Attracting Investment

Wednesday 10 January 2024

(Updated 21/05/25)

Why do you need to know?

A robust funding strategy is an integral part of a credit union’s strategic planning, risk management and business continuity planning processes and is central to its security and sustainability. The funding strategy should be underpinned by an ambition to ultimately achieve self-sustainability through self–generated income from loan interest.  However, this is an ambitious goal, and in the interim, the funding strategy will need to incorporate various forms of investment to secure income. In the current economic climate, established sources of financial support from the public sector are no longer certain. Credit unions need to look to more creative ways to secure income and attract investment.  The Credit Unions Act 1979 has permitted credit unions certain options to both make investments and borrow. In addition, the Legislative Reform Order (LRO) will offer new opportunities for investment from corporate members (companies, partnerships and local community groups).Additionally, the Financial Services and Markets Act 2023 (FSMA 2023) made changes to the Credit Unions Act 1979, included in these changes was the ability to carry out new financial activities.

Credit unions also need to be familiar with the New Credit Union Sourcebook (CREDS), which replaces the Credit Union Sourcebook (CRED, relevant rules within the Senior Management Arrangements Systems and Controls Sourcebook (SYSC)) and the new Credit Union Regulatory Guide (CURGS,) which now contains the guidance on relevant legislation. Both CREDS and CRUG together reflect the FSA’s new regulatory regime and the new provisions of the Credit Unions Act introduced as a consequence of the Legislative Reform (Industrial and Provident Societies and Credit Unions Order 2010 (LRO).

The Key Changes

CREDS and the new legislation (LRO) still permit credit unions to generate income through the following means:

  • Investment of surplus funds
  • Borrowing from another credit union or
  • Borrowing from a corporate body as a subordinated loan
  • Grant – funding from external funders
  • Income from partners to support the provision of credit union services or products to members

In addition the LRO permits credit unions to:

  • Offer loans to corporate members
  • Offer investment opportunities individuals, corporate bodies, partnerships and unincorporated organisations as deferred shares

Financial Services and Markets Act 2023

Given Royal Assent on 29 June 2023 , the FSMA  came into force on 29 August 2023. The changes increased the range of products or services credit unions can offer. The changes are listed below:

  • Credit unions can  choose to adopt an additional object
  • Credit unions can engage in new financial activities including
      • (a) entering into conditional sale agreements, as the seller
      • (b) entering into hire purchase agreements, as the person from whom goods are bailed or (in Scotland) hired
      • (c) insurance distribution activities

Note: Credit unions need to have permission under the FSMA before carry on or agreeing to carry on any of these regulated activities.

Putting into Practice

Any borrowing or investment should be sure to comply with the revised Credit Union Act 1979 and the New Credit Union Sourcebook (CREDS).

Care should be taken to consider the financial implications and potential risks associated with such measures (such as none or late repayment of a loan) and clear agreements drawn up (with specialist legal advice if necessary), so that all parties are clear about all aspects of the transaction arrangements.

The Topic In Detail

Income from land and property

The Credit Union Act states that a credit union can hold, purchase or take a lease on land for the purpose of conducting its own business but not as a business investment. In the same way, a credit union can buy or hold property as a premise from which to conduct its business, but note solely as a business investment. This means that a credit union may acquire accommodation that is reasonable to anticipate future growth and may lease it out in the meantime, as long as this is not “creating an investment property

Investment of surplus funds

Credit unions are permitted to invest surplus funds to aid income generation but only under as deposits in a UK firm; sterling denominated securities or fixed interest securities. The maturity date for such deposits must be not more than 12 months. (CREDS 3.2.1)

Borrowing and lending between credit unions

A credit union cannot issue shares or take deposits from another credit union but can provide a loan to another credit union.  (CREDS 3.2.6) This is dealt with in detail in the separate technical bulletin on Loans between credit unions 

Regulations on borrowing

The new Credit union sourcebook (CREDS) sets out the parameters for credit unions to remain compliant whilst borrowing from various lenders. (CREDS 3.3) This topic is summarised in the accompanying technical bulletin on Regulations on borrowing. 

Borrowing from other corporate bodies

The Credit Unions Act 1979 once allows a credit union to borrow from an external corporate organisation through a subordinated loan. (CREDS 5.2.) This borrowing would not automatically entitle the corporate body to receive credit union shares or membership rights. This topic is deal with in detail separately on the accompanying technical bulletin on Subordinated lending. 

Grant funding and income generation from local partners

Credit unions can seek funding from external funding bodies and from partners (such as RSLs), to provide services or products to their members. These topics are dealt with in greater detail on the separate accompanying technical bulletin on Grant funding and income generation from partners.

Investment opportunities – deferred shares and loans to corporate members

The LRO introduces a new category of shares available for credit unions to use if they so choose. Deferred shares can contribute to the credit union’s capital because they can only be repaid to the shareholder when the credit union is wound up or dissolves and creditors paid in full (or the FCA consents to repayment). Credit unions need to consider the rules and limits of such shareholding by individuals, partnerships, unincorporated associations and corporate bodies to reflect proportionality. The LRO introduces the possibility of loans to corporate members (within set limits). This topic is dealt with in detail separately on the accompanying technical bulletin on Deferred shares and loans to corporate members.

Checklist

Ensure that the Board and Management of the credit union have up-to-date financial reports and information available from which to make informed decisions.

  1. Ensure that decision-making is made in the context of the business plan and informed by the priorities and long-term objectives of the plan.
  2. Discuss the options for investment in detail and make sure that definitions are clearly understood by everyone involved in the decision.
  3. You may find it useful to carry out a risk analysis of each investment option to help prioritise and assist in prioritisation and decision-making
  4. Confirm that the details of each option you decide to pursue conform to the new regulatory requirements of CREDS, the regulations (CURG) and SYNC.
  5. Check that your current rules permit you to proceed with the option(s) agreed upon. If not, seek guidance from ABCUL on the wording of rule changes.
  6. Get approval for changes of the rules at your AGM or special general meeting.
  7. Update policies and procedures to incorporate changes.
  8. Assess any new training needs as a consequence of new policies.
  9. Check the ABCUL website for training opportunities and templates.

Definitions

  1. Credit Union Sourcebook (CRED) is the FSA (Now FCA) Handbook for credit unions replaced by the New Credit Union Sourcebook (CREDS) as a consequence of the introduction of the FCA new rules for credit unions and the amendments to the Credit Unions Act 1979 as a consequence of the Legislative Reform (Industrial and Provident Societies and Credit Unions Order 2010 (LRO).
  2. Non–deferred shares is the new term to describe a member’s shares (savings). These may be attached (associated with a loan) or unattached (not associated with a loan) shares.
  3. New Credit Union Sourcebook (CREDS) replaces the Credit Union Sourcebook (CRED). It reflects the new provisions of the Credit Unions Act 1979 as a consequence of the introduction of the Legislative Reform (Industrial and Provident Societies and Credit Unions Order 2010 (LRO).
  4. The Legislative Reform (Industrial and Provident Societies and Credit Unions Order 2010 (LRO).
  5. A senior loan is ordinary funding that is not regarded as regulatory capital
  6. Short Term Basis is suggested within FCA guidance as 2 consecutive quarters (CREDS 3.3.4/5)
  7. A subordinated loan differs from other senior loans as it has specific terms and conditions. The loan agreement specifically stipulates that the loan debt is subordinated to the interest of the members i.e. in the event of liquidation; repayment of the debt would be made only after the repayment of members’ shares. There are also specific minimum repayment and accounting terms for these kinds of loans. A subordinated loan is regarded as regulatory capital.
  8. Surplus funds are those funds not required immediately by the credit union for “accepting deposits, lending and ancillary purposes.” (CREDS 3.1.3 (2))
  9. The Senior Management Arrangements Systems and Controls Sourcebook (SYSC) sets out the rules for small firms (including credit unions) regarding senior management arrangements, systems and controls as summarised in (CREDS 2.1.4)