The FSA has published its near final rules to strengthen the financial resilience of the credit union sector and reduce the number of credit union failures.
On average, around six credit unions are declared in default each year with customers compensated by the Financial Services Compensation Scheme. The new rules aim to improve the financial soundness of credit unions and therefore maintain consumer choice in the financial services sector. The rules will be contained in a new Credit Union sourcebook (CREDS), which will replace the existing sourcebook CRED.
The new rules will raise prudential standards and the main changes are as follows:
* New credit unions must have adequate initial capital, the amount of which will be dependent on the nature, scale and complexity of their business. In most cases, smaller credit unions will need to have initial capital of at least £10,000 and larger credit unions at least £50,000
* Smaller credit unions must have a capital-to-assets ratio of at least 3%
* All credit unions must hold liquid assets of at least 5% of total relevant liabilities but not below 10% in two consecutive quarters. This is the current requirement for smaller credit unions but a slight increase for larger credit unions.
The capital-to-assets and liquidity requirements will be phased in, coming into full effect on 30 September 2013, which should give credit unions enough time to comply.
The publication of near final rules should also help ensure that credit unions are prepared for new Government legislation, which is currently before Parliament and will allow credit unions to carry out a wider range of financial activities. Confirmation of the final CREDS rules will be published after the Government legislation is made, and CREDS will come into effect at the same time as the legislation.
Since July 2002, when the FSA took on responsibility for the regulation of credit unions, the Financial Services Compensation Scheme (FSCS) has declared 43 credit unions in default, including six in 2009.
Paul Sharma, director of the prudential policy division, said: “We want to make sure credit unions are financially sound and well managed