Credit Unions to be able to do much more

For a summary of the changes click here

To access the Relevant FSA Factsheet Click Here

ABCUL has welcomed steps taken this week in parliament to remove restrictive legislation and allow them to reach out to more people, increasing access to safe and ethical financial services in communities and workplaces across the country. 

A Legislative Reform Order, which will make changes to the Credit Unions  Act 1979, was re-laid before Parliament on Tuesday (19 July).  The order will make a number of changes to the Credit Unions Act 1979, including allowing credit unions to provide services to community groups, attract investment from local businesses and extend services to new groups, including housing association tenants and employees.  

Credit unions will also be able to pay interest on savings, instead of a dividend, making saving in one more attractive.  Subject to scrutiny by parliamentary committees, the changes should be in place by the end of the year.

ABCUL Chief Executive Mark Lyonette said: “Credit unions around the country along with their partners have been eagerly awaiting these changes, so I’m delighted that the changes are on track to be in force very early in 2012. In campaigning for these changes we’ve taken a great deal of inspiration and received much assistance from our international colleagues.

The Legislation is enabling and so we have to change our rules to enact these changes. This requires us to  submit a resolution that the member can decide on at our Annual General Meeting.  We are looking at these changes to see if we want to incorporate them.

Link to AGM 2012 Page

Below is a summary of the changes.

Changes to the Common Bond

Corporate Membership is now allowed, but requires a credit Union rule change

A credit union may only admit corporate members if the membership qualification in its registered rules provides specifically for this. There are three types of corporate member which the LRO permits:

• a body corporate;

• a partner acting for a partnership; and

• an officer or member of the governing body acting for an unincorporated association.

The common bond could therefore include members of such as Housing Associations. It will also be possible for a credit union to frame its membership qualification in a way that permits other credit unions to join.

Non-Qualifying Members

Previously, credit union legislation placed a 10% of total membership limit on the number of non-qualifying members. The LRO removes this restriction.

A non-qualifying member is a member who was eligible for membership when joining the credit union, but subsequently ceased to qualify, for example because they moved to a location not covered by the credit union’s common bond.

Credit Unions will be allowed to charge for services.

“for providing services which are ancillary to accepting a deposit or making a loan”.

The following are examples of an ancillary service:

• making or receiving payment (via standing order or otherwise);

• issuing and administering the means of payment (via cheque books and debit cards); money transmission services; and

• giving advice on the above.

Members who joined before 8 January 2012 may only be charged the cost of providing the ancillary service.

Juvenile Members

If we decide to change, people under 16 can become full members of a credit union and persons over 16 can become a member of the Committee or Board. Under 16’s can’t hold shares or vote or receive dividend, only interest.

Tighter Rules for Attached Shares

Attached shares are shares which cannot be withdrawn because the credit union member has an outstanding loan in excess of his/her shareholding.  Thje Loan Agreement should clearly include:

• all loan agreements must include a term identifying which of the member’s shares can be withdrawn and the amount that is attached;

• the loan agreement may break down the attached shares in different ways, including stating which accounts the funds are held in, or stating whether they are below a specific amount or proportion of the member’s shareholding or outstanding balance; and

• the agreement should make clear the shares already held by the credit union and state the date of the agreement and the treatment of shares received after that date.

Capital Asset Ratio

Capital-assets ratio – all credit unions will be required to maintain a capital-to-assets ratio of at least 3%. There will be a transition period of 3 years for this.

Liquidity –

all credit unions must hold 10% of relevant liabilities but with the flexibility to drop to no less than 5% for no more than one quarter at a time. This is the same for Version 1 credit unions but a change for Version 2 credit unions, which will have a 3 year transition period to comply with this new rule.

Annual Returns –

The submission period for Annual Returns is to be reduced by 1 month, to 6 months after year end.

Provisioning for bad debt – Guidance on provisioning will be introduced that credit unions should (as well as meeting current requirements) should also make provision for 60% of a a loan when it is 6 months in arrears and 80% of a loan when it is 9 months in arrears. This may become a rule at a later date.

Deferred shares –

With Rule change and clear policy Cu’s will be able to issue deferred shares. This is a share that does not have any rights to the assets of a company (in this case a credit union) undergoing bankruptcy until all common and preferred shareholders are paid. Deferred shares are not withdrawable and will not be eligible for compensation from the Financial Services Compensation Scheme.

Approach to governance –

The FSA will increase its supervisory emphasis on securing compliance with governance, prudential and reporting requirements in a more timely fashion.

To take advantage of the changes credit unions will need to change their rules.

Credit unions will only be able to change their rules after the new laws and FSA rules have come into

force, and by changing the rules at an Annual General Meeting or Special General Meeting. The FSA

would have to approve the changes before any of the new powers could be used.

Changes at the FSA!

The government is engaging in a fundamental reform of the institutional arrangements for the supervision of UK financial market activity. This will see the Financial Services Authority (FSA) being split up in 2013, and replaced by two new regulatory bodies.

The Bank of England will sit at the top of a structure in which a subsidiary of the Bank — called the Prudential Regulation Authority (PRA) — will conduct the prudential regulation of institutions, i.e. their financial health and the impact this has on the UK economy.

Another regulator — the Financial Conduct Authority (FCA) — will be responsible for consumer protection in financial services and the regulation of firms’ conduct, including for those firms also regulated by the PRA.

This means that, as deposit takers, credit unions will be regulated by both new bodies: by the PRA for prudential matters relating to financial strength; and by the FCA for governance and conduct matters.         Back to Legal & Management

In April 2011 the FSA moved to a shadow structure — with two new business units, the Prudential Business Unit (PBU) and the Conduct Business Unit (CBU) — which mirrors this split of responsibilities.

As deposit takers, credit unions are now supervised by the PBU, which is consistent with the revised approach of categorising firms not by size, but by activity.

16/11/11