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New guidance from the Financial Services Regulatory Authority of Ontario (FSRA) aims to bolster the resilience of the credit union sector by setting out the regulator’s approach to operational risk.

FSRA issued final guidance, which will take effect March 1, 2024, that aims to improve the ability of credit unions to deal with ongoing and emerging threats, including various ESG risks, in an effort to enhance protection for customers and their deposits.

“Improvements in the sector’s ability to monitor its current internal and external environments, anticipate future threats, and respond effectively to stress events will strengthen credit unions in Ontario,” the regulator said in a notice.

“Through this guidance we are helping to reduce the risk for credit union members and ensuring the sector remains strong, viable and well managed well into the future,” said Mehrdad Rastan, executive vice-president, credit unions and insurance prudential with FSRA, in a release.

Among other things, the new guidance sets out FSRA’s interpretation of the credit union rules to identify potential compliance and enforcement issues, and the regulator’s processes for assessing firms’ operational risk and resilience.

It also details some of the standards and guidance developed in other jurisdictions regarding ESG risk management, and sets out potential implications of this work for credit unions in the future — particularly the growing threat of climate change and the risks to financial institutions’ safety and soundness.

“Some [credit unions] have already started working towards developing and meeting ESG objectives. FSRA recognizes these efforts and encourages [credit unions] to continue progress towards further incorporation of ESG goals in their corporate strategies and business activities,” the regulator noted in the guidance.

Additionally, FSRA said it will consider integrating ESG objectives into its regulatory and supervisory frameworks, including possible future guidance on addressing climate-related risks, human and social rights, and governance practices.

In the meantime, it said credit unions are “encouraged to develop and implement plans to include ESG considerations in their corporate strategies and business activities to ensure positive contributions towards ESG goals.”

FSRA said it will revisit the guidance within five years of its effective date.