PS11/23 – Credit Unions: Changes to the regulatory regime

The Prudential Regulation Authority, PRA, has published a new policy statement (PS11/23) in connection with credit unions following a corresponding consultation in September 2023. In this policy statement, the PRA briefly describes the responses it received to its consultation and the final rules and the new supervisory statement as they will apply from August 29, 2023.
#### Background
On September 21, 2022, the PRA launched a consultation to modify the regulatory framework of credit unions in an effort to modernize the requirements on credit unions, yet maintain the security and soundness of individual financial institutions. Specifically, the PRA proposed to
– extend the scope of permissible investments of credit unions so long as certain requirements are met (e.g. investment grade bonds, traded in a UK trading venue, minimum asset sizes of UCITS investments);
– extend certain requirements of larger credit unions, e.g. by imposing additional requirements as to the amount and quality of capital held by a credit union or as to its wind-down planning;
– set out minimum requirements when lending to corporate customers; and
– clarify that the lending limits applicable to credit unions also apply to „hire purchase agreements and conditional sale agreements“.
#### Responses and changes to the draft version(s)
Broadly speaking, most respondents agreed with the proposed changes. However, a large number of commenters objected to the 75% concentration limit on any single counterparty where regulatory capital is held. A large number of respondents also disagreed with the proposed requirements on the quality of capital for institutions which haven’t been established for at least five years. In addition, as far as exit planning of large institutions is concerned, commenters noted regulatory limitations such as the prohibition to sell loans on their books, which will prevent institutions from establishing orderly exit strategies.
Having reviewed the feedback, the PRA will implement most provisions as proposed with some changes to
– enhance the readability of the new supervisory statement by moving all „general requirements“ applicable to all credit unions to the first 10 chapters, followed by chapters covering larger unions only;
– introduce an additional permissible investment (non-UK bank bonds);
– remove UCITS from permissible investments;
– exempt certain investments from the counterparty concentration limit (e.g. sterling denominated securities issued by the UK government, UK bank bonds as long as they meet certain rating criteria);
– consider the limitations with respect to possible exit strategies in institutions‘ planning requirements.
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As the above summary only describes the key revisions to the proposal, please consult the original legal document for more detailed, comprehensive information.