly urged market participants to finalize any final steps outlined in the FSB’s Global Transition Roadmap, as most LIBOR panels will end at the end of 2021. While some key USD settings will continue into June 2023 to allow legacy contracts to mature, the FSB states that, “Continued reliance of global financial markets on LIBOR poses risks to global financial stability.” The FSB has ensured participants that in the upcoming months they will continue to monitor the final steps of the LIBOR transition.
Key details covered in the statement include:
- “Significant progress has been made in transitioning to Risk-Free Rates (RFRs), but market participants still need to finalize preparations to cease new use of LIBOR by end-2021.
- Transition should be primarily to overnight RFRs, the most robust benchmarks available, to avoid reintroducing the weaknesses of LIBOR.
- Active transition of legacy contracts remains the best way for market participants to have control and certainty over their existing arrangements.”
More information on the FSB’s Statement to Support Preparations for LIBOR Cessation is available here.
Why this matters to your credit union: Credit unions need to ensure that they have adequately prepared for a transition from using LIBOR as regulators will pay close attention to the risks associated with its use.
 |
Andrew T. Price, Esq. |
Follow me on Twitter