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FCA - Distribution and promotion of credit union deferred shares and subordinated debt

Response to the consultation 

As a general principle ABCUL and its members support the proposals.  As the consultation’s analysis sets out, the majority of deferred share and subordinated debt instruments sold by credit unions are to corporate and sophisticated investors who would not be caught by these proposals and we believe that this trend is likely to continue in the short-term.

Similarly, we fully accept and appreciate the risks associated with investment in unprotected instruments such as these, driven by their subordinated nature, and we believe that measures to protect consumers are appropriate in order to prevent incidents of mis-selling which would be damaging to those consumers and the wider reputation of credit unions. 

Furthermore, we also accept that very similar restrictions are already in place for the retail distribution of deferred share instruments which do not carry a fixed return.  These are restrictions which we have assisted in raising awareness of among our membership since their introduction in 2015. 

On the other hand, however, we are conscious of the potential for these proposals to introduce new costs to credit unions which may present an insurmountable barrier to the sale of such instruments in certain circumstances and we do not believe that the cost benefit analysis presented in the consultation adequately reflects this.  For example, we are of the view that there is potential for credit unions to wish to distribute deferred shares and subordinated debt in small sums on a “crowd-funding” basis to members as part of plans for organic capital accumulation to support faster balance sheet growth than the credit union’s short-term profitability might allow.  In such circumstances, the costs of the appropriateness test in particular would be substantial where deferred shares are the chosen instrument and could simply preclude the exercise altogether.  Consideration might be given here to whether there might be a minimum value threshold for where the appropriateness test becomes a requirement set at a relatively low nominal level of, perhaps, £500 or a certain proportion of the investee’s relevant assets.  

Similarly, we take the view that the wording of the risk statement which credit unions would be required to use in promotions and to have signed recognition of at the point of sale is problematic in its use of the phrase “unlikely to be in your best interests”.  While we appreciate that this relates only to amounts over 10% of a person’s investible assets, we also believe it is reasonable for a potential buyer to read this such that any investment in such instruments is equally unlikely to be in the investor’s best interests.  We would strongly suggest that a different wording is used which states that such investment “would not be in your best interests if the credit union performs poorly or fails”.  

In respect of the appropriateness test, we would appreciate clarity as to the implications for a credit union in respect of it being challenged in its appropriateness assessment.  It is also not clear from the material in COBS 10 to what extent the provision of information to enhance understanding on the part of clients may be considered satisfactory to the FCA.  We are concerned, should further clarity not be provided as to the extent of expectation in respect of the appropriateness test and the implications of a successful challenge of it, that this will have a chilling effect upon credit unions considering making such sales since they may be concerned about the potential for their best efforts to retrospectively be considered inadequate. The other alternative would be to gold-plate the appropriateness test and this would come with enhanced attendant costs which would detract from the attractiveness of this activity by making it less economic to engage in.

In respect of subordinated debt specifically, we welcome the proposal to limit the requirements by not requiring the appropriateness test to be conducted in respect of these instruments.  This is a welcome recognition of the difference between deferred shares and subordinated debt in that the latter is a repayable instrument which is senior to deferred shares in a winding up scenario and is therefore less risky. 

In relation to the restriction on the obligatory requirement that members purchase deferred shares or subordinated debt, we have no objection to this rule in principle and fully support its intent.  We do, however, wonder how widespread this issue is – it is not something that we have ever come across and it would appear to be dealt with by implication through other requirements already in place. 

In respect of the proposals in relation to the requirement to review and update standing data annually and to tidy up the glossary of terms in relation to the abolition of the version split by PRA, we have no objections and support the new requirements.

[1] Figures from unaudited quarterly returns provided to the Prudential Regulation Authority