Regulatory Over-Reach

This week FICOM hosted a conference for BC credit union directors, the sixth such annual event they have mounted.  Presentations from commission staff were augmented by a speaker on ‘Building Effective Boards’, Bev Behan.  The reporting out on FICOM and CUDIC activity was to be commended and some good questions were raised.  And while the educational programming was good, and it enabled directors from small and big credit unions to trade thoughts, I was left wondering why the regulator was providing this director development programing rather than Stab Central or Central 1.

One presentation by FICOM’s Chris Carter, “Regulators and Boards Linkages”, tried to emphasize how both FICOM and boards have similar roles in managing risks.  He outlined 5 components of a business model at FICOM and he said it ‘paralleled’ functions at the board level.  These included providing ‘guidance’, analyzing information, and ensuring action is taken to correct/mitigate perceived risks.  Subsequently, I posed a question related to FICOM’s apparent overlap with, or intrusions into, the traditional responsibilities of the board of directors at the credit union level.  Traditionally, so long as statutory requirements are being met, the management of risks was the responsibility of board and management at the institution.  In the last eight years FICOM has issued guidelines and bulletins that essentially promote policies that ‘are to be’ adopted by all boards.  By so doing, FICOM has asserted a variety of new performance ‘requirements’.

Chris Carter provided an answer that was not really adequate.  He said that the commission had a ‘principles based’ approach to the supervision of credit unions and that this approach leads to their concern with governance and risk management policies.  But he appeared to concede that their approach has led to confusion regarding the distinct roles and responsibilities of the board on the one hand, and the regulator on the other.

I think this is where ‘regulatory over-sight’  may become ‘regulatory over-reach’.  In particular, there is confusion about the role of the board (the owners’ representatives) and the role of the regulator.  In private conversation I learned that others were also not satisfied with the ‘business model’ as it muddies the relationship between the regulator and the regulated.  In particular, concern was expressed regarding instances when reasonable differences in risk management strategies arise.  In this context the risk-based regulator seems to insist on also being the risk manager.

Notably, the Financial Institutions Act (FIA) was scarcely referenced by FICOM staff, in part because their business model is not the one set out in the FIA.  In basic terms, legislation sets requirements for provincial regulated financial institutions.  The FIA gives the commission powers to intervene if a credit union fails to meet the standards.  The superintendent is authorized to collect any information she wants, and to make recommendations for action in the event of non-compliance or excessive risk-taking.  But the regulator wants to potentially intervene earlier or prevent losses. This may not be the role of the regulator.

The muddy risk management questions have grown. The FIA does not give the commission or the superintendent powers to insist that risks should be managed sector-wide in a certain way.  But guidelines are being issued.  And credit unions are ‘staged’.  And since these guidelines and ‘staging’ are outside the basic framework of the Financial Institutions Act the dispute resolutions processes under the FIA do not come into play.  Boards are effectively threatened with higher deposit insurance assessments or costly appeals through the courts.  Unfortunately, the outlined ‘business model’ would appear to continue this dance.

In the end, statements by the commission chair and others indicated that there is a changing ‘culture’ at FICOM.  This may also mean that there is a fresh approach to this over-reaching that we have known.  There seemed to be a genuine interest in building a better rapport.  I think there is also a need to better understand the respective roles.

I think that if ‘principles’ are to be referenced, they ought to be the OECD/G20 Corporate Governance Principles; the first three are relevant to the pending review of legislation in BC and the conduct of the regulator:

• A. The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and well-functioning markets.
• B. The legal and regulatory requirements that affect corporate governance practices should be consistent with the rule of law, transparent and enforceable.
• C. The division of responsibilities among different authorities should be clearly articulated and designed to serve the public interest.

So.  In convening director development sessions the regulator is encroaching on credit union service organizations and centrals.  In insisting on publishing guidelines it is encroaching on government’s legislative authority.  And in insisting on certain risk management practices within a credit union it encroaches on the board governance role.  Do we have regulatory over-reach?