FSAs proposed regime for credit unions reaches key milestone

David Strachan, Director of the FSAs Deposit Takers Division, said:

These proposals, which have had the benefit of extensive pre-consultation with the credit union movement, will form a proportionate regulatory regime for credit unions. This regime will, in our view, increase consumer confidence in credit unions, enabling them to grow and to meet their wider social and financial objectives.

The 700 credit unions registered in England, Scotland and Wales have around 300,000 members and assets in the region of 200 million.

The FSA set out its original proposals for credit union regulation for consultation in December 2000 and published a feedback statement in July 2001. A key part of the proposed regime was that credit unions offering only a limited range of services to members would have reduced regulatory requirements relative to those offering a wider range of services. As a result of the December 2000 consultation a number of changes to our original proposals are reflected in the Credit Union Sourcebook published today:

• the FSAs Approved Persons regime, which sets the standards required of key personnel, will apply to all credit unions, consistent with the majority of responses to the December 2000 consultation;

• all credit unions will have to meet a basic test of solvency and maintain a certain level of initial capital. Additional capital requirements will be set for larger credit unions, reflecting their potentially greater impact on consumers should they fail. For example, credit unions offering a wider range of services, such as long-term loans, will be expected to meet an 8% minimum capital requirement. But where a credit union currently falls below this requirement they will be given a limited period of time to make good the shortfall, provided they can demonstrate that they have a realistic strategy for building capital;

• all credit unions will be required to maintain a minimum liquidity ratio. In the light of responses to the December 2000 consultation the proposed ratios have been reduced to 10% of unattached shares for credit unions with a narrower permission and 5% for those with a wider permission.

David Strachan went on to say:

The reaction to our consultation with credit unions and other interested parties has been exceptional, with no fewer than 265 responses received in respect of our proposals issued last December. We believe that the new regime set out today will meet the FSAs regulatory objectives and at the same time improve confidence in the financial soundness of credit unions. Our proposals also give effect to our commitment to provide credit unions with a separate manual covering the rules and guidance which will apply to them.

Responses to the proposed Credit Union Sourcebook are invited by 30 October 2001. The final version of the Sourcebook will be published at the turn of the year, thereby allowing about six months before the new regulatory regime comes into effect. During that period, the FSA will undertake a series of seminars, presentations and workshops to help credit unions to understand the new requirements and to plan and prepare for them.

Notes for editors

1. Consultation paper 107: Credit Unions Specialist Sourcebook is available on the FSA Website www.fsa.gov.uk under Publications.

2. Following this consultation, the FSA will publish, early in the New Year, a Feedback Statement and a final version of the Sourcebook . The final version of the Sourcebook will include a number of Schedules not included with this Consultation Paper. One of these Schedules will contain the transitional provisions which will be drafted by the Treasury to enable credit unions to make the transition to the new regulatory regime on 1 July 2002.

3. The final version of the Sourcebook will provide an explanation of what procedures the FSA will adopt in relation to decisions arising from the "inherited" legislation. These will be designed to ensure that they are consistent with the procedures that the FSA will apply when using its powers under the new legislation. These procedures will be designed to ensure that decisions taken by the FSA, under both the old and new legislation, will be consistent and compatible, both in their application and in the rights of representation and appeal that are open to credit unions.

4. 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, is due to come into effect from 1 July 2002.

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. Credit unions are currently registered by the Registry of Friendly Societies and are supervised by FSA staff under contract to the Chief Registrar of Friendly Societies.

7. 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.

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