PRA Annual Assessment Letters to Category 4 Credit Unions

PRA Annual Assessment Letters to Category 4 Credit Unions Published

The Prudential Regulation Authority (PRA) have published their annual assessment letters to all category 4 credit unions. Category 4 credit unions are divided into two peer groups:

• Category 4B total assets below £10m, and
• Category 4A total assets between £10m and £50m

The letters detail the key findings from the PRA’s annual assessment for this peer group and the actions the PRA expects directors to take. Both letters focus on two keys risks Operational resilience and disorderly failure, and corporate governance.

We have provided a summary for both peer groups below:

Category 4B Credit Unions (total assets below £10m)

The PRA’s letter to category 4B credit unions identifies two key risks that credit unions within this peer group should address and that will drive the Supervision Team’s engagement with CU’s over the next 12 months.

Key risk 1: Operational resilience and disorderly failure

The PRA expects credit union Boards to proactively monitor their:

• Own prudential position
• Performance against financial forecasts, and
• Act in a timely manner in response to any emerging issues.

They have highlighted several other issues that can impact a credit union operational resilience and potentially increase the risk of a disorderly failure. These include:

• Dependences on third parties and outsourcing – when an important operational function is outsourced, the credit union remains fully responsible for all its obligations under the regulatory regime
• Material operational changes – the PRA should be notified of any material operational changes e.g. change of third-party supplier, data center/cloud migration. Board should ensure they have the appropriate governance, risk management and risk mitigation in place for these changes.
• Loss of service due to cyber or operational incidents – Credit union should assume that an operational or cyber incident will happen and have mitigating policies and procedures in place to ensure resilience and notify the PRA of such incidents

Credit union Boards need to be aware of these dependencies and risks and to consider how they would respond to them.

Ease of Exit

When a credit union is no longer viable and sustainable, its options and timescales for implementing those options are affected by the services it offers. The PRA expects Boards to understand and plan who they will communicate with members (including having management information identifying the different member groups) and the impact of the services on the credit union, including where the credit union is no longer able to offer those services.

Key risk 2: Corporate Governance

The PRA have previously written to all Cat4 credit unions in March 2024, to stress that good governance is fundamental to the safety and soundness of each credit union.

They requested Boards assess their compliance with the relevant rules and guidance and to identity any gaps and remedial actions. More than 60% of the credit unions in this peer group are currently taking steps towards compliance or are actively seeking a transfer or proceeding towards closure.

The PRA have now started to follow up with a range of credit unions and expect boards to be able to provide evidence of their progress and/or ongoing compliance.

The PRA will share their findings of the project, including minimum expectations for credit unions in this peer group during 2025.

Category 4A Credit Unions (totals assets between £10m and £50m)

The letter for Cat4A credit unions also contains the details above with the exception of the figures in the corporate governance sections increasing to 70% of credit unions in this peer group currently taking steps towards compliance or are actively seeking a transfer partner or proceeding towards closure.

Both letters to Cat4A and 4B also contained an additional update on liquidity and conclusion below.

Additional update – liquidity

The previous supervisory statement 2/23 introduced the additional expectations for liquidity and investments management for credit unions in this peer group. This was to proportionately mitigate risks posed by larger, more complex credit unions.

The PRA have completed a number of thematic visits focused on liquidity and credit unions compliance with the new expectations.  The PRA engaged with credit unions above £10m to obtain information relevant to all Cat4 credit unions. The PRA identified issues with accuracy and frequency of liquidity. More detail on this can be found in the appendix of the published letters.

To conclude the PRA are committed to engaging with credit unions on regulatory matters in a proportionate way, which they have emphasised relies on the credit unions being open and transparent with the PRA. They also quote Fundamental Rule 7

“A firm must deal with its regulators in an open and cooperative way and must disclose to the PRA appropriately anything relating to the firm which the PRA would reasonable expect notice”

To notify the PRA of any events likely to impact the credit unions prudential position or ability to continue to offer service to members, you must notify the PRA by emailing  prudential_creditunions@bankofengland.co.uk.

If you have any questions in relation to the PRA’s letters please do not hesitate to contact the PRA directly on prudential_creditunions@bankofengland.co.uk or the ABCUL Regulatory Affairs Team Advocacy@abcul.org.