Banks and Financial Institutions Regulation: Recent Developments

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*Olakunle Komolafe

This review captures recent regulatory developments in the banking space.

1. CANADA:

i) Department of Finance: Regulations Amending Certain Regulations made under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2018

The Department of Finance published draft amendments to regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act 2018.

In 2015/16, the Financial Action Task Force (FATF) evaluated Canada’s Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Regime for compliance with its standards and identified deficiencies for Canada to address. In addition, in 2014 and 2017, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act was amended through the Economic Action Plan 2014 Act, No. 1 and the Budget Implementation Act, 2017, No. 1 to strengthen the AML/ATF Regime.

The draft amendments will operationalize the legislative changes introduced to strengthen Canada’s AML/ATF Regime, and ensure alignment with the FATF standards.

ii) Office of the Superintendent of Financial Institutions: Total Loss Absorbing Capacity Disclosure Requirements Guideline

The Office of the Superintendent of Financial Institutions (OSFI) released final version of Total Loss Absorbing Capacity (TLAC) Disclosure Requirements Guideline.

Applicable to Domestic Systemically Important Banks (D-SIBs), key components of the guideline include that D-SIBs:
• implement the TLAC disclosures commencing with quarterly reporting period ending January 31, 2019;
• follow the fixed format for the TLAC disclosure templates; and
• follow the five guiding disclosures principles set out in OSFI’s April 2017 Pillar 3 disclosure requirements Guideline, when preparing the TLAC disclosures.

iii) Office of the Superintendent of Financial Institutions: Capital Disclosure Requirements

OSFI released final version of Capital Disclosure Requirements (CDR) Guideline. The CDR Guideline sets out capital disclosure requirements for Canadian banks, bank holding companies, federally regulated trust and loan companies, and cooperative retail associations.

Together with the Total Loss Absorbing Capacity Disclosure (TLAC) Requirements Guideline, both form a key element of a TLAC regime designed to ensure Canada’s largest banks maintain a minimum capacity to absorb losses and enhance stability within the financial sector.

iv) Prince Edward Island: Improved Lending Agency Transparency

The Government of Prince Edward Island introduced a policy change affecting the government’s two lending agencies – Finance PEI and Island Investment Development Inc. Islanders.

The policy change requires all loans of more than $1 million to be posted online along with:
• who is receiving the loan;
• how much it’s worth;
• the interest rate; and
• basic information about the purpose of the loan.

The government hopes the policy change will lead to improved access to open and transparent information about money the government lends to companies in the province.

v) Office of the Privacy Commissioner of Canada: Guidance on Inappropriate Data Practices

The Office of the Privacy Commissioner of Canada (OIPC) released final version of its Guidance on Inappropriate Data Practices.

Coming into force on July 1, 2018, the release of the guidance is part of the OIPC’s work to improve the current consent model under the Personal Information Protection and Electronic Documents Act.

vi) Office of the Privacy Commissioner of Canada: Guidelines on Obtaining Meaningful Consent

The OIPC released final version of its Guidelines on Obtaining Meaningful Consent.

Coming into force on January 1, 2019, the release of the guidelines is part of the OIPC’s work to improve the current consent model under the Personal Information Protection and Electronic Documents Act.

2. UNITED STATES:

i) Federal Reserve Board: Proposed Rule to Simplify and Tailor Compliance Requirements Relating to the Volcker Rule

The Federal Reserve Board launched for comment proposed rule to simplify and tailor compliance requirements relating to the Volcker Rule.

The proposed changes will:
• tailor the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities, with the most stringent requirements applied to firms with the most trading activity;
• provide more clarity by revising the definition of “trading account” in the rule, in part by relying on commonly used accounting definitions;
• clarify that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity;
• streamline the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition;
• limit the impact of the Volcker rule on the foreign activity of foreign banks; and
• simplify the trading activity information that banking entities are required to provide to the agencies.

The Volcker rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds. Comments on the proposed changes will be accepted for 60 days after the proposal’s publication in the Federal Register.

ii) Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation: Final Rulemaking to Shorten Settlement Cycle

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued a final rule to shorten the standard settlement cycle for securities purchased or sold by OCC-supervised and FDIC-supervised institutions.

The rule aligns the settlement cycle requirements of the OCC, FDIC, and the Federal Reserve Board. It requires banks to settle most securities transactions within the number of business days in the standard settlement cycle followed by registered broker dealers in the United States unless otherwise agreed to by the parties at the time of the transaction.

3. NIGERIA:

Central Bank of Nigeria: Regulatory Guidelines for the Redesigned Credit Risk Management System for Commercial, Merchant and Non-Interest Banks

The application of the Regulatory Guidelines for the Redesigned Credit Risk Management System for Commercial, Merchant and Non-Interest Banks (Guidelines) has commenced.

Section 6.2 of the Guidelines requires the chief financial officer of each bank to ensure that total loans/advances/credits reported on any regulatory platform for such submission of returns match total value of exposure/credits reported in the Credit Risk Management System (CRMS).

The Central Bank has indicated it will commence monthly compliance status checks of each bank’s CRMS returns to verify compliance with this requirement.

4. UNITED KINGDOM:

Bank of England: ISO 20022 Consultation

The Bank of England, in conjunction with the New Payments System Operator and the Payment System Regulator, launched a 6-week consultation on the adoption of ISO 20022 for payments in the United Kingdom (UK).

The standard will be adopted across CHAPS, Faster Payments and Bacs, the UK’s three main interbank payments systems, which together process over 8 billion payments per year, with a total value of over £90 trillion.

5. SWITZERLAND:

i) Financial Stability Board: Total Loss-Absorbing Capacity Standard

The Financial Stability Board (FSB) published for public feedback, the technical implementation of its Total Loss-Absorbing Capacity (TLAC) Standard.

The TLAC Standard seeks to ensure that Global Systemically Important Banks (D-SIB) always have sufficient loss-absorbing and recapitalisation capacity available. In case of failure of a D-SIB, this will ensure the bank can be resolved in a manner that minimises impacts on financial stability, maintains the continuity of critical functions, and avoids exposing public funds to loss.

Stakeholders are to submit comments by August 20, 2018.

ii) Financial Stability Board: Bank Resolution Planning

As part of its third thematic peer review on resolution regimes, the FSB is seeking feedback on its Bank Resolution Planning.

The objective of the thematic peer review is to evaluate implementation by FSB jurisdictions of the resolution planning standard set out in the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions and in associated guidance in relation to banks.

Stakeholders are required provide feedback by July 4, 2018.

6. NEW ZEALAND:

i) Ministry of Finance: Reserve Bank Act Review – Terms of Reference for Phase 2

The Ministry of Finance released Terms of Reference for Phase 2 of the review of the Reserve Bank Act.

The review will cover a series of key topics, including the following:
• the institutional arrangements for prudential regulation and supervision;
• objectives, objective setting processes, and alignment with government policy and risk appetite;
• statutory functions and powers;
• the strengths of current legislation, including its flexibility;
• alignment with the domestic regulatory management system;
• procedural approaches, fairness, and safeguards; and
• international experience and best practice.

Phase 1 of the review covered changes to objectives of monetary policy to give due consideration to: i) maximizing employment alongside price stability; and ii) making provision for a committee decision-making model for monetary policy.

ii) Reserve Bank of New Zealand and the Financial Markets Authority: Misconduct Incidents in its Financial Services Industry

The Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority (FMA) briefed on the Australian Royal Commission (RC) into Misconduct in Banking, Superannuation and Financial Services Industry, and the response by regulators in New Zealand.

The RC was established on December 14, 2017 in response to a series of misconduct incidents widespread within New Zealand’s financial services. The Commission is expected to issue an initial report in September 2018 and a final report, with recommendations, by February 2019.

Quick Facts: Canada

• As part of efforts to enforce federal financial consumer protection obligations, the Financial Consumer Agency of Canada (FCAC) early this year completed a review of sales practices of Canada’s six largest banks.
• The review involved the FCAC examining factors that could influence sales practices in Canada and measures the banks had taken to minimize any resulting risks to consumers.

7. ISRAEL:

Bank of Israel: Policy for Establishing a New Bank and Guidelines for License Applicants

The Bank of Israel published a policy on the process of establishing a bank. The policy also aims to create regulatory certainty in the early stages of the licensing process for anyone interested in establishing a bank.

8. MALAYSIA:

Central Bank of Malaysia: Exposure Draft on Trade Credit Insurance and Trade Credit Takaful

The Central Bank of Malaysia issued Exposure Draft on Trade Credit Insurance and Trade Credit Takaful

The exposure draft sets out the Bank’s proposed requirements on the offering of trade credit insurance and trade credit takaful. It also proposes the recognition of trade credit insurance and trade credit takaful as credit risk mitigation under the Capital Adequacy Framework (Basel II – Risk-Weighted Assets) and Capital Adequacy Framework for Islamic Banks (Risk-Weighted Assets).

Stakeholders are to provide feedback on the proposed regulatory requirements by July 16, 2018.

9. HONG KONG:

Hong Kong Monetary Authority: Guideline on Authorization of Virtual Banks

The Hong Kong Monetary Authority (HKMA) published a revised Guideline on Authorization of Virtual Banks.

10. BULGARIA:

Central Bank of the Republic of Bulgaria: Guidelines on Probability of Default Estimation, Loss Given Default Estimation and the Treatment of Defaulted Exposures

The Central Bank of the Republic of Bulgaria adopted Guidelines on Probability of Default Estimation, Loss Given Default Estimation and the Treatment of Defaulted Exposures.

The guidelines will come into effect on January 1, 2021.

*An expert on banks and financial institutions regulation, Olakunle Komolafe holds an LL.M. from Harvard Law School and another LL.M. in Energy, Natural Resources and Environmental Law from the University of Calgary.

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