CRED 13

Part

CRED Credit Unions

Chapter

CRED 13

Printed on: 03/07/2024

Rulebook at: 01/10/2008

CRED 13

CRED 13.1

Application and purpose

01/12/2004

CRED 13.1.1

This chapter applies to:

(1) [Deleted]
(1A) a person considering applying to the FSA for approval of the use in a name of the words "credit union" or "undeb credyd";
(2) a person applying, or considering applying, to the FSA to become authorised as a credit union with a Part IV permission to accept deposits; and
(3) a candidate, but only as a matter of general relevance.

01/12/2004

CRED 13.1.2

This chapter gives guidance about:

(1) what it means to become a credit union with a Part IV permission to accept deposits;
(2) the application procedures for persons wishing to become a credit union;
(3) the procedures by which an applicant can obtain approval for persons to perform controlled functions under the approved persons regime; and
(4) the FSA's decision making procedures for Part IV permission and approved persons applications.

01/12/2004

CRED 13.2

Introduction

01/12/2004

CRED 13.2.1

Registration and becoming authorised as a credit union are two distinct statutory processes. The Credit Unions Act 1979 sets out the statutory requirements for registration and the Act sets out the statutory requirements relating to authorisation. Section 1 of the Credit Unions Act 1979 as amended (see CRED 13 Annex 1B) provides that a credit union may not be registered unless it has applied to the FSA for a Part IV permission to accept deposits, and the FSA shall not issue an acknowledgment of registration to a credit union unless it also proposes to give the credit union such a permission. If it does issue an acknowledgment, it should determine any outstanding application for a Part IV permission to accept deposits as soon as reasonably possible thereafter.

01/01/2005

CRED 13.2.2

The circumstances in which authorisation is required are set out in the Perimeter Guidance manual (PERG). Information on the authorisation process can be found on the FSA website "How do I get authorised": http://www.fsa.gov.uk/Pages/Doing/how/index.shtml.

06/10/2007

CRED 13.2.3

An applicant for Part IV permission should consult the FSA website "How do I get authorised": http://www.fsa.gov.uk/Pages/Doing/how/index.shtml.

06/10/2007

CRED 13.2.4

The application pack, which is modular, contains some general forms applicable to all applicants and some specific to credit union applicants. The application pack also contains a set of explanatory notes about the information required and on how to complete the forms.

01/12/2004

CRED 13.2.5

Applications should be accompanied by the relevant application fees set by the FSA for registration and authorisation (see FEES).

01/01/2006

CRED 13.2.6

The FSA is committed to an interactive application process. Applicants are encouraged to contact the FSA's Credit Union team at an early stage to discuss their plans and proposed application. In any event, applicants are expected to discuss their plans with the FSA's Credit Union team before making a formal application. In some circumstances, it may be appropriate for the FSA to hold a pre-application meeting with an applicant.

01/12/2004

CRED 13.2.7

(1) The application pack and accompanying explanatory notes are available on www.fsa.gov.uk or from the Corporate Authorisation department of the FSA. To contact the Corporate Authorisation department:

(a) telephone on 020 7066 1000; or
(b) write to the Corporate Authorisation department at The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS; or
(c) email corporate.authorisation@fsa.gov.uk.

(2) Copies of all current guidance are available from the FSA website www.fsa.gov.uk or through the FSA's Publication Enquiries department on 020 7066 3298. The FSA will review its guidance from time to time and may need to amend or withdraw published or written guidance in the light of changing circumstances, developing business practices or case law.

01/12/2004

CRED 13.2A

Use of name "credit union"

01/12/2004

CRED 13.2A.1

Section 3 of the Credit Unions Act 1979 (as amended) makes the following provisions about the use of the name "credit union":

(1) under section 3(1), every credit union with its registered office:

(a) in England or Scotland should have "credit union" in its name;
(b) in Wales should have "credit union" or "undeb credyd" in its name;

(2) under section 3(2), unless one is registered as a credit union, it is an offence to:

(a) refer to oneself as a "credit union" or "undeb credyd", or any related words;
(b) represent oneself as being a credit union;

subject to section 3(3) (see CRED 13.2A.1 G (3));
(3) section 3(3) provides that section 3(2) (see CRED 13.2A.1 G (2)) does not apply:

(a) to specified overseas deposit-takers;
(b) to a person who has the FSA's written approval;
(c) where an officer or employee uses a title or descriptive expression indicating his office or post with:

(i) a credit union; or
(ii) an organisation in CRED 13.2A.1 G (3)(a) or CRED 13.2A.1 G (3)(b).

01/12/2004

CRED 13.2A.2

The effect of section 3 of the Credit Unions Act 1979 (see CRED 13.2A.1 G) is that if one of the following organisations, for example, wishes to use the words "credit union" in its name, it will need the approval in writing of the FSA:

(1) a study group working towards registration as a credit union;
(2) a body representing or providing services to credit unions.

01/12/2004

CRED 13.2A.3

Approval for study groups (CRED 13.2A.2 G (1)) will generally be limited to a period of no more than 2 years.

01/12/2004

CRED 13.2A.4

The organisations in CRED 13.2A.2 G are subject to the general prohibition mentioned in CRED 7A.3.2 G (1), which means that they cannot accept deposits.

01/12/2004

CRED 13.3

What does registration mean?

01/12/2004

CRED 13.3.1

On registration, a credit union becomes a special type of industrial and provident society, which is a body corporate with limited liability.

01/12/2004

CRED 13.3.3

A credit union must become authorised under the Act (see CRED 13.5) before it can undertake the activity of accepting deposits.

20/10/2005

CRED 13.4

Process for registration

01/12/2004

CRED 13.4.1

(1) For registration, applicants must demonstrate to the satisfaction of the FSA that the statutory conditions set out in section 1 of the Credit Unions Act 1979 will be fulfilled. CRED 13 Annex 1 G contains a table listing these statutory conditions. CRED 13 Annex 2 G contains information about eligibility for membership of a credit union.

(a) One of the conditions is that the objects of the credit union are those, and only those, of a credit union. The objects are set out in full in CRED 13 Annex 1B. Unless an activity is consistent with these objects, a credit union has no power to engage in it. It is important that a credit union satisfies itself that it has the necessary power before engaging in the activity. For instance, it is clear that a credit union is permitted to receive donations from an outside organisation, so may receive the proceeds from a lottery run by that organisation. Any such organisation will need to be independent from the credit union, with separate management and accounting.
(b) Another condition is that admission to membership of the credit union is restricted to persons who fulfil an appropriate membership qualification ("AMQ") and that in consequence a common bond exists among the members (see CRED 13 Annex 1A - CRED 13 Annex 1C).

(2) The application pack contains the relevant forms for registration and explanatory notes on how to complete the forms. The notes also contain information about the appropriate membership qualifications for credit unions.
(3) CRED 13 Annex 2 G contains information about eligibility for membership of a credit union.

01/01/2005

CRED 13.5

What does authorisation involve?

01/12/2004

CRED 13.5.1

An applicant seeking to carry on the activity of accepting deposits (a regulated activity) must seek authorisation by way of a Part IV permission (so called because the relevant provisions are contained in Part IV of the Act). For the purposes of the legislation, members' shares in a credit union are considered to be deposits (in the same way that shares in a building society are considered to be deposits).

01/12/2004

CRED 13.5.2

Whilst there is a single deposit-taking permission, applicants will need to decide whether to apply to be a version 1 credit union or a version 2 credit union.

01/12/2004

CRED 13.5.3

An applicant for Part IV permission must also obtain approval by the FSA of persons who perform one or more controlled functions. The approved persons regime and controlled functions, as they apply to credit unions, are explained in CRED 6.

01/12/2004

CRED 13.5.4

06/10/2007

CRED 13.6

Process for Part IV permission

01/12/2004

CRED 13.6.1

The nature of the information and documents requested by the FSA for a Part IV permission, in the application pack, or in subsequent requests, will be proportional to the risks posed by firms. For instance, in the case of credit unions, the risks posed by an applicant seeking permission to carry out the activities of a version 2 credit union will normally be greater than those of an applicant seeking to become a version 1 credit union. Similarly, the risks will be greater for an applicant with a widely-drawn common bond.

01/12/2004

CRED 13.6.2

The FSA will typically require the following information from all applicants as a minimum:

(1) a business plan which describes the regulated activities and any unregulated activities which the applicant proposes to carry on, the management and organisational structure of the applicant and details of any proposed outsourcing arrangements;
(2) appropriately analysed financial budget and projections which demonstrate that the applicant expects to comply with the relevant financial resources requirements applicable to credit unions (see CRED 5.2.1 G (4), CRED 8 and CRED 9);
(3) details of the systems to be used, and the controls to be put in place, for the running of the credit union (see CRED 4.3);
(4) details of the individuals to be involved in the running of the credit union, particularly those performing one or more controlled functions for whom approved persons status will be required (see CRED 6.3);
(5) a statement from two directors of the applicant's committee of management confirming, to the best of their knowledge, the completeness and accuracy of the information supplied; and
(6) confirmation of insurance against fraud or other dishonesty (see CRED 7A.4.1 R CRED 7A.4.3 R).

01/12/2004

CRED 13.6.3

The FSA will begin its formal process of consideration once it has received an application made using the application pack. During this process, the FSA may consider it appropriate to ask for additional information, undertake additional lines of enquiry or seek verification from third parties of the information provided to it by the applicant. The FSA will normally want to meet with the applicant's management team, in their own area, to discuss their application. As part of its assessment, the FSA will consider whether the applicant is ready, willing and organised to comply with the regulatory requirements to which it will be subject if it is granted Part IV permission to carry on the regulated activities referred to in its application.

01/12/2004

CRED 13.6.4

As part of its application for Part IV permission, an applicant may wish to apply for certain limitations or requirements. Applicants applying to be a version 1 credit union will need to apply for the appropriate requirement to define the scope of its Part IV permission (details of which are given in the application pack).

06/10/2007

CRED 13.6.5

The FSA may decide to grant an application for Part IV permission subject to limitations or requirements. For example, the FSA:

(1) can impose limitations, for example, to limit the number of customers from whom the credit union can accept deposits during an initial period of operation; this might be used where, for example, a credit union's systems are not yet adequate to be able to process a high volume of transactions; and
(2) can impose requirements, for example, to restrict the scope of a credit union's Part IV permission to carry on regulated activities or require a credit union to submit financial returns more frequently than normal.

06/10/2007

CRED 13.6.6

Where the FSA decides to impose limitations or requirements not requested by the applicant, these will be discussed with the applicant, and the applicant will be informed in writing and given the opportunity to make representations before the FSA reaches a final decision.

01/12/2004

CRED 13.6.7

An applicant which has been granted a Part IV permission by the FSA is authorised. The FSA will inform the applicant, in writing, of the effective date of the authorisation. A credit union should not commence its regulated activities before receiving this written notice. When a credit union is authorised, a general description of the activities it has been authorised to carry on will be recorded in the FSA Register which will be accessible by the public.

01/12/2004

CRED 13.6.8

If a Part IV permission is given, the FSA will expect the credit union to operate in accordance with its business plan. Credit unions are advised to discuss any problems with commencing a regulated activity with their usual supervisory contact at the FSA. If the FSA consider it appropriate to vary or cancel a credit union's Part IV permission (see EG), it will discuss the proposed action with the credit union and ascertain its reasons for not commencing or carrying out the regulated activity, or activities, concerned as described in its application.

28/08/2007

CRED 13.6.9

The FSA has six months from the date of receipt of a completed application to make its determination about whether to grant a Part IV permission. However, where the FSA receives an application in respect of a Part IV permission which is incomplete, it has up to 12 months to make its determination. This provides time for the applicant to provide the FSA with the information required to complete the application.

01/12/2004

CRED 13.7

Applying for approved persons status

01/12/2004

CRED 13.7.1

The approved persons regime and the controlled functions that apply to credit unions with a Part IV permission to accept deposits are explained in more detail in CRED 6.3.

01/12/2004

CRED 13.7.2

An applicant for Part IV permission must take reasonable care that it has applied in respect of all persons who will be performing controlled functions for approval by the FSA. A person cannot commence performing a controlled function until it has been approved by the FSA. Applicants planning to outsource the performance of one or more controlled functions should discuss the approved persons requirements with their usual supervisory contact at the FSA.

01/12/2004

CRED 13.7.3

Applicants for Part IV Permission should complete Form A (included as part of the FSA's application pack) when applying for approval of a person to perform a controlled function.

06/10/2007

CRED 13.7.4

The FSA's application pack includes explanatory notes on how to complete the approved persons forms.

01/12/2004

CRED 13.7.5

The FSA has to process complete approved person applications within three months of receipt, but it will aim to come to a decision more quickly than this whenever circumstances allow. Where the FSA has to request additional information, the elapsed time from receipt of the application to determination may be more than three months to make a determination about the application.

01/12/2004

CRED 13.7.6

The FSA may grant an application only if it is satisfied that the candidate is a fit and proper person to perform the controlled function stated in the application form. The criteria used by the FSA in making this judgement are covered in CRED 6.4. Responsibility lies with the applicant to satisfy the FSA that the candidate is fit and proper to perform any controlled function applied for.

01/12/2004

CRED 13.7.7

SUP 10.13.16 R requires that, if a firm becomes aware of information which would reasonably be material to the assessment of an approved person's, or a candidate's, fitness and propriety (see FIT), it must inform the FSA on Form D as soon as practicable.

06/10/2007

CRED 13.7.8

An application for approval can be withdrawn by the applicant at any time by notifying the FSA, using Form B. The applicant must have the consent of the candidate before withdrawing an application for approval.

01/12/2004

CRED 13 Annex 1

Requirements of Registration

01/12/2004

The requirements of registration under the Industrial and Provident Societies Act 1965, as set out in the Credit Unions Act 1979 and referred to in CRED 13.4.1G.

REQUIREMENT

SECTION OF THE RELEVANT ACTS

That the objects of the society are those, and only those of a credit union.

Credit Unions Act 1979, s.1(2)(a)

See CRED 13 Annex 1B G Section 1 of the Credit Unions Act 1979 (as amended).

Credit Unions Act 1979, s.1(3)

That admission to membership of the society is restricted to individuals all of whom fulfil a specific qualification which is appropriate to a credit union (and that in consequence a "common bond" exists between members).

Credit Unions Act 1979, s.1(2)(b)

See CRED 13 Annex 1B G Section 1 of the Credit Unions Act 1979 (as amended) - CRED 13 Annex 1C G Qualifications approved by the FSA (and the Registry of Friendly Societies).

Credit Unions Act 1979, s.1(4)

That the rules of the credit union are in a form as agreed by the FSA and provide for all matters required by the legislation.

Credit Unions Act 1979, s.4(1) and Schedule 1

That the registered office of the credit union is in Great Britain.

Credit Unions Act 1979, s.1(1)(c)

See CRED 13 Annex 1B G Section 1 of the Credit Unions Act 1979 (as amended).

Credit Unions Act 1979, s.1(1)(c)

That a suitable name is chosen for the credit union.

Credit Unions Act 1979, s.3

for credit unions with their registered office in England or Scotland their name must always include the words 'Credit Union' and have 'Limited' as the last word in the name

Credit Unions Act 1979, s.3(1) and 3(4)

for credit unions with their registered office in Wales their name may use 'undeb credyd' instead of 'Credit union' and 'cyfyngedig' instead of 'Limited'

The Welsh Language Act 1993, s.28 and 29

That the credit union has at least 21 members.

Credit Unions Act 1979, s.6(1)

only individuals can be members of a credit union

Credit Unions Act 1979, s.5(1)

an individual is not a member of a credit union unless he holds at least one fully paid-up share in that credit union

Credit Unions Act 1979, s.1(6)

01/01/2005

CRED 13 Annex 1A

Common bond

01/01/2005

CRED 13 Annex 1A 1

Application

(1)

This Annex is relevant to:

(a)

societies (typically known as "study groups") seeking registration as credit unions (see CRED 13 Ann 1A G 1(2)); and

(b)

credit unions seeking to amend their membership qualifications.

(2)

When the term "credit union" is in italics, its definition is in the Glossary to the FSA Handbook which reads: "a body corporate registered under the Industrial and Provident Societies Act 1965 as a credit union in accordance with the Credit Unions Act, which is an authorised person". When the term is not in italics, it may also refer to a credit union that does not have permission to take deposits, but is merely registered, or is a study group or other association seeking to be registered as a credit union. The term is only intended to refer to a credit union in Great Britain, not one in Northern Ireland.

Introduction

(1)

This Annex relates to section 1 of the Credit Unions Act 1979 (see CRED 13 Annex 1B). It explains how the FSA exercises its statutory function of satisfying itself before registration that a common bond exists among the members of a credit union.

(2)

These are the key points covered by this Annex:

(a)

the need for a common bond is fundamental to the regulatory regime for credit unions;

(b)

an "appropriate membership qualification" does not necessarily create a common bond;

(c)

the FSA has adopted the following policy for the geographical extent of terms limiting membership qualifications:

(i)

"locality" is comparable in extent to a principal tier of local government (for example: a single city, London borough or county); and

(ii)

"area" is comparable in extent to a single administrative region (for example: Scotland, Wales, North-East England or London);

(d)

a membership qualification based on association between members may be combined with another qualification set out in section 1(4) of the Credit Unions Act 1979 (for example, residing in or being employed in a particular locality - see CRED 13 Annex 1B) but not with additional qualifications created under that subsection;

(e)

common bonds cannot be infinitely extended, so the FSA has adopted the policy of using the following presumptions for or against the existence of a common bond for different numbers of persons eligible for membership:

(i)

up to 100,000 - there is a presumption for the common bond (if supported by a statutory declaration - see CRED 13 Ann 1A G 2(2)(g));

(ii)

from 100,000 to 1 million - there is no presumption either way: the credit union has to make a case; and

(iii)

over 1 million - there is a presumption against the common bond: the credit union will have to have particularly strong arguments to succeed in making a case;

(f)

the common bond is not a franchise, so:

(i)

when deciding whether to approve a common bond, the FSA will not take into account whether the proposed area overlaps the area of another credit union; and

(ii)

it is not necessary for a credit union to demonstrate an intention to service the whole of its common bond are

(g)

(i)

three members and the secretary of a credit union may make a statutory declaration that as a result of the qualification for admission to membership, a common bond exists between the members (but the FSA may require other evidence - see CRED 13 Ann1A 7(2)(b));

(ii)

there is a special form for this purpose;

(iii)

a statutory declaration is made under the provisions of the Statutory Declarations Act 1835 and must be signed before a solicitor or commissioner for oaths or notary public or justice of the peace;

(iv)

it is a criminal offence knowingly or wilfully to make a false statutory declaration, and an offender may be imprisoned or fined or both.

Statutory function

A credit union may be registered if the FSA is satisfied (among other things) that admission is restricted to persons who fulfil an "appropriate membership qualification", in consequence of which a "common bond" exists among the members (sections 1(1)(a) and 1(2)(b) of the Credit Unions Act 1979 (CRED 13 Annex 1B)).

Handbook material

CRED 13 (Registration and authorisation) provides guidance on the registration and authorisation of credit unions.

What is a common bond?

(1)

The Credit Unions Act 1979 provides for the registration of credit unions under the Industrial and Provident Societies Act 1965 (the Act under which bona fide co-operatives are registered).

(2)

Credit unions are only allowed to have the objects set out in section 1(3) of the Credit Unions Act 1979 (see CRED 13 Annex 1B). They are thus restricted to providing services to their members, not to the public at large.

(3)

Membership of a credit union must be restricted by an "appropriate membership qualification" that creates a common bond (section 1(2)(b) of the Credit Unions Act 1979 - see CRED 13 Annex 1B and CRED 13 Annex 1C).

(4)

It is apparent from the Parliamentary debates on the Credit Unions Act 1979 that persons who had a common bond were envisaged as having some degree of shared identity, a sense of belonging or a collective interest. The FSA considers that the bond should be sufficient to encourage members to do some or all of the following:

(a)

play an active role in the credit union (for example, by volunteering);

(b)

save regularly; and

(c)

repay loans promptly.

The sense of obligation to save and repay among the members of credit unions would be greater than among persons dealing with an ordinary commercial provider.

(5)

The decision whether or not a common bond exists is made under the Credit Unions Act 1979, so the basis for the FSA's decision will be confined to criteria under that Act, and prudential issues will not be directly involved. However, in discharging its responsibilities under the Act, the FSA will need to satisfy itself that the credit union will meet or continue to meet the threshold conditions and not put its members' funds at risk. These issues will be considered in a risk-based manner when the FSA decides whether or not to give a credit union permission to accept deposits. Section 1 of the Credit Unions Act 1979 as amended (see CRED 13 Annex 1B) provides that a credit union may not be registered unless it has applied to the FSA for such permission, and the FSA shall not register a credit union unless it proposes to give the credit union permission. The FSA may give the credit union an opportunity of withdrawing an application for registration if it considers that it will not be able to grant authorisation. Prudential issues will also be considered separately when a credit union seeks to amend its membership qualification.

(6)

It is important that a credit union should not admit to membership any person who does not share the common bond; that is any person who is ineligible under the credit union's membership qualification. CRED 13 Annex 2 G provides further guidance about the consequences of admitting ineligible persons.

What is an "appropriate membership qualification"?

(1)

"Appropriate membership qualifications" are such qualifications as "residing in a particular locality", "being employed by a particular employer" and "being a member of a bona fide organisation". Some of the qualifications were included when the Credit Unions Act 1979 was passed; others have been added to that Act by Deregulation and other Orders; and others have been approved by the FSA, or its predecessor, the Registry of Friendly Societies. A full list of "appropriate membership qualifications" is given in CRED 13 Annex 1B (Section 1 of the Credit Unions Act 1979, as amended) and CRED 13 Annex 1C (Qualifications approved by the FSA (and the Registry of Friendly Societies)). The FSA has power to approve further qualifications.

(2)

The membership of a credit union is made up of the following types of member:

(a)

directly qualifying member - who fulfils the "appropriate membership qualification";

(b)

indirectly qualifying member ("family member") - who lives in the same household as, and is a relative of, a directly qualifying member; and

(c)

non-qualifying member - who joined the credit union as a directly or indirectly qualifying member, but has ceased to be so.

Further guidance on eligibility for membership of a credit union is given in CRED 13 Annex 2 G.

(3)

The two concepts of the "appropriate membership qualification" and the "common bond" are often treated in the credit union sector as though they were interchangeable, but this is not the case. The "appropriate membership qualification" exists as the basis for creating the common bond: thus, the "appropriate membership qualification" may be viewed as the cause and the "common bond" the effect. But the fact that there is an "appropriate membership qualification" does not necessarily mean that there will be a "common bond".

(4)

For registration to be possible, both the "appropriate membership qualification" and the "common bond" have to be in place. On examining the "appropriate membership qualification", the FSA could in theory infer from it the existence of a "common bond" (section 1(5)(b) of the Credit Unions Act 1979 - see CRED 13 Annex 1B) without a statutory declaration or further evidence. However, the FSA is unlikely to be able to make this inference for any but the smallest of population pools - see CRED 13 Ann 1A 7(2).

(5)

Since the Regulatory Reform (Credit Unions) Order 2003, it is possible for a credit union to adopt a membership qualification combining association and one of the other qualifications set out in section 1(4)(a), (b), (c), (d) or (f) of the Credit Unions Act 1979, as amended (without the need for the FSA to approve an additional qualification for each combination, under the power in the tailpiece to that subsection - see CRED 13 Annex 1B). For example, a credit union may now adopt a membership qualification under which some members reside in the locality (but do not belong to a bona fide organisation there) and other members belong to a bona fide organisation in the locality (but do not reside there). However, a credit union cannot combine association and one of the qualifications approved by the FSA or Registry of Friendly Societies (see CRED 13 Annex 1C and CRED 13 Ann 1A G 10(2)); nor may the qualifications in section 1(4)(a), (b), (c), (d) or (f) of the Credit Unions Act 1979, as amended, be combined with each other (see CRED 13 Annex 1B).

(6)

Having chosen an "appropriate membership qualification" from the list, it has always been possible for a credit union to impose within its registered rules an additional requirement upon members. This is the effect of the words in section 1(2)(b) of the Credit Unions Act 1979 see CRED 13 Annex 1B: "whether or not any other qualifications are also required by the rules". Thus it has always been possible to adopt a requirement that each member of the credit union must both reside and belong to a bona fide organisation in the locality. Under such a qualification, neither a person who merely resides (but does not belong to the organisation), nor one who merely belongs to the organisation (but does not reside) may join the credit union.

(7)

CRED 13 Annex 1C lists the qualifications approved by the FSA (or its predecessor, the Registry of Friendly Societies). The FSA has power, as previously mentioned, to approve further qualifications.

What has the FSA to decide?

(1)

In relation to membership, the FSA has to be satisfied on two counts:

(a)

there is an "appropriate membership qualification"; and

(b)

in consequence of the "appropriate membership qualification", a common bond exists.

It is a two-stage process: the first stage is factual (a question of technical validity); the second is judgemental (and potentially subjective).

(2)

If it considers it proper in the circumstances of the case, the FSA may:

(a)

infer the existence of a common bond from the appropriate membership qualification (but see CRED 13 Ann 1A G 6(4)); or

(b)

rely on a statutory declaration (by 3 members and the secretary of the credit union or prospective credit union - see CRED 13 Ann 1A 2(2)(g)) that a common bond exists (section 1(5) of the Credit Unions Act 1979 - see CRED 13 Annex 1B). Even where a statutory declaration is given, the FSA may require other evidence to support the credit union's (or prospective credit union's) contention that there is a common bond.

Meaning of "locality " in "appropriate membership qualifications " based on residence

(1)

Although several of the "appropriate membership qualifications" (see CRED 13 Annex 1B - CRED 13 Annex 1C) use the term "locality", it is not defined by the Credit Unions Act 1979. Historically, the Registry of Friendly Societies took a fairly restrictive view of its meaning, but the FSA is taking a broader one, drawing on case law and other statutory uses of that term.

(2)

The FSA's working definition is that a "locality" is a natural geographical or administrative unit, comparable in size (but not limited to) the principal tier of local government in Great Britain, that is unitary authorities or county councils. The justification for this is that the common provision of "local" public services is currently made at this level.

(3)

So the FSA will generally accept that "locality" extends up to the area covered by such local authorities, and so may cover such areas as single cities, London boroughs or counties. If larger areas were proposed, the onus would lie with credit unions to demonstrate that they still constituted a "locality". Even if a geographical or administrative area satisfies the criteria for being a "locality", that does not mean that there will be a common bond (see CRED 13 Ann 1A G 2(2)(b) and 11(1)-(5)).

Meaning of "area " in "appropriate membership qualifications " based on employment

The "appropriate membership qualification" based on employment in CRED 13 Annex 1C uses the term "area", but this is not defined in the Credit Unions Act 1979. The FSA accepts that the term "area" is potentially much larger in scope than "locality", and that it could extend up to the size of a single standard administrative region within Great Britain. So, for example, Scotland, Wales, the North-East of England or Greater London could be regarded as "areas" for the purpose of this "appropriate membership qualification". To be acceptable, it is not necessary for the boundary proposed by a credit union to coincide with an actual standard administrative region.

Regulatory Reform (Credit Unions) Order 2003 and associational "appropriate membership qualification"

10.

(1)

The "appropriate membership qualification" in section 1(4)(e) of the Credit Unions Act 1979 is that of "being a member of a bona fide organisation or being otherwise associated with other members of the society for a purpose other than that of forming a society to be registered as a credit union". So the members must be associated through something other than the credit union. The stronger the character of the association between the individuals, the more likely it is to form the basis for the existence of a common bond.

(2)

As a result of the Regulatory Reform (Credit Unions) Order 2003, it is now possible for a credit union to adopt a membership qualification combining association and one of the other qualifications set out in section 1(4)(a), (b), (c), (d) or (f) of the Credit Unions Act 1979, as amended (without the need for the FSA to approve an additional qualification for each combination, under the power in the tailpiece to that subsection - see CRED 13 Annex 1B and CRED 13 Ann 1A G 6(5)). However, it is not possible for a credit union to combine association and one of those qualifications specifically approved by the FSA or its predecessor, the Registry of Friendly Societies - see CRED 13 Annex 1C and CRED 13 Ann 1A G 6(5), nor may the qualifications in section 1(4)(a), (b), (c), (d) or (f) of the Credit Unions Act 1979, as amended, be combined with each other. This means that a single credit union may be properly formed for persons who:

(a)

live or work in a locality; or

(b)

associate with the residents and workers (through, for example, attending a religious centre in the locality).

(3)

However, it is still necessary to establish that the qualifications establish a common bond: this may be difficult if there is no shared identity between the members qualifying under the different qualifications (even where the population pool is below 100,000 - CRED 13 Ann 1A G 11(3)).

Overall size of population pool for "appropriate membership qualifications "

11.

(1)

It is in the nature of the common bond that the concept cannot be infinitely expanded: the larger the eligible population pool covered by an "appropriate membership qualification", the weaker or less plausible will be the existence of a common bond.

(2)

It is not practical to expect credit unions to operate on the basis that members will be fully acquainted with each other, but there has to be some mutual identification, and some point at which this ceases to have a significant effect.

(3)

The Registry of Friendly Societies (a predecessor of the FSA) adopted 100,000 as an indicative maximum for the size of the residential population in a common bond area. The FSA has further developed that thinking through its decisions in subsequent cases. For full transparency, the indicative bands currently used by the FSA are set out below:

(a)

where an "appropriate membership qualification" covers a pool of up to 100,000 people eligible to be members:

(i)

there is a presumption in favour of the existence of a common bond; and

(ii)

the FSA will (provided the "appropriate membership qualification" is technically valid and there are no unusual features) generally accept a simple explanation of the nature of the common bond, together with a statutory declaration (but see CRED 13 Ann 1A G 10(3)).

(b)

where an "appropriate membership qualification" covers a pool of between 100,000 and 1 million eligible people:

(i)

there is no presumption in favour of the existence of a common bond; and

(ii)

the FSA expects the credit union to make a positive, convincing case, marshalling all the information relevant to establishing that a common bond exists among the members.

(c)

where an "appropriate membership qualification" covers a pool of more than 1 million eligible people:

(i)

there is a presumption that the common bond is so dilute as to be meaningless; but

(ii)

it is open to a credit union to make a submission to convince the FSA that a common bond exists among the members: but its arguments would have to be particularly strong for it to succeed in making a case.

(4)

The FSA's decision whether or not to accept the existence of a common bond (for a new or prospective credit union) is made on an individual basis. So decisions (whether made by the FSA or its predecessor, the Registry of Friendly Societies) create no binding precedent that a population pool of a given size is acceptable for a particular "appropriate membership qualification".

(5)

Given the range of "appropriate membership qualification" and the different populations covered, it is not possible to be prescriptive about the information necessary to show that a common bond is real. In general, it has been the experience of the Registry of Friendly Societies and the FSA that it is fairly straightforward to make a plausible case for the existence of a common bond where the "appropriate membership qualification" is based on employment by a single employer. For residential qualifications, applicants should draw on their local knowledge to identify those elements, geographical and social that create a sense of cohesion. For a qualification based on living or working in a particular locality, the applicants might wish to identify the ways in which workers from outside the area become involved in the activities of the residential community.

(6)

The size thresholds set out above apply to the number of persons eligible for membership under any "appropriate membership qualification", not just ones based on residence.

Overlapping common bond areas

12.

A common bond area cannot be regarded legally as a franchise, giving exclusive rights of access to a particular area or pool of potential members. The FSA recognises the value of consolidation in providing stronger entities, but there is no justification in current legislation for refusing the registration of a new credit union in an area already served by existing credit unions, nor even for consulting them: the FSA's decision on registration is based only on the criteria in the Credit Unions Act 1979 (see CRED 13 Ann 1A G 5(5). In the absence of express statutory support, it would be wrong for the FSA to act in a manner that could be construed as anti-competitive. So the FSA will not refuse registration on the grounds of overlap, nor will it undertake to consult credit unions whose common bond area may be overlapped by a later registration.

Servicing whole of area

13.

Since the common bond is not a franchise, the FSA will not expect a credit union to service fully the whole of its area or population pool. But where the "appropriate membership qualification" covers a large population pool, the inference is that the bond is likely to be weaker, and there will need to be more justification. An intention to service only part of the area does not help to establish whether or not the "appropriate membership qualification" establishes a common bond for the area as a whole.

Mergers

14.

(1)

The Credit Unions Act 1979 allows credit unions to merge, either by amalgamation (where a new credit union is created and the constituents cease to exist) or by transfer of engagements (where the credit union transferring its engagements ceases to exist, but the enlarged credit union accepting the engagements continues).

(2)

For either of these procedures to be practicable in individual cases:

(a)

the merged credit union will need to have an "appropriate membership qualification" that creates a "common bond"; and

(b)

members of the constituent credit unions will need to be eligible for membership of the merged credit union.

(3)

So in individual cases:

(a)

it might not be possible for the merged credit union to adopt an "appropriate membership qualification" (for example, the new catchment area required for the merger of two residential credit unions might not qualify under the definition of "locality" - see CRED 13 Ann 1A G 8(1)-(3));

(b)

even though each credit union seeking to merge has a "common bond" among its own members, this does not necessarily mean that there would be a common bond among all the members of the merged credit union (for example, too large a population pool might be produced by the merger - see CRED 13 Ann 1A G 11(1)).

What information does a credit union need to provide in support of a common bond application?

15.

Table

Population pool

Information needed

Up to 100,000

Statutory declaration
Simple explanation of common bond (subject to CRED 13 Ann 1A G 10(3))

100,000 to 1 million

Convincing case that common bond exists

Over 1 million

Evidence to rebut presumption against existence of common bond (special factors generating particular interaction in this population pool, despite its large size and the dilution normally expected in such circumstances)

28/08/2007

CRED 13 Annex 1B

Section 1 of the Credit Unions Act 1979 (as amended)

01/01/2005

Registration as a credit union

(1)

Subject to - sections 2(1) and 7(1) of the Industrial and Provident Societies Act 1965 (in this Act referred to as "the 1965 Act"), a society may be registered under that Act if:

(a)

it is shown to the satisfaction of the Authority that the conditions specified in subsection (2) below are fulfilled;

(b)

the rules of the society comply with section 4(1) [of this Act];

(c)

the place which under those rules is to be the society's registered office is situated in Great Britain;

(d)

the society has made an application to the Authority for Part IV permission under section 40 of the Financial Services and Markets Act 2000 (in this Act referred to as "the 2000 Act" to accept deposits; and

(e)

the Authority is satisfied that, once registered under the 1965 Act, the society will satisfy, and continue to satisfy, the threshold conditions set out in Schedule 6 to the 2000 Act in relation to the regulated activity of accepting deposits; and a society which is so registered by virtue of this section shall be registered as, and is in this Act referred to as, a "credit union".

(1A)

The Authority shall not issue an acknowledgement of registration under section 2(3) of the 1965 Act to a credit union unless it also proposes to give that society permission under Part IV of the 2000 Act to accept deposits.

(2)

The conditions referred to in subsection (1)(a) above are -

(a)

that the objects of the society are those, and only those, of a credit union; and

(b)

that as a result of any provision of the rules, admission to membership of the society meets the requirement specified in subsection (3A) or (3B) below (whether or not any other qualifications for admission to membership are also required by the rules) and that in consequence, a common bond exists between members of the society.

(3)

The objects of a credit union are -

(a)

the promotion of thrift among the members of the society by the accumulation of their savings;

(b)

the creation of sources of credit for the benefit of the members of the society at a fair and reasonable rate of interest;

(c)

the use and control of the members' savings for their mutual benefit; and

(d)

the training and education of the members in the wise use of money and in the management of their financial affairs.

(3A)

The requirement specified in this subsection is that admission to membership of the society is restricted to persons all of whom fulfil the same specific qualification for admission to membership, being a qualification specified in, or approved under, subsection (4) below as being appropriate to a credit union.

(3B)

The requirement specified in this subsection is that admission to membership of the society is restricted to persons each of whom fulfils either -

(a)

the qualification for admission to membership specified by paragraph (e) of subsection (4) below as being appropriate to a credit union; or

(b)

the same specific qualification for admission to membership, being a qualification which is so specified in paragraph (a), (b), (c), (d) or (f) of that subsection.

(4)

The qualifications for admission to membership which are appropriate to a credit union are -

(a)

following a particular occupation;

(b)

residing in a particular locality;

(c)

being employed in a particular locality;

(d)

being employed by a particular employer;

(e)

being a member of a bona fide organisation or being otherwise associated with other members of the society for a purpose other than that of forming a society to be registered as a credit union;

(f)

residing in or being employed in a particular locality;

and such other qualifications as are for the time being approved by the Authority.

(5)

In ascertaining whether a common bond exists between the members of a society, the Authority -

(a)

may, if it considers it proper in the circumstances of the case, treat as sufficient evidence of the existence of a common bond a statutory declaration which is given by three members and the secretary of the society, and is to the effect that a common bond exists

(b)

may, if it considers it proper in the circumstances of the case, treat the fact that admission to membership is restricted as mentioned in subsection (2)(b) above as sufficient evidence of the existence of a common bond.

(6)

For the purposes of this Act, if the rules of a credit union so provide, a person shall be treated as fulfilling a qualification for admission to membership stated in those rules if he is a member of the same household as, and is a relative of, another person who is a member of the credit union and fulfils that qualification directly.

In section 1 of the Credit Unions Act 1979, the FSA is referred to as "the Authority".

01/01/2005

CRED 13 Annex 1C

Qualifications approved by the FSA (and the Registry of Friendly Societies)

01/01/2005

The following qualifications (in addition to those set out in section 1(4) of the Credit Unions Act 1979) have been approved by the FSA (and the Registry of Friendly Societies ("RFS")):

(1)

being currently in receipt of a continuing and regular contractual payment arising from employment by a particular employer;

RFS:25 February 1994

(2)

being currently in receipt of a continuing and regular contractual payment arising from employment by particular employers in a particular area;

RFS: 6 October 1994

(3)

being currently in receipt of a continuing and regular payment arising from participation in the provision of a public service of a particular nature, or of particular services associated with such participation;

RFS: 22 May 1998

(4)

residing in a particular locality, or being a member of a bona fide organisation or group of organisations (or otherwise having a continuing and active association with one or more of such organisations) existing within that locality for a purpose other than that of forming a society to be registered as a credit union;

RFS: 15 November 1999

(5)

being employed by an undertaking in a particular group of employers (and for this purpose "group" has the same meaning as in section 421 of the Financial Services and Markets Act 2000).

FSA 1 January 2005

Section 421 of the Act:

(1)

In this Act "group", in relation to a person ("A"), means A and any person who is-

(a)

a parent undertaking of A;

(b)

a subsidiary undertaking of A;

(c)

a subsidiary undertaking of a parent undertaking of A;

(d)

a parent undertaking of a subsidiary undertaking of A;

(e)

an undertaking in which A or an undertaking mentioned in paragraph (a), (b), (c) or (d) has a participating interest;

(f)

if A or an undertaking mentioned in paragraph (a) or (d) is a building society, an associated undertaking of the society; or

(g)

if A or an undertaking mentioned in paragraph (a) or (d) is an incorporated friendly society, a body corporate of which the society has joint control (within the meaning of section 13(9)(c) or (cc) of the Friendly Societies Act 1992).

(2)

"Participating interest" has the same meaning as in:

(i)

Part VII of the Companies Act 1985 or Part VIII of the Companies (Northern Ireland) Order 1986, where these provisions apply; or

(ii)

paragraph 8 of Schedule 7 to the Small Companies and Groups (Accounts and Directors' Report) Regulations 2008 (SI 2008/409) where applicable; or

(iii)

paragraph 11(1) of Schedule 10 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) where applicable; or

(iv)

paragraph 8 of Schedule 5 to the Small Limited Liability Partnerships (Accounts) Regulations 2008 (SI 2008/1912) where applicable; or

(v)

paragraph 8 of Schedule 4 to the Large and Medium-sized Limited Liability Partnerships (Accounts) Regulations 2008 (SI 2008/1913).

In (i) to (v) above, the meaning also includes an interest held by an individual which would be a participating interest for the purposes of those provisions if he were taken to be an undertaking.

(3)

"Associated undertaking" has the meaning given in section 119(1) of the Building Societies Act 1986.

01/10/2008

CRED 13 Annex 2

Eligibility for membership of a credit union

01/12/2004

Admission of members

It is a condition of registration of a credit union that its membership is restricted to persons who fulfil (directly or indirectly) the qualification stated in the credit union's registered rules (section 1(2) of the Credit Unions Act 1979).

Categories of membership

Eligibility for membership of a credit union is determined by its registered rules. Each member of a credit union should fall within one of the following categories.

(1)

Category 1. Directly qualifying member

A directly qualifying member is a person who:

(a)

meets the membership criteria set out in the credit union's registered rules (section 1 of the Credit Unions Act 1979); and

(b)

is above the age of 16 (unless the credit union's registered rules stipulate a higher age) (section 20 of the Industrial & Provident Societies Act 1965).

Note:

A member who is under the age of 18 may not be a member of the committee, trustee, manager or treasurer of the credit union (section 20 of the Industrial & Provident Societies Act 1965) or receive a loan (section 11(1) of the Credit Unions Act 1979).

(2)

Category 2. Indirectly qualifying member

An indirectly qualifying member ("family member") qualifies only through a directly qualifying member (Category 1 above). This category of membership is available only if the registered rules of the credit union provide for it explicitly.

An indirectly qualifying member ("family member") is a person who is:

(a)

a member of the same household as; and

(b)

a relative of another person who is;

a directly qualifying member of the credit union (section 1(6) of the Credit Unions Act 1979).

(3)

Category 3. Non-qualifying member

A person in this category would originally have joined the credit union as a directly qualifying member (Category 1 ) or indirectly qualifying member ("family member") (Category 2 ). This category of membership is available unless the credit union's registered rules provide otherwise. The number of non-qualifying members should not at any time exceed ten per cent of the total membership of the credit union (section 5(6) of the Credit Unions Act 1979). The registered rules of a credit union should make provision for terminating the membership of members in order to comply with this limit (paragraph 13 of Schedule 1 to the Credit Unions Act 1979).

A non-qualifying member is a person who has ceased to fulfil the membership qualification; that is to say a person who:

(a)

joined the credit union as a qualifying member (whether qualifying directly or indirectly); but

(b)

later ceased to qualify (section 5(5) of the Credit Unions Act 1979).

Note:

When directly qualifying members become non-qualifying members, then all members who qualified indirectly through them will also become non-qualifying members (unless subsequently by some other route they have themselves become either directly qualifying members or indirectly qualifying members). A person who is eligible for membership under more than one category will hold membership under the higher of those categories (so, for example, someone who is eligible under Categories 1 and 2 will be regarded as a Category 1 member, and someone who is eligible under Categories 2 and 3 will be regarded as a Category 2 member).

Category of Membership

Category 1

Category 2

Category 3

Directly qualifying member

Indirectly qualifying member ("family member")

Non-qualifying member

DQM

IQM

NQM

Fulfils the membership qualification set out in the common bond rule of the credit union

Lives in the same household as, and is a relative of, a DQM

Has ceased to be a DQM or IQM

Persons too young to be members

A person too young to be a member ("juvenile depositor") may make deposits with a credit union (section 9 of the Credit Unions Act 1979). A person too young to be a member ("juvenile depositor") is a person who:

(1)

is below the age of 16 (unless the credit union's registered rules stipulate a higher age for entry) (section 20 of the Industrial & Provident Societies Act 1965); and

(2)

would qualify for membership (directly or indirectly) if he were old enough.

This means that in a qualification of residing in a particular locality, an eligible juvenile depositor should reside there (because indirect qualification means being a member of the same household as well as a relative of a DQM). In a qualification of being employed in a particular locality, a juvenile depositor is eligible by going to school or college there.

Note:

These deposit's are not shares and these depositors are not members.

Section 9 of the Credit Unions Act 1979 does not require a juvenile depositor to cease to hold an account in a credit union if his parents become non-qualifying members.

Status of transactions

Credit union's may only undertake the activities authorised by their registered rules. If they purport to undertake wider activities, then any transactions arising from such activities are void. Any transactions with an ineligible person are unenforceable.

If a credit union becomes aware that it has admitted ineligible persons as "members", it should immediately take steps to:

(1)

reclaim any loans made to such persons; and

(2)

repay to such persons any sums they have deposited with the credit union by way of share purchase.

There are legal rights - such as the doctrine of unjust enrichment - that should enable a credit union to recover funds lent to such persons. Similar principles should apply to enable such persons to recover any funds deposited with the credit union.

If a credit union discovers that it has admitted to membership a significant number of ineligible persons, it should inform the FSA at the earliest opportunity to discuss the implications and the way forward.

Extension of common bond

Transactions with an ineligible person are not validated if that person subsequently becomes eligible for membership through, say, an extension of the common bond. Although a newly registered common bond extension allows a credit union to admit members in the additional area, it does not have retrospective effect for those who were erroneously admitted before the extension. If funds are not to be returned in accordance with the guidance given under "Status of Transactions" (paragraphs 4 to 7), immediate steps will have to be taken to ensure that proper business relations commence - and are shown to commence - after the common bond extension has been effected. The following steps should generally be taken:

(1)

the credit union should issue a new pass book;

(2)

share deposits and loans should be started again - stating the current position - being entered as new transactions in the new passbook.

Powers available under other Acts

This annex draws attention to a number of offences under the Industrial & Provident Societies Act 1965 and the Credit Unions Act 1979. The existence of these offences does not preclude the FSA from using any other powers that are available to it under the Act.

10.

A credit union, officer, member or other person who does anything forbidden by credit union legislation is liable on summary conviction to a fine not exceeding level 3 on the standard scale (currently £1,000) (section 61(b) of the Industrial & Provident Societies Act 1965 and section 28(1) of the Credit Unions Act 1979).

11.

The registration of a credit union may be cancelled on proof that it has wilfully and after notice from the FSA violated any of the provisions of the Industrial & Provident Societies Act 1965 or Credit Unions Act 1979 (section 20 of the Credit Unions Act 1979).

01/01/2006