PRA makes modifications to the Reform of the legacy Credit Unions Sourcebook

Original Proposals

  • Limit on shares and deposits for credit union members to the FSCS level of protection

  • Framework for additional activities based on achieving ratios

  • Minimum capital for credit unions with either £10m assets or 10,000 members to be 10%

  • Lending to be subject to a cap of £500,000

  • Credit unions must maintain a liquidity ratio of a minimum of 10% at all times

  • General provision for bad debt removed and replaced by mandatory tiered requirements

  • Boards to report to AGM on compliance with key regulatory requirements

  • Compliance with general organisational requirements and whistleblowing

On the 1st February the Bank of England publicised its Policy Statement on the Reform of the legacy Credit Unions sourcebook.

There were some modifications made to the original proposals set out in the Consultation Papers CP22/15 PRA and CP15/21 FCA which received 124 responses. Rule changes will come into place on the 3 February 2016. Modifications and rule changes have been highlighted below:

Limit on shares and deposits

The original proposal was to set a limit on the amount of shares that could be held in a credit union to the maximum amount that would be covered by the Financial Services Compensation Scheme (FSCS). Although this was not likely to affect many credit unions, ACE and UKCU argued that this proposal would give a negative view of credit unions to existing members and potential new members, in that credit unions could be viewed an insecure place to save for those members who would wish to hold larger amounts in shares thus undermining consumer confidence. Recognising this potential impact of this proposal, particularly on larger credit unions, the PRA will not now set a blanket restriction on shares but will expect credit unions with members wishing to exceed the FSCS limit to provide an advance notification to the PRA. You now have to tell the PRA at least 5 days before issuing shares above this limit, and they can refuse you permission.

Framework for additional activities

Although ACE and UKCU welcomed the abolition of the version 1 and version 2 credit union models we were concerned about the introduction of the proposed “minimum prudential standard” that would be imposed on credit unions before they could undertake any additional services including a minimum 10% capital:assets ratio or to benefit from the new opportunities to invest in a wider range of capital protected products over a longer period of time. There was concern that the proposed framework would impose a rigid structure of prescribed regulatory requirements that would have seen many credit unions failing to meet some of the ratios suggested in the original proposal. Taking such responses into account the PRA has modified the proposal in the following way:

  • The 10% capital requirement will now be composed of two elements, an 8% minimum to be maintained at all times and a 2% capital buffer which would be available to absorb losses in stress situations. Buffer to be in place by September 2018.

  • The number of ratios that credit unions will be expected to achieve will be reduced with credit union boards deciding which of the ratios correctly reflect their business model. While most of the ratios remain, credit unions will now be able to set the level of these ratios based on its individual business model. The PRA has set out indicative requirements and expects the levels set by Credit Unions to be justifiable.

Minimum Capital Requirements

The previous hard line on achieving a 10% capital ratio has been eased by the 8% fixed + 2% buffer approach but the PRA has modified the requirement for a minimum of a 10% capital ratio to those credit unions with over £10m in assets or 15,000 members (was previously 10,000).

Maximum Lending Cap

The proposed maximum lending cap of £500,000 has been removed by the PRA.

Bad Debt Provisioning

The General Provision requirement for bad debts has been removed and replaced by a mandatory tiered obligation which will require all credit unions to make the following provisions from the 3rd February 2016:

months in arrearsbad debt provision
335%
660%
980%
12+100%

Bad Debt Write-offs

The original proposal to write-off all bad debts over 12 months in arrears has been removed by the PRA. Credit unions will still have to make a 100% provision but will not automatically have to write-off these debts.

Audited Accounts

  • It is now a rule that British credit unions must submit annual audited accounts to both the PRA and the FCA.

Electronic Reporting

  • Electronic reporting by credit unions will become mandatory in the near future via the website portal with an estimated timeline of the end of Q2 2016. Annual and Quarterly Returns will be simplified with the addition of separate provisioning and information regarding additional activities.

Criminal Records Checks (CRC)

  • It is the responsibility of all credit unions to undertake a CRC on all new Directors.

Liquidity

  • Liquidity remains at 10% unattached shares.