Investment and borrowing

Part

CRED Credit Unions

Chapter

Investment and borrowing

Printed on: 22/11/2024

Rulebook at: 28/08/2007

CRED 7

Investment and borrowing

CRED 7.1

Application, purpose and interpretation

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CRED 7.1.1

This chapter applies to all credit unions.

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CRED 7.1.2

(1) The rules and guidance contained in this chapter are designed to address risks that can arise from the structure of a credit union's balance sheet.
(2) These risks include the risk that a credit union's income is not sufficiently large to cover its funding, operational and other costs, and the risk that a credit union may not be able to renew or replace wholesale funding at an affordable rate.

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CRED 7.1.3

For the purposes of this chapter:

(1) the maturity of a security or loan is the last or only date on which it shall be repayable by or under its terms; and
(2) surplus funds means funds not immediately required for a credit union's accepting deposits, lending and ancillary purposes.

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CRED 7.2

Investment

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Types of investment

CRED 7.2.1

Subject to the general limitations on its powers contained in the Credit Unions Act 1979 and to the limitations contained in CRED 7.2.2 R CRED 7.2.3 R below, a credit union may invest its surplus funds and funds serving liquidity purposes only in the following types of investment:

(1) deposits or loans to a UK domestic firm with Part IV permission to accept deposits;
(2) deposits or loans to an institution which is authorised in any other EEA State to accept deposits;
(3) sterling-denominated securities issued by the government of any EEA State;
(4) fixed-interest sterling-denominated securities guaranteed by the government of any EEA State, provided that any guarantee is unconditional in respect of the payment of both principal and interest on those securities.

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Maturity of investments

CRED 7.2.2

Any securities invested in, or loans made, in accordance with CRED 7.2.1 R by a version 1 credit union must have a maturity date of not more than 12 months from the date on which the investment is made.

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CRED 7.2.3

Any securities invested in, or loans made, in accordance with CRED 7.2.1 R by a version 2 credit union must have a maturity date of not more than five years from the date on which the investment is made.

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Cash in custody of officers

CRED 7.2.4

Surplus funds not invested by a credit union in accordance with CRED 7.2.1 R CRED 7.2.3 R must be held as cash in the custody of officers of the credit union.

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Investment conditions no longer satisfied

CRED 7.2.5

Where under CRED 7.2.1 R CRED 7.2.3 R above, a firm or another institution ceases to satisfy the conditions necessary for a credit union to invest with it or lend to it, and any funds of a credit union are with that firm or other institution, the credit union must take all practicable steps to call in and realise that loan within three months of that cessation, or, if that is not possible, as soon after the end of that period as possible.

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Transactions between credit unions

CRED 7.2.6

(1) A credit union may accept a loan from another credit union (section 10(1) of the Credit Unions Act 1979). However, although a credit union is a UK domestic firm with Part IV permission to accept deposits (CRED 7.2.1 R (1)), it cannot issue shares to another credit union (section 5(1) and (2) of the Credit Unions Act 1979) or otherwise accept deposits from another credit union (Section 8(1) of the Credit Unions Act 1979). UK banks and building societies may accept deposits from a credit union.
(2) CRED 7.2.2 R - CRED 7.2.3 R apply to loans between credit unions, except for subordinated loans qualifying as capital under CRED 8.2.1 R (4)(a). (See CRED 7.2.1 R and CRED 8.2.5 R (2)).
(3) CRED 8.2.1 R - CRED 8.2.6 G apply to subordinated loans between credit unions qualifying as capital under CRED 8.2.1 R (4)(a).
(4) CRED 10 (Lending) (which covers loans to members) does not apply to loans between credit unions (see CRED 10.1.1 R). However, in relation to such loans, credit unions should have regard to the principles outlined in CRED 10.4.6 G and CRED 10.5 (Provisioning).
(5) CRED 9.3.7 R(2) applies to loans between credit unions in relation to liquidity.

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CRED 7.2.7

Loans between credit unions should only be arranged after careful consideration by both parties. For example:

(1) the borrower should consider the financial implications of relying on such borrowing in order to lend to members, or to finance share withdrawals; and
(2) the lender should assess the risk of late and non-repayment arising from the borrower's own liquidity and credit risks, and keep the aggregate of its loans to other credit unions to a very modest level.

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Section 12 of the Credit Unions Act 1979

CRED 7.2.8

Section 12 of the Credit Unions Act 1979 permits a credit union to hold, purchase or take on lease any land for the purpose of conducting its business, but for no other purpose, except where it holds an interest in land as security for loans to members.

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CRED 7.2.9

(1) A credit union may buy or hold property as premises from which to conduct its business, but not as an investment.
(2) A credit union may acquire premises that reasonably anticipate its future accommodation needs, or a unit (for example, the whole building, or a floor of a building) of which it requires most, but not all, and lease out the surplus area. But it may not acquire as an investment property greatly in excess of its operating requirements, with the real purpose of letting out the excess.
(3) A credit union may purchase premises out of surplus funds, or by borrowing, or by a combination of the two, whichever is most prudent.
(4) A credit union's premises will not count as liquid for the purposes of CRED 9.3.7 R.

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CRED 7.2A

Joint ventures

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Section 26 of the Credit Unions Act 1979

CRED 7.2A.1

Section 26 of the Credit Unions Act 1979 prohibits a credit union from having a subsidiary within the meaning of section 15 of the Friendly and Industrial and Provident Societies Act 1968. To have a subsidiary in that sense, a credit union has to be a member of the company and control the composition of its board of directors, or hold more than half in nominal value of the company's equity share capital.

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CRED 7.2A.2

Credit unions may set up (and hold shares or other membership rights in) associated bodies corporate to establish shared service facilities and other joint ventures, so long as they demonstrably further the credit union's statutory objects and do not breach section 26 of the Credit Unions Act 1979.

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CRED 7.3

Borrowing and Financial risk management

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Borrowing

CRED 7.3.1A

A credit union must not borrow from a natural person, except by subordinated loan qualifying as capital under CRED 8.2.1 R(4).

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CRED 7.3.2A

Although section 10 of the Credit Unions Act 1979 now permits a credit union to borrow money without restriction, CRED 7.3.1A R imposes a limitation. A credit union may borrow from a body corporate, even though it may not admit a body corporate to membership or issue it with shares. Such loans can either be subordinated loans (providing regulatory capital within CRED 8.2.1 R (1)(c)) or senior loans (providing ordinary funding, but not constituting regulatory capital). Further explanation is given at CRED 7A.1A.1 G and CRED 7A.3.2 G.

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CRED 7.3.3

The borrowing of a version 1 credit union must not exceed, except on a short-term basis, an amount equal to 20% of the total shareholding in the credit union.

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CRED 7.3.4

(1) The borrowing of a version 1 credit union should not exceed an amount equal to 20% of the total shareholding in the credit union at the end of more than two consecutive quarters.
(2) Contravention of CRED 7.3.4 E (1) may be relied on as tending to indicate contravention of CRED 7.3.3 R.

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CRED 7.3.5

The borrowing of a version 2 credit union must not at any time exceed an amount equal to 50 per cent of the total shareholding in the credit union.

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CRED 7.3.6

Subordinated debt obtained by a credit union and forming part of its capital (see CRED 8.2.1 R) does not count towards the borrowing limits under CRED 7.3.3 R and CRED 7.3.5 R.

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Financial risk management policy statement

CRED 7.3.7

A version 2 credit union must establish, maintain and implement an up-to-date financial risk management policy statement approved by the committee of management.

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CRED 7.3.8

This policy should address both interest rate and funding risk. It should cover aggregate limits on holdings of investments and borrowings from sources other than members. It should deal with avoidance of funding concentrations (both source and time-band concentrations) and should detail the organisational arrangements, systems and controls in respect of these matters.

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CRED 7.3.9

A credit union's committee of management should review and approve its financial risk management policy at least once a year, and more frequently if necessary, especially in light of significant changes in business.

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CRED 7.3.10

A version 2 credit union must send to the FSA a copy of its financial risk management policy statement as soon as is reasonably practicable after approval by the committee of management.

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