Prudential Regulation Authority Rulebook

11.1

The PRA expects credit unions with more than £10 million in total assets, and any credit unions that hold investments that come under Rules 6.4(7) and 6.4(8) of the Credit Unions Part of the PRA Rulebook, to adhere to the following concentration limits (in addition to the limits required by Rule 6.4A of the Credit Unions Part of the PRA Rulebook,⁹ and with the exception of the investments listed in paragraph 11.2):

• no more than 20% of a credit union’s total investments¹⁰ to be held with a single counterparty; and
• an amount equivalent to no more than 75% of credit union’s total capital to be held with any single counterparty.

11.2

The PRA considers that the above concentration limits set out in paragraph 11.1 would not apply to the following investments:

• sterling-denominated securities issued by the UK government, or a fixed-interest sterling-denominated security guaranteed by the UK government with a maturity of up to five years from the date on which the investment is made (under Rules 6.3.3, 6.3.4, 6.4.3, and 6.4.4 of the Credit Unions Part of the PRA Rulebook);
• deposits placed with a credit institution which is authorised in the UK to accept deposits on terms that the deposit shall be repayable within at most 12 months from the date on which the investment is made (under Rule 6.3 (1) of the Credit Unions Part) and rated A-AAA by at least two credit rating agencies registered with the FCA; and
• UK bank bonds which have a maturity of up to five years from the date on which the investment is made (under Rule 6.4 (6) of the Credit Unions Part) rated A-AAA by at least two credit rating agencies registered with the FCA.¹¹

11.3

When the credit rating of an investment (or a relevant credit institution that holds the investment) that falls under the categories in paragraph 11.2 changes so that it no longer meets the required credit rating, a credit union would be expected to move funds as appropriate to ensure that they meet the limits set out in paragraph 11.1. The PRA does not expect a credit union to break a term deposit to meet the limits set out in paragraph 11.1.

11.4

Where a credit union’s existing investments exceed the concentration limits in paragraph 11.1, the PRA would not expect a credit union to break existing investment contracts to bring them into line with the expected limits. Rather, when investments mature the PRA expects credit unions to ensure that new investments made are compliant with the limits in paragraph 11.1.

11.5

It is best practice to spread funds out where practicable and before making investment decisions, credit unions should remain mindful of the importance of not creating excessive time band or counterparty concentrations in line with credit unions rule 6.5(4).

11.6

Credit unions investing their surplus funds are required to consider and document their decisions and account for counterparty, concentration, liquidity, and interest rate risk under Rules 6.5 and 6.6 of the Credit Unions Part of the PRA Rulebook. When making investment decisions, the PRA expects credit unions to carefully consider the risk return trade-off and to ensure investment decisions reflect the credit union’s risk appetite. Credit unions should consider setting exposure limits for different counterparties based on their risk profile, as part of their risk appetite statement. 

11.7

Credit unions should be mindful of the need to meet liquidity expectations, in particular the additional liquidity expectations where credit unions invest in more complex investments (see Chapter 14). In order to help credit unions manage their liquidity in the face of unexpected outflows, and in line with Rule 6.5 of the Credit Unions Part of the PRA Rulebook, the PRA expects credit unions to ensure that an adequate proportion of its investments are able to be broken before the end of the term is reached (even if a fine is incurred).

11.8

The PRA considers that the limits in paragraph 11.1 would not apply to funds held temporarily in an account before an investment decision is made. 

11.9

For credit unions with more than £10 million in assets, the PRA also expects the liquidity management policy statement to cover:

• the credit union’s strategy, processes, and systems in place for liquidity risk management;
• the liquidity risk appetite agreed by the board;
• any liquidity buffers to be maintained as a safeguard on the basis of stressed conditions that may arise;
• plans to address any liquidity or funding risks arising from mismatches in maturity (which can give rise to cash flow imbalances and a risk that there could be insufficient cash resources to meet payment outflows when they fall due); and
• contingency plans with actions that will be taken if liquidity targets are not met.

11.10

Rule 11.1(2) of the Credit Unions Part of the PRA Rulebook requires credit unions to establish, implement, and maintain effective processes to identify, manage, monitor, and report the risks it is, or might be, exposed to. Rule 11.2 requires that these processes are comprehensive and proportionate to the nature, scale, and complexity of the risks inherent in its business model and activities. In line with these requirements, the PRA expects all credit unions with more than £10 million in assets to maintain a risk appetite statement (RAS). This should:

• include clear, objective and, where appropriate, quantitative measures which the whole board has approved;
• be explicitly connected to the business objectives, and accurately reflect the credit union’s specific risk appetite (including articulation of the threshold at which it would consider taking management actions against each risk); and
• be used proactively by the board to inform the strategy and business plan, and ensure the board’s decisions are compliant and consistent with, aligned to and not in excess of, the board’s risk appetite.

11.11

In addition to the expectations set out in Chapter 10, the PRA expects credit unions with more than £10 million in assets to consider and document the core systems and outsourcing arrangements that are critical to the operation of the business.