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Prudential Regulatory Authority – CP 24/16 – Credit Union Regulatory Reporting

Response to the Consultation

We have no objections to the principle of electronic reporting.  In general we agree that this will make regulatory reporting more efficient, both for credit unions and the regulators.  In particular, the use of logical validation systems will reduce the need for lengthy data verification processes on the part of PRA and the need for repeated submissions by credit unions to correct data that has been submitted erroneously.

A crucial consideration here, however, will be those credit unions which find difficulty in operating digitally and may struggle to access the online system without some assistance.  Some careful consideration must be given to how the PRA implements the tool in light of this in order not to unfairly penalise those who genuinely find difficulty in accessing such systems.  ABCUL stands ready to support these credit unions where they are our members but flexibility and understanding on the part of PRA will be crucial to ensuring a smooth transition.

We hope that the use of electronic reporting and its attendant benefits in this regard will also enable the swifter publication of aggregate credit union sector data for which currently there is a significant time lag between submission and publication which makes it difficult to give an accurate and timely view of the credit union sector to interested stakeholders. 

In terms of the data validation, we hope that it will also be possible for this to incorporate some level of verification in respect of rule compliance as well as simple summing of fields to ensure consistency of data submitted.  This would be a useful addition in that it would ensure that credit unions knew that they were submitting data which demonstrates a failure to comply with key requirements.  We would not suggest that the system should prevent submissions of such data, but it would be a helpful feature if such submissions were highlighted.

In addition, we have had strong feedback from a number of members as to how the electronic reporting system should be designed to retain and make available historical submissions from credit unions.  It would be helpful, for instance, if credit unions are able to view their most recent data submissions to ensure consistency in data between submissions – particularly in relation to data items which are annual only where quarterly submissions are concerned.  Where possible, pre-population of fields would also be beneficial – such as in respect of standing data and the like. 

Furthermore, we strongly urge the PRA to consider creating a facility for submissions to be retrievable in a digital receipt format – perhaps an .xls or .pdf file – as well as being hosted and accessible online.  This would enable the credit union to retain records of their submission to ensure contestability where discrepancies may arise and the sharing of data with third parties such as ABCUL.  We are developing a number of tools to enhance credit unions’ awareness and analysis capabilities in respect of their financial data and management information – notably ABCUL inSight – with a view to supporting the improved governance of credit unions and to help them comply with their requirements in respect of the regulatory ratios in Supervisory Statement 2/16.  This facility would therefore support the PRA’s regulatory objectives and we hope will be something that the new system might allow.

In terms of the revised returns themselves, we have a number of detailed comments and suggestions to make which we set out more fully below.  However, in general terms – while we appreciate the ambition to simplify the returns as far as possible – we feel it is incumbent upon us to point out that for many credit unions not previously engaged in activity requiring them to complete the supplementary analysis of the return, the new return will feel like a complication of the existing return regime. 

Furthermore, we believe that more could have been done to consider updating the returns in light of the new accounting standards in FRS102.  On the most superficial level this involves a clash of terminology which may be confusing.  However, in certain areas – notably the treatment of bad debt write-off and provisioning – the new FRS102 impairment requirements are likely to significantly distort credit union accounts over time with older bad debt accumulating and being provided for whilst retained on the balance sheet for longer, instead of written off and a proportion recovered in future as is currently the case. 

The cost benefit analysis fails in this regard since it takes as its point of reference only the returns as they exist today – which are also based on UK GAAP – and does not consider the wider context in which the returns are drawn up and submitted.  We appreciate that there is an attempt here to maintain a simplicity in credit union reporting and regulation more generally which is to be welcomed but the FRS102 financial reporting requirements ought not to be ignored since if they are it may well produce some absurd data results over time.  Additionally it creates costs in for credit unions in having to operate on two different bases which are not necessarily consistent. 

Finally, we are also concerned that certain areas of clarification and helpful guidance which are available in the regulatory return guidance notes in the existing returns framework have been lost in the proposed new guidance.  Again, we appreciate the attempt to simplify but we feel that this has inadvertently resulted in some loss of useful material and clarification.  We set out below more detailed comments in this regard.

In what follows we provide more specific and detailed feedback on the proposed return format and guidance document supporting.  There is a good deal of cross-over between the two and therefore some items are outlined twice.

Comments on regulatory return format

-       It is not clear to us how (or whether) bad debt should be reported in the balance sheet of the return.  It is current practice – both in accounting and regulatory reporting – for loan balances to be reported net of provisioning for bad debt.  In the proposed new format, however, there is no clear provision for this.  This will be important to clarify.

-       We do not support the introduction of reporting requirements for loan balances by statutory company type and can see no regulatory justification for this data granularity.  We could support breaking reporting down for individual borrowers vs. organisational borrowers but we do not believe that this level of detail would be easy to obtain in many cases nor do we see any clear reason why the corporate form is of regulatory interest.  We suggest strongly that these figures are aggregated into individual and organisational members.

-       In the asset side of the balance sheet, we feel extra clarity would be beneficial in relation to the meaning of “Banks and Building Society balances”.  One assumes, in light of the existing returns, that this refers to current account balances while “other investments” would include longer-term deposits along with other kinds of investment, however, this is not clear.  Guidance would be helpful here and we note this below but this could also be helped by clearer labelling in the return itself, e.g. bank and building society balances could be explicitly referred to as cash balances, in some way.

-       In the liability section of the balance sheet, it is not clear – either from the return or the guidance provided – whether overdraft balances refers only to drawn balances or also committed but unused facilities.  We would assume the former but the loss of guidance material on this matter and lack of clarity in the return wording itself makes this unclear. 

-       Once again in liabilities on the balance sheet, one would assume that “interest to juvenile depositors” refers to interest committed but not yet paid but this is not clear from the return or the guidance.  It is also unclear why this subset of interest is disaggregated while there is no data point provided for interest due on ordinary member shares (where the credit union pays such) or deferred shares.  We would suggest that interest outgoings are aggregated and reported as a single item covering all contractually-guaranteed interest payments.

-       The treatment of deferred shares in the balance sheet is confusing.  The reporting of deferred shares both in the capital and shares sections of the balance sheet could cause a double-counting of deferred shares which is unhelpful.  Since deferred shares are a capital instrument and their balances appear only in the capital account of the credit union, we would suggest that deferred shares only be reported there and that the shares section of the return explicitly only requires reporting on all categories of non-deferred shares.

-       Throughout the return there are “other” fields for residual items not covered in the standardised data items.  It is not clear from the return format the level of granularity that the regulator requires as far as these items are concerned. Guidance as to how much detail is sought here would be very helpful.  Furthermore, we assume that the technical facility to add boxes to the level required for each credit union will be available for all submitters?

-       In the capital account section, there are fields for subordinated debt.  It is not clear whether this is in reference to the aggregate balances of subordinated debt or whether this would be disaggregated and itemisable.  We know of several credit unions that have a number of subordinated debt investments.  On a related note, we assume that “initial repayment date” is in reference to subordinated debt – this would benefit from guidance in the notes.  If we are correct in our assumption, then this would need to be disaggregated to the level of individual loans as otherwise the repayment date item would be meaningless.

-       In terms of grants on the balance sheet, we assume – following the guidance notes from the previous return regime – that this refers to grants not yet applied to income but this is not sufficiently clear.

-       The section “surplus funds and liquidity” is poorly labelled – we would suggest instead the use of “investments and liquidity” since “surplus” can have unhelpful connotations which may frustrate comprehension, particularly given the lack of comprehensive guidance on this.  Furthermore, we feel more thought needs to be given to how this will work in practice – many credit unions hold numerous accounts with a single counterparty and therefore to achieve what we believe the PRA intends, it will be necessary to require each investment to be separately itemised, rather than each counterparty, if maturity dates are to be captured.  Otherwise, this needs to be adjusted to “earliest maturity date” though this, we feel, would be of limited use. 

-       Also in the surplus funds section, further guidance is needed in respect of “authorised overdraft” – we assume that this refers to unused but committed facilities as this is in line with historical practice and the existing return regime but this is not clear and the guidance is not helpful on this point.

-       In the “P/L – other” section, the field for “rate of dividend” needs the facility to be itemised and disaggregated to provide for credit unions that pay multiple rates of dividend.  


-       As set out above, guidance was provided in the outgoing return guidance in respect of “other” items and the level of granularity expected in particular would be a helpful item for inclusion in the revised guidance throughout.  We assume here that “other” items will be itemised as a requirement in line with existing practice but this is not clear.

-       Also as referred to above, it would be helpful if the guidance could delineate the different between bank and building society balances and over investments.  On the basis of the outgoing guidance we have assumed that the key differentiator is between cash and longer-term investments here but this is not clear and could be helpfully elaborated in the guidance as well as by improved labelling in the return.

-       The outgoing guidance provided a helpful clarification as to the tax treatment of credit union income, specifying the fact that credit unions only pay corporation tax on interest received from investments and not on interest and other income received from members.  It would be helpful if the new guidance retained this guidance which is a very helpful reminder.

-       The balance sheet section of the guidance could also provide a helpful pointer as to the treatment of grants and overdrafts as the outgoing guidance does.  The point here is about at what stage do these count towards assets or liabilities.  We have expanded on these points above.

-       We believe the guidance could also helpfully point out the odd treatment that the returns give to shares – i.e. not listing them as a liability – and the effect that this has on the Net Assets figure.  This is unusual vis-a-vis standard accounting practice and does have some odd conflicting effects in respect of PEARLS and other financial management tools used by credit unions since member share deposits tend to be the main category of liability for credit unions.

-       In the guidance on regulatory capital, first of all we are unsure why different headings are used since this is simply referred to as “capital” in the return itself.  Secondly, it’s not clear to us why the guidance only refers to two subsections of chapter 8 of the Credit Union Part of the PRA Rulebook.  Given that the whole of chapter 8 applies to capital in a credit union, surely the whole of the chapter should be referenced here?  This is also true of the references used in the “movement in reserves” section.

-       In the section on members’ shares, and as per our comments above, we are firmly of the view that there is no regulatory gain from the disaggregation of different types of corporate form and so would suggest that the distinction is left at individual and organisational members and no further guidance needed. 

-       In the section on income and expenditure, the outgoing guidance provided lots of helpful material to delineate the difference between different aspects of income and expenditure which are lost here.  For example, the distinction between what counts as administrative expenses and what counts as management expenses is lost.  Already we know that there are varying interpretations of these concepts in use among credit unions and this leads to inconsistent and therefore incomparable data submission.  We believe this could be usefully elaborated in the guidance.   A similar point comes up in respect of regulatory fees – it is not clear what exactly is counted here, such as, for instance, FSCS levies.  If this is not clarified in the guidance we will see different positions adopted and incomparable data submitted.

-       In the section on arrears, we would suggest that a reference is made to the definition of “net liability” in the glossary of the Credit Union Part.  We also suggest that 3.10 and 3.11 should be referenced as well as 3.12 on arrears policy.

-       In the section on surplus funds and liquidity, guidance on the treatment of committed but unused facilities would be helpful here to clarify that such facilities are permitted to count towards a credit union’s liquidity.  This was helpfully clarified in the outgoing guidance.

The full PDF version of this response is available to download from the right-hand side. 

ABCUL - September 2016