Opinion: Proposals for CREDS

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Regulation restricts the sector

Our latest Press Release focuses on the problems with the CREDS proposals.

One of the catchphrases beloved of politicians of all hues is “joined-up government”, an ideal form of administration in which departments and agencies are aware of what others are doing and interact accordingly with a common purpose.

How often, though, that admirable aim falls short.

A sterling example is the changes which currently are being proposed to the Credit Union Sourcebook (CREDS) by the Prudential Regulation Authority (PRA), which have now launched a major consultation process.

The proposed changes have been billed in advance by the PRA as allowing more flexibility for the credit union movement and providing more opportunity to invest in a greater range of investments.

This comes hard on the heels of the Association of British Credit Unions (ABCUL) winning a £35.6m contract from the Department of Work and Pensions (DWP) to expand and modernise the movement in the UK with aims which include increasing membership by a million by 2019 and saving consumers up to £1bn in interest payments.

But looking past the rosy prognosis from the PRA about the changes and reading carefully between the lines, it becomes clear that the proposed new regime would actually be far more restrictive than at present.

The consultation paper talks about placing restrictions on who can carry out transactional services, and putting limits on savings which are radically different from those applied to banks and building societies.

The PRA is also tilting what was supposed to be a level playing field with regard to mortgage provision by credit unions. It is suggesting a list of up to 13 criteria that they will need to meet if they want to offer larger loans, mortgages or invest in more products – some of which are wholly impractical.

This includes minimum returns on loans – thus forcing the credit unions to charge a particular rate. This runs counter to their fundamental philosophy of providing affordable credit for their members.

What is even more concerning is that the criteria conflict with new international accounting standards and if credit unions are compliant with FRS102, they will find it difficult also to comply with the new PRA rules.

Proposed changes include:

  • A limit on members’ savings up to the limit of protection under the Financial Services Compensation Scheme.
  • General bad debt provision requirements will disappear but credit unions must apply the 60% and 80% provisions for loans over six and nine months in arrears.
  • Certain requirements must be met before credit unions can offer payment services.
  • Liquidity ratio requirement will be 10% at all times.
  • Credit Unions with over 10,000 members or £10 million assets must meet a 10% capital to asset ratio.

Under the propose version of CREDS most Credit Unions would still be unable to invest in a two year government gilt while banks continue to put millions at risk on highly speculative transactions.

It is difficult to not feel that the PRA is, consciously or otherwise, erecting barriers in the path of a successful and socially vital movement with a series of restrictions which set credit unions up to fail.

There is no doubt that the PRA is made up of honourable men and women, but until now its primary focus has been on the core of financial services – that is, banks and building societies – and it is not unreasonable to perceive an unconscious bias against the credit union sector.

But it makes no sense for both local and national government to publicly and financially support and promote the growth of credit unions, while one of government’s primary regulatory agencies does its best to pull the rug from under them.

Credit unions have an honourable and vital role in society. They have played a pivotal role in the long fight against financial exclusion and have proved a socially cohesive tool in communities large and small.

It is important for all those concerned with the sector to take advantage of the period of consultation, on the CREDS proposals, to make sure that they are not unnecessarily shackled.

The article has featured in the Accountant and Scottish Financial News.

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