Pre-Legislative Scrutiny Committee - Financial Services Bill
We have significant concerns about the potential impact of the Financial Services Bill on the credit union sector in Britain. As deposit-takers, credit unions are to be dual-regulated by both the Prudential Regulatory Authority and the Financial Conduct Authority along with the major banks and building societies, investment banks and insurance companies. Credit unions are, however, a very small sector in comparison to the other dual-regulated sectors which raises significant questions in terms of ensuring proportionality.
ABCUL and its members have always been supportive of full prudential regulation of credit unions. The move to the Financial Services Authority from the Registry of Friendly Societies in 2002 led to significant benefits for the sector. However, this regulation is only effective if it properly takes account of the specific nature of the sector and balances any regulatory burden imposed proportionately against the benefit it provides.
Whilst we would not want to be regulated under a different framework to our fellow deposit-takers, it is vital that the particular features of credit unions as a small, co-operative, not-for-profit sector are taken into account through the development of the new regulatory framework. Otherwise the sector’s development could be impeded which would run counter to the express policies of the UK Government who are clear in their support for the development of credit unions as a means for extending fair financial services to everyone in society and for the role that mutual financial services can play in creating a more diverse and therefore more stable financial services industry.
A recent analysis of the size of ABCUL member credit unions in the year October 2007 – September 2008 (the most recent year for which complete figures are available to us) the following features were found which demonstrate the size and scale of the sector:
- 56% had less than 1,000 member customers
- 53% had assets of less than £500,000
- 32% had no staff at all and relied entirely on volunteers to operate
- 82% generated less than £200,000 turnover
- 56% generated a pre-tax profit of less than £10,000
- 46% were unable to pay their depositors a dividend return on their savings
Whilst there is a significant minority of credit unions – in terms of number of institutions – that are much larger than this (with many millions of pounds in assets and tens of thousands of members), the figures above demonstrate how the great majority of credit unions are extremely small organisations. Not only, therefore, do they face a significant challenge in dealing with two regulators instead of one they also pose little or no risk to the systemic stability of the financial services industry. Again, therefore, proportionality is the key concern for our sector as the move to the new regulatory structure evolves.
We have repeatedly made clear our concerns in this regard to HM Treasury in the consultations that have taken place so far. However, HMT’s White Paper states the following in its Impact Assessment at point 39:
The PRA will also be responsible for prudentially supervising much smaller firms which take deposits or effect and carry out contracts of insurance. Almost all credit unions and some friendly societies and building societies would fall [sic] to be considered as small firms; many credit unions would be very small by any standard. Some investment firms regulated by the PRA may also be small firms although it is likely that they will be parts of groups that include a bank or insurance company. The transitional costs for these firms seem likely to be relatively less depending on the circumstances of the individual firm.
And further at point 45:
Consultation respondents were concerned that dual-regulated firms would face significantly higher costs and that these would disproportionately on [sic] smaller dual-regulated firms. In practice, this probably means that the smallest dual regulated firms would (e.g. credit unions) would [sic] not be much affected while the largest banks and insurance companies would not face significantly higher compliance costs in comparison with their current compliance costs. The effect could be greatest in smaller banks or proprietary trading firms.
It is unclear why HMT assert that the regulatory impact of the new framework on the smallest dual-regulated firms (such as credit unions) would be ‘relatively less’ or that it ‘would not be much affected’. It seems to us, rather, that the economies of scale available to larger firms and the increased resource they are able to dedicate to regulatory compliance will mean that the larger a firm becomes the more equipped it will be to deal with an increased regulatory burden and the practical demands of dealing with two bodies instead of one. This is certainly the experience in our sector.
Similarly, there have been no guarantees given as to the fee increases that are likely to be required to fund the new regulatory framework. Already, between the original HMT consultation and the White Paper, cost estimates for implementing and transitioning to the new system have almost doubled from £400 million to £770 million. Similarly, even with the considerable thought that has been put into co-ordination between the new bodies and avoidance of duplication it would seem that there is little chance – with two sets of fixed-costs to cover and a halving of the institutional scale of the successor bodies – that the overall direct cost to financial services in regulatory fees will not have to increase. At present the FSA affords credit unions and small friendly societies a lower minimum fee than other firms in consideration of the inclusive services they provide and their diminutive scale but it would appear likely that this will come under threat with drastically increased transitional and ongoing costs for the new regulators to cover.
With these concerns in mind we have a series of specific recommendations that we would like to put forward which we feel would enhance the proportional treatment of credit unions as small, dual-regulated firms:
- It is important that CREDS the specialist regulatory sourcebook which is to be implemented alongside the Legislative Reform (Industrial and Provident Societies and Credit Unions) Order which is currently before Parliament is retained. This has been developed specifically for credit unions and is constructed in a rules-based format which is more suitable than principle-based regulations which are more suited to larger, more complex organisations.
- We propose that mechanisms are not only retained but strengthened for smaller firms – such as credit unions – to hold the new regulatory bodies to account. The Practitioner Panels should be retained for both bodies, the Smaller Businesses Panel should be put on a statutory footing for both and smaller firms should be given a voice in the governance structures of the new regulators.
- A greater emphasis should be placed upon Cost Benefit Analysis (CBA) and this should be provided for in statute. Not only should individual regulatory developments be subject to CBA but regular, sector-wide assessments should be conducted to assess the overall impact of regulatory developments rather than ad hoc piecemeal assessments which only take account of one specific issue. This would put the statutory obligation to proportionality on a directly measurable footing.
- A single point of contact is needed for dual-regulated firms to deal with both bodies. At present there are very complex proposals in place for different regulatory approvals and processes – approved persons authorisations, for example – which will be very difficult for small firms especially to negotiate and deal with without the creation of a single port of call through which all such issues are communicated and behind which the regulatory split is co-ordinated by the two bodies themselves. This would alleviate the resource-strain of dealing with two regulatory bodies.
- Fees must not be allowed to rise significantly from the level that they are at present outside of reasonable incremental increases. It should not be the case that fees increase more rapidly than under the FSA. Regulatory fees are one of the key expenditures credit unions are required to meet and major increases brought on through the division of the FSA and behind-the-scenes duplications of function would add no value but put significant strain on the financial position of many small credit unions.
- The costs of funding the Financial Services Compensation Scheme must be kept under control and set up such that they are proportionate to the risk that various sectors pose to the stability of the financial system as a whole. We have benefitted greatly from the FSCS’s protection but current proposals under discussion – such as the EU proposal to pre-fund guarantee schemes – could leave our sector facing very serious difficulties.
We appreciate that HMT have stated their view that some of these proposals – such as the creation of a single point of contact for dual-regulated firms – are operational matters for the new bodies to decide. We do however feel that statutory measures could be taken to implement these recommendations in the interests of embedding the principles of proportionality throughout the statutory framework within which the new regulatory bodies will operate.
Credit unions play an invaluable role in providing fair access to financial services to the whole of society and in providing much-needed diversity of ownership having the effect of stabilising the financial system. Their promotion and development is Government policy. We therefore urge the committee and HMT to consider closely our concerns of proportionality and our recommendations to alleviate the risks that credit unions could be unduly burdened at present.
The full response is available to download on the right hand side of the screen.