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PRA - Reform of the legacy credit union sourcebook

Response to the consultation

1.     Executive summary

1.1.  ABCUL welcomes the Prudential Regulation Authority’s (PRA) review of the Credit Unions sourcebook.  ABCUL has a strong track record of encouraging successive regulators to provide a strong, robust and proportionate regime for regulating credit unions.  

1.2.  This is the most comprehensive review since credit unions in England, Scotland and Wales were brought into full prudential regulation in 2002 and it is an excellent opportunity to refresh and reset the prudential framework following a period of strong growth and development in the sector.  In 2002, there were 686 credit unions in Britain with 406,000 members and assets under management of £319 million.  In September 2014 this had grown to over 1 million members, with assets of £1.3 billion and only 356 credit unions in the sector.   The average size of a credit union has therefore increased from 592 to 2,809 members.

1.3.  During this period many credit unions have developed a stronger consumer offering often introducing staffed operations and high street premises.  To complement this many credit unions are also offering a wider range of services.

1.4.  With this in mind, the PRA’s overarching decision to abolish the artificial split between Version 1 and Version 2 credit unions – which was a legacy of the pre-FSA regime and required credit unions to undergo a full authorisation process to activate Version 2 status – in favour of a more dynamic framework which does not require pre-approval but applies heightened requirements to more sophisticated and complex business models is to be welcomed.  ABCUL and our membership strongly support this move which removes a significant barrier to growth and innovation and should support credit unions to make a much smoother transition to a higher level of regulatory scrutiny.

1.5.  We also support the maintenance of lower requirements for smaller credit unions which is in line with the need for proportionality and appropriateness in regulation.  Small firms, such as many credit unions, who do not provide high risk services and which have a simple business model ought not to be required to meet the same levels of regulation as larger more complex credit unions and this move is to be welcomed in its support for the continued organic growth of the credit union sector.

1.6.  However, we also have a number of concerns that some of what is proposed  will  present a barrier to growth and innovation while potentially hampering credit unions ability to compete on a level playing field with other providers of banking and financial services.  These concerns can be summarised as follows:

1.6.1.    Limit on deposits – we are concerned that the proposed cap on credit union deposits set at the level of FSCS protection is unfair and undermines the present parity of the FSCS regime.  It will also create a number of practical difficulties undermining credit unions’ ability to compete.  We suggest the proposal is dropped altogether or otherwise is applied to all other deposit-takers.

1.6.2.    10% capital requirement – we are concerned that the 10% capital requirement, without risk-weighting, is unduly high relative to international banking and credit union standards.  It will present a barrier to growth (particularly for community credit unions), and does not address the section of the sector which sees most failures.  We suggest that this is replaced with a target of 10% capitalisation for credit unions with a lower minimum of 8% at the level currently applicable.  We also suggest the removal of the membership threshold for capital requirements, the retention of risk-adjustment and the possibility of risk-weighting of assets.

1.6.3.    £500,000 absolute lending cap – we are concerned that this proposal does not serve a prudential purpose given the dynamic caps and limits on large exposures that already exist to limit the potential for credit unions to over-exposure to a single borrower.  The effect of an absolute cap in light of inflation will also be regressive through time.  We suggest that this proposal is withdrawn altogether or, alternatively, that a mechanism is provided for certain credit unions to apply to have it removed.

1.6.4.    Restriction to entering only “regulated mortgage contracts” – we are concerned that this provision may prevent credit unions from entering into second charge mortgages for which the Government and FCA have allowed credit unions to remain outside of the scope of mortgage regulation.  We are also concerned that this may prevent lending secured against property in a commercial lending context.  We suggest that PRA amends their rules to specify that the “additional activity” requirements only apply to first charge regulated mortgages and do not apply to second charge lending and commercial secured lending.

1.6.5.    Cap of £15,000 on inter-credit union lending – the rules seem to limit lending between credit unions to £15,000, although we think this is an error and is not reflective of the PRA’s policy intention which was to align credit union lending limits to other credit unions with those pertaining to individual members.  We suggest that PRA amends its proposed rules to ensure that lending between credit unions is allowed on the same basis as between a credit union and its members and, furthermore, that consideration is given to providing extra flexibility in inter-credit union lending since in the long-term this may provide a mechanism for central financing of credit unions.

1.6.6.    Outsourcing requirements – we are concerned that the PRA’s outsourcing requirements are not appropriately flagged as the policy change that they are.  This is disappointing.  We are also worried that the effect of making these requirements into full rules for credit unions may be to undermine the viability of some incumbent IT providers in the sector which could provide significant problems for many credit unions.  We suggest that a rule is added which expressly provides for these requirements applying only in so far as they are proportionate to the complexity and scale of the credit union concerned.

1.6.7.    The definition of Payment Services – we are concerned that the proposed definition of payment services is not clear in how it impacts upon credit unions.  If interpreted widely it could take in even the basic payment facilities that credit unions provide to their members as a matter of course in respect of their function as a deposit-taker.  We are also concerned that it is not clear as to the PRA’s remit in respect of these services and that, if this is limited to the PRA’s concern for ensuring the prudential soundness of credit unions, that a tighter definition would be more appropriate. We suggest a definition which limits payment services to member-managed payment services on the credit union’s balance sheet which have the potential to undermine the credit union’s stability through independent in and out flow of funds.

1.6.8.    Financial ratio requirements for “additional activities” – we are concerned that the PEARLS-derived financial ratio requirements force credit unions into a very narrow business model and bar credit unions from engaging in certain activities which are perfectly legitimate and justifiable but would breach the calibrations and ratios set.  We suggest that the PRA formalises a flexible approach to the application of the ratios in its rules and adopts a “comply-or-explain” model whereby a credit union is permitted to vary from the prescribed standards where it has a justifiable and legitimate reason for doing so.

1.7.  We also have some more minor queries and concerns which we set out below.  

1.8.  Once more, we would like to reiterate our support for the review and for the ways in which it creates a more dynamic and fit-for-purpose regulatory framework for credit unions.  We only have certain concerns which we believe can be addressed through other means so that the PRA’s legitimate concerns are dealt with but credit unions are not unduly hampered by regulatory burdens and barriers.

To read the full response please download the PDF document on the right hand side