On 21 September 2022, the PRA published Consultation Paper 7/22 ‘Credit Unions: Changes to the Regulatory Regime’ (CP7/22).
In CP7/22 the PRA sets out proposed amendments to the regulatory regime that applies to credit unions. The proposals broadly relate to amending and strengthening the regulatory regime in order to address risks posed by larger, more complex credit unions. The PRA considers that setting higher expectations of credit unions that pose greater risk (due to their size or activities undertaken) to the PRA’s primary safety and soundness objective would help ensure higher standards among those credit unions, while at the same time retaining a simple PRA Rulebook in recognition of the diversity of the sector.
The proposed changes to the Credit Unions part of the PRA Rulebook are to:
- Include lending to corporate members and the provision of consumer credit within the definition of ‘additional activities’, with the effort of bringing credit unions undertaking these activities within the scope of existing additional systems and control requirements.
- Extend the range of products available to credit unions to invest in, to include a wider range of products, where a credit union meets certain requirements. This also includes clarification that credit unions may hold funds with other credit unions, as clarified by recent changes in legislation.
- Amend the PRA rules on lending limits, including confirmation that the current limits on credit union unsecured lending will also apply to the provision of hire purchase agreements and conditional sale agreements, which will be permitted products for Great Britain credit unions under the Financial Services and Markets Bill’s proposed amendments to the Credit Unions Act 1979.
The PRA also proposes to introduce a new Supervisory Statement ‘Supervising credit unions’ which would supersede Supervisory Statement 2/16 ‘The prudential regulation of credit unions’. The changes that the new Supervisory Statement would introduce include:
- Additional expectations for credit unions with more than £10 million in assets with respect to liquidity risk management and contingency funding, with a further expectation for credit unions with more than £50 million in assets and/or credit unions that wish to undertake more sophisticated investment business as per the above, to undertake basic liquidity stress testing;
- More clarity on the PRA’s expectations regarding the amount and quality of capital held by a credit union.
- Additional detail on the PRA’s expectations regarding the amount and quality of capital held by a credit union.
- Additional detail on the PRA’s expectations of credit unions that offer mortgages including consideration of relevant sections of Supervisory Statement 20/15 ‘Supervising building societies’ treasury and lending activities’ as evidence of good practice.
- An expectation that the largest credit unions (with more than £100 million in assets) consider the steps and resources needed to wind down their business in an orderly manner and are able to evidence that they have evaluated the risks and how best to mitigate them.
- Expectations for credit unions that provide credit cards.
- Expectations around risk management, including operational risk management for credit unions with more than £10 million in assets, with good practice guidance for all credit unions.
- Clarification regarding existing expectations for all credit unions on governance, business plans and forecasts.
- Expectations regarding a credit union’s internal audit function, including indicators that it may not be fulfilling its role.
The deadline for comments on CP7/22 is 21 December 2022.