HM Treasury – A new approach to financial regulation 2nd Response
1.1 Credit unions in Britain are a sector of small deposit-taking firms which – whilst growing at a very healthy rate of around 10% annually – remain in need of specific consideration in order that their development can be encouraged and not unduly burdened by inappropriately onerous regulation. Credit unions enjoy cross-party political support for the work they do in providing access to financial services to those at risk of financial exclusion. This includes the recent announcement by DWP of a £73 million modernisation fund for the sector and an ongoing programme of legislative reforms which are set to release credit unions from a legislative framework which has been described by the World Council of Credit Unions (WOCCU) as amongst the most restrictive in the world .
1.2 Since 2002, credit unions have been regulated by the Financial Services Authority (FSA) having previously fallen under the remit of the Registry of Friendly Societies. ABCUL and our membership supported the move to FSA regulation as, for the first time in the sector’s history, it has meant properly enforced and specially developed prudential and conduct standards. This has directly contributed to the professional development of the credit union sector and has been complementary to ABCUL’s strategy of supporting credit union development based around prioritising sustainable business-like development as a precursor to effective social intervention. Furthermore, membership of the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service (FOS) has greatly contributed to the sector’s legitimacy and credibility.
1.3 However, the success of FSA regulation of the credit union sector has been thanks to the efforts taken to ensure that the sector was treated proportionately. The Credit Union Sourcebook (CRED) was developed with the specific needs of the credit union sector in mind to ensure that regulations – both prudential and conduct – were appropriate to ensure the financial soundness of the sector whilst not unduly burdening its development. In 2009 and 2010 the sourcebook was reviewed and an updated version – CREDS – with higher regulatory standards is set to come into force later this year. Regulations have been tightened in line with the development the sector has undergone since the original sourcebook was developed back in the early part of the century.
1.4 Proportionality, therefore, is the key principle which ensured this appropriate treatment of credit unions. To ensure that credit unions are allowed to continue their strong development into the future it is vital that proportionality is applied by the FSA’s successor bodies. There are a number of ways in which we would like to see proportionality applied for the benefit of our sector:
1.4.1 The CREDS sourcebook as recently reviewed must be retained, in its rules (rather than principles or judgement) based format. Whilst it is true that larger, complex firms respond better to less concrete, prescriptive regulation, smaller firms require clarity in order to ensure that they are able to apply regulation in a resource-poor context. The burden of regulatory compliance for credit unions would be unmanageable were CREDS to be lost in this restructuring process.
1.4.2 We would like the governance and industry engagement mechanisms within both PRA and FCA to include small firm and credit union representation in order that the needs of our sector can be taken into account at the highest levels of regulatory development. We would also like to see Practitioner Panels – or their equivalents – given real power to hold regulators to account where it is apparent that developments run counter to the objectives and principles of regulation – perhaps by referring decisions upwards to the FPC.
1.4.3 We would like to see a greater emphasis placed upon the importance of rigorous and thorough Cost Benefit Analysis (CBA). A proper CBA process is vital to the effective application of proportionality as a principle. We would also like to see a new approach whereby a sector’s overall regulatory burden can be regularly subjected to CBA taking all regulatory developments into account so that the true proportionality of a sector’s treatment in general can be assessed. Currently this is only conducted on a piecemeal basis as individual initiatives come under discussion whilst the combined effect of all initiatives is never properly assessed.
1.4.4 We would like to see, for credit unions, the creation of a single portal through which engagement with the various regulatory bodies can be conducted. Given the fact that credit unions are unique as small firms which are dual regulated, we feel that if the burden of supervision by two different bodies is to be manageable that a single point of contact be created through which credit unions can interact with both bodies. Without this we have serious concerns that having to deal with two different bodies simultaneously will double the burden of being supervised for the credit union sector.
1.4.5 We feel strongly that, for the new regime to be truly proportionate, fees associated with regulation must not be allowed to rise. It should not be the case that, in creating the new regulatory structure, regulatory fees are allowed to spiral upwards. A single portal would alleviate much of the resource strain but direct fees must not rise either if the new regime is to be truly proportionate. Already regulatory fees are one of the key expenditures for credit unions and therefore co-ordination between the two bodies should be such to ensure that the overall cost does not increase.
1.4.6 The cost of the FSCS is a serious cause of concern for us. Since the financial crisis and the unprecedented call on the FSCS following the collapse of various major banks, credit unions have been required to pay significant levies towards the compensation of their depositors. Whilst we have no quarrel with paying towards the compensation of depositors – our sector, too, has benefitted from the FSCS – we are concerned at the sheer scale of the levies we are required to pay. Further changes mooted at EU level include the pre-funding of compensation schemes the cost of which credit unions are unable to pass through to their customers as they operate under a fixed interest rate ceiling. If cross-subsidisation within the FSCS were to end this would likely increase the costs even further. It is imperative that the costs associated with the FSCS must be kept at a manageable level.
1.5 In summary we do not have any objection to the Government’s plans for restructuring financial regulation in principle. However, the principle of proportionality must be rigorously and thoroughly applied throughout the new structures and their future activities if small firms, such as credit unions, are not to be damaged by the framework and its implications.