The Prudential Regulatory Authority (PRA) has issued a letter updating its position on credit union service organisations (cusos) and a forthcoming consultation on its plans to change the rules.
Cusos are entities that are owned by credit unions and provide shared ancillary services to them – in areas like management and tech – providing economies of scale. Cusos are well established in countries like the USA in Ireland and there is a small number established in the UK, with more credit unions looking to set them up.
However, there is some uncertainty as to whether the regulatory framework permits credit unions to hold an investment in a cuso.
In a bid to clarify the position, Laura Wallis, director, UK deposit takers at the PRA, wrote a letter recognising “there may be material benefits to the sector to having cusos, including access to (and control of) shared services (such as administrative, professional, management and technology services), benefits from economies of scale such as reduced costs, and access to new expertise and services that the credit union could not offer by itself”.
But she warned: “There are risks inherent to cusos that need to be managed appropriately. These include reliance on third parties without adequate governance and controls, movement of activity to non-supervised entities, the creation of single points of failure and step-in risk.”
Step-ini risk refers to the possibility of a credit union having to offer financial support to a struggling cuso.”
Countries with a strong cuco presence also have explicit regulatory frameworks to mitigate these risks, she added. In the UK’s case, ”whether a credit union’s use of a cuso is permitted under existing legislation and PRA rules will depend on how the cuso is set up and funded”.
Related: Report from the UK credit union conference
Unnder the Credit Unions Act 1979, credit unions in Great Britain must ensure their interest in a cuso is compatible with the legislation, including Section 26 of the act which prohibits a credit union from having a “subsidiary”.
In Northern Ireland, there is no express prohibition in legislation on forming a subsidiary.
When it comes to the PRA, part of the regulator’s rulebook may prevent a credit union from holding an interest/investment in a cuso, depending on how that cuso and the credit union’s interest in it is structured.
“There are wider regulatory considerations that credit unions should be mindful of in order to ensure that any risks associated with a credit union holding an investment in a cuso are mitigated,” added Wallis. “However, these are not currently explicitly captured in regulation and we will aim to set these out as part of the consultation”.
She said the PRA “recognises that properly established and operated, cusos have the potential to facilitate credit union growth and ensure their sustainability“ and is ”supportive of the establishment of cusos that meet the legislative requirements and where the associated risks are managed prudently”.
As such, it plans to consult on amending PRA rules in order to make it clear that investment of surplus funds in cusos is permitted, where the cuso investment meets the legislative requirement); and consult on expectations for credit unions that invest in and/or use cusos.
Regulatory considerations to be discussed in the consultation include ensuring that a credit union carries out due diligence and risk assessment before establishing/ investing in a cuso.
Related: Report on the Swoboda credit union conference
And to avoid step-in risk, measures will be discussed to ensure the liability of the credit union is limited to the amount it has invested. This may include limits on the amount a credit union is allowed to invest, and a requirement for a credit union to undertake legal due diligence to satisfy itself that the credit union is legally and operationally separate from the cuso.
Outsourcing considerations are also important, says the PRA, to ensure the inherent risks, such as reliance on third parties and the creation of single points of failure, are managed.
Key to this will be establishing a clear line of risk oversight of outsourced activities, together with substitutability and exit plan arrangements,” added Wallis.
“The PRA is clear that when setting expectations it will seek to be proportionate to credit unions’ size and scale.”
The PRA says it will now contact credit unions that are already investing in a cuso “to ensure that they are doing so in a way that is compatible with the current regulation”, adding: “Where appropriate we may use temporary rule modifications to ensure these credit union’s use of cusos is in line with PRA rules.”
