Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

Written evidence submitted by the Association of British Credit Unions Ltd


  1.1  As the main trade association for credit unions in Britain, we welcome the opportunity to respond to this inquiry on behalf of our members who serve around 85% of credit union members in the country.

  1.2  Credit unions provide services to over 850,000 people in Britain and look after over £600 million in savings.

  1.3  As financial co-operatives, credit unions only exist to meet the needs of their members, who own and control the credit union on a one member one vote basis. Credit unions provide inclusive financial services and work with local, regional and national governments to tackle financial exclusion in communities around the country.

  1.4  As financial mutuals, credit unions have a key role to play in Government plans to foster diversity in financial services and promote mutuals.

  1.5   Many credit unions employ staff and of those that do, the vast majority employ less than five. The size of credit unions, coupled with their simple business model means that a proportionate approach to regulation is essential if they are not to be adversely affected by burdensome red tape.

  1.6  Our submission to this inquiry represents the early thoughts of our members. Credit unions are keen to be able to access focussed communication and guidance in the run up to any changes. Credit unions have concerns about the following points:

    — that the regulatory compliance burden may not be proportionate to the size of the sector and institutions;

    — that regulation by two bodies may cost more to deal with and may require significantly more time from credit union volunteers and staff;

    — that staff and directors of the new organisations, if new to the regulation of the sector, may not have sufficient understanding of the unique features of credit unions and that briefing these people becomes a further burden for credit unions and the trade body;

    — that consultation with practitioner panels and public consultation should continue to be a key part of the policy making process; and

    — that costs may be increased due to an overcomplicated structure for raising levies for the FSCS.

  1.7  In the work of both the PRA and the CPMA, consideration should be given to promoting financial inclusion and recognising the value of financial mutuals.

  1.8  The key regulatory needs for the credit union sector are for proportionality, a recognition of and understanding of credit unions' unique features and a simple structure which will not place undue burdens on credit unions in terms of time and money.


  2.1  We welcome the opportunity to respond to this inquiry. ABCUL is the main trade association for credit unions in Britain. The Association represents approximately 70% of credit unions in England, Scotland and Wales who in turn represent about 85% of credit union membership. Credit unions are not-for-profit, financial co-operatives owned and controlled by their members. They provide safe-savings and affordable loans facilities. Increasingly credit unions offer more sophisticated products such as current accounts, ISAs, Child Trust Funds and mortgages.

  2.2  At the end of March 2010, credit unions in Great Britain were providing financial services to 761,708 adult members and held £599 million in deposits with £474 million out on loan to members. There were also 107,077 young people saving with credit unions.[1]

  2.3  At 30 September 2009, the 325 credit unions belonging to ABCUL were managing around £568 million of members' savings on behalf of over 470,000 adult members.

  2.4  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.

  2.5  The Coalition Government, since coming to office, has committed to bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.[2] At a meeting of the All-Party Parliamentary Group on Credit Unions on 30 June 2010, the Financial Secretary to the Treasury, Mark Hoban MP, explicitly identified credit unions as part of this drive to support mutuals in financial services saying:

    "This Government believes that strong credit unions will greatly enrich British society, so it is in our interest to do whatever we can to help the credit union movement to prosper."[3]

  2.6  Over the past decade or more credit unions in Britain have developed significantly towards emulating the successes of their international counterparts. According to the World Council of Credit Unions (WOCCU) there are 49,330 credit unions operating in 97 countries and with $1.4 trillion dollars in assets—in Ireland more than 50% of people belong to their credit union whilst in the US and Canada it is around 45%.[4]

  2.7  The credit union business model is a simple one. With limited exceptions—notably the DWP Growth Fund with which over 100 credit unions have delivered 300,000 affordable loans in low income communities using money from the Financial Inclusion Fund—the money that credit unions lend out to members comes from members' savings.

  2.8  The latest information available to us (from 2007) shows that 150 credit unions that are ABCUL members (out of 330) did not employ any staff. Only 25 credit unions employed 5 or more full time staff. This demonstrates the small size of credit unions and the need to ensure that regulation does not result in a disproportionate burden on their operations.

  2.9  ABCUL recognises the need for good governance and management in credit unions and works with its members in a number of ways to raise standards of governance and ensure that credit unions are well run, sustainable and effective financial co-operatives. As well as a range of training and information services, we have launched a Code of Governance for Credit Unions and introduced the PEARLS financial monitoring system. We have always been supportive of FSA regulation and the raising of standards for credit unions, but given the size and development stage of the sector, have always stressed the need for proportionate regulation which does not place undue burdens on credit unions.

  2.10  We have concentrated in our response on some early thoughts from our sector on how credit unions could be affected by this proposal, informed by a survey of our members. We have also included some views informed by the last transition for credit union regulation—the move to FSA regulation in 2002.


  3.1  Credit unions have been regulated by the Financial Services Authority since 2002. A specialist sourcebook within the FSA Handbook sets out prudential rules and guidance for credit unions.

  3.2  Prior to the FSA regime, credit unions were regulated by the Registry of Friendly Societies. This was largely a light touch regime and the move to FSA regulation therefore represented a challenge for the sector, especially for smaller credit unions.

  3.3  In recognition of this, staff at the FSA worked closely with the sector and trade associations to ensure that credit unions were prepared for the new regime. A series of road shows took place at which credit union staff and volunteers were able to find out more about the new regime. FSA staff helped ABCUL to prepare a range of information and training.

  3.4  Comments received from our survey of members shows that these efforts were appreciated and helped credit unions to make the transition to the new regime.

  3.5  Credit unions were, on the whole, appreciative of the efforts that the FSA took to communicate the changes to credit unions, and the time that was taken to allow credit unions to familiarise themselves with the new regime. But the view that FSA staff did not, at the beginning of the regime, have enough knowledge and experience of credit unions was also raised.

  3.6  We believe that it is important that the communication and education efforts that the FSA put in place to prepare credit unions for transition in 2002 are repeated when these proposed changes take place. Efforts should also be taken to ensure that experienced and knowledgeable staff are in place at the new regulatory authorities to ensure the smoothest possible transition.


  4.1  Credit unions are currently subject to rules and guidance in the Credit Union Sourcebook (CRED) as well as being required to conform with Banking Conduct of Business Rules (COBS).

  4.2  Credit unions are required to keep a basic level of solvency, maintain a minimum liquidity ratio, and key staff and volunteers are subject to the FSA's approved persons standards. Credit unions are also part of the Financial Ombudsman Service and must comply with rules on complaint handling and they must comply with reporting requirements as part of their membership of the Financial Services Compensation Scheme.

  4.3  Credit unions operate either with a Version 1 or Version 2 permission. Along with some variation because of a credit union's size, this determines the powers credit unions have and the regulatory regime they are subject to.

  4.4  This regime reflects the risk based approach to credit union regulation that the FSA has taken. Smaller credit unions are mainly supervised using a desk based approach using regulatory returns—credit unions will be visited and more attention will be paid to their business planning and operations.

  4.5  As the FSA has to cover the costs of regulation through fees paid to firms, it is essential that the regulation is efficient, proportionate and does not impose a financial or resource burden on credit unions.

  4.6  The FSA has taken the opportunity of forthcoming legislative reform for credit unions to review the prudential standards for the sector. We have worked closely with our members and the FSA during the consultation period for these changes and broadly welcome the near final rules which will increase the minimum capital-assets ratio for credit unions, so that the majority of credit unions will not just have to meet bare solvency to be compliant. We also welcome the commitment of the FSA to review their use of regulatory returns to ensure that problems are picked up in credit unions in a speedier manner.

  4.7  Credit unions have a simple business model which is not affected by the vagaries of international financial markets. Credit unions have not been responsible for risky and short term business practices which have severely damaged the economy in recent years. As financial mutuals, credit unions have democratic internal checks and balances built in to their business models. Proportionate and effective regulation, which recognises the volunteer led nature of credit unions and effectively uses financial information to spot early signs of trouble, need not place a financial or resources burden on credit unions. The FSA has been reasonably successful in reaching this balance and this should continue under a new regime.


  5.1  In order to ascertain the views of our members, varying in size from 200 to over 20,000 members, we carried out an online and postal survey during August 2010. 64 credit unions responded to the survey, representing over 20% of our membership. The survey attracted responses from a broad cross section of credit unions.

  5.2  The proposed new structure—The majority (53%) of credit union respondents did not know at this stage whether these proposals overall were a good idea. Only 22% thought that the proposals were a good idea.

  5.2.1  Major changes in regulation can be extremely disruptive for small firms which operate with few or no staff. Communication and explanation about how the changes will affect credit unions and assistance to prepare is essential if understanding is to be raised and if credit unions are to be able to confidently comply with a new regime.

  5.3  Dealing with two regulators—A large majority (73%) had concerns about dealing with 2 regulators instead of one.

  5.3.1  Reasons to be concerned focussed around cost, time and level of understanding:
Costs of dealing with regulation may increase 87%
Fees for dealing with regulation may increase 91%
Time taken to deal with regulation may increase 83%
Regulators may not understand credit unions as well 72%

  5.3.2  A number of credit unions were also concerned about the potential for conflicts that could arise because of more than one regulatory body, and potential problems that could be caused by lack of communication between different regulators. This could possibly lead to duplication of work and/or credit unions being pulled in two different directions.

  5.3.3  It is essential to ensure that in building a new system any duplication is avoided and efficiency as well as effectiveness are the main considerations in its design. Credit unions only exist to meet the needs of their members and operate on very tight margins. They have limited resources and unnecessary regulatory burdens can place the operations of smaller credit unions at risk. It is essential that care is taken to ensure that these reforms do not impact unduly upon the compliance burden for credit unions.

  5.4  Cost Benefit Analysis and consultation requirements— Of those who had made up their mind, a large majority of respondents (88%) thought that the PRA should be required to carry out a Cost Benefit Analysis and consult with practitioner panels and the general public before making rules.

  5.4.1  The consultation process is a vital part of the FSA rules making process, and will continue to be so under the new regime. As a small part of the financial service sector, credit unions have no representation on the FSA board.

  5.4.2  Credit union inclusion in practitioner panels and ABCUL's engagement with consultations in the past few years has been an essential way of demonstrating the needs of the sector and ensuring that unnecessary burdens are not placed (whether inadvertently or not) on credit unions. It is essential that the consultation process should continue under a new regime.


  5.5.1  A large proportion of our members who expressed a view (82%) believe that a single scheme for funding the Financial Services Compensation Scheme should continue, as should cross-subsidy across the classes. This is likely to be a simpler and more cost effective system and is more likely to be able to cope with any future crisis and ensure that consumers receive compensation in the most efficient way possible. We would be concerned about proposals which would place a higher financial burden on credit unions.

  5.5.2  A single levy raising system for the FSCS should continue, as should cross subsidy between different classes of firms under the Financial Services Compensation Scheme. It would make sense for the CPMA, as the responsible body for the FSCS to have responsibility for the levy raising function.

  5.6  Considerations under which the CPMA should operate: Establishing considerations or "have regards" under which the CPMA should operate represents a great opportunity to ensure that social goals and Government commitments are at the core of the operations of the CPMA.

  5.6.1  The Coalition Agreement commits the Government to "foster diversity in financial services, promote mutuals and create a more competitive banking industry". Having a built in requirement to promote diversity in the financial services industry and require the CPMA to ensure that rules do not disadvantage mutually owned financial services providers will be of benefit to the aims of the Government as well as to consumers.

  5.6.2  Ensuring that the needs of all consumers and not just those on higher incomes are met should also be a key consideration for the CPMA. Commercial financial services providers tend either to not provide the services that people on lower incomes need, as they are not profitable, or, in the case of so called `sub-prime' lenders, charge much higher rates than customers of mainstream financial services providers enjoy. Promoting financial inclusion by encouraging access to suitable products and services should therefore also be a key consideration within the work of the CPMA.

  5.6.3  We agree with considerations proposed and believe that the suggested public interest considerations will be an important factor in the effectiveness of the CPMA and its ability to meet the needs of all consumers. Promoting diversity by ensuring that the unique needs of financial mutuals are taken into account in the work of the CPMA, and promoting financial inclusion are essential in ensuring that all consumers can benefit from the work of the new agency. Other agencies in the new regulatory structure should also have regard to these considerations, and that of promoting competition in the financial services industry in their work. One way in which this could happen will be ensuring that the make up of the boards of the agencies have representation from mutual and consumer experts, not just individuals from the commercial financial services sector.


  6.1  This submission represents the early thoughts of the sector and we will be preparing a full response to the FSA consultation on the proposals. We would be very happy to submit further information that the committee requests.

  There is often a risk in the design of new systems that the needs of smaller sectors are not fully considered or considered last, often leading to unnecessary burdens. It is essential that the new regime recognises the unique position of credit unions as not-for-profit, volunteer led organisations providing inclusive financial services to a wide range of people, including those on low incomes.

September 2010

1   Figures from unaudited quarterly returns provided to the Financial Services Authority. Back

2   The Coalition: our programme for Government: Back

3   See: for full speech. Back

4   See: Back

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