Proposal for a Legistlative Reform Order for Credit Unions

by Bill Johnston

Now that the dust has fallen on the proposed change in the law relatings to credit unions let us look at the position as it appears now and my comments on it.

1.Proposal to change the Common Bond requirement for credit unions with a “Field of membership Test”(ref B1 and B2)
To increase the maximum number of potential membership to 2million in a geographical area.
To allow a combination of any number of membership qualifications.

My comments

Whilst the FSA will still have the power to restrict “field of membership” in practice the concept of a common bond is now redundant.

Fields of membership is a sop and is unworkable.

The result is that credit unions cease to have a relationship with is members and now regarded as a financial organisation. Members will not have any empathy to the organisation they are a member of and therefore have no loyalty to it when it comes to loan repayments.

In this current financial climate common bonds need to be strengthened rather than lossened.

2. Remove non qualifying category limit (ref B3) : I have no comment on this

3. Allow credit unions to admit bodies corporate ,unincorporated associations or partnerships into membership.(ref B4)

My comments

This will allow credit unions to act a local depositary for locally created funds from local organisations and is therefore an excellent idea.
Caveat
However there is a failure to recognise that loans to local organisations are more risky and amounts potentially higher. Also it could be used an investment vehicle bearing in mind the cancellation of the 8% maximum dividend and the agreement to have interest on deposits. There has to be further safeguards built in here.

4. Guaranteed interest on deposits. (ref B5)

My comments
This continues the gradual drift for credit unions to become the same as a bank of building society. Is this what the movement wants?
Caveat
There will need to be strict controls over the maximum amount of interest payments a credit union can pay in any one year as a means of controlling the potential liability .This will be down to the FSA to police.

5. Remove maximum of 8% dividend (Ref B6)

6. Repeal of attachment of shares to loans (Ref B7) .Having withdrawn this I have no comment.

7. Being able to charge for ancillary services (ref B8) I have no comment on this.

Major omissions and criticisms of the Legislative Reform Order

1. Taxation.
Credit Unions are currently suffer from partial double taxation. If a credit union’s income consisted wholly of interest on bank deposits and distributed back to members in the form of interest or dividend then corporation tax is levied on the interest received and income tax levied on the dividends or interest distributed and received back to members.

Credit unions should be excluded from corporation tax and the dividends or interest passed back to members be treated as tax paid . An arrangement similar to the “old” composite rate of tax levied on the building societies should be levied on credit unions on the amount it so distributes in the form of interest or dividends. As most of the credit unions members pay little or no income tax it is considered that this would be a low rate of tax payable by the credit union.

2. Due consideration to the diversity of credit unions.
The current Legislative Reform Order panders only to the larger and more ambitious credit unions and neglects the smaller credit union .

Almost all of the changes will have no impact on the small credit unions of less than £100,000 in assets. Yet these are the bedrock of the credit union movement in the UK and because they are small and fragmented have been ignored in this Reform Order for credit unions.

The numbers of small credit unions have been decimated since the Financial Services and Markets Act of 2000 came into existence. In the main this is due to the increasing involvement by the FSA in the appointment of volunteers as officers and in the higher level of accountability of the credit union itself. Gradually these credit unions have been merged into the larger credit unions or closed down through lack of volunteer support because of the increased complexity of running a credit union.

There is a need to remove the shackles imposed on these small credit unions by allowing those under £100,000 in assets to opt out of being supervised by the FSA and to have the title “unregulated” in their title. They would lose the FSCS benefits but in return would only file audited accounts once a year. Credit Unions in Ireland are not monitored by the state and it is left to the national bodies to do this. Perhaps a similar model could be adopted for the UK.

There is also a need to allow credit unions between £100,000 to £1M to have a less stringent regulatory regime for example appointments of volunteer officers need not be approved by the FSA .

The above will need to be addressed in this document.

© Copyright 2009 W.P.(Bill) Johnston F.C.A. mobile 07778934125

Bill Johnston is a chartered accountant specialising in the credit union industry for more than 40 years. He has build a successful audit practice serving at one time nearly 200 credit unions and currently directs Conaccess Ltd which services the IT needs of almost 150 credit unions.