The Prudential Regulation Authority (PRA) proposed amendments to the Credit Union Part of the PRA Rulebook and a new supervisory statement on "Supervising credit unions," which will supersede the existing supervisory statement (SS2/16) on "The prudential regulation of credit unions." The consultation ends on December 21, 2022 and is relevant for all credit unions in the UK.
The proposed amendments relate to amending and strengthening the regulatory regime to address risks posed by larger, more complex credit unions. PRA considers that setting higher expectations for credit unions that pose greater risk (due to their size or activities undertaken) to the primary safety and soundness objective of PRA would help ensure higher standards, while retaining a simple PRA Rulebook in recognition of the diversity of the sector.
PRA proposed changes to the Credit Union Part of the PRA Rulebook to
- include lending to corporate members and the provision of consumer credit within the definition of "additional activities," within the scope of existing additional systems and control requirements.
- extend the range of products available to credit unions to invest in and to include a wider range of products, where a credit union meets certain requirements, including funds held with other credit unions.
- 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 FS Bill’s proposed amendments to the Credit Unions Act 1979.
The proposal on the supervisory statement is intended to
- set additional expectations for credit unions with more than GBP 10 million in assets with respect to liquidity risk management and contingency funding.
- provide more clarity on PRA expectations regarding the amount and quality of capital held by a credit union.
- set out additional detail on PRA expectations of credit unions that offer mortgages, including consideration of relevant sections of SS20/15 ‘Supervising building societies’ treasury and lending activities’.
- set an expectation that the largest credit unions (with more than GBP 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.
- set expectations for credit unions that provide credit cards.
- set expectations for credit unions that provide loans to corporate members, including minimum expectations for credit unions undertaking secured lending to corporate members.
- set expectations around risk management, including operational risk management for credit unions with more than GBP 10 million in assets, with good practice guidance for all credit unions.
- clarify existing expectations for all credit unions on governance, business plans, and forecasts.
- set expectations regarding a credit union’s internal audit function, including indicators that it may not be fulfilling its role.
With the introduction of the aforementioned changes, PRA highlights that credit unions should carefully consider the risk-return trade-off and ensure that investment decisions reflect the risk appetite of the credit union. There may be an incremental cost to credit unions in developing expertise in investments and updating policies and procedures to reflect the new requirements and expectations. With regard to implementation, PRA clarifies that the proposed amendments are based on the version of the Financial Services Bill introduced into Parliament on July 20, 2022. Going forward, PRA will provide an update if there are any material changes to the Financial Services Bill that affect the proposals in this consultation paper. The proposed changes would take effect on publication of the final policy.
Keywords: Europe, UK, Banking, Credit Unions, Reporting, PRA Rulebook, Supervisory Statement, Lending, Credit Risk, Corporate Lending, Regulatory Framework, CP7 22, PRA
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