FSA announces tougher prudential standards for credit unions

The Financial Services Authority (FSA) has today published its near final rules to strengthen the financial resilience of the credit union sector and reduce the number of credit union failures.

On average, around six credit unions are declared in default each year with customers compensated by the Financial Services Compensation Scheme. The new rules aim to improve the financial soundness of credit unions and therefore maintain consumer choice in the financial services sector. The rules will be contained in a new Credit Union sourcebook (CREDS), which will replace the existing sourcebook CRED.

The new rules will raise prudential standards and the main changes are as follows:

• New credit unions must have adequate initial capital, the amount of which will be dependent on the nature, scale and complexity of their business. In most cases, smaller credit unions will need to have initial capital of at least GBP10,000 and larger credit unions at least GBP50,000;
• Smaller credit unions must have a capital-to-assets ratio of at least 3%; and
• All credit unions must hold liquid assets of at least 5% of total relevant liabilities but not below 10% per cent in two consecutive quarters. This is the current requirement for smaller credit unions but a slight increase for larger credit unions.

The capital-to-assets and liquidity requirements will be phased in, coming into full effect on 30 September 2013, which should give credit unions enough time to comply.  

The publication of near final rules is timely as it will also help ensure that credit unions are prepared for new Government legislation, which is currently before Parliament and will allow credit unions to carry out a wider range of financial activities. Confirmation of the final CREDS rules will be published after the Government legislation is made, and CREDS will come into effect at the same time as the legislation.

Paul Sharma, director of the prudential policy division, said:

"We want to make sure credit unions are financially sound and well managed, with fewer failures and defaults. We are publishing near final rules now so that credit unions have enough time to be able to meet the stronger prudential requirements, and to prepare for future Government legislative changes.

"Our reforms focus on improving the areas of weakness that we still see in the credit union sector, by raising requirements for capital, liquidity and financial reporting."

The FSA will also reduce the submission period for annual financial returns from seven to six months so that more timely financial information is received from credit unions.

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