FSA regulation will allow credit unions to grow

FSA Chairman Howard Davies said:

"Its just over two and a half years since the Government asked us to regulate credit unions. I said then that the FSA would create a regulatory regime that would be practical and which took account of the special characteristics of credit unions. I am confident we have now done so. The new standards and requirements we have set out for credit unions are designed to allow the movement to advance while giving greater protection to members, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service.

As a result, saving with a credit union should be more attractive to a wider range of consumers; and higher savings will give credit unions a stronger platform from which to enhance and increase the range of services they can provide.

I expect the new regime to achieve its aim of improving confidence in the financial soundness of credit unions, and to provide the positive environment the movement needs in order to grow and pursue its objectives. We have tried to provide the right framework - the movement now has the chance to utilise it to the full.

"Some credit unions will find it harder than others to make the transition to the new regulatory requirements. So at the start of the year we set up a support team to work with credit unions - and other interested parties such as the trade associations, local authorities and funding agencies - to help them meet the challenge. In the great majority of cases the outcome has so far been positive."

Looking ahead to the future prospects for the credit union movement, David Strachan, Director Deposit Takers Division at the FSA, said:

"I am encouraged by the growing realisation within the sector that credit unions have to be successful as financial enterprises if the movement is to progress. Reflecting this there is an increasing move towards consolidation to create credit unions large enough to be financially viable while not so large as to lose contact with the communities and groups they aim to serve.

Over the medium to long term, the number of unions may therefore decline while total membership and assets continue to grow. Developments in other countries may be a pointer to the future of sector here in Ireland there are 200 fewer credit unions than in Britain but with something like ten times as many members."

Notes for editors

1. There are 700 credit unions registered in Great Britain with more than 300,000 members and with assets of around 200 million.

2. The Treasury announced on 16 November 1999 that credit unions would come within the scope of FSA regulation under the Financial Services and Markets Act. The new regime, including credit unions' participation in the Financial Services Compensation Scheme and the Financial Ombudsman Service, came into effect from 2 July 2002.

3. Key features of the FSA new regulatory regime are:

   • Credit unions will have to meet a basic test of solvency. Additional capital requirements will be set for larger credit unions, reflecting their potentially greater impact on consumers should they fail;

   • Credit unions will be required to maintain a minimum liquidity ratio;

   • Key personnel running credit unions will have to meet the standards set out in the FSAs rules for Approved Persons;

   • Credit unions will be required to operate an effective complaints scheme with members having access to the new Financial Ombudsman Service where they are not satisfied with the way their complaint has been handled;

   • Credit unions will participate in the Financial Services Compensation Scheme providing members with deposit protection for the first time.

4. The FSAs regulatory arrangements for credit unions are set out in the specialist Credit Union Sourcebook which forms part of the FSA's Handbook of Rules and Guidance. In finalising the Sourcebook the FSA carried out extensive pre-consultation with the credit union movement and other interested parties. This drew a record number of responses to Consultation Papers covering aspects of the new regulatory arrangements.

5. Credit unions are mutually owned financial co-operatives established under the Credit Unions Act 1979. The objects of a credit union are stated in the 1979 Act to be:

   • the promotion of thrift among members

   • the creation of sources of credit for members at a fair and reasonable rate of interest

   • the use and control of members savings for their mutual benefit

   • the training and education of members in the wise use of money and in the management of their financial affairs.

6. Members save by subscribing for non-transferable shares deposited with a credit union. Members may take out loans, at a maximum rate of interest of 1% per month and, for the majority, up to 5,000 in excess of their shareholding.

7. Membership is restricted to those who meet the qualification (the common bond), for a particular credit union. The common bond may be one of four main types: residence in a particular locality; being a member of, or have an association with, an organisation; working for a common employer or in a particular locality; and following a particular occupation. Many credit unions are run by unpaid volunteers and provide basic savings and loan services to low income groups, who may well have no dealings with providers of financial services other than loan sharks.

8. On 1 December 2001 responsibility for registration and supervision of credit unions passed from the Chief Registrar to the FSA. Until the new FSA regime based on the Credit Union Sourcebook came into effect on 2 July 2002, the FSA regulated credit unions in line with the former Chief Registrar powers.

9. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

10. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.