Gov’t says credit unions must meet bank insolvency rules

HM Treasury has proposed applying bank insolvency to credit unions, warning a lack of formal legislation for winding up credit unions poses significant risks as currently “considerable intervention” is needed from the regulators.

In a new consultation paper, Industrial and provident societies: growth through co-operation, the government is seeking views on the merits of applying bank solvency rules in the Banking Act 2009 to credit unions.

The government said while credit union default has so far been adequately managed under normal liquidation procedure and Financial Services Compensation Scheme payments have been made quickly, these businesses have required considerable intervention by the Prudential Regulation Authority, the FSCS and the official receiver as well as the co-operation of the liquidator.

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By applying the Banking Act’s bank insolvency rules to credit unions, the government said the “considerable risks” posed by the lack of formal legislation will help mitigate:

• A time lapse between the institution of winding up proceedings and eventual liquidation, which carries the potential for a “run” on the credit union,

• Disruption to members who have “current” accounts with automated transactions; and,

• Financial hardship suffered by members who rely on access to state benefits or salaries paid directly into their accounts.

The government said requiring an insolvency practitioner to achieve bank solvency rules would strengthen the hand of the FSCS in discharging its statutory functions effectively and efficiently.

A credit union liquidator would be obliged to work with the FSCS to secure prompt pay-out or transfer of depositors’ accounts.

However, the government also warned it will be important to take account of any risks that applying bank solvency under the Banking Act 2009 to credit unions will have on the ordinary course of business such as terms of trade and costs of capital.

According to FSCS data, 18 credit unions have gone into liquidation in less than two years.

The latest credit union to go into liquidation is the Millom & District Credit Union, which entered liquidation on 15 May after the Financial Services Authority suspended it last November from lending money or allowing members access to their accounts.

The government consultation closes on 20 September.