Interest Bearing Shares

Interest-bearing shares

Legislative conditions:

In the Act “interest-bearing share” means a share issued on terms which entitle the holder to interest but not to a dividend.

Under the Credit Union Act 1979, section 7A, credit unions may issue interest bearing shares if –

1. its rules so provide;
2. its most recent year end balance sheet shows that it holds reserves of at least £50,000 or five percent of its total assets, whichever is greater;
3. its auditors have made a report under section 87 of the 2014 Act on that balance sheet
4. it has submitted that balance sheet to the appropriate authority; and
5. it has submitted to the appropriate authority a report by its auditors (post-dating the balance sheet referred to above), stating that in their opinion the credit union satisfies such conditions as are specified by the appropriate authority for the purpose.

A credit union which issues interest bearing shares must submit to the appropriate authority an annual report by the auditors appointed to audit its accounts and balance sheet fulfilling the requirements of point 5 above by the date specified by the appropriate authority for the purpose.

A credit union shall convert any interest bearing shares in issue into shares which are not interest-bearing if –

1. its rules no longer provide for the issue of interest-bearing shares
2. neither its most recent year end balance sheet nor the balance sheet immediately preceding it –
   • shows that the credit union holds reserves of at least £50,000 or five percent of its total assets, whichever is greater, or
   • has been submitted to the appropriate authority by the date specified or
3. for two consecutive years it has not complied with submitting the annual report to the appropriate authority.

Regulatory conditions:

The credit union can only offer interest-bearing shares if it meets the criteria detailed in the PRA Sourcebook:

The rules provide explicitly for interest-bearing shares

• Capital = greater than £50,000 or 5% of total assets. This must be evidenced by submitted audited accounts and a separate report from its auditor that the credit union satisfies the criteria.
• There are adequate systems and controls as defined by the appropriate regulator.
• The credit union operates accrual-based accounting which properly accrues expenditure and interest payable for the purpose of the credit union’s interim, unaudited accounts and management information. The credit union must have a business plan that demonstrates that the credit union will have adequate financial resources meet its obligations to pay interest plus maintain required reserves and capital/asset ratio.

The business plan must:

• from the appropriate place of development
• be based on reasonable assumptions
• include provisioning required by CREDS
• be subject to a relevant sensitivity analysis
• incorporate safety margins that are sufficient to enable the credit union to maintain adequate financial resources.

It is important to note that reserves are not the same as regulatory capital and subordinated loans and provisions for bad debt will not count towards the reserves figure.

The credit union can offer interest-bearing shares and dividend bearing shares; e.g. may offer interest-bearing shares for ISAs and dividend bearing shares or ordinary share accounts.

The credit union has an obligation to pay the contractual rate of interest whatever the profits.

If the credit union ceases to meet the above criteria it must convert the member’s shares back to dividend bearing shares. This may be evidenced by the following applying for two consecutive years:

• The annual audited accounts:
  • show that the credit union does not hold sufficient reserves
  • are not submitted on time
  • The annual report on conditions (mentioned above:
    • Does not state that the conditions have been satisfied
    • Has not been submitted on time. 

Rulebook example text (for guidance only)

36. The Credit Union may issue Interest Bearing Shares if it meets the criteria for doing so as may be prescribed by law, the Relevant Authority and these Rules.

37. When a Member opens a share account the Credit Union must inform the Member whether said share account will qualify for interest or dividend as per the Rules. If a Member is informed that they hold Interest Bearing Shares they must also be informed that if the Credit Union ceases to meet the criteria set out by law or the Relevant Authority to pay interest on Shares their Interest Bearing Shares will be converted to Dividend Bearing Shares.

38. If a Member’s Interest Bearing Shares are converted to Dividend Bearing Shares the Member must be informed using an agreed policy and procedure established by the Board of Directors.

 39. Interest Bearing Shares shall not be eligible for a dividend and interest shall be set and credited using an agreed policy and procedure established by the Board of Directors.

Reporting Requirements 

Credit unions must also submit information on interest-bearing shares in their BEEDS report in sections G9 AND K15 which is detailed in the Credit Union reporting clarification document .

If you have any questions on interest-bearing shares please do not hesitate to contact your Member Relationship Manager or the Advocacy and Regulatory Affairs Team advocacy@abcul.org