Regulatory Arbitrage

This is a new frontier for credit unions.  Regulatory Arbitrage is a big part of decision-making in large corporate entities as they choose where and how to do business.  The issue is the potential impact of requirements in certain legal jurisdictions; differing requirements drive corporate structures, governance practices, business strategies, investments, business location, staffing, and, of course, the eventual tax liabilities.  Some companies get jurisdictions to ‘bid’ against each other – reducing taxes, relaxing labour standards, or disabling environmental protections. Analysts usually call it ‘finding loop holes’ in regulatory approaches.

To date, the issues for BC credit unions were fairly simple, often dealt with the use of subsidiaries.  Subsidiaries sell insurance for example, to circumvent some limits in the Financial Institutions Act.  But the creation of a ‘federal credit union’ option under The Bank Act (Canada) puts the a new arbitrage question to larger credit unions;  Should we go federal?  Which legislative framework offers us the best option, provincial or federal?

In the conventional business world the best option is always assumed to be that which will generate the highest profits.  For credit unions, this is not the only criteria; since most credit unions are defined by the community or employee group for whom they were formed, since they are all part of an integrated network provincial credit unions, and since they are not profit driven by definition.

In 2012 The Bank Act was amended to allow provincial credit unions to be ‘continued’ under the federal act; a provincial credit union may move to that jurisdiction and become a bank. This is a disquieting option for BC credit unions.  The question actually challenges the very core of the credit union movement/system. Individual credit unions are given the right to ‘opt out’ of the integrated network of BC credit unions.

The cooperative network of credit unions has built volume purchasing power, back office supports, and a provincial deposit insurance program (through which credit unions guarantee each others deposits).  In this respect, the conversion to a federal credit union may actually be ‘dismemberment’, as significant limbs/organs are transplanted. Critically, the ‘point of view’ of credit unions is changing ; it is changing from ‘how do we advance the vision of a democratically controlled network of financial services providers’ to ‘how do we build our own business’.  It is this shift to ‘what’s in it for me’ that leads to the arbitrage question for an individual credit union.

The federal option further undermines the concept of a membership `bond`, and local ownership (see prior post).  Credit unions have been crafted as local alternatives to large national banks, international banks.  These entities were defined as cooperative, self-help community projects, though they have grown larger over time.   The federal credit union model breaks the ownership link to a community and sees communities as `markets` in the same way they are viewed by banks.  And the co-operative ownership model is stretched to its limits.

The federal option also creates a new set of questions related to the BC legislative review, which is to continue in the coming months.  How does the BC legislation compare with the provisions of The Bank Act?  BC credit unions have a stake in ensuring that BC legislation does not disadvantage BC credit unions – and potentially induce more credit unions to ‘go federal’.  Taxation is top of the agenda, but many other issues will arise.

Interestingly, several credit unions that are considering the `federal option` will be active in the legislative review working group at Central 1.  They may be conflicted.  Will they be seeking concessions to `stay in BC`?  Or will they be ready to make concessions on behalf of BC credit unions that will possibly give federal credit unions an advantage, that is themselves when they transition.

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