New FSA rules could close up to 70 credit unions

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Up to 70 credit unions could close this year as a result of new regulations published yesterday by the Financial Services Authority, according to the Association of British Credit Unions (Abcul).

The new regime, which begins on 1 July, will force credit unions to maintain a minimum liquidity ratio, and their key personnel will have to meet the standards set out in the FSA's rules for Approved Persons. Credit unions will have to meet a basic test of solvency and maintain a level of initial capital. Additional capital requirements will be set for larger credit unions, reflecting their potentially greater impact on consumers should they fail.

Credit unions will join the Financial Services Compensation Scheme and will have to operate an effective complaints scheme under the Financial Ombudsman Service.

There are 700 credit unions in Britain, handling £200m for 300,000 members, an average of £666 a head. They are financial co-operatives owned and controlled by their members, who save in a common fund. This money can be used to make low-interest loans to members. But they are directed and controlled by volunteer boards of directors who may have had little or no training.

Abcul's spokeswoman, Abbie Shelton, said: "We support the FSA decision because we believe the new regime will give the movement greater credibility. We have been telling credit unions that with the new FSA regime if they are running a small operation with few members or volunteers they should consider whether they should merge, and the six in Leeds, West Yorkshire, have merged into one, for example. Some will simply cease trading, and we estimate between 5 per cent and 10 per cent will close or merge over the next year."