PS5/26 – Credit Union Service Organisations

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to consultation paper (CP) 13/25 – Credit Union Service Organisations. It also contains the PRA’s final policy, as follows:

• amendments to the Credit Unions Part of the PRA Rulebook (Appendix 1); and
• updates to SS2/23 – Supervising credit unions (Appendix 2).

1.2 This PS is relevant to PRA-authorised credit unions and their trade bodies.

Background

1.3 In CP13/25, the PRA proposed to:

• amend the PRA investment rules to permit credit unions to invest in Credit Union Service Organisations (CUSOs);
• set out in SS2/23 expectations of credit unions that invest in or use CUSOs; and
• amend Chapter 17 of SS2/23 as a result of the deletion of SS20/15 (see PS26/25 – Discontinuing SS20/15: Supervising building societies’ treasury and lending activities).

1.4 In determining its policy, the PRA considers representations received in response to consultation, publishing an account of them and the PRA’s response (‘feedback’). Details of any significant changes are also published. In this PS, the ‘Summary of responses’ section contains a general account of the representations made in response to the CP and the ‘Feedback to responses’ chapter contains the PRA’s feedback.

1.5 In carrying out its policymaking functions, the PRA is required to have regard to various matters. In CP13/25, the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The ‘Changes to draft policy’ section of this chapter refers to that explanation, taking into account consultation responses where relevant.

Summary of responses

1.6 The PRA received 11 responses to the CP. The names of respondents to the CP who consented to their names being published are set out at Appendix 3.

1.7 Respondents broadly welcomed the PRA’s proposals, with all respondents supportive of the PRA’s aim to provide clarity on this issue and facilitate greater innovation, collaboration, and sustainability through the establishment and expansion of CUSOs. They also supported its intention to permit credit union investments in CUSOs. Respondents highlighted that cooperative investment and shared services are essential to credit unions delivering better outcomes for members. However, some respondents expressed concerns about the way this approach is structured – particularly the level of the proposed investment cap and the ownership and membership aspects of the CUSO proposals, which were seen as restricting options available to credit unions. Several respondents also requested clarification on a number of areas. This is set out in Chapter 2.

Changes to draft policy

1.8 This PS takes account of how the policy advances the PRA’s objectives and of significant matters that the decision maker had regard to. These are as set out in CP13/25, with the following changes and additional points.

1.9 Where the final rules differ from the draft in the CP in a way that is, in the opinion of the PRA, significant, the Financial Services and Markets Act 2000 (FSMA)^{footnote [1]} requires the PRA to publish:

• details of the differences together with an updated cost benefit analysis; and
• a statement setting out in the PRA’s opinion whether or not the impact of the final rules on mutuals is significantly different from the impact that:
  • the draft rule would have had on mutuals; or
  • the final rule will have on other PRA-authorised firms.

1.10 The PRA has made changes to the draft policy in response to the consultation. These include:

• amending the credit union investment rules to provide that credit unions may invest in CUSOs that serve other UK-regulated mutuals (those with a Part 4A permission);
• clarifying that a credit union may partner with non-credit unions to own a CUSO;
• setting a number of safeguards to ensure the risks associated with the expansion of CUSO scope in this way are managed;
• raising the maximum investment that a credit union can make in a CUSO from 5% to 7.5% of its capital, together with clarifications on the practical application of the limit; and
• clarifying that credit unions have six months to implement the expectations set out in the CUSOs chapter of SS2/23.

Updated cost benefit analysis

1.11 Expanding the scope of credit union investments in CUSOs is expected to support credit union growth and innovation, while improving access to high-quality shared services and delivering cost efficiencies. By reducing barriers to establishing CUSOs and allowing partnerships with other mutuals or non-credit unions, these changes create opportunities for new revenue streams and greater collaboration. Raising the investment cap from 5% to 7.5% further enables credit unions to scale their involvement, fostering economies of scale and better service provision. Safeguards set out in SS2/23, such as legal and operational separation requirements, are designed to manage prudential risks effectively.

1.12 The proposed change is permissive and does not impose additional compliance costs on firms. However, credit unions that choose to participate, particularly where CUSOs serve other mutuals or include non-credit union partners, may face additional costs. The proposed change also introduces potential challenges such as misaligned interests and reduced regulatory oversight. Increasing the investment cap could heighten credit unions’ exposure to losses and raise the risk of breaching capital requirements, as well as step-in risk. However, the safeguards and guidance in the supervisory statement (SS) should ensure the economic costs associated with these risks are not material.

1.13 The PRA considers these costs and risks to be justified given the significant benefits for credit union growth, innovation, and efficiency. Importantly, these costs will only be incurred by credit unions that opt to take advantage of the expanded scope. Those that do not engage with CUSOs beyond the consulted framework will not be directly affected.

Impact on mutuals and compatibility with objectives and regulatory principles

1.14 The final rules will only affect credit unions, which are all mutual institutions, and may be of interest to other mutuals that use CUSOs. Consequently, there is no comparison to be made in compliance with the mutuals requirement.

1.15 When making rules, the PRA is required to comply with several legal obligations. In CP13/25, the PRA published its explanation of why the rules proposed by the CP were compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [2]} The PRA has provided updated explanations below taking into account responses to CP13/25.

1.16 The PRA’s decision to expand the scope of CUSOs in which credit unions may invest reflects a strategic effort to support sector growth while maintaining prudential standards and is based on feedback from respondents. While the broader investment scope may introduce additional prudential risks – such as increased financial exposure and potential conflicts of interest when partnering with non-credit union entities – the PRA considers these risks manageable through the safeguards proposed. These include supervisory expectations around due diligence, governance, and a cap on investments.

1.17 This policy change is consistent with the PRA’s primary objective of promoting the safety and soundness of firms, as it ensures that credit unions remain resilient while engaging in new investment structures. The proposed amendments to the PRA Rulebook and SS2/23 aim to clarify the regulatory framework and provide guardrails to mitigate risks.

1.18 The changes directly support the PRA’s secondary competition objective by removing regulatory barriers to credit union innovation and scalability. By enabling credit unions to collaborate effectively through CUSOs, the PRA is helping to level the playing field and foster a more competitive and sustainable mutuals sector.

1.19 In revising its policy, the PRA has had regard to the regulatory statutory principle of fostering a regulatory environment that promotes growth through competition and innovation. The PRA’s proposed approach supports this principle by removing barriers to innovative growth, enabling credit unions to collaborate with fintechs and innovators via CUSOs to deliver new solutions and drive sector growth.

Implementation

1.20 The rules will take effect from 20 February 2026. The new Chapter 18 of SS2/23 (Credit Unions that use or own CUSOs) will take effect on 20 August 2026, six months following publication of this PS.

2: Feedback to responses

2.1 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it in response to the consultation, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [3]}

2.2 The PRA has considered the representations received in response to the CP. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 The sections below have been structured broadly along the same lines as the chapters of the CP as follows:

• credit union investments in Credit Union Service Organisations (CUSOs)
  • rule amendments
  • supervisory statement
• consequential amendments to SS2/23 as a result of deletion of SS20/15

Credit Union investments in Credit Union Service Organisations

Rule amendments

2.4 The PRA proposed amendments to the PRA’s investment rules to permit credit unions to invest in CUSOs. The proposed definition set out that the investment should be in an entity in order for it to provide ancillary services exclusively to credit unions and the members of those credit unions. These ancillary services should benefit credit unions and their members and do not form part of the regulated activities of the credit unions.

Purpose of the CUSO

2.5 Six respondents put forward that limiting the definition of CUSOs that credit unions can invest in to entities providing services exclusively to credit unions and their members is too restrictive. They noted this prevents credit unions from extending services (such as collections, HR or compliance) to other mutuals or community-based organisations.

2.6 Having given this matter further consideration, the PRA has extended the definition to include other regulated mutuals (with a Part 4A permission).^{footnote [4]} The PRA considers it is important for a CUSO’s purpose to remain closely aligned with the mutual ethos and objectives of the credit union sector. However, the PRA recognises that this remit could be broadened to include other regulated mutuals that share this ethos, thereby supporting opportunities for growth. Nonetheless, the PRA remains mindful of the need to protect the interests of credit union members. It has therefore set a number of safeguards. These include an expectation that credit unions consider introducing a conflict of interests policy. This is intended to manage diverging priorities and to ensure that credit unions are meeting their legislative objects. Those objects include the use and control of members’ savings for their mutual benefit when taking decisions related to the CUSO.

Supervisory statement

2.7 The PRA proposed a new chapter of SS2/23 to set out the PRA’s expectations of credit unions that invest in or use CUSOs to manage associated prudential risks. These included expectations that credit unions carry out due diligence and risk analysis before investing in a CUSO. They also included expectations to ensure that the liability of an investing credit union is limited to the amount it has invested. It was proposed that this investment should be no more than 5% of a credit union’s capital, across all CUSOs, where a credit union uses its own capital to fund the investment.

CUSO ownership

2.8 In the consultation, the PRA noted that CUSOs are owned by credit unions and provide shared services to them, while noting that in Great Britain there is a legislative prohibition on credit unions holding a majority interest in a CUSO.^{footnote [5]} Some respondents raised concerns that the PRA’s rules and expectations did not allow for CUSOs to be owned by non-credit union owners. They noted that the latter may be valuable, for example where credit unions partner with innovator providers, and can enable credit unions to deliver innovation at scale. Other respondents noted the need for legislative reform to allow CUSOs to be established, and wholly owned, by a single credit union, noting that in the United States, wholly owned CUSOs have been an important element of the CUSO landscape.

2.9 The PRA acknowledges the potential benefits of credit unions partnering with non-credit union owners and has clarified the wording in the SS to acknowledge this as a permitted ownership structure. However, the PRA recognises that there are a number of risks associated with this ownership structure, including weakened regulatory oversight and misalignment of interests (commercial interests vs membership focus). It has therefore set out a number of expectations of credit unions that intend to partner with a non-credit union in this way (such as due diligence expectations and reinforcing credit union legislative objects), which aim to minimise risks linked to non-credit union CUSO ownership while supporting growth and innovation.

2.10 The PRA notes that allowing a credit union to wholly own a CUSO is not permitted under the credit union legislation and therefore has not been considered further.

The investment limit

2.11 Eight respondents noted concerns that the 5% limit is too low and may not be sufficient to allow a CUSO to establish quickly (where significant upfront capital outlay is often required), or for credit unions to co-invest meaningfully in shared service models. They noted in particular that the cap could effectively prevent participation in CUSOs altogether by smaller or growth-oriented credit unions, which typically operate with limited capital surpluses. Additionally, some respondents requested more clarity regarding how the limit would work (eg whether grants would be subject to the limit and whether credit unions would be expected to divest their investments if their capital, and therefore investment limit, reduced over time).

2.12 Having considered the responses, the PRA has decided to increase the investment limit to 7.5%, where a credit union uses its own capital to fund the investment. The PRA considers this limit strikes the right balance of supporting the establishment of CUSOs while managing risk exposure. Analysis indicates that, in a scenario where the full 7.5% investment is lost, the number of credit unions that would fall below minimum capital requirements remains within the PRA’s risk appetite. Modelling suggests that raising the limit materially beyond 7.5% might lead to a significant increase in credit unions falling below capital requirements should a CUSO fail. However, SS2/23 outlines circumstances where exceptions to the 7.5% cap may be considered, based on factors such as financial strength and risk controls, and provides practical guidance on how the limit applies.

2.13 Raising the investment limit may increase exposure to potential losses and elevate the risk of breaching capital requirements, as well as other prudential risks. Credit unions are expected to meet the risk management standards set out in SS2/23, including demonstrating clear legal and operational separation from the CUSO.

Consequential amendments to SS2/23 as a result of deletion of SS20/15

2.14 The PRA proposed amendments to Chapter 17 of SS2/23 resulting from the proposed deletion of SS20/15 (see CP11/25 – Discontinuing SS20/15: Supervising building societies’ treasury and lending activities). The PRA has since published its final policy relating to SS20/15 in PS26/25 – Discontinuing SS20/15: Supervising building societies’ treasury and lending activities and its decision that SS20/15 no longer has effect as of Friday 5 December 2025.

2.15 Only one response was received on this proposal, raising no objections to the minor changes. However, the PRA received three responses to CP11/25, which referenced these changes. Two respondents supported retaining the guidance in SS20/15 for credit unions, citing their smaller size, reliance on unpaid volunteers and limited development of robust risk management systems, especially in treasury management. A third respondent argued that the limits in SS20/15 are not relevant to credit unions, given their distinct business model and risk profile compared to building societies and that the cross references to SS20/15 should not continue in a ‘shadow’ way.

2.16 Having considered the responses, the PRA has decided to proceed with the changes as consulted on, noting that the changes at this stage are solely to remove outdated references. The risk management expectations of credit unions remain unchanged. However, this is an area that the PRA may revisit as part of the wider review on credit union regulation as referenced in the Mutuals landscape report.