Report: Very Little Progress Has Been Made in Reforming COSSEC

A 2020 Fiscal Plan report of the Financial Oversight and Management Board for Puerto Rico found that very little progress has been made in reforming the Public Corporation for Supervision and Insurance of Cooperatives of Puerto Rico (COSSEC) that was proposed in 2016 and 2017 by the Puerto Rico government.

According to the report, COSSEC’s system is composed of 113 locally-chartered and insured credit unions, holding approximately $8.3 billion in shares and deposits.

However, the Fiscal Plan noted that the island's credit unions face numerous challenges. Puerto Rican cooperatives had increased their investment in Puerto Rico government bonds in the run-up to the government's default on its debt. In addition, COVID-19 and the subsequent 4-month loan moratorium will have a negative impact on many cooperatives’ cash flows in the short term. Approximately, $1 billion in loans have participated in the 4-month loan moratorium.

The 2020 COSSEC Fiscal Plan recommends that COSSEC to develop and commit to a plan to identify and resolve any cooperatives that are currently insolvent and undercapitalized within 24 months.

The report states that COSSEC governance must be overhauled to allow COSSEC to act quickly, decisively, and in the best interests of the safety and soundness of the cooperative system and to ensure depositor protection. The COSSEC Board must be reformed to ensure that it is an independent
body.

Currently, COSSEC’s board is comprised of 9 members, 5 of which are cooperative members and the remaining 4 are government officials. It is being recommended that the board be comprised of 5 members, who cannot have any affiliation or financial ties to a cooperative regulated by
COSSEC or the cooperative movement. The Oversight Board recommended that legislation reforming COSSEC become law by March 2021.

The 2020 COSSEC Fiscal Plan looked at improving transparency in accounting. The legal system currently allows cooperatives to use Regulatory Accounting Principles (RAP). However, RAP does not require disclosure of the current market value of assets under distress.

Additionally, legislation permitted cooperatives to amortize over a 15-year period any losses resulting from the default of Puerto Rico Government Bonds.

The Government must submit legislation that addresses this critical gap by requiring all cooperatives to adhere to GAAP within 5 years. Also, legislation needs to abolish any special accounting treatment for holdings of Puerto Rico Government Bonds.

Furthermore under the current structure, COSSEC is the regulator for both financial and certain non-financial cooperatives in Puerto Rico. However, non-financial cooperatives do not contribute to COSSEC’s resources. The report recommended that the regulatory power over these non-financial cooperatives be transferred to Comisión de Desarrollo Cooperativo with an effective date of no later than the end of Fiscal Year 2023.

To read the document, go to the Financial Oversight and Management Board's documents page.