Vendors accused of compliance hype

The Credit Union Industry Association (CUIA) has slammed a report claiming a widespread lack in the sector of compliance with Basel II which takes effect January 1, 2008.

CUIA general manager Adrian Lovney accused some vendors of using survey to try to create a market for compliance solutions.

He said the association is "extremely disappointed" at a survey released by IT service provider Attain IT which claims only half of 185 respondents surveyed at an Australasian Credit Union Institute conference are ready to meet Basel II requirements.

Lovney pointed out that not all compliance procedures have been finalized. For example, he said the prudential standard changes to the existing APS112 (Credit Risk) and the new APS114 (Operational Risk) for authorized deposit taking institutions (ADIs) using the standardized approaches under Basel II are not yet finalized.

"Some parts of the framework have not yet been released [therefore] no ADI in Australia could currently claim to 'have a policy to meet the requirements of Basel II', simply because the framework has not yet been finalized," Lovney said.

He said the Attain IT survey suggests a lack of industry preparation, which is ridiculous and exists only to "benefit the vendor-driven market".

"Aside from Attain IT's self-interest in pushing ADIs towards its products, it is questionable whether credit unions actually need another IT response to Basel II," he said.

"Credit unions have been encouraged to develop a risk management framework that suits the diversity and size of their business and not to rely on off-the-shelf, possibly expensive and inappropriate IT solutions.

"Some credit unions may well be investigating IT packages to assist them with their business from a range of suppliers; however, to use the above statement as an indicator of unpreparedness for Basel II is simply nonsense," Lovney said.

Philip Parton, Attain IT managing director, said financial institutions need to have much better information concerning credit risk and operating risk.

"They may not need better technology to comply, but better technology undoubtedly improves management capability which improves competitiveness," he said.

"We ran this survey because we wanted to find out how prepared credit unions are for Basel II compliance. We issued the findings because we felt it was of strong enough interest to provoke thought and would be useful feedback to the industry.

"Credit Unions facing the challenge of Basel II compliance may be comforted by the knowledge that they are not alone in being uncertain as to how to meet the challenge. Fostering discussion will benefit the industry by leading to heightened awareness of compliance issues."

The Australian Banking Association chief executive David Bell said the banking industry of Australia is one of the most advanced in the Asia-Pacific region in its approach to Basel II.

"A recent survey by Standard and Poors found that the banking systems of Australia and Singapore are the most advanced in the Asian region in adopting targets relating to the Basel II capital accord," Bell said.

Setting a global standard

According to the Australian Prudential Regulation Authority Web site, Basel II will make the Australian deposit taking sector, and therefore the Australian economy, safer and more efficient. Basel II consists of three "pillars"; the first sets the minimum capital requirements needed to meet credit, market and operational risk; the second prompts firms to consider whether extra capital should be held against additional risks, and the final pillar asks financial businesses to publish details of risks, capital and risk management to improve market discipline.