Particular bodies: credit unions : introduction
A credit union is a form of financial co-operative, owned and run by its members. In Great Britain (GB) they are registered under the Co-operative and Community Benefit Societies Act 2014 (CCSB14) and are subject to the Credit Unions Act 1979. In Northern Ireland (NI) they are registered and subject to the Credit Unions (Northern Ireland) Order 1985. Both GB and NI Credit Unions are registered with the Financial Conduct Authority (FCA) and are regulated by the FCA or the Prudential Regulation Authority as appropriate.
Credit unions provide basic savings and loan services, though it is a growing sector and the number and types of product they can provide has been expanding rapidly. They are often, but not exclusively, targeted at those on modest incomes who, for a variety of reasons, may have no dealings with the commercial banking sector.
The objects of all UK credit unions, as defined by the relevant acts, are:
- the promotion of thrift among the members by the accumulation of savings,
- the creation of sources of credit for the benefit of the members at a fair and reasonable rate of interest,
- the use and control of the members’ savings for their mutual benefit,
- the training and education of the members in the wise use of money and in the management of their financial affairs.
GB credit unions only
The Credit Unions Act 1979 was amended with effect from 8 January 2012 by The Legislative Reform (Industrial & Provident Societies and Credit Unions) Order 2011, SI2011/2687. The main aims of the reforms were to allow GB unions to
- reach out to new groups by serving more than one group of people
- provide services to community groups, businesses and social enterprises
- offer interest on savings placed with them, instead of only dividends.
GB credit unions can continue to apply the previous more restrictive regime, but can take advantage of the new regime by amending and registering new rules.
The principle of one member one vote remains firmly in place. No matter how many shares a member has, by number, by type, or by value, each member gets only one vote.
Previously only individuals could be members of a credit union. Now membership can be extended to ‘corporates’, defined as bodies corporate, partnerships, and unincorporated associations. But non-individuals can only make up a maximum of 10 per cent of a credit union’s total membership, hold a maximum of 25 per cent (by number) of its non-deferred shares and be granted a maximum of 10 per cent of its loans.
Membership continues to be restricted to members who meet a common bond, though there has been some relaxation of the ‘common bond’ qualifications. Services can now be provided to different groups of people within one credit union, there is a potential ‘field of membership’ test. However credit unions whose ‘common bond’ remains geographical are limited to two million potential members. The ‘common bond’ qualifications will be stated in the rules of the society and may be one (or a combination) of four main types:
- living and/or working in a particular geographical area (by far the most common),
- being a member of, or having an association with, a particular organisation,
- working for a common employer,
- following a particular occupation.
Credit unions can now choose whether to offer ordinary shares, whose ownership will bring all the benefits of credit union management, or deferred shares which will only be repayable in restricted circumstances and also count towards capital of the credit union. Shares can be interest bearing or dividend bearing but cannot be both.
This capital, any additional borrowing raised by the union from other sources, and any additional funds generated by its investment, provides a common fund out of which loans can be made to members at reasonable rates of interest. Where a member takes out a new loan his shares become ‘attached’ to the loan to the extent of the amount of the loan, which means that the member cannot withdraw those shares whilst there remains a balance of the loan outstanding.
A ‘dividend’ on the shares may be paid to members out of the surplus that results from lending at interest. Before 8 January 2012 a credit union could only pay a maximum dividend rate of 8 per cent. That restriction has now been removed except for any dividend payable on closure of a credit union.
Some credit unions will, following the reforms, be able to choose to pay a guaranteed rate of interest on savings placed with them. Such unions have to show that they have the necessary systems and controls in place and must hold reserves equal to the greater of £50,000 or 5 per cent of total assets.
The 2012 changes continue a trend towards deregulation in the sector, increasing maximum membership and relaxing rules on the length and the amount of loan which can be made to members and on the sources from which credit unions can borrow additional funding.
NI credit Unions continue to operate a more restrictive regime. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
As ‘registered societies’ in GB, and industrial and provident societies in NI (see CTM40505), credit unions are within the definition of company for tax purposes at CTA10/S1121 and fall within the charge to CT. For more on the taxation of credit unions, see CTM40160 and CTM40165. Although they can merge with other credit unions, they cannot hold subsidiaries and cannot convert into or merge with Companies Act companies.
Computer records for credit unions should be set up in accordance with COM40010.
Head Office responsibility for credit unions lies with BAI (Technical).