Changing Times - Get ready for the April 2010
Following a meeting on the 18th May 2009, between the FSA and the National Credit Union Liaison Group, of which NACUW is a member, credit unions have been advised to be prepared to take advantage of new legislative changes by April 2010, at the earliest. HM Treasury published draft proposals for a Legislative Reform Order for Credit Unions in April 2009, which recommended some major legislative changes for UK credit unions including:
B1. Replacing the “common bond” requirement for credit unions with a “field of membership” test
Under this proposal the “common bond” will be replaced with a “field of membership” test with an upper limit of potential membership to be set at two million for those credit unions operating geographically. The new “field of membership” test will enable credit unions to provide services to new groups, including, for example, housing association tenants and national employers.
B2. Reform the requirements relating to membership qualifications and rename them “common bonds”
It has now been proposed that any number of membership groups could be combined so that, for example, a credit union could serve a geographical area as well as four employers and three housing associations. It is believed that this will enable credit unions to reach out to more members and improve both their strength and stability.
B3. Reform restrictions on non-qualifying members of credit unions.
It has been proposed that the current 10% restriction on non-qualifying members should be removed. It was considered that this artificial restriction was unhelpful especially due to the high mobility of labour. The 10% restriction will be removed and credit unions will be allowed to set their own limits in their rules.
B4. Allow credit unions to admit bodies corporate, unincorporated associations or partnerships to membership
This proposal will allow credit unions the flexibility to admit bodies corporate, unincorporated associations and partnerships (‘corporate members’) to their membership, which, it is believed, would boost the involvement of community groups, small businesses and larger organisations, such as housing associations. Credit unions will be able to choose whether to offer deferred or ordinary shares to such members with a cap on organisational membership of 10%.
B5. Allow credit unions to offer interest on deposits, provided certain requirements are met
It is proposed that credit unions should be allowed to choose to offer interest on deposits instead of a dividend. It was considered that this put credit unions at a disadvantage in comparison with banks and building societies, which do not have this restriction. Credit unions hoping to offer this would be required to have £50,000 or 5% of total assets held in reserve to offer interest.
B6. Abolish the 8 per cent per annum limit on dividends.
HMT proposes to remove the 8% dividend restriction and leave the dividend award to individual credit unions to decide their own rate.
B7. Repeal the “attachment” requirement, which restricts withdrawal of shares
HMT originally proposed that the attachment of shares should be repealed as it did not reflect the wider situation in the financial services industry whereby a bank or building society customer has no such restriction. Post-Consultation, HMT decided to modify this proposal and allow share attachment to remain as a tool for the board with credit unions will be able to offer loans where the shares are either attached or not.
B8. Allow credit unions to charge the marker rate for ancillary services to their members
Under current legislation credit unions may only charge on a cost-recovery basis for services which are ancillary to accepting a deposit or making a loan. Other deposit-takers such as banks and building societies do not face such restrictions on charging for ancillary services. HMT proposed that this restriction should be removed to allow credit unions more flexibility to develop new services. The restriction preventing credit unions from charging the market rate for providing services to their members.
Next Steps
The Legislative Reform Order itself will be published shortly and a further consultation period will follow to ensure that the terms of the order fit with the needs of the movement and are of sufficient public interest to warrant their passing via secondary legislation. It is hoped that the LRO will be passed by Parliament before the Summer Recess. The FSA will need to see the final version of the draft legislation which will enable them to prepare a new Regulatory Guide for credit unions which will also require a 12 week Consultation period. Areas identified by the FSA for more detailed scrutiny included:
The re-drafting of the share “attachments” rules
The limitations on Corporate membership
Guidelines for the issuing of deferred shares to Corporate members
Guidelines for the payment of interest and related prudential control issues
The FSA hope to arrange LRO change Workshops for the credit unions in September-October 2009.
NACUW plans to meet with the FSA again, later in Summer 2009. Please let us have any thoughts, ideas or questions that you have on the proposed legislative changes and any related regulatory implications. Plenty for us to discuss at this years NACUW Conference in Sheffield. Contact: bill.hudson@wales.gsi.gov.uk