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FSA & HM Treasury - FSA regulation of credit unions in Northern Ireland

Introduction

We welcome the opportunity to respond to this consultation.  ABCUL is the main trade association for credit unions in England, Scotland and Wales, and our members serve around 80% of Britain’s credit union membership.  Credit unions are not-for-profit, financial co-operatives owned and controlled by their members providing safe savings and affordable loan facilities.  Increasingly a small number of credit unions offer more sophisticated products such as current accounts, ISAs, Child Trust Funds and mortgages. 

At the end of June 2011, credit unions in Great Britain were providing financial services to 826,557adult members and held more than £689 million in deposits with more than £561 million out on loan to members.  An additional 114,000 young people were saving with credit unions.  

At 30 September 2010, the 325 credit unions belonging to ABCUL were managing around £512 million of members’ savings on behalf of over 611,037 adult members. 

The Credit Unions Act 1979 sets down in statute the objects of a credit union; these are four-fold:

  • The promotion of thrift among members;
  • The creation of sources of credit for the benefit of members at a fair and reasonable rate of interest;
  • The use and control of their members’ savings for their mutual benefit; and
  • The training and education of members’ in the wise use of money and in the management of their financial affairs.

Credit unions in Britain are small, co-operative financial institutions often extending financial services to those unfairly excluded from the financial services the majority take for granted.  They are owned and controlled by a restricted membership and are operated for the sole benefit of this membership.  The Credit Union Act 1979 sets down these operating principles in law. 

In the past decade, British credit unions have trebled their membership and assets have expanded four-fold.  As this growth has taken place, the role that credit unions can play – both in providing equitable financial services to the whole of their communities and providing diversity in the financial services sector – has been increasingly recognised by government and policy-makers.

The Coalition’s Programme for Government committed to promoting mutuals as part of a diverse financial services system and the Department for Work & Pensions is currently conducting a feasibility study the outcome of which will determine whether and how the earmarked £73 million credit union modernisation and expansion fund will be invested in the credit union sector.  Both of these initiatives demonstrate the strength of the Government’s commitment to the promotion of credit union growth in Britain and a cornerstone of any growth strategy is the implementation of effective, appropriate and proportionate regulation.

ABCUL response

The proposals as set out do not directly affect British credit unions which make up ABCUL’s membership exclusively.  We therefore limit our response to what we perceive to be the potential impact upon British credit unions arising indirectly from the proposals. In terms of the transitional provisions themselves we see no obvious issues but defer to the trade associations of the credit unions of Northern Ireland who will be responding independently.

The main concern of ABCUL and its member credit unions is that British credit unions’ experience of FSA regulation could potentially deteriorate should the transition to and implementation of FSA regulation for Northern Irish credit unions be mishandled or not-appropriately resourced.  Similarly, we are anxious to avoid divergence between the regulatory regime for British and Northern Irish credit unions since this could result in a complex situation for regulators to administer and for the splitting of credit union regulatory and supervisory resource which, again, has the potential to damage effective supervision.

With this in mind we are reassured by FSA and HM Treasury’s joint commitment to achieving as consistent as possible a regulatory regime for credit unions operating in the two jurisdictions.  We feel that this principle is critical to ensuring the best possible regulatory and supervisory regime for credit unions in both Britain and Northern Ireland which, in turn, will be conducive to the FSA (and successor) adherence to their statutory principles of effective and proportionate regulation.

We appreciate that complete consistency will not be possible since the legislative frameworks for the two jurisdictions vary and for total consistency legislative measures would be required from the Northern Irish Assembly.  It is welcome, however, that within these constraints consistency has been maximised.

Whilst we welcome the commitment to consistency, it seems that there is the potential, over time, for greater divergences to emerge which would inevitably put a strain upon the FSA (and successor) resources.  Therefore, we suggest a binding commitment within CREDS to be instituted to the effect that, within relevant legislative constraints, the regulatory regime for British and Northern Irish credit unions will be made as consistent as possible to ensure effective and efficient regulation.

Our second concern is related and involves the regulatory and supervisory resource that will be required to effectively oversee the activities of Northern Irish credit unions on top of the British credit union sector.  It is vital, given that FSA credit union oversight will be increasing by around half, that there is a commensurate increase in the availability of resource for their supervision.  Given that the Northern Irish credit union sector will be paying fees and levies, it would seem reasonable that the funds raised be allocated to resourcing the credit union regulatory and supervisory personnel required to effectively meet the increase in workload. 

Whilst the allocation of funds paid by Northern Irish credit unions would appear naturally to be allocated to their supervision, it is not clear from the consultation document that this will be the case.  We would expect it to be so and therefore would appreciate assurances to that effect.

Were the regulatory resource currently allocated to the supervision of British credit unions to be expected to stretch to cover both British and Northern Irish credit unions we would inevitably see a deterioration in the quality of credit union supervision and regulatory oversight.  This must be avoided.

Our final concern reinforces the need for appropriate supervisory resource allocation and relates to the complex set of transitional arrangements which are set to simultaneously take effect within credit union regulation:

  • The transition from CRED to CREDS which is expected to come into force early in 2012 – pending the legislative progress of the Legislative Reform (Industrial & Provident Societies and Credit Unions) Order – and involves the introduction of new prudential requirements over a transitional period of three years.
  • The process of dismantling the FSA and its replacement with a new regulatory edifice centred on the Bank of England which is ongoing with a view to completion late in 2012 early in 2013.
  • The transitional provisions and proposals under discussion here for the effective transfer of regulation and supervision of Northern Irish credit unions from the DETINI to FSA.

Already, the credit union supervisory resource is likely to be tested within the context of transition to a new regulatory sourcebook – CREDS – and the splitting of functions along prudential vs. conduct lines to fit with the creation of the twin peaks model of regulation which will see the credit union sector – as deposit-takers – ‘dual-regulated’.

The addition of the transition of Northern Irish credit unions into FSA regulation is likely to further exacerbate this spike in activity.  It is vital that the complex, overlapping transitions that are taking place within the FSA and specifically its credit union team are effectively managed and the appropriate resource allocated if this period is to be successful. 

British credit unions have been awaiting the passage of the Legislative Reform (Industrial & Provident Societies and Credit Unions) Order (LRO) since the initial review of credit union legislation which took place in 2007.  Many credit unions are extremely keen to immediately take advantage of the new powers that the LRO makes available to them in order to expand their businesses having been unduly restricted until this point.  To do this, however, requires the approval of new rulebooks by the FSA and should the appropriate resource not be available to promptly and effectively process the required applications then the sector’s growth will be restricted.  We urge the FSA to ensure that this situation is not allowed to arise through the effective allocation of resource.

Our final point relates to the possibility of British-based credit unions providing services to members in Northern Ireland once the FSA take control of Northern Irish credit union supervision. 

Under the post-LRO regime, credit unions will be able to extend their common bonds more easily and in ways that have been prohibited until now.  At present there are certain ‘industrial-type’ credit unions serving certain industries which are approached regularly by those in the relevant industry but based in Northern Ireland.  At present these people are ineligible to join British-based credit unions as British credit unions are unable to extend their membership criteria to take in those based in Northern Ireland.  We would like direction, therefore, on whether British-based credit unions will be able to extend their services to those based in Northern Ireland once the transition is complete.

Conclusion

Since neither ABCUL nor its members are directly affected by the detailed provisions of these proposals we have expressed no view as to the provisions themselves, this we leave to our Irish counterparts who represent the interests of the Northern Irish credit unions.

Instead, we have outlined a series of general concerns which relate to the potential for the proposals here to indirectly impact upon the quality of credit union supervision in Britain.  These are:

  • The potential for divergence between the two credit union regulatory regimes in Britain and Northern Ireland despite assurances in the consultation document to the effect that a consistent regime will be pursued.
  • The potential dilution of credit union supervisory resource with an approximate, additional 50% workload by credit union members.
  • The complex set of parallel transitions which the transition of Northern Irish credit unions into FSA regulation will further complicate.

In response to these concerns, we would like to see the following steps taken to ensure that the experience of FSA regulation by British credit unions does not deteriorate:

  • A binding provision within CREDS which requires, as far as is possible within legislative constraints, the regulatory regime for Northern Ireland and Britain to be consistent.
  • The use of regulatory fees and levies charged to Northern Irish credit unions to enhance credit union supervisory resource proportionately to the increase in workload.
  • The allocation of appropriate resources to manage the complex transition of British credit unions to CREDS, Northern Irish credit unions to FSA regulation and the dismantling of the FSA.

Finally, we would like the FSA to clarify the position of British credit unions – particularly, employee-based industrial credit unions – to provide their services to those residing in Northern Ireland.  This is something that several of our members have expressed an interest in doing having been approached in the past by Northern Irish people wishing to access their services.

A pdf of this response can be dowloaded on the right-hand side of the screen.