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FSA - CP 13/8 - FCA publication of warning notices

Credit unions, as ethical, co-operative financial institutions, are supportive of efforts to reform and enhance the regulation and supervision of financial services.  As such, we are broadly supportive of the proposals set out in the consultation which should have the effect of increasing the deterrent effect of regulatory enforcement action through harnessing the power of transparency.

However, we do have some concern as to the potential effects of the proposals on smaller firms, such as credit unions, which – because of their size and their community ties – are more
vulnerable to negative, word-of-mouth, reputational damage.  Indeed, as deposit-takers, credit unions can be vulnerable to a "run" on funds should there be a loss of confidence in its soundness which could have a knock-on impact upon the Financial Services Compensation Scheme (FSCS) should the effects threaten the credit union's liquidity position.

As community institutions, credit unions are particularly reliant upon building a strong reputation through word-of-mouth which makes them particularly susceptible to the potential effects of the reputational damage that could be caused by the publication of information about warning notices.

We would therefore request that, in deciding whether to publish a warning notice, consideration is given to the fact that smaller, community-based firms are likely to be more vulnerable to the potential detrimental effects of publication.  Likewise, if the publication undermines the viability of a community firm, such as a credit union, this should be considered in terms of the potential detriment it might cause to consumers through the loss of a service to people who might not otherwise have access to fair and affordable financial services as many credit unions seek to provide in line with their social goals of financial inclusion.  Other bodies, such as Citizens Advice, have issued guidance to the effect that the loss of a credit union’s services should be considered as part of a range of detrimental side effects when advising clients (in this case on personal insolvency) and therefore we feel similar considerations would not be inappropriate in the context of warning notices.  

In this respect, we would also suggest an addition to the proposed warning notice text in order to reassure readers that the firm in question, though perhaps being out of compliance in some way, is not close to closure or collapse (where, of course, this is true) to mitigate the potential for the notice to undermine the viability of the firm. Similarly, reference might be made alongside a notice to the guarantees provided by the Financial Services Compensation Scheme (FSCS) in order to reassure the public that any funds they have invested are not at risk despite the matters contained in the notice.

It is an unfortunate fact that when credit unions in trouble seek assistance they are often at too late a stage for recovery to be possible.  If they were to ask for support from trade associations, neighbouring credit unions or regulators at an early stage, action could be taken to strengthen governance and processes, so a recovery or merger rather than a failure would be more likely.  An alternative therefore to the warning notice, which would be more effective to a credit union whose problems lie in lack of resources and weak governance, could be for internal stakeholders to be informed of the problems, rather than the general public.  This would have the effect of ensuring the credit union takes action to resolve the situation and work with other bodies to try and effect the continuation of essential financial services to their members.

The full response is available to download on the right hand side.