Regulatory Requirements for Additional Activities

There are four types of activities that credit unions may be permitted to carry out by fulfilling some additional regulatory requirements: additional lending, additional investments, transactional accounts and mortgages. This guide specifies the conditions of participating in these additional activities, for which there are two key aspects: governance requirements and prudential ratio monitoring.

Changes to the PRA’s supervisory requirements in 2016, 2020 and 2023 have lessened the requirements for additional activities, making it more straightforward for credit unions to undertake these activities. For example, the changes meant that credit unions no longer need to meet a 10% capital-to-assets ratio, or get prior authorisation from the PRA to participate in additional lending and investments.

These requirements are set out in the PRA’s credit union rulebook and supervisory statement.

Governance Requirements

There are specific governance requirements set by the PRA for credit unions carrying out an additional activity.

Credit unions carrying out any additional activity must ensure their board monitors and assesses the risk associated with carrying on additional activities on at least a monthly basis. In addition, credit unions are required to establish, implement and maintain an up-to-date financial risk management policy statement approved by the board. This risk management policy needs to cover the following points:

1. Both interest and funding risk
2. Aggregate limits on investment holdings and borrowing from sources other than members
3. Avoiding excessive funding concentrations (for both source and time band concentrations)
4. Organisational arrangements, systems and controls in respect of the above.

Credit unions carrying out any additional activities must ensure that the board reviews and approves its financial risk management policy whenever there is a change in circumstances or, where there has not been a change of circumstances, on an annual basis.

Prudential Ratio Monitoring and Capital Requirements

The PRA provides a set of ratios that it expects credit unions to regularly monitor whilst undertaking an additional activity, shown in the table below.

The ratio values given in the table are provided as a guide. The credit union will choose for itself a target value for each ratio, that supports its sustainable and viable business model. A credit union needs to be able to provide the values it has selected to the PRA on request, as well as the reasoning behind the chosen values.

A credit union’s board should use the target ratio values as a tool to monitor whether the performance of the credit union is in line with its strategic business plan and the relevant prudential regulations. The ratios should be reviewed for their performance against target values at least monthly.

The ratio monitoring requirements are specified in the PRA’s supervisory statement for credit unions, found here.

Additional Lending

A credit union may carry out additional lending, by providing loans greater than the usual allowance of £15,000 in excess of member’s attached shares. For additional lending activity, loans may be up to a maximum of 1.5% of total non-deferred shares in excess of that member’s attached shares.

Additional lending also provides credit unions the ability to set longer maximum loan terms than usually permitted by the regulator: the maximum term for additional lending is increased from 5 years to 10 years for unsecured loans and from 10 years to 25 years for secured loans.

In order to carry out additional lending, a credit union must fulfill the additional governance requirements and monitor the prudential ratios specified previously. Further, a credit union must have a capital-to-assets ratio of at least 5%, so it is not limited to a maximum loan amount of £7,500 in excess of member’s attached shares.

Additional Investments

By fulfilling some extra regulatory requirements, credit unions can make additional investments, which are less restrictive and have longer terms permitted than the usual 12 month limit on investments for a credit union.

If a credit union carries out additional investing, it must monitor the prudential ratios and fulfil the governance requirements defined above. Further, credit unions will need to ensure that these investments are capital protected, e.g. they must contractually guarantee the return of the capital sum invested.

A credit union fulfilling the additional governance and prudential monitoring requirements can hold investments in:

1. A non-subordinated loan to a deposit-taker authorised in the UK for up to a 5 year term.
2. A sterling-denominated security issued by the UK government, for up to a 5 year term.
3. A fixed-interest, sterling-denominated security guaranteed by the UK government, for up to a 5 year term. The guarantee must be unconditional on the payment of both principal and interest on the security.
4. Any other product offered by a deposit-taker authorised in the UK, up to a 5 year term, provided the product is capital-protected.

Following the UK’s exit from the EU, investments can no longer be held in an EEA state other than the UK.

Transactional Accounts

A transactional account is defined as a credit union account “that is regularly used by a member of that credit union for the receipt of funds from, and disbursement of funds to, a third party”.

This means that a transactional account refers to an account, that makes transactions both to and from third parties. Savings accounts do not qualify where the member only  transacts with the account directly.

The definition also specifies that such a transactional account must be a credit union account, meaning the account cannot be operated independently from the credit union and/or the account funds are held on the credit union’s balance sheet. For example, a prepaid card facility operated entirely by another organisation, where the funds are held off the credit union’s balance sheet would not be considered a credit union account.

Please also note that the member would not count as a third party even where they are transferring funds from another account. For example, transactions where a member transfers money into the credit union from their personal bank account, or out of the credit union to a prepaid card account in their own name would not affect whether their credit union account is considered transactional.

To provide transactional accounts, the governance requirements and prudential monitoring specified previously must be fulfilled. Credit unions are also required to report the number of active transactional accounts in their quarterly return to the PRA.

Mortgages

Credit unions may provide regulated mortgages up to a term of 25 years, if it continues meet the governance requirements and monitor the prudential ratios specified previously. These conditions must continue to be met by a credit union at all times whilst it is party to a mortgage contract.

Members should note that there are more extensive regulatory requirements that come with providing a regulated mortgage service. None of ABCUL’s members currently provide mortgages, but if your credit union is considering providing this product, please contact the ABCUL policy team for guidance.