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FSA - CP 13/1 – FSCS Funding Model Review

Q1. Do you have any comments on our proposal?

  • While we are sympathetic to the situation of the intermediary classes, we do not accept that a universal link exists between their activities and those of the “providers”.  
  • Credit unions do not and can not sell their products and services through intermediaries so the assumed link between ‘providers’ and intermediaries does not apply in the credit union sector.  Not only do credit unions pride themselves on offering a personal service to members, they are only legally able to offer services to those members.  
  • Credit unions are already facing a significant call on their resources arising from the financial crisis and the compensation of depositors in various banking institutions by FSCS.  This has already placed a substantial burden upon our membership.   
  • The general assumption underpinning most cost-benefit analysis around reform of compensation scheme funding is that firms will be able to pass through at least a proportion, and in many cases the entirety, of the extra cost by raising their prices.  However, credit unions are unique in the UK as lenders operating under a statutory interest rate ceiling (of 26.8% APR).  Combined with the short-term, small-sum nature of much credit union lending, the ability of credit unions to pass through these extra costs is significantly constrained.
  • Another constraint for mutual deposit-takers more generally in respect of meeting increased FSCS levy demands is the closer link between retail deposits and profitability.  While the principal highstreet banks operate the universal bank model allowing them to engage in highly profitable investment bank activity which is unconstrained by available depositor funds for lending, mutuals – such as credit unions – are reliant upon a simple model of lending retail deposits.  Since FSCS levies are calculated purely with reference to protected deposits, therefore, credit unions are hampered by their lower deposit-to-profit ratio as compared with the universal banks.
  • Given that these pressures upon the credit union sector have been acknowledged by FSA already, it does not appear consistent to us to impose a new burden in a separate process of reform.  This is especially true since the credit union sector is not linked to the intermediary sector in the same fashion as other deposit-taking firms. We therefore urge the FSA to reconsider its proposals.

The full response can be downloaded on the right hand side.