Mutuals Industry: Regulatory resilience Mutuals Industry: Regulatory resilience Mutuals Industry: Regulatory resilience

The regulatory pressure on the Mutual banks is significant. Key regulatory areas, including capital requirements, Design and Distribution Obligations (DDO) and the implementation of BEAR were explored in our webinar held in late March 2021.

Mutual banks need to consider how to navigate the regulatory change agenda and how they can remain compliant. Evolving regulations facing mutual banks, credit unions and building societies calls for organisations to commence work now in order to comply in the future.

Various new standards for capital, governance, data and other areas have come into effect over the last 12 or 24 months (for example CDR, CPS 234 on Information Security or several reporting standards).

Under the most recent Basel regulatory capital guidelines, APRA has issued several revised prudential standards. Some have been finalised and some are under consultation and will become effective from January 2023.

There are a number of prudential standard changes in the pipeline which will impact regulatory capital, but the most significant for Mutuals is the standardised approach for credit risk - the revised APS 112 Capital Adequacy – Standardised Approach to Credit Risk and 117 Capital Adequacy – Interest Rate Risk in the Banking Book.

With a new and higher capital floor applicable to advanced ADIs, it will have a positive impact on the Mutuals as it levels the playing field with advanced ADIs regarding capital requirements.

APRA’s proposals will change the basis for calculation of capital ratios. The key to taking advantage of the changes is to have sufficiently granular and accurate data to manage your risk weighted assets (RWA) requirements.

Considerations

Have you started to identify any data gaps and build appropriate RWA calculators to understand the impact on your Mutual, and have you got sufficient time to mitigate any issues?

APS 117 raises reporting requirements for all ADIs, including the Mutuals. We anticipate four challenges important for the Mutuals.

Considerations

1. Resourcing. APRA expects risk to have a strong and independent voice in relation to Interest rate risk in the banking book (IRRRBB). Have you formed a clear second line risk function around interest rate risk management?
2. Board engagement. Boards will need to play a visible and effective role in the management of interest rate risk. Does your Board need additional training?
3. Stress testing and limit setting. Comprehensive limits are required for stress testing, which is likely to prove challenging in the current low-interest environment. Are you adequately prepared to define limits and test scenarios in the current interest rate environment?
4. Data and systems. Good decision-making and oversight demands strong systems and reliable data. Many smaller ADIs will need to inject greater rigour into their data and systems. Do you have adequate systems and reliable data?
    

The proposed changes are a repeal of the prescriptive responsible lending obligations contained in the National Consumer Credit Protection Act. There will be a greater reliance on the new APS220 standard that governs credit risk management, which is intended to increase the flow of credit to stimulate the economy and remove some of the obstacles that have developed in recent times. The regulations are trying to strike the right balance between customers taking responsibility for their actions and lenders acting appropriately and this balance has been hard to find in the past.

The relaxation of some of the requirements will theoretically improve decision times and reduce the cost of credit assessment. While the Mutuals are always likely to have relationship and service advantages over the big banks, this advantage erodes if credit decisions are delayed and competitors can provide almost instant responses.

Considerations for Mutuals

Have you invested in systems and processes to automate the credit process, such as online channels and credit decisioning? 

The regulatory guide issued by ASIC in December 2020 expects that issuers will implement DDO in a manner which is embedded in your day to day practices to comply with the obligations. Enhancing the product governance framework in a customer-centric approach will support the delivery on your proposition to your members/customers.

With clarity on the obligations under the DDO regime and with ASIC’s guidance on their expectations, the key risks relevant for boards and senior executives in Mutual banks with regards to DDO are outlined below.

Considerations for Mutuals

• Does your business understand the key risks DDO poses (both in terms of the regulatory change program and on the business ongoing)? Have the risks been contemplated, documented?
• What does your project timeline look like? Will you be compliant for all your products by 5 October 2021?
• Do you have the right number of resources and capabilities to get the work done?
   

APRA released in December 2020 an Information Paper detailing its review of the BEAR Implementation by three of Australia’s largest ADIs. What has come across clearly from the Implementation Review is that this is a whole of organisation exercise. Dedicated time and allocation of resources are critical to ensure effective execution of the regime. In a cost-conscious environment and without the resources of a large ADI, Mutual banks need to manage BEAR and integrate it within their governance, process, systems and control frameworks.

Considerations for Mutuals

How will you align and embed the BEAR with the way you manage other regulatory change, and avoid creating parallel frameworks and processes?

A range of better practice observations that could help other ADIs improve their implementation include the following.

• Introducing centralised resources to implement the BEAR and providing meaningful support to Accountable Persons (APs) to meet their obligations.
• Implementing robust processes in place to ensure that accountabilities remain clear and accurate on an ongoing basis, as well as reflect business changes.
• Establishing frameworks that support Accountable Persons to take reasonable steps and monitoring the range of practices that APs are using to meet their obligations through periodic reporting.
• Integrating the consequence management and remuneration framework to reinforce accountability obligations through variable remuneration decisions.
• Ensuring the board reflect and decide on whether existing governance practices can sufficiently demonstrate reasonable steps of non-executive directors.