Corporate Members

Why do you need to know?

In January 2012, the Legislative Reform Order (LRO) was brought into force that removed several restrictions, allowing credit unions to include corporate members in its membership qualification. Credit unions are intending to use this increased flexibility in a number of ways:

What are the main points?

• Credit unions will no longer be limited to providing services to just individuals.
• Credit unions cannot not include corporate members in a particular common bond unless the membership criteria includes individuals for that bond.
• Credit unions will be able to choose to offer membership to unincorporated associations and corporate bodies such as companies, partnerships and co-operatives.
• Non-individuals will only be able to make up a maximum of 10% of a credit union’s total membership hold a maximum of 25% of shares in the credit union and be granted a maximum of 10% of loans
• Credit unions will be able to choose whether to offer ordinary shares – ownership of which will bring all the benefits of credit union membership, or deferred shares, which will only be repayable in restricted circumstances and which will count towards the capital of a credit union

Notifying the regulator

Once your credit union has decided to include corporate membership and the necessary rules have been successfully registered you must notify the Prudential Regulation Authority as soon as the credit union intends to start offering corporate accounts.

The notification is separate from, and in addition to the registration of rules.  A ‘Notification of Starting a Particular Activity Form’ will need to be completed and sent to the PRA at the following address:

Credit Unions Supervision Team, Prudential Regulation Authority, 20 Moorgate, London, EC2R 6DA

What is a corporate member?

“Corporate member” means:

A body corporate which is a member of the credit union
A body corporate may become a member of a credit union in its own name if it is eligible under the corporate membership qualification in a credit union’s registered rules. This can include another credit union.

In ABCUL Model Rules this person is called a Corporate Representative

An individual who is a member of the credit union in his capacity as a partner in a partnership
The individual must be a partner in the partnership, and old enough to be a member of the credit union – but does not need to be eligible under the individual membership qualification in the credit union’s rules

The partnership must be eligible under the corporate membership qualification in the credit union’s rules

In ABCUL Model Rules this person is called a Designated Representative

Note: All the above conditions need to be satisfied. An eligible individual cannot act for an ineligible partnership

An individual who is a member of the credit union in his capacity as an officer or member of the governing body of an unincorporated association
The individual must be an officer or member of the governing body of the unincorporated association, and old enough to be a member of the credit union – but does not need to be eligible under the individual membership qualification in the credit union’s rules. The unincorporated association must be eligible under the corporate membership qualification in the credit union’s rules.

In ABCUL Model Rules this person is called a Designated Representative

Note: All the above conditions need to be satisfied. An eligible individual cannot act for an ineligible unincorporated association.

It is important to note that a body corporate may be a member in its own right, but a partnership and unincorporated association may not. This means that in the case of partnerships and unincorporated bodies it is the representing individual who is the member not the organisation.

What organisations fit under what category?

Restrictions on corporate membership

Corporate members as a percentage of total membership

The total number of corporate members must not exceed 10% of the total number of members. E.g. a credit union with 1000 members in total (individual and corporate members) can have no more than 100 corporate members.

Corporate members are counted as members no matter whether they hold non-deferred or deferred shares.

The credit union rules must include how the number of corporate members is reduced should the maximum limit be breached. It is highly recommended that the credit union monitors the percentage on a monthly basis and takes action when the limit reaches 8%. You should have a policy and procedure for expelling corporate members in these circumstances that should include an assessment of the impact to the credit union of expelling any particular member.

Shares

Corporate members must not hold more than 25% of total non-deferred shares in the credit union.

For example, if the latest Annual return CY shows a total shareholding (excluding deferred shares) of £1m, then the total number of corporate member shares should not exceed £250,000.

There is no limit to holdings on deferred shares.

The credit union rules must include how the level of shares is reduced should the maximum limit be breached. It is highly recommended that the credit union monitors the percentage on a monthly basis and takes action when the limit reaches 20%. You should have a policy and procedure for reducing shares in these circumstances that may include reducing share balances to corporate members on a pro-rata basis or asking corporate members to convert non-deferred shares into deferred shares (which are not included in the limit).

Loans

The credit union can make loans to corporate members holding non-deferred shares. Loans cannot be granted to corporate members holding only deferred shares.

The limit on loans to corporate members is 10% of the aggregate outstanding balances of all loans to members. The calculation of total loans to corporate members is made on outstanding balances plus any interest charges added but not yet paid. The member’s shareholding does not reduce the outstanding balance of the loan even if those shares are held as security or they are attached (see information on attaching shares)

It is the granting of the loan that constitutes a potential breach of the limit. If a corporate member repaid a large loan causing the percentage of corporate loan to rise above 10% then the credit union would not be in breach. However, it would be in breach if it made another loan to a corporate member.

The credit union rules must include how the level of shares is reduced should the maximum limit be breached. It is highly recommended that the credit union monitors the percentage on a monthly basis and takes action when the limit reaches 20%.

The credit union must seek permission from the FCA to issue loans to corporate members. See separate guidance on loans to corporate members.

More information on lending to corporate members

Transferring membership

In the case of partnerships and unincorporated bodies, membership is in the form of an individual acting for the corporate member. That individual may also be a member of the credit union in their own right.

A credit union’s rules will need to provide for a transfer of shares and loans where a different partner begins acting for a partnership or where a different officer or different member of the governing body begins acting for an unincorporated association.

When an individual ceases to become a representative, the individual must withdraw the shares held in the credit union, and the new individual acting on behalf of the corporate member will then deposit the shares.

If the member has a loan on behalf of the corporate member, then the loan agreement can be transferred to the new acting member.

Putting it into practice

In order to accept corporate members the credit union must:

• Ensure that the membership qualification (common bond) includes the ability to accept corporate members and is registered with the regulators. (see separate guidance on common bond)
• Update policies and procedures to include the limits and management of corporate members, including limits to the number of corporate members, limits to shareholding, limits to loans, transfer of membership, and membership entry.

Application process

Before accepting an application for membership from a corporate member, you must check to ensure it meets the membership criteria outlined in your common bond.

• An incorporated body is a member in its own right.
• An unincorporated association must be represented by an individual/s
• It is the organisation that must meet the criteria for membership. In the case of unincorporated members the individuals representing the organisation do not have to fall within the criteria of membership just so long as the organisation does. Equally, an individual that meets the criteria for membership cannot represent an organisation that does not.

Identity and verification
The type of organisation will determine the information you require. This will include identification of individual signatories as well as information verifying the organisation. The attached appendix gives a guide to the types of organisations and the information you would require.

As with individual members , the credit union must take a risk-based approach to verifying the identity of corporate members. ID should be taken of all individual signatories, and Joint Money Laundering Steering Group guidance requires that, in the case of an incorporated body, details should be taken of all shareholders, directors, or beneficial owners holding more than 25% of shares in the organisation.

Application form
The attached appendix gives a template example of a corporate application form.

Signatories
The amount of signatories required for an account is a matter of policy for your credit union. You should consider what authority you will give to account signatories in terms of depositing and withdrawing funds as well as loan agreements.

Whilst one individual will hold the authority to act on behalf of the organisation, you can require a second signatory to authorise deposits and withdrawals.

Corporate members FAQs

Q. Do we have to admit corporate members?

A. No, you can choose not to admit corporate members. If at any time in the future you wish to admit corporate members than you must change your common bond and register the changes.

Q. Do we have to change our common bond to include corporate members?

A. Yes, you must include corporate members in your common bond by stating how they relate to the individuals in the common bond. You must have individual members before you can have corporate members. See the common bond guidance for more details. You cannot have a common bond made up of just corporate members.

Q. How do we determine whether a corporate member qualifies for our common bond?

A. You must state in your common bond what the relationship of a corporate member is to the individuals in the common bond. For example, you can have a corporate member that has a place of business in your live or work locality or a corporate member that is the employer of the individuals.

Q. Can we set a policy that we require two signatories to a corporate account?

A. Yes, your application should have the details of the first individual acting as the authority representing the organisation plus any additional signatures you require.

Q. How will we be able to determine which are unincorporated and which are incorporated member?

A. See the definitions in the appendix

Q. In terms of partnerships, is an LLP partnership an incorporated member and an ordinary partnership an unincorporated member?

A. Yes, basically if an organisation has limited liability status it is an incorporated member.

Q. Can a credit union become a corporate member of another credit union?

A. Yes, provided it qualifies as part of your common bond stating how your corporate members relate to your individual members.

Q. What are the rules in regard to lending to corporate members?

A. You will have to inform the regulator whether you intend to lend to corporate members or just accept deposits. Business lending is a risky business, and we have provided separate guidance on this. What we do know is that loan limits to corporate members are the same as with your individual members.

Q. Do we have to lend to corporate members?

A. No, you can choose simply to accept deposits.

Q. Will we need to have a rule to prevent lending to corporate members?

A. No, this would be a matter of policy.

Q. Will corporate members have the same rights as individual members?

A. Yes, corporate members have one vote in the same way as individual members. There are no rules regarding the percentage of corporate members on the board or elected members and you might want to consider whether you want to impose limits in your rules.

Q. Can a member representing a corporate member have a loan on behalf of the corporate member and also have a loan in their own right as an individual member?

A. Yes, you should ensure that you have sufficient risk based approach to policies and procedures to protect the credit union.

Q. If individuals leaving cause the credit union to breach the limit of 10% corporate members what do we do?

A. If the 10% limit is breached by default as suggested then the credit union would not fall out of compliance but would be expected to take steps to reach compliance. However, if by admitting corporate members the 10% is breached then the credit union will fall out of compliance.

Q. Will we have to provide LPLS insurance for corporate members?

A. it is unlikely that you would wish to offer Life Savings Insurance for corporate members but you may want to have Loan protection Insurance. ABCUL will clarify with the insurance provider on how this will work.

Q. can we pay a different rate of interest or dividend to corporate members?
A. You can only pay differential rates for members if you meet the criteria of having at the time of the payment a capital/asset ratio of at least 5% and payment of dividend does not reduce the ratio to below 5% or are a Version 2 credit union. It is not yet clear whether the same rule will apply for interest.

Further guidance is available in the ABCUL Member Resource Library here.