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PRA - CP20-14 - Depositor Protection - January 2015

Part of our repsonse is available to read below. The full consultation repsonse is available to download on the right hand side of the page.

Response to the consultation

Implementing the recast Deposit Guarantee Scheme Directive
We have a number of concerns relating to the proposals contained in this consultation. Credit unions are atypical financial institutions and this fact is recognised in many different ways by the regulatory authorities, including the Prudential Regulation Authority. The European Union, likewise, has recognised this in providing in the Deposit Guarantee Scheme Directive for credit unions to be treated differently under the scheme than other firms. This flows from the scope of the Directive which mirrors that of the Capital Requirements Directive and Capital Requirements Regulation which allow for credit unions to be exempted on the basis that they are a national concern which, though sharing characteristics with credit institutions, warrant special treatment due to the various restrictions that are placed upon them (the common bond and interest rate cap, in particular, but also limits borne of the co-operative ownership structure) and the social good that they seek to engender in society. ABCUL is a member of the European Network of Credit Unions and lobbied specifically on this point during the passage of the Directive receiving positive assurances throughout that the scope would mirror that of the CRD. We firmly believe the final text reflects this position. As such we believe that there is a clear discretion available to the PRA in making special arrangements for credit union in relation to this Directive and the package of reforms here proposed.

Proposal to remove credit unions’ deposit protection
Of particular concern in this respect is the proposal to remove credit unions’ own protection as depositors in credit institutions. To date, credit unions have enjoyed the same level of protection under the scheme as have individual customers. We believe strongly that this is warranted on the basis of the fact that while credit unions are more financially-knowledgeable and aware than perhaps are individuals, they are not so sophisticated as other commercial providers in the market who are more sufficiently capable of managing their investment risk and taking appropriate action where the level of apparent risk exceeds an acceptable level. It is a deep irony that the Directive’s effect of extending FSCS protection to all non-financial firms does not recognise that a credit union and a large plc-firm with huge financial management and control resources are incomparable in their resource and capacity to manage investment risk yet credit unions are denied protection while large non-financial firms are not.

Furthermore, credit unions face significant barriers in the mobility of their deposited funds:
- Under credit union regulations in the CREDS Sourcebook, credit unions are limited to bank deposits and sterling-denominated government securities in their investments.
- As a result of numerous factors, such as extraordinary monetary support and increasing regulation in relation to both conduct and prudential matters supplemented by commercial risk-aversion, credit unions are finding increasing difficulty in securing deposit accounts with banks and building societies. This severely restricts their investment options and precipitates concentration risk.

As a result of these factors, credit unions are more vulnerable than most financial firms to exposure to a failing credit institution. The difficulty of identifying a viable investment and then securing the facility with the counterparty can be time consuming and ultimately outwith the credit union’s control. Firms operating without such restrictions are much better-able to respond to changing market conditions and the threat of counterparty failure.

Finally, it must be noted that there are a number of credit unions at the smaller end of the sector for whom the loss of £85,000 as a result of bank failure would mean the closure of that credit union due to insolvency. This would push the credit unions’ members on to the resources of the Financial Services Compensation Scheme in addition to those of the failed bank. This cannot be sensible as it could significantly increase the compensation costs but, perhaps more importantly, the complexity of dealing with a failure situation for the FSCS. What’s more, where credit unions are able to liquidate their holdings in a failing bank at times of financial stress, the lack of protection would cause them to do so more readily and therefore potentially exacerbate a failure of confidence in the counterparty institution and, in particular, any liquidity gap.

As a result of all these factors we urge the PRA to reconsider its proposal to withdraw protection from credit unions’ deposits. Indeed, we call on PRA to go further and to consider the case for credit union deposit protection to be extended beyond £85,000 in order to ensure that failure of a bank need never cause the failure of a credit union and in clear recognition of the fact that credit unions face constraints and restrictions which other firms do not face.