PRA offers credit unions more investment flexibility

The regulator also sets higher requirements and expectations for credit unions deemed higher risk.

The PRA has issued a policy statement aimed at credit unions, offering more investment flexibility, but attempting to address some prudential regulatory concerns connected with some of the larger of these institutions.

It is amending its rules to extend the range of products available to credit unions to invest in, including:

  • UK bank bond;
    • With a maturity that is up to 5 years from the date on which the investment was made;
  • Non-UK bank bond;
  • Supranational bond;
  • Corporate bond;
  • UCITS;
  • Money market fund;
    • Authorised by the FCA;
    • Assets under management of at least £100m.

The changes are intended to offer credit unions more investment flexibility subject to certain requirements.

A new supervisory statement, SS2/23 – Supervising credit unions, has been issued, which supersedes SS2/16 – The prudential regulation of credit unions.

The new supervisory statement seeks to address the PRA’s concerns about the potential risks posed by large credit unions as signalled in CP7/22 by strengthening the risk management regime for credit unions focusing specifically on capital and risk management:

Credit UnionAdditional regulatory expectations
Holding more than £10m in assets
  • Counterparty risk and concentration limits
  • Expanded liquidity management policy statement
  • Risk appetite statement
  • Core systems and outsourcing arrangements
Holding more than £50m in assets
  • Liquidity stress testing on a periodic basis (at least annual)
  • Scenario analysis focusing on strategic initiatives and external risks
  • People, processes, and technology required to deliver critical services
  • Operational risks, including external disruptions stemming from providers supporting critical services
Holding more than £100m in assets
  • Exit strategy that avoids negative effects on members including the steps and resources needed to:
    • Wind down
    • Achieve a transfer of engagements
Investing in complex instruments
  • Counterparty risks and concentration limits
  • Board approved investment policy
Lending to corporate members
  • Overall and individual loan limits
  • Loan risk appetite agreed by the board
  • Monthly management information reporting to the board
  • Scenario analysis for credit risk
Providing consumer credit
  • Adequate board knowledge and expertise
  • Credit card policy outlining how risks are monitored and mitigated and covering:
    • Risk management arrangements
    • Outsourcing arrangement risks
    • Capital requirements
Providing mortgages
  • Systems and controls to mitigate risks stemming from mortgage business
  • Evidence of managing and mitigating financial risks
  • Internal controls on treasury risk management
  • Liquidity stress testing

The supervisory statement also provides clarification on existing expectations for credit unions in connection with governance, business plans, forecasts as well as the role of internal audit.

Generally these requirements appear to be aimed at putting a more formal structure around risk management and governance at credit unions in order to prevent or alert of the risk of material defaults or systemic issues. The broad regulatory thrust here is one that aims protect not only the stability of the organisations and the system, but also the consumer.

The new rules and supervisory statement are both effective from August 29, 2023.