On 2nd December 2024, Helen Ainsworth wrote to credit unions setting out the PRA’s Annual Assessment of the sector. Similar to previous years there were two versions of the letter, one for credit unions up to £10m in assets and one for credit unions with assets between £10-£50m. Some of the main issues set out in the letter include:
Operational Resilience
The PRA set out a number of risk factors for operational resilience and disorderly wind ups including:
- Economic and idiosyncratic reasons– They expect credit unions to monitor prudential performance including against budgets.
- Dependencies on third parties and outsourcing– The PRA expects credit unions to assure themselves that they can exit arrangements with third parties and outsourcers without determinant to the quality or continuity of service to members.
- Changes of systems are poorly planned- The PRA has reminded Credit Unions of the requirements to notify them of key changes such as changes in platforms and moving systems to the cloud, etc.
- Loss of service due to cyber attacks or operational reasons- The PRA have stated Credit Unions should expect cyber attacks to occur and plan accordingly. They also remind Credit Unions to notify them in a timely manner when such incidents do occur.
The PRA expects credit unions to monitor these risks and consider how they would respond to them. The regulator also expects credit unions with transactional accounts or who process DWP benefits or salaries, to consider the impact if they can no longer offer these services.
Governance
The PRA has written to Credit Unions regarding their governance earlier this year. The regulator notes that 60% of credit unions, with assets up to £10m, responded by stating they were making improvements or looking at a transfer of engagements or closure. This figure increased to 70% for credit unions with assets between £10m-£50m. The PRA is currently following up on these responses to check the progress being made.
Liquidity
The PRA’s review of liquidity has identified a number of issues including:
- Number of credit unions not monitoring liquidity often enough
- Lack of procedures in place for monitoring liquidity
- Incorrect reporting of liquid funds
- Reporting the name of platform/broker rather than the underlying investment on returns
- Failure to carry out due diligence on brokers (where they are used)
- Failure to report of liquidity issues to the regulator where liquidity is breached over two successive days.
For Credit Unions with assets between £10-£50m the PRA also added that Credit Unions should be:
- Forecasting liquidity for at least 2 years after the current year, and as good practice, reforecast wherever there is a significant change.
- Setting risk appetites and, as good practice, triggers for liquidity
- Monitoring credit ratings
- As good practice, performing liquidity stress testing
More Information
Copies of the letters can be found at https://www.bankofengland.co.uk/prudential-regulation/publication/2024/december/annual-assessment-of-the-credit-union-sector