Shearman & Sterling LLP | FinReg | UK Prudential Regulator Launches Consultation on More Proportionate Capital Requirements for Credit Unions
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  • UK Prudential Regulator Launches Consultation on More Proportionate Capital Requirements for Credit Unions

    10/24/2019
    The U.K. Prudential Regulation Authority has launched a consultation on the capital requirements that apply to credit unions. The PRA considers that credit unions approaching the thresholds of £10 million in assets or 15,000 members may find barriers to expansion under the current capital regime. It also finds that the risks that the capital regime endeavours to tackle could be addressed in a simpler manner than the link between capital and credit union membership size and activity which is currently used. The PRA also considers that engaging with small credit unions earlier could increase chances of a non-failure solution.

    Under the current regime, firms with total assets of £5 million or lower must hold a current minimum capital to assets ratio (or “CAR”) of at least 3%, rising to a minimum of 5% CAR where total assets held are greater than £5 million but lower than or equal to £10 million, and to 8% CAR plus a 2% buffer for credit unions with more than £10 million in total assets. These thresholds may vary depending on the activities and membership size of the credit union. Those that carry out additional activities and those that have more than 15,000 members are each subject to the 8% CAR  + 2% buffer requirement. Credit unions with more than 5,000 members must hold a minimum 5% CAR.

    The PRA’s proposed changes are as follows:
     
    1. For credit unions with more than £10 million of total assets: the 2% buffer would be removed and a graduated approach adopted, requiring 5% CAR in respect of a firm’s first £10 million of assets, 8% between £10 million and £50 million and 10% above £50 million. The Credit Unions part of the PRA rulebook would also be revised, meaning credit unions would be permitted to pay out interim profits more than once a year where the credit union’s CAR was 8% of total assets, removing the additional 8% CAR + 2% buffer that was previously required.
    2. For credit unions conducting additional activities or with more than 15,000 members: these factors will no longer be relevant in determining the CAR of a credit union. Provisions for mitigating the risks associated with these factors will be dealt with by systems and controls requirements under the Credit Union rulebook.
    3. For credit unions with less than £5 million of total assets: where the credit union’s CAR is below 5% but greater than 3%, the credit union must engage with the PRA more fully on its sustainability and ability to budget. The PRA also proposes to implement an earlier trigger for credit unions to engage with the PRA with a view to recovery, wind down or merger.

    The changes would take effect upon publication of the final policy. The PRA is seeking feedback on its proposals by January 24, 2020.

    View the PRA's consultation paper.
     
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