FSA gets tough on credit unions

It published "near final" rules today aimed at strengthening the financial resilience of the credit union sector and reducing the number of credit union failures.

The FSA said on average, around six credit unions were declared in default each year with customers compensated by the Financial Services Compensation Scheme (FSCS).

The regulator said the new rules aimed to improve the financial soundness of credit unions and therefore maintain consumer choice in the financial services sector.

The new rules will require new credit unions to have adequate initial capital, the amount of which will be dependent on the nature, scale and complexity of their business.

In most cases, smaller credit unions will need to have initial capital of at least £10,000 and larger credit unions at least £50,000.

Smaller credit unions will be required to have a capital-to-assets ratio of at least three per cent and all credit unions will need to hold liquid assets of at least five per cent of total relevant liabilities but not below 10 per cent in two consecutive quarters.

This is the current requirement for smaller credit unions but a slight increase for larger credit unions.

The capital-to-assets and liquidity requirements will be phased in, coming into full effect on 30 September 2013.

Paul Sharma, director of the prudential policy division at the FSA said the regulator wanted to make sure credit unions were financially sound and well managed, with fewer failures and defaults.

He said: "We are publishing near final rules now so that credit unions have enough time to be able to meet the stronger prudential requirements, and to prepare for future government legislative changes.

"Our reforms focus on improving the areas of weakness that we still see in the credit union sector, by raising requirements for capital, liquidity and financial reporting."