CU Prudential Revised

Table of Contents

Revised Prudential

The Credit Union Act 2012 amended the regulatory framework for certain prudential requirements for credit unions. It made significant amendments regarding the governance of credit unions, stemming from the financial crisis that left many credit unions oversized and insolvent.

It amends governance and provides for the separation of functions of the management and the board of directors. It also establishes a stabilization mechanism for credit unions and outlines provisions for restructuring.

The Central Bank is granted expanded powers to impose conditions on the registrations of societies as credit unions, which are deemed necessary to protect the interests of the society’s members. These conditions may be revoked or amended from time to time. The requisite procedures for this are outlined.

Credit unions are empowered to raise funds through shares to members or by accepting deposits.

CB Regulations

Regulations may be made by the Central Bank concerning

savings,
limits on savings amounts,
categories of savings a member may hold, the deposit-to-share ratio, and
other requirements deemed appropriate by the bank.

These regulations must be effective and proportionate, considering the nature, scale, and complexity of credit unions or the specific categories of credit unions affected.

Safeguarding of Funds

The legislation stipulates standards that credit unions must adhere to, ensuring the safeguarding of savings and compliance with financial services legislation.

The power to borrow is modified, allowing credit unions to borrow money and issue debentures within specified limits. Notification to the Central Bank is required when intending to borrow money above certain thresholds.

The legislation establishes overarching principles applicable to the management of a credit union and its investments. These principles involve

assessing risks to member savings,
considering impacts on liquidity and the
financial position of the credit union.

Credit unions may invest surplus funds in prescribed investments by the Central Bank, as well as in other credit unions and societies, industrial and private societies, subject to regulations.

CB Regulations on Investments

In prescribing investments, the Central Bank may specify matters such as

the class and quality of investments,
the maximum amount that can be invested,
term-to-maturity limits,
currency of investment
reinvestment conditions, and
other matters deemed appropriate by the Central Bank.

Additionally, the Central Bank may make regulations regarding distribution policies concerning investment income. Credit unions must retain surplus funds for operating requirements and maintain liquidity, unless they are invested under the specified section or held in a current account or on loan with a credit institution.

CB Requirements

In cases where the Central Bank deems it necessary to protect savings or ensure the proper regulation of credit unions, a credit union may be permitted to exceed borrowing limits without having to comply with the standard notice requirement, provided it is considered necessary.

If a person knowingly lends money to a credit union breaching its requirements and accepts security for the loan, their loan and security become unenforceable. However, the transaction itself remains valid.

Regulations must be proportionate and effective, considering the scale and complexity of the credit unions or the specific categories involved.

The Central Bank may impose conditions on the registration of societies as credit unions, which it deems necessary to protect the members’ interests. These conditions can be amended or revoked, and specific procedures are in place for amendment and revocation.

The powers of credit unions to raise funds were amended 2012. They can raise funds by issuing shares to members or accepting deposits.

CB Standards on Savings

The Central Bank may establish regulations concerning savings, including limits on the amount or categories of savings a member can hold, the ratio of deposits to shares permissible, and other requirements deemed appropriate by the Bank. These regulations must be effective and proportionate concerning the nature, scale, and complexity of the credit union or categories to which they apply.

Standards are provided that credit unions must maintain to protect depositors’ and members’ savings and ensuring compliance with financial services legislation.

The credit union’s authority to borrow and issue debentures was altered. The Central Bank can establish regulations regarding borrowing limits and specify circumstances where prior notice of borrowing intent must be provided to the Central Bank. If the Central Bank deems it necessary to protect member savings or regulate credit unions appropriately, a credit union may be allowed to exceed the borrowing limit set by regulations without the need for prior notice.

A person who lends money to a credit union or accepts security for a loan, knowing it breaches requirements, cannot enforce their debt or security, although the transaction remains valid.

Lending Regulation

Credit unions may offer loans to members for purposes they consider appropriate, with or without security, prioritizing the member’s ability to repay the loan. They are required to manage and control lending to prevent undue risk to members’ savings, considering the credit union’s nature, scale, complexity, and risk profile.

Loan applications must be made in writing to the credit union, specifying the loan’s purpose. An officer may not guarantee a loan unless it is for certain prescribed close relatives. Credit unions are responsible for determining, as per their rules, the amount of loans granted to non-qualifying members.

The Central Bank can establish regulations regarding credit union lending, specifying the classes of lending allowed, limiting loan amounts or classes, large exposures, concentration of lending to members, or any other limits it deems suitable.

Additionally, the Central Bank can enforce regulations on lending practices, loan reporting to the Central Bank, and the maintenance of provisions, reserves, and capital by credit unions. These regulations must be effective and proportionate, considering the nature, scale, and complexity of the credit unions or categories to which they apply.

Credit unions must take necessary steps to ensure compliance with these obligations. A credit union may accept a pledge, guarantee, or pledge of shares or security, among other forms of security.

Investments

The 2012 Act provides overriding principles related to the management of investments. These seek to avoid undue risk to members’ savings and minimize the impact on the liquidity and financial positions of the credit union.

Surplus funds that are not immediately required may be invested in certain prescribed investments, as well as in other credit unions and industrial and provident societies. The Central Bank may prescribe matters including classes and quantity of investments in which a credit union may invest, maximum amounts or the class of investments that may be invested in, term to maturity of a class of investments, currency, the limits for investment, and other matters as they consider appropriate.

Regulations can be made in relation to the distribution policy regarding investment income. Credit unions must keep any funds that are surplus to operating requirements either in cash in the custody of the credit union or invested in a current account with a credit institution.

Reserves

Credit unions are required to maintain adequate reserves, taking into account the nature, scale, complexity, and risk profile of their business. The Central Bank may prescribe the level of regulatory reserves through regulations, covering matters such as risk rating. It may specify alternative reserve requirements for newly formed credit unions.

In addition to regulatory reserves, credit unions must maintain reserves for operational risk, the amount of which and the basis for calculation may be prescribed by the Central Bank. Failure to comply with reserve requirements may result in a directive from the Central Bank to transfer part of the surplus to reserves. To distribute dividends or pay loan interest rebates, approval from the Bank must be obtained after meeting reserve requirements.

Provisions for appeals against certain decisions by the Central Bank under this legislation are outlined.

2023 Act Interest & Services

The 2023 Act allows the Minister to set the maximum interest rate that may be charged on loans made by a credit union to its members.

Credit unions can invest in entities providing services relating to the objects and purposes of credit unions or in relation to the operation of credit unions.

The 2023 Act removes the requirement for the rules to specify the provision of additional services, in order for the credit union to provide those additional services.

The 2023 Act for the referral of members to another credit union. It allows credit unions to refer its member(s) to another credit union to receive a service only in circumstances where the referring credit union does not provide the service. The receiving credit union may provide the service referred and that the referred member(s) is only deemed a member of the receiving credit union for the purposes of the provision of services concerned.