DP2/26 – Credit Unions: Supporting sustainable growth and resilience

2: Overview

2.1 Credit unions are member-owned financial co-operatives that provide savings and lending services to members who share a common bond, such as living in the same area, working for the same employer, or belonging to the same association. The regulators jointly regulate around 340 UK credit unions, which together serve more than two million members and hold around £4.9 billion in assets.

2.2 The mutuals landscape report, published on 5 December 2025 by the regulators, emphasised the important role that mutuals, including credit unions, play in the UK financial system, including by contributing to consumer trust and financial inclusion. The PRA has already taken steps to fulfil some of the commitments made in the mutuals landscape report via consultation paper (CP) 12/26 – Insurance friendly societies, amalgamations and transfers. This DP reviews only the regulatory framework for credit unions and supports the regulators’ wider ambition to facilitate sustainable growth in the credit union sector while maintaining confidence in its integrity and prudential soundness. In addition, the DP reflects broader Government support for the sector’s contribution to financial inclusion, including through the Financial Inclusion Strategy. This committed to developing a Credit Union Transformation Fund in England to support the sector, which is being taken forward by Fair4All Finance.

2.3 In the mutuals landscape report, the regulators committed to working with the credit union sector to review its current position and trajectory in more detail and consider the longer-term evolution of its regulatory framework. This DP therefore explores whether the current framework remains fit for purpose as the sector changes. This includes exploring whether it supports sustainable growth, maintains appropriate prudential safeguards and remains proportionate for small and simple firms while addressing the risks posed by larger or more complex credit unions.

2.4 This review also follows recent initiatives intended to support the sustainable development of the credit union sector. These include the PRA’s final policy statement (PS) 5/26 – Credit Union Service Organisations, allowing credit unions to invest in CUSOs. These initiatives reflect a broader effort to ensure that the prudential framework remains proportionate, supports confidence in the sector and facilitates sustainable growth.

2.5 The regulators intend this review to assess the regulatory and legislative framework holistically, including assessing whether it provides the conditions for sustainable growth and delivers the PRA’s and FCA’s intended regulatory outcomes, which advance their regulatory objectives and facilitate the sustainable development of the sector:

2.6 Collectively, these outcomes would support the PRA's primary objective of promoting the safety and soundness of PRA-regulated firms. They also advance the FCA’s objectives of securing an appropriate degree of protection for consumers and supporting confidence in the sector. Ensuring that credit unions maintain prudent financial, operational and governance standards, while being able to serve their members effectively, can support both the resilience of credit unions and positive outcomes for consumers. The focus on consumer confidence and protection, operational resilience, risk management and orderly market exit supports depositor protection and contributes to confidence in the sector, reducing the likelihood and impact of firm failure.

2.7 At the same time, the outcomes on proportionate regulation, effective competition and innovation, and long-term sustainability are consistent with the PRA's secondary and FCA’s primary competition objective and both regulators’ secondary competitiveness and growth objective (SCGO). The outcomes also support the Government's growth and competitiveness priorities, including facilitating competition and innovation and reinforcing financial inclusion, by helping credit unions continue to provide accessible financial services to members within their common bond, including vulnerable and under-served communities.

2.8 When developing proposals to deliver these outcomes, the regulators would have particular regard to proportionality and the desirability of recognising differences in the nature and objectives of mutual organisations such as credit unions, ensuring that regulatory requirements are commensurate with their size, complexity and risk profile.

2.9 In addition, the emphasis on strong governance, risk management and orderly market exit supports resilient credit unions, helping them to identify and manage risks effectively. It also reflects the principle that firms' senior management should remain responsible for compliance with regulatory requirements, as set out in Rule 11.5(3) in the Credit Unions Part of the PRA Rulebook.

2.10 The regulators would welcome feedback and discussion on the proposed intended outcomes for the review of the credit union regime set out in this chapter, including:

• views on whether these intended outcomes are appropriate;
• discussion on how these outcomes should be prioritised as part of this review; and
• feedback on any outcomes the regulators have not included in this DP, but which respondents consider should inform their policy development.

2.11 This DP is relevant to Great Britain and Northern Ireland-based credit unions, and their members, service organisations, and trade associations.

Structure of the DP 

2.12 While the regulators have identified six intended outcomes for this review, these outcomes are closely interconnected and many of the potential options explored in this DP contribute to more than one outcome. The DP therefore groups related issues together around the key policy questions facing the sector, rather than considering each outcome in isolation.

2.13 The DP is structured as follows:

• Chapter 3 – considers proportionality and whether the prudential regime remains appropriately calibrated across credit unions of different sizes. This includes options to simplify requirements for small and simple firms, review existing thresholds and consider how prudential requirements should evolve as firms grow in size, complexity and risk profile.
• Chapter 4 – considers how the framework could support sustainable growth, competition and innovation, including barriers to growth, CUSOs, newly permitted activities and the conditions needed to support the long-term sustainability of the sector.
• Chapter 5 – considers consumer confidence, operational resilience and risk management. This includes governance, risk management capabilities, aggregator-driven growth, mortgages and fixed-rate products, the role of third-party providers and outsourcing, and whether additional safeguards may be appropriate as firms expand and diversify.
• Chapter 6 – considers market exit and wind-down, discussing the lack of accessible solvent exit tools for both large and small credit unions. It explores options relating to transfer powers and sale of the loan book, as well as assessing legislative barriers to achieving this outcome.
• Chapter 7 – sets out a summary of questions for discussion.
• Chapter 8 – sets out details for responding to this DP.

2.14 Throughout the DP, the regulators seek views not only on individual options but also on how different measures might operate together as coherent packages to support sustainable growth, maintain confidence in the sector and ensure appropriate prudential safeguards.

Next steps and responses 

2.15 The regulators invite responses to this DP by Friday 5 March 2027. See Responding to the DP for details on how to respond and for information on how the PRA handles your personal data.

Q1: Do you consider that the outcomes the regulators have set out in this chapter are appropriate, and will support the development of a regime that fosters sustainable growth while preserving safety and soundness? If so, please provide feedback on how these outcomes should be prioritised. If not, are there other outcomes the regulators should consider?

3: Delivering proportionate prudential regulation

Background

3.1 The current prudential framework for credit unions was developed for a sector characterised by relatively small institutions offering simple savings and lending products. While that remains an accurate description of many firms, the sector has become increasingly diverse. Legislative change, consolidation, common bond reform and the emergence of new business models have enabled some credit unions to grow significantly in scale and complexity.

3.2 As a result, firms with very different business models, growth trajectories and risk profiles may now operate within the same broad regulatory framework. This raises questions about whether the current regime continues to provide an appropriate pathway for firms to grow and innovate while maintaining confidence in the safety and soundness of the sector.

3.3 The PRA is interested in understanding whether aspects of the existing prudential framework may unintentionally constrain sustainable growth or create frictions as credit unions expand, diversify their activities and seek to compete more effectively with other providers of retail financial services. In addition, the PRA notes that as credit unions begin to undertake activities such as mortgages and fixed-term loans, they become exposed to increasingly complex risks. As their balance sheets grow and their business models become more complex, the largest or most complex credit unions might become more similar in terms of scale and activity to small building societies.

3.4 The current framework differentiates firms primarily through asset-based thresholds, reflecting the view that size can be a useful indicator of the nature and scale of the risks a firm presents. However, the PRA recognises that firms may also differ in other respects, including the activities they undertake, balance sheet composition and business model complexity. The PRA is therefore interested in exploring how proportionate regulation should account for differences in business model and complexity as well as size.

3.5 While much of the discussion around proportionality focuses on how the framework responds to growth and increasing complexity, the PRA is also interested in understanding whether the cumulative effect of existing requirements and expectations remains proportionate for the smallest and simplest credit unions. Over time, regulatory requirements, supervisory expectations and reporting obligations evolve in response to emerging risks, changes in the wider regulatory framework and developments across the financial sector. While each individual requirement may be justified, their cumulative effect may create a material operational and administrative burden for firms with limited financial, technological and governance resources.

3.6 A framework that imposes disproportionate costs on small and simple credit unions may not only affect individual firms but could also inhibit the development of the sector as a whole. Where compliance resources are focused on meeting regulatory requirements rather than serving members, investing in technology or strengthening operational capabilities, regulation may unintentionally act as a barrier to sustainability and growth. The PRA is therefore interested in understanding whether the framework continues to deliver sufficient prudential benefit in relation to the burden it imposes on the smallest and simplest firms.

3.7 In designing a proportionate prudential framework for credit unions, there may be a trade-off between simplicity and risk sensitivity. A simpler framework may reduce compliance burdens and be easier for firms to operate, while a more risk-sensitive approach may better reflect differences in firms' activities and risk profiles but introduce greater complexity. As the sector evolves, it may be useful to consider where the appropriate balance lies between these objectives.

3.8 Overall, this chapter explores whether the current framework remains appropriately calibrated across the sector, and whether regulatory requirements continue to reflect differences in firms' size and risk profile. It also seeks to explore whether there are areas where the framework may no longer deliver the intended balance between supporting sustainable growth, maintaining resilience and preserving confidence in credit unions. The PRA would welcome feedback and discussion on whether the following package of options might support the PRA’s intended outcome on proportionality.

Delivering proportionate prudential regulation

Q2: Does the current prudential framework strike an appropriate balance between financial resilience, proportionality and supporting sustainable growth in the credit union sector?

Simplifications for small and simple credit unions

3.9 In considering how the regime could become more proportionate, the PRA has had regard to the principle that regulatory burdens should be proportionate to the benefits they are intended to achieve, and to the desirability of recognising differences in the nature, scale and objectives of different firms, including mutual organisations such as credit unions.

3.10 The smallest credit unions typically undertake simple activities, often operate locally or within single companies or institutions, and present limited risks to the wider financial system. The current framework already reflects this through a range of proportionate measures, including simplified prudential requirements and a lighter-touch, largely reactive supervisory approach that recognises the limited scale and complexity of these firms, and focuses on supporting solvent wind-downs and orderly exits.

3.11 However, the PRA recognises that not all small and simple credit unions share the same business plans and growth ambitions. While some credit unions may wish to limit their business to a specific community, locality, or occupation, others may be considering expanding their common bonds to extend their services to a wider range of members. Similarly, while some credit unions may prefer to continue provision of simple savings and lending products, others may consider that their members would be better served by the provision of additional services such as mortgages.

3.12 The regulators will set out considerations on appropriate risk management in Chapter 5 and consider that, in general, credit unions intending to grow significantly, expand their common bond, or diversify their balance sheets and take on new activities should ensure that these ambitions are supported by commensurate enhancements to their risk management capabilities and governance processes.

3.13 However, for those credit unions that intend to continue providing simple services to a limited common bond, the PRA considers there may be scope to simplify or reduce some of its requirements for the smallest and simplest credit unions (for example those with less than £10 million in total assets). These simplifications would need to be balanced against the need to maintain core safeguards including minimum capital, liquidity, provisioning and Single Customer View requirements; Financial Services Compensation Scheme (FSCS) protection for eligible deposits and appropriate governance and oversight arrangements. In particular, the credit union’s board would need collectively to have appropriate skills and experience, employ or engage people with the knowledge and expertise necessary to discharge their responsibilities, and ensure that an appropriately competent and accountable individual has oversight of the business.

Reducing prescribed regulatory documents

3.14 One option would be to reduce or replace some prescribed documentation requirements and expectations, such as the liquidity management policy and the business plan, with more outcomes-focused expectations. This could improve proportionality, reduce compliance costs and allow limited resources to focus on managing risks in practice.

• Liquidity management policy statement: Rule 10.5 of the Credit Unions Part of the PRA Rulebook requires that credit unions must establish, implement, and maintain an up-to-date liquidity management policy statement approved by the governing body. In addition, supervisory statement (SS) 2/23 – Supervising credit unions sets out further expectations on the content of the liquidity management policy statement. The PRA could carve out the smallest and simplest credit unions from this requirement to produce a board-approved policy statement, and instead simply expect these firms to have a strategy for liquidity management that takes into account the nature, scale, and complexity of the credit union, and considers the credit union’s strategic plan, risk profile, and current economic climate.
• Business plan: Rule 11.7 of the Credit Unions Part of the PRA Rulebook requires that a credit union must establish, implement and maintain an up-to-date business plan approved by the governing body. The PRA sets out further expectations in relation to the business plan in SS2/23. For example, the PRA expects the business plan to include measurable objectives for the next three years, plausible financial forecasts, and a robust plan for delivering the credit union’s strategy. For the smallest credit unions, the PRA could replace the requirement to maintain a formal business plan with an expectation that boards regularly consider the credit union's strategy, financial sustainability, growth plans and key risks in a manner proportionate to the firm's size and complexity.

3.15 The PRA recognises that requirements to produce, review and update board-approved documents can impose costs that may be disproportionately burdensome on firms with limited resources. However, removing these requirements could weaken discipline, board oversight and audit trail that support effective risk management and forward planning. Removing the business plan requirement may also reduce strategic planning and early identification of financial or operational risks.

3.16 High-level expectations may also be interpreted inconsistently, making it harder for credit unions and supervisors to assess compliance and potentially allowing liquidity, operational or sustainability risks to go unidentified until problems arise. Furthermore, the PRA notes that rather than replacing requirements with outcomes-based expectations, the smallest credit unions may prefer a more prescriptive approach in PRA rules that sets out in greater detail the specific information that should be included in these documents.

3.17 Overall, the PRA considers that these documents can form an important part of a credit union's governance and risk management framework. However, it is interested in understanding whether the costs associated with producing, reviewing and maintaining them remain proportionate for the smallest firms. The PRA would therefore welcome feedback on how the smallest credit unions use these documents and other documentation required by PRA rules in practice, and whether any reduction or simplification of these requirements would materially affect their ability to identify, monitor and manage risks.

Internal audit requirements

3.18 Another option would be to replace the existing internal audit requirement^{footnote [1]} with a broader expectation for independent assurance over governance, risk management and controls. This could provide firms with greater flexibility to adopt assurance arrangements suited to their size and complexity and reduce costs for small and simple credit unions.

3.19 As with the considerations above on reducing required documents, high-level expectations could be interpreted inconsistently and may weaken the independence, regularity and quality of assurance, board oversight, follow-up of findings and the audit trail available to supervisors. In addition, the PRA is aware of concerns that external audit costs may be prohibitively expensive for small firms, and that expecting credit unions to seek independent assurance over governance, risk management and controls may not materially reduce costs for the smallest firms.

3.20 The PRA would welcome feedback and supporting quantitative and qualitative evidence on the relative benefits and costs of replacing internal audit requirements with such an expectation.

Reporting requirements

3.21 A further option could be to simplify reporting requirements by removing fields that have limited supervisory value or by streamlining aspects of balance sheet asset and liability reporting. In principle, this could reduce reporting burdens, lower the risk of manual data-entry errors and lessen demands on limited staff or volunteer resources. However, it is not clear how significant these benefits would be in practice for small and simple credit unions, particularly where reporting processes are already embedded within firms' systems and governance arrangements.

3.22 Regulatory returns play an important role not only in supporting the PRA's supervision of the sector, but also in helping credit unions monitor their own financial position and risk profile. Reducing reporting requirements could therefore have unintended consequences if it led firms to collect or review less management information. Less granular data could also reduce the PRA's ability to identify emerging capital, liquidity, lending or sustainability concerns, compare firms consistently and assess sector-wide risks. Given the PRA's portfolio-based approach to supervising many small firms, the information provided through regulatory returns is an important supervisory tool, and excessive simplification could increase the risk that issues are identified only after they have become more serious.

3.23 Changes to reporting requirements could also involve implementation costs for both credit unions and the PRA, create discontinuities in historical data and require amendments to systems, processes and guidance. In some cases, changes intended to simplify reporting could introduce operational risks during transition or require firms to maintain parallel processes. Any changes would therefore need to balance burden reduction against implementation costs and the continued availability of useful information for both firms and supervisors. The PRA is interested in stakeholders' views on the extent to which further reporting simplification would deliver meaningful benefits and whether those benefits would justify the associated costs and risks.

Simplifications for small and simple credit unions

Q3: Are there existing prudential, reporting or governance requirements that could be simplified for small and simple credit unions without materially weakening risk management, member protection or supervisory oversight? What are your views on the options discussed here to reduce prescribed documentation, internal audit requirements and reporting requirements?

Rationalising thresholds

Simplifying the leverage-based threshold framework

3.24 One area the PRA could consider as part of this review is whether the current threshold framework remains fit for purpose as the sector evolves. The current capital framework for credit unions is based primarily on a simple leverage ratio, under which capital requirements increase at specified asset thresholds (see Table 1). The amount of capital required therefore depends principally on the size of a credit union’s balance sheet, rather than the risk profile of its assets. A credit union undertaking relatively low-risk activities may consequently face the same leverage requirement as one of a similar size undertaking activities that expose it to greater or more complex risks.

3.25 Separately, the existing framework includes additional requirements or expectations for credit unions undertaking certain activities (such as mortgages, corporate lending and consumer credit). These seek to address some of the additional risks that may arise as a credit union grows or undertakes a wider range of activities, but do not change the fundamentally risk-insensitive nature of the leverage-based capital measure itself.

3.26 There is a question as to whether the number and calibration of the existing asset-based thresholds remain appropriate. While the thresholds provide greater differentiation as credit unions grow, the differences between firms at either side of a threshold may be relatively small. Multiple thresholds may therefore introduce cliff-edge effects, potentially affecting firms’ incentives or ability to grow and making longer-term planning more difficult.

3.27 The PRA is therefore interested in views on whether the asset-based framework could be simplified, for example by reducing or consolidating the number of thresholds or applying a more consistent approach across a broader range of credit unions. This could reduce cliff-edge effects and barriers to growth, while retaining a simple and proportionate approach for much of the sector.

3.28 Simplifying the thresholds is, however, distinct from the question of whether a predominantly risk-insensitive capital measure remains appropriate for the largest and most complex credit unions. As credit unions grow, undertake a broader range of activities or develop more complex balance sheets, differences in their underlying risks may become more significant. This raises the question of whether greater risk sensitivity may be appropriate for such firms.

3.29 There are different ways in which the framework could respond. The PRA could retain the leverage ratio as the core capital measure while introducing additional safeguards for larger or more complex credit unions, for example through capital, governance, risk management or liquidity requirements or expectations. Alternatively, a more explicitly risk-sensitive approach to capital could apply above a particular size or level of complexity. These approaches would involve different trade-offs between simplicity, proportionality and risk sensitivity.

Capital thresholds

Q4: Do the existing capital thresholds in the Credit Unions Part of the PRA Rulebook remain fit for purpose? If not, which thresholds should be reviewed and why?^{footnote [2]}

Options for the capital framework

3.30 The number and calibration of asset-based thresholds are distinct from the broader question of how the capital framework should respond as credit unions grow, become more complex or undertake activities that give rise to different risks. The following sections therefore consider a range of options. These include:

• retaining the leverage ratio as the core capital measure, potentially with higher capital requirements or additional safeguards for larger or more complex credit unions;
• introducing greater risk sensitivity into the capital framework, including through further development of the existing regime or application of the Small Domestic Deposit Taker regime; and
• facilitating conversion to building society status where a credit union’s activities and risk profile increasingly resemble those of a building society.

3.31 These options involve different trade-offs between simplicity, capital strength, risk sensitivity and compliance costs.

Increasing the capital floor for the largest or most complex credit unions

3.32 In order to address concerns that larger or more complex credit unions may warrant enhanced prudential requirements, particularly where they compete with building societies offering similar products and services, one option to achieve this could be to increase the capital requirement applicable to these credit unions, for example from 10% to 15% of total assets above £300 million. This option would serve as a simpler but more conservative alternative to the application of a more complex but risk-sensitive regime which the PRA explores in paragraphs 3.35 – 3.53.

3.33 Together with a simplification to the thresholds for small and simple credit unions, introducing an increased capital floor for the largest or most complex credit unions could maintain the simplicity of the existing leverage-based thresholds framework. This approach would be straightforward to understand, calculate and supervise, provide a larger buffer against losses, and avoid the implementation costs and complexity of introducing risk-weighted assets (RWAs) or firm-specific capital add-ons.

3.34 An increase determined solely by total assets would not capture credit unions below the relevant threshold that undertake complex or higher-risk activities, grow rapidly, or have material weaknesses in governance and risk management. A uniform increase would remain relatively insensitive to differences in asset quality, activities and risk management, and could therefore require too much capital from lower-risk credit unions while providing insufficient protection against higher-risk business models. It could also constrain lending, reduce distributions to members, create a cliff-edge at the relevant threshold and encourage firms to remain below it. While these outcomes might promote stability, boosting consumer confidence and protection in the sector, the PRA considers that such an approach is unlikely to foster competition within the sector or provide an environment that supports growth.

Risk-based capital regime for large credit unions

3.35 As noted, delivering proportionate regulation requires consideration of whether the framework continues to reflect adequately the risks presented by the largest or most complex firms.

3.36 It is possible that as credit unions grow and take on more secured lending, such as mortgages, their scale and activities become increasingly similar to those of small building societies. If some credit unions were to expand their secured lending activities to the point where they were offering similar products to similar members and facing similar risks to smaller building societies, this could raise questions about whether they should be subject to a more comparable prudential regime. This includes considerations not only about whether the current leverage-based framework remains appropriate for the risks these firms present, but also whether it continues to support effective competition and a broadly level playing field across similarly sized deposit takers.

3.37 The PRA recognises that there may be different views on how best to ensure that prudential requirements remain proportionate as credit unions grow and/or become more complex. Some stakeholders may consider that a more risk-sensitive framework could better align requirements with the risks undertaken by larger or more complex credit unions, support a more level playing field with other deposit takers and reduce potential distortions associated with a purely size-based approach. Others may argue that the simplicity and predictability of the current framework are important strengths and that introducing additional complexity could create new operational and compliance burdens.

3.38 The PRA is therefore interested in understanding whether a more risk-based approach for larger or more complex credit unions could better support the intended outcomes of proportionality, sustainable growth and effective competition, while continuing to maintain confidence in the safety and soundness of the sector.

Developing the current credit union capital regime further for large or complex credit unions

3.39 The PRA could consider developing the existing capital regime further for those credit unions which are large or complex to include: basic risk-weighted assets (for example based on a simplified version of the Basel framework); streamlined capital add-ons where credit unions have high-risk exposures or weaknesses (for example governance issues, concentration risk, or rapid growth) that are tailored to credit union characteristics; and potentially a simple capital buffer designed to absorb shocks during stress periods.

3.40 However, the development and implementation of such a prudential regime could create additional costs for both the sector and the PRA. As set out in the statement of policy (SoP) 14/24 – The Prudential Regulation Authority’s approach to cost benefit analysis, fixed regulatory costs can have a disproportionate impact on smaller firms, and the introduction of a new framework could require investment in systems, processes, reporting and specialist expertise.

3.41 In addition, such a regime could require the PRA to develop and maintain new supervisory approaches and supporting infrastructure. While such an approach may allow prudential requirements to be calibrated more closely to the risks presented by credit unions, the PRA is interested in understanding whether these potential proportionality benefits would justify the additional complexity and costs that such a framework would entail.

3.42 The PRA also recognises that the costs of developing and operating a tailored framework may have implications for the allocation of regulatory costs across the wider population of regulated firms. The PRA would therefore welcome feedback on whether the benefits of a credit union-specific regime would justify these additional costs and complexities.

Application of the Small Domestic Deposit Taker (SDDT) regime

3.43 A tailored regime is not the only potential response to the growth and increasing diversification of the sector. An alternative approach could be to consider whether credit unions that have grown significantly in scale and complexity should have a clearer pathway to transition into an existing prudential framework designed for larger deposit takers. This could allow firms to continue growing and expanding their activities within a well-established regulatory framework, while avoiding some of the costs and complexity associated with developing and maintaining a separate credit union-specific regime.

3.44 In January 2026, the PRA set out final policy for the simplified capital regime for SDDTs. PS4/26 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs) set out final rules on simplifications to all elements of the capital stack, including Pillar 1, Pillar 2A, buffers, the calculation of regulatory capital, reporting, as well as simplifications to liquidity and disclosure requirements. This PS built on previous simplifications to liquidity and disclosure requirements that were finalised in PS15/23 – The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements.

3.45 In considering what a risk-based capital regime for larger or more complex credit unions should look like, the PRA could consider whether it may be appropriate and proportionate to apply parts or all of the SDDT regime to credit unions. As part of this, the PRA would need to consider carefully which credit unions this could apply to. One potential option could be to calibrate this regime such that it does not immediately capture any credit unions but serves as a regime for the largest or most complex credit unions to grow into.

3.46 There are some challenges to this approach. One of the drawbacks of applying the SDDT regime to large credit unions is that it applies much of the Basel 3.1 Pillar 1 capital framework and was not designed to target specific risks to a credit union’s safety and soundness.

3.47 The different legislative framework for credit unions also imposes unique restrictions that do not apply to comparable firms. For example, credit unions are subject to other legislative restrictions on their activities, including an interest rate cap^{footnote [3]} and corporate lending limits, and are subject to different accounting frameworks. In addition, credit unions cannot manage balance sheet and interest rate risks like other deposit takers, as they cannot use derivatives to manage interest rate risks, and they cannot increase the interest rate charged on deposits above the interest rate cap.

3.48 Nevertheless, the PRA could consider applying some aspects of the SDDT regime to larger or more complex credit unions. This could include:

• Requiring large and/or complex credit unions to calculate RWAs using the standardised approach to credit risk (CR SA) and standardised approach to operational risk (OR SA) as set out in PS1/26 – Implementation of Basel 3.1: Final rules.
• Application of a single non-cyclical capital buffer. For SDDTs this is set at least 3.5% of the SDDT’s RWAs or to a higher level depending on the risks to which the firm is exposed.

3.49 In addition, the PRA could explore whether some elements of the SDDT regime are unduly complex or burdensome for large or complex credit unions and consider whether these elements would need to be excluded or adapted. For example, the PRA would need to consider whether the benefits of detailed Internal Capital Adequacy Assessment Process (ICAAP) expectations would justify the additional costs and complexity for these firms.

3.50 The PRA could also consider whether it would be appropriate to apply some elements of the liquidity framework applicable to SDDTs, particularly where credit unions undertake activities that create greater liquidity or maturity-transformation risk, such as fixed-rate or longer-term lending funded by withdrawable shares. These could include requirements to maintain a 50% four-quarter moving average retail deposit ratio, and a requirement to report one additional liquidity monitoring metric return related to concentration by deposit type.

3.51 Overall, the PRA recognises that applying some or all of the SDDT framework to larger or more complex credit unions could represent a significant shift from the current prudential regime. Such an approach could support the intended outcome of proportionate regulation by aligning requirements more closely with firms' activities and risk profiles, while also supporting effective competition where larger or more complex credit unions compete with other deposit takers offering similar products and services.

3.52 However, it would also introduce greater complexity, implementation costs and operational burdens for firms, and may require significant adaptation to reflect the legislative, business model and accounting differences that distinguish credit unions from other deposit takers.

3.53 The PRA is therefore interested in understanding whether the potential benefits of the more risk-sensitive SDDT framework would outweigh these costs and complexities, and whether such an approach could better support the intended outcomes of proportionality, sustainable growth, competition, safety and soundness than the current leverage-based regime.

Risk-based capital regime

Q5: Should larger or more complex credit unions be subject to a more risk-sensitive prudential regime and, if so, what form should that regime take?

Building society conversion

3.54 As some credit unions grow and undertake a broader range of activities, it may be appropriate to consider whether there are circumstances in which conversion to building society status could become a suitable framework for continued growth. This could be relevant where a credit union's size, activities or balance sheet composition become more characteristic of a building society, for example through significant secured retail lending.

3.55 Creating a path for a credit union to convert to building society status could have several benefits, associated with operating within a legislative and prudential framework better aligned to larger or more complex firms. This includes making the institution eligible to apply for access to the Bank of England’s Sterling Monetary Framework (SMF) facilities, subject to meeting the relevant requirements. In addition, this may provide access to a wider range of funding tools to those credit unions that have demonstrated their ability to manage more complex risks, such as wholesale funding, covered bonds, more sophisticated treasury options, and derivatives for the purposes of managing interest rate risk. This approach might also provide improved access to mergers and restructuring options.

3.56 However, this approach would require legislative change and introduce significant complexities, including: differences in capital structures, the need to comply with distinct accounting standards, and potential exposure to demutualisation risk.

3.57 The PRA would welcome views on this option and on other approaches, including those that would represent a more significant departure from the current framework.

Other capital considerations

3.58 Alongside the above considerations, there may be other aspects of the current capital framework that warrant further examination. Areas for consideration include: the use of very costly capital that significantly exceeds market rates, which can result in profits being used to service capital rather than being returned to members or reinvested in the credit union; reliance on a small number of capital providers; potential conflicts of interest where capital providers also supply services; and the listing of credit union capital instruments on non-EU exchanges.

3.59 Additional expectations or limits could protect members, reduce concentration and conflict risks, and improve the quality and resilience of capital. However, they could also restrict access to funding, increase costs and deter legitimate investment, particularly where alternative sources of capital are limited. These examples are not exhaustive but are intended to prompt discussion and gather views on where changes may be needed.

Other capital considerations

Q6: Are there risks in the way credit unions currently raise or service capital that warrant changes to the regulatory framework? Are there other capital-related issues the PRA should consider?

Potential packages of proportionality measures

3.60 The PRA is also mindful that individual aspects of the framework should not be considered in isolation. For example, reducing capital thresholds or leverage requirements could support growth and reduce barriers to expansion, but this might also strengthen the case for more robust requirements in other areas to ensure that risks remain appropriately managed as firms become larger or more complex. The PRA is therefore interested in views on whether there are alternative combinations, or ‘packages’ of prudential requirements that could better support sustainable growth while maintaining safety and soundness.

Small credit unions

3.61 One possible approach for small and simple credit unions would be a simpler but more conservative framework. Under this approach, credit unions would be subject to a higher minimum capital requirement in exchange for a reduction in administrative, governance and reporting burdens. Rather than maintaining multiple layers of differentiated requirements for very small firms, the framework would seek to preserve core prudential safeguards while simplifying compliance obligations.

3.62 Such a package could include applying a common 5% leverage ratio to all credit unions with total assets below £10 million, replacing the current 3% threshold for firms below £5 million. It could also include simplifying or removing some prescribed documentation requirements, replacing certain internal audit requirements with broader assurance expectations, and reviewing whether reporting requirements could be streamlined.

3.63 Together, these changes could create a clearer and more straightforward framework for small and simple credit unions while retaining an appropriate level of financial resilience.

Large credit unions

3.64 For larger or more complex credit unions, there may be a range of approaches to balancing growth, resilience and proportionality.

3.65 At one end of the spectrum, the PRA could retain the current leverage-based framework and its relative simplicity, while introducing stronger safeguards, such as higher capital requirements for the largest or most complex firms (such as a 15% leverage ratio for total assets above £300 million) and a rationalisation of existing thresholds.

3.66 At the other end, the PRA could adopt a more risk-sensitive framework, potentially including risk-weighted capital requirements, liquidity requirements, ICAAP expectations, and enhanced governance and risk management standards. Such an approach may allow capital requirements to be more closely aligned to the risks firms take but would also increase complexity and compliance costs.

3.67 A third possibility would be to maintain the current credit union framework for most firms while facilitating conversion to building society status for those whose activities, size and complexity increasingly resemble those of building societies.

3.68 The PRA is interested in views on the advantages and drawbacks of these different approaches, and whether alternative combinations of requirements could better support sustainable growth while maintaining safety and soundness.

Potential packages of proportionality measures

Q7: Do you agree that there may be benefits in considering packages of prudential measures, rather than individual requirements, when designing a proportionate framework for credit unions? If so, what combinations of measures would you favour?

Q8: What balance should be struck between simplicity, capital requirements and risk sensitivity for (a) smaller and simpler credit unions and (b) larger or more complex credit unions? Please provide reasons and, where possible, supporting evidence.

Summary of questions for discussion: Chapter 3

Delivering proportionate prudential regulation

Q2: Does the current prudential framework strike an appropriate balance between financial resilience, proportionality and supporting sustainable growth in the credit union sector?

Simplifications for small and simple credit unions

Q3: Are there existing prudential, reporting or governance requirements that could be simplified for small and simple credit unions without materially weakening risk management, member protection or supervisory oversight? What are your views on the options discussed here to reduce prescribed documentation, internal audit requirements and reporting requirements?

Capital thresholds

Q4: Do the existing capital thresholds in the Credit Unions Part of the PRA Rulebook remain fit for purpose? If not, which thresholds should be reviewed and why?^{footnote [4]}

Risk-based capital regime

Q5: Should larger or more complex credit unions be subject to a more risk-sensitive prudential regime and, if so, what form should that regime take?

Other capital considerations

Q6: Are there risks in the way credit unions currently raise or service capital that warrant changes to the regulatory framework? Are there other capital-related issues the PRA should consider?

Potential packages of proportionality measures

Q7: Do you agree that there may be benefits in considering packages of prudential measures, rather than individual requirements, when designing a proportionate framework for credit unions? If so, what combinations of measures would you favour?

Q8: What balance should be struck between simplicity, capital requirements and risk sensitivity for (a) smaller and simpler credit unions and (b) larger or more complex credit unions? Please provide reasons and, where possible, supporting evidence.

4: Competition, innovation and long-term sustainability

Background

4.1 The regulators’ intended outcomes for effective competition and innovation, and the long-term sustainability of the sector, are closely linked to their statutory objectives relating to competition, competitiveness and growth. Competition and innovation can support the development and sustainability of the credit union sector by enabling firms to improve services for members, diversify income, adopt new technologies, operate more efficiently and respond to changing member needs.

4.2 As discussed in Chapter 3, a proportionate prudential framework is an important factor in supporting sustainable growth across the sector. The ability of credit unions to innovate, adopt new business models and make effective use of technology may also play an important role in determining their future and long-term sustainability.

4.3 Competition and innovation may also support the long-term sustainability of the sector by helping credit unions reach a broader range of members, develop new products and services, and compete more effectively with other providers of retail financial services. The regulators are therefore keen to ensure that regulatory requirements do not create unnecessary barriers to entry, expansion or innovation where these are consistent with the integrity and safety and soundness of firms.

4.4 This chapter therefore explores whether there are opportunities to support competition, innovation, and the long-term sustainability of the sector within the existing credit union model. These opportunities may arise through different mechanisms, including the development of new products and services, collaboration between firms, the use of certain third-party arrangements and the deployment of resources in ways that support the sector's future development. The regulators are interested in understanding whether any features of the current regulatory framework constrain firms' ability to pursue such opportunities and whether it provides appropriate conditions for innovation and sustainable growth.

4.5 The regulators recognise that innovation can also create new operational, governance and prudential risks. These issues are considered in more detail in Chapter 5, which discusses how growth and innovation can be supported by appropriate risk management, governance and operational resilience arrangements.

4.6 While a proportionate regulatory framework can support sustainable growth, the future development of the sector will also depend on broader considerations, including firms' ability to scale safely, invest in operational capabilities and technology, attract and retain appropriately skilled staff and volunteers, and adapt to changing member needs and demographics.

4.7 The opportunities available to support the long-term sustainability of the sector are likely to vary across firms depending on their size, business model and strategic objectives. Some firms may seek to expand the products and services they offer to members. Others may look to collaborate with other credit unions, share resources or develop common capabilities. Some may identify opportunities to deploy surplus resources in ways that support both financial sustainability and their wider social purpose. The following sections explore several examples of these opportunities and seek views on the barriers and challenges firms may face in pursuing them.

Uptake of newly permitted activities

4.8 The Financial Services and Markets Act 2023 expanded the range of products and services that credit unions in Great Britain can offer, including conditional sale agreements, hire-purchase agreements, and insurance distribution services. These changes were intended to provide credit unions with greater flexibility to meet their members’ needs, diversify their product offerings, and compete more effectively with other retail financial service providers. Once these changes were enacted, the FCA updated CREDS 10 with the application of relevant Handbook Provisions to reflect these additional activities.

4.9 These powers support sustainable growth of the sector by enabling credit unions to offer a broader range of products and services, generate additional revenue streams, and attract new members. However, despite these legislative changes, the FCA understands that credit unions, both small and large, in Great Britain have yet to take up these activities.

4.10 The FCA is therefore seeking views on whether there are barriers preventing credit unions from doing this, such as regulatory requirements, operational challenges, demand, or other factors.

Credit Union Service Organisations

4.11 CUSOs are entities jointly owned by two or more credit unions that provide shared services to support those credit unions’ operations and growth objectives. By pooling resources and collaborating, CUSOs can help credit unions achieve economies of scale so they can access or provide services that would otherwise be too costly or complex to obtain individually. This can include operational, technological, or administrative services that support delivery of products and services.

4.12 CUSOs may be particularly beneficial for small and simple credit unions facing resource constraints to develop certain capabilities. They enable credit unions to access expertise and invest in innovation, which support operational resilience and enhance service quality. This means CUSOs can play a significant role in facilitating credit union growth and resilience.

4.13 As with any third-party arrangement, the regulators expect credit unions to maintain appropriate governance arrangements, oversight, risk management and controls to monitor and manage risks arising from their CUSO. This is consistent with expectations relating to outsourcing and third-party risk management. Depending on the nature of the activities it conducts, a CUSO may require authorisation by the FCA.

4.14 In recognition of the significant benefits CUSOs can provide to the credit union sector, in February 2026, the PRA published amendments to the Credit Unions Part of the PRA Rulebook and updates to SS2/23 allowing credit unions to invest in CUSOs (PS5/26 – Credit Union Service Organisations) while establishing safeguards to manage associated risks. Following the PRA’s recent changes, the FCA would welcome views on credit unions’ use of CUSOs, in particular whether the FCA should provide additional CREDS guidance on oversight and risk management expectations specifically for CUSO arrangements.

Investments in social housing funds

4.15 On 19 October 2026, the Northern Ireland Department for the Economy (DfE) published a Credit Unions (Amendment) Bill following its 2025 consultation. The changes include allowing Northern Ireland Credit Unions (NICUs) to use surplus funds for social or charitable purposes without distributing a dividend. In addition, the DfE proposes to work with the PRA to enable NICUs to invest collectively in social projects, such as housing or local infrastructure. This mirrors an approach adopted in the Republic of Ireland, where credit unions can invest in social housing through a regulated structure approved by the Central Bank of Ireland.

4.16 The PRA’s current investment rules prevent credit unions from investing in such funds. Allowing these investments could broaden the range of eligible investments, support diversification away from traditional counterparties, provide a potential return on surplus funds and enable credit unions to contribute to projects consistent with their social purpose and mutual ethos.

4.17 However, social housing funds may be long-term and relatively illiquid, and could expose credit unions to credit, concentration, valuation, governance and operational risks that they may have limited expertise to assess or manage. There may also be a risk of mission drift if investment decisions give insufficient weight to safety and soundness.

4.18 The PRA is interested in exploring this matter further for credit unions in both Great Britain and Northern Ireland. Any change would need appropriate prudential safeguards, potentially including restrictions on eligible funds, investment and concentration limits, liquidity requirements, due-diligence and valuation standards, and proportionate governance and risk management expectations.

FCA periodic (annual) fees

4.19 In recognition of the important role credit unions play in promoting financial inclusion, the FCA is considering whether there may be opportunities to reduce FCA fees for credit unions, such as authorisation fees relating to their deposit-taking activities, to promote growth of the sector. This aims to reduce regulatory costs and enable credit unions to direct more resources towards serving members and supporting sustainable growth. Any changes to FCA fees would be considered as part of a wider review of fees and funding arrangements and would be consulted on separately from this review.

Other considerations

4.20 The topics discussed in this chapter are not an exhaustive assessment of all the opportunities or challenges facing the credit union sector. Rather, they are intended to illustrate areas where changes in legislation and the regulatory landscape could support competition, innovation and the long-term sustainability of the sector.

4.21 The regulators recognise that credit unions, trade bodies, service providers and other stakeholders may identify additional opportunities, barriers or emerging trends that are not specifically considered in this DP and would therefore welcome views on whether there are other areas that may warrant further consideration.

4.22 In particular, the regulators are interested in understanding whether there are opportunities, constraints or risks that may affect the ability of credit unions to innovate, compete effectively and continue serving their members over the longer term, and which have not been captured elsewhere in the DP.

Competition, innovation and long-term sustainability

Q9: Are there aspects of the current regulatory framework that may unnecessarily constrain the ability of credit unions to grow, innovate or compete effectively?

Uptake of newly permitted activities

Q10: Are there any regulatory or other barriers discouraging or preventing credit unions from offering conditional sale agreements, hire-purchase agreements or insurance distribution services?

Credit Union Service Organisations

Q11: Should the FCA provide additional guidance in CREDS clarifying the application of existing oversight and risk management expectations to third-party arrangements with CUSOs? If so, what additional clarification would be helpful?

Investments in social housing and other social-purpose funds

Q12: What demand is there for credit unions to invest in social housing or other social-purpose funds?

Q13: How could such investments support the sector’s social purpose while remaining consistent with safety and soundness?

FCA periodic (annual) fees

Q14: Are there any potential risks or unintended consequences that the FCA should consider if it were to consult on reforming FCA fees for credit unions in the future? The FCA would also welcome any evidence on the potential benefits of any such changes.

5: Ensuring consumer confidence and protection

Background

5.1 Operational resilience, risk management and governance are closely linked to the PRA’s and FCA’s objectives by promoting resilient firms, consumer protection and confidence in the sector.

5.2 Sustainable growth depends not only on the regulatory framework and the opportunities available to firms, but also on the ability of credit unions themselves to identify, manage and control the risks arising from their activities. Members need to have confidence that credit unions can grow, innovate and adapt to changing circumstances while continuing to manage risks effectively and protect member funds. As credit unions grow, diversify their balance sheets and introduce new products and services, they may become exposed to a wider range of financial and operational risks.

5.3 These developments also require proportional enhancements to governance and risk management capabilities.

5.4 This chapter explores a number of areas where changing business models, growth trajectories or new activities may give rise to additional risks and seeks views on whether the current framework provides appropriate support and safeguards to enable firms to manage these risks effectively. The chapter also considers whether there are opportunities to improve the clarity and accessibility of regulatory communications, helping firms to understand and implement regulatory expectations in a proportionate manner.

Risk management and governance

5.5 Both the PRA and FCA frameworks currently contain a range of governance, risk management and systems and controls requirements that are intended to be applied proportionately, taking account of a credit union's size, nature and complexity. As credit unions continue to evolve, the regulators are interested in understanding whether the current framework continues to support firms in growing sustainably while maintaining appropriate safeguards for members.

5.6 Clearer expectations could strengthen oversight, support earlier identification and escalation of emerging risks, and provide greater consistency for firms and supervisors. However, more prescriptive arrangements could increase governance, staffing and systems costs, duplicate existing controls or impose structures that are disproportionate to some business models. Requirements would therefore need to be proportionate to the size, activities, complexity and rate of growth of the credit union, with periodic supervisory review to ensure that frameworks remain fit for purpose as institutions expand.

5.7 One option could be to place greater emphasis on the accountability of Senior Management Function holders and boards for maintaining effective oversight, embedding a strong risk culture and ensuring that staff have the necessary skills and capabilities to manage emerging risks. This could sharpen ownership and challenge, although it would not by itself compensate for inadequate resources, expertise or systems.

5.8 The regulators also recognise that there may be different views on the appropriate balance between flexibility and clarity. Some credit unions may favour additional guidance on regulatory expectations in areas such as governance, risk management and internal controls. Others may consider that the existing framework already provides sufficient flexibility to tailor arrangements to their business model and risk profile. The regulators would therefore welcome feedback on whether the current governance, risk management and systems and controls framework remain appropriate for credit unions of different sizes and business models, and whether there are specific areas where additional guidance, clarification or flexibility may better support the sector.

5.9 While the nature of the risks credit unions are exposed to is likely to evolve as the sector and wider economic landscape change, the regulators have identified a number of areas where the growth and diversification of the sector have given rise to particular governance, risk management and operational resilience challenges. The following sections explore several examples and seek views on whether the current framework provides appropriate safeguards and support for firms operating in these areas.

Risks posed by fast-paced growth including aggregator-driven growth

5.10 One of the regulators’ key concerns regarding large credit unions is rapid growth without commensurate strengthening of risk management frameworks which can expose them to significant risks. Expansion in membership, lending volumes, and product complexity increases operational, credit and liquidity risks that may outpace a credit union’s governance and controls capabilities. This risk can be amplified where growth is driven by third parties that refer or attract members to credit unions, also known as aggregators. These may introduce additional challenges such as weaker understanding of credit union membership, limited direct member engagement, and potential misalignment of incentives between aggregators and credit unions.

5.11 Without robust oversight and risk management proportional to scale, fast-paced growth could undermine financial and operational resilience and erode member confidence in the sector. The PRA would welcome views on whether there may be a case for additional requirements or expectations relating to the pace of growth, engagement of borrowing members, and the acquisition of depositors through aggregators. Options to address this could include exposure limits, concentration controls, and enhanced stress testing.

5.12 In addition, to ensure that risk management evolves with the sector, the PRA could consider establishing more formal governance, risk monitoring and escalation frameworks for large, complex and fast-growing credit unions. Expectations could be set out more clearly, including the key components of a sound risk management system: a documented risk management policy and process; a comprehensive risk register; effective systems and controls; regular board review; and the application of the three lines of defence model.

Mortgages and fixed-rate products

5.13 Credit unions may wish to expand their mortgage lending activities as part of their growth and diversification strategies. Mortgage lending can offer benefits to members and provide an additional source of income for credit unions. At the same time, mortgages typically involve longer-term exposures and introduce a range of risks that differ from those associated with shorter-term consumer lending. These risks can include credit risk, concentration risk, liquidity risk, operational risk, and interest rate risk. The significance of these is likely to vary depending on the nature, scale and complexity of a credit union's mortgage activities.

5.14 These exposures require strong governance, technical capability and risk awareness, yet the PRA has concerns that some credit unions lack the necessary expertise and systems to manage them appropriately. As one example, fixed-rate mortgage products can expose credit unions to interest rate risk where funding costs increase while income from mortgage assets remains fixed. Regulatory and legislative restrictions further compound these challenges, as credit unions are currently unable to use derivatives to hedge interest-rate risk, limiting their ability to manage Interest Rate Risk in the Banking Book (IRRBB) effectively.

5.15 Depending on how mortgage lending is structured and funded, other mortgage products may also give rise to prudential risks that require appropriate management. The PRA is therefore interested in understanding whether the current framework remains appropriate as mortgage lending by credit unions evolves, and whether there are areas where additional guidance, requirements or flexibility may be beneficial.

5.16 To support prudent mortgage lending, the PRA could consider whether firms engaged in mortgage lending should be subject to more explicit expectations regarding their ability to identify, measure, monitor and manage mortgage-related risks, including IRRBB and asset-liability mismatch. This could improve risk management and reduce the likelihood of firms entering these markets or expanding their business model without adequate capability, but could impose additional costs and restrict product availability, particularly for small and simple credit unions.

5.17 One option could be to amend the rules to permit credit unions offering fixed-rate products to use derivatives solely for risk management purposes, subject to PRA approval and evidence of adequate capability. This could provide a more effective hedge and support prudent growth, but derivatives introduce counterparty, operational, legal and valuation risks and would require specialist expertise and robust controls.

5.18 Alternatively, the PRA could introduce more stringent risk management expectations, such as limits on mortgage concentrations, higher-risk exposures (for example, 100% Loan to Value lending) and fixed-rate lending, alongside designated Senior Management Function accountability and more sophisticated arrears provisioning aligned with expected-loss approaches used by banks and building societies. These measures may be simpler to supervise and constrain the build-up of risk, but could be less tailored, limit otherwise sustainable lending and increase systems and governance costs.

5.19 The PRA could also consider capital add-ons for credit unions with high mortgage exposures and insufficient risk management; these would provide an additional loss-absorbing buffer, although a small add-on may be insufficient if the risk crystallises and would not substitute for effective risk management. The PRA may impose an additional capital add-on^{footnote [5]} where there are specific risks present in a credit union (examples might include credit unions with high-risk business models, high arrears, or governance concerns). However, the PRA could consider a more structured Pillar 2 framework for larger or more complex credit unions.

Use of third-party providers

5.20 The regulators are increasingly seeing credit unions rely on third-party providers to support a range of activities such as technology services, lending platforms, operational support, compliance, and internal audit functions. While credit unions of all sizes can benefit from these outsourcing arrangements, they may be particularly useful for smaller credit unions by providing them with access to specialist expertise that may not be affordable or available in-house.

5.21 Properly managed, third-party providers allow credit unions to improve their efficiency, expand their services, innovate, and attract new members. However, reliance on third-party providers can create operational, technological, and conduct risks, particularly where credit unions outsource complete control over one or more business functions or where a credit union becomes overly dependent on a single provider. This can result in system failures and outages that harm members, such as services being unavailable to members or data breaches.

5.22 While the use of third-party providers supports credit unions’ operations, responsibility for meeting the FCA’s governance, systems, and controls expectations remains with credit unions’ governing bodies and senior management (CREDS 2.2.16G). Effective oversight is an important component of operational resilience. Credit unions should ensure they maintain adequate risk management systems (PRIN 3, SYSC 4 and SYSC 7) and appropriate governance, oversight, systems and controls to identify, monitor and manage risks arising from outsourcing and other third-party arrangements. The extent of these arrangements should be proportionate to the scale and complexity of the credit union and the services provided by the third party.

5.23 FCA requirements and guidance relating to outsourcing and third-party arrangements (SYSC 8) can apply depending on various factors such as the services involved, and significance of the outsourced function. While the FCA's existing requirements and guidance provide a framework for the oversight of outsourcing and third-party arrangements, the FCA is interested in whether credit unions would benefit from additional detail on the use of third parties and outsourcing within CREDS.

Communication and clear regulation

5.24 The regulators recognise that firms need to be able to both identify requirements, expectations, and guidance that currently apply to them and to understand how the regulatory framework is likely to develop.

5.25 In the mutuals landscape report, the regulators indicated they would set out tailored content for credit unions on their respective websites to enhance accessibility and engagement. The regulators would welcome feedback on any accessibility issues credit unions experience with their websites, as well as suggestions on how these could be further enhanced.

5.26 The PRA currently uses several mechanisms to assist in its communications with firms. For credit unions, this includes the credit unions web page within the Prudential and Resolution Policy Index which supports firms’ ability to understand which regulations they are subject to, by bringing together currently applicable requirements and expectations and organising them by sector and topic. There is also a dedicated Supervision: Credit unions web page which acts as a one-stop shop for credit unions from a regulatory perspective, with links to credit union reporting, legislation, rules, supervisory statement and supervisory communications. Together, these tools are intended to help firms navigate the existing regulatory framework, remain informed about recent changes and prepare for upcoming initiatives.

5.27 The PRA considers that existing documents, particularly SS2/23, set out useful clarifications for credit unions on the PRA’s expectations in key areas, and considers that credit unions should allocate sufficient resources to understanding and implementing the PRA’s requirements and expectations. However, navigating multiple layers of regulation can be challenging, particularly for small and simple credit unions with limited specialist or compliance resource.

5.28 If credit unions spend disproportionate time identifying requirements and expectations relevant to them, this may create an opportunity cost that limits their capacity to invest in the sustainable growth of the business, improve products and services for their members, or enhance the experience of their members. Clearer and more accessible regulatory materials could therefore reduce unnecessary compliance costs without reducing resilience.

5.29 The PRA amended the structure of SS2/23 in its last iteration in 2023 to make the SS more accessible and user-friendly. For example, expectations that apply to larger or more complex credit unions were removed and placed in separate chapters so that small, simple credit unions had fewer chapters to navigate. However, there may be more that the PRA can do to make its requirements and expectations clearer and more accessible.

5.30 The PRA would welcome feedback on the extent to which credit unions, particularly small and simple credit unions, struggle to understand and implement the PRA’s requirements and expectations. The PRA would also welcome feedback on whether changes to the organisation, presentation, or communication of its regulatory materials would make the regulatory framework easier to navigate for credit unions.

Consumer confidence

Q15: What factors are most important in supporting confidence in the credit union sector, and are there any regulatory changes that could strengthen confidence while remaining proportionate?

Risk management and governance

Q16: Are the current risk management and governance requirements appropriately calibrated to credit unions' size, complexity and risk profile? If not, what changes should be considered?

Fast-paced growth

Q17: What opportunities and risks arise from the use of aggregators and other growth strategies, and how should the regulatory framework respond to those risks?

Mortgages and fixed-rate products

Q18: What opportunities and risks would arise from greater credit union participation in mortgage lending and other fixed-rate products, and what prudential safeguards should be required?

Use of third-party providers

Q19: Would credit unions benefit from additional guidance within CREDS on the application of existing FCA expectations relating to outsourcing and third-party arrangements? If so, which areas would be most helpful and why?

Communication and engagement

Q20: How can regulators, trade bodies and the sector work together to improve communication, understanding and implementation of regulatory requirements?

6: Facilitating orderly market exit

Background

6.1 Many of the topics discussed in this DP are intended to support the resilience of credit unions and reduce the likelihood of firm failure. These include discussions on sustainable growth and competition. However, the regulators also recognise the importance of ensuring that firms can leave the market in an orderly manner.

6.2 Facilitating market exit therefore complements the wider regulatory framework by reducing disruption to members, supporting continuity of critical services and maintaining confidence in the sector. The PRA has previously highlighted the importance of increasing confidence that firms can exit the market in an orderly way and with minimal disruption and introduced solvent exit planning expectations for non-systemic banks and building societies in PS5/24 – Solvent exit planning for non-systemic banks and building societies on this basis.

6.3 In SS2/23, the PRA introduced expectations for large credit unions – those with total assets exceeding £100 million – to begin solvent exit planning, and supervisors are now starting to see these plans being developed. However, for most credit unions (those under £100 million), there are currently no recovery or solvent-exit planning requirements, and resolution relies on the Single Customer View and FSCS payout processes.

6.4 Availability of credible exit and restructuring options may support the sustainable development of the sector. A framework that provides firms with practical options to transfer business, merge, restructure or wind down in an orderly manner may reduce barriers to innovation and growth by giving firms, members and regulators greater confidence that risks can be managed if circumstances change.

6.5 Conversely, where exit options are limited, firms may have fewer alternatives available to them before insolvency becomes necessary, potentially increasing costs, disruption and uncertainty for members.

6.6 The regulators are therefore interested in understanding whether the current framework provides credit unions of different sizes with adequate tools to exit the market in an orderly way and whether there are barriers that may prevent these tools from being used effectively.

Barriers to solvent exit

6.7 One area the regulators are interested in exploring further is whether the current legislative and regulatory framework provides credit unions with sufficient flexibility to transfer business or restructure in an orderly manner. Under the existing framework, transfers of engagements are limited to other credit unions with the same or an overlapping common bond.

6.8 While these restrictions reflect the mutual and community-based nature of the sector, they may also affect the range of options available to a credit union seeking to exit the market or restructure its activities. As the sector evolves, the PRA and FCA are interested in understanding whether the current framework continues to provide firms of different sizes and business models with practical and accessible exit options.

6.9 These considerations may become more relevant where credit unions have exposures to longer-term assets, such as residential mortgages. In such cases, a credit union's assets may remain on its balance sheet for an extended period, potentially making an orderly exit more complex than for firms whose lending is concentrated in shorter-term products, particularly where there are no suitable purchasers within the relevant common bond.

6.10 Removing or relaxing this restriction could widen the pool of potential purchasers, help achieve a fair market price, accelerate a wind-down and reduce the risk that the value of the loan book deteriorates before a transaction can be completed. It could therefore increase recoveries, preserve value for members and make solvent exit more credible.

6.11 However, a wider sale could transfer member loans to a commercial entity with a different purpose or servicing approach, potentially affecting borrowers’ experience, protections or access to forbearance. It could also raise concerns about data sharing, conduct, valuation, purchaser suitability and the treatment of members whose loans are sold.

6.12 Any reform would therefore need appropriate safeguards concerning purchaser eligibility, fair valuation, communications with borrowers, continuity of servicing and the treatment of vulnerable members.

6.13 The regulators are interested in understanding whether any aspects of the current legislative and regulatory framework affect the ability of credit unions to transfer, restructure or wind down longer-term business in an orderly manner, and the implications this may have for members, firms and the wider sector.

Sale of non-performing loans

6.14 The regulators are also aware of broader questions regarding the treatment of delinquent debt where all reasonable recovery actions have been exhausted. The regulators have received feedback that elements of the current legislative framework may prohibit the ability of credit unions to transfer such debt to an entity other than another credit union, including third-party purchasers, potentially reducing options for managing legacy loan portfolios.

6.15 Changes to these restrictions could support more efficient management of non-performing loans, reduce operational costs, improve recoveries, and support orderly wind-downs. However, any reform would need to consider the implications of transferring loans that were originated under credit union-specific legislative exemptions to entities that may not be subject to the same exemptions.

6.16 The regulators are interested in understanding whether changes to these restrictions could provide benefits to credit unions, including supporting orderly wind-downs and reducing operational costs, and how to align such changes to the statutory objects and mutual purpose of the credit union sector.

6.17 Both the sale of loan books as part of a solvent exit and sale of non-performing loans may require legislative change, which falls within HM Treasury’s remit. Accordingly, the DP will not propose specific solutions but will seek feedback from the sector to inform future engagement with HMT on potential options.

Q21: What changes, if any, could be made to the current framework for solvent exit, restructuring and transfers to support orderly market exit while maintaining appropriate member protection and prudential safeguards?

Q22: What benefits, risks, or unintended consequences could arise from allowing credit unions to transfer or sell non-performing loans to non-credit union entities where recovery actions have been exhausted?

7: Summary of questions for discussion

7.1 This section brings together the questions raised throughout the DP. Respondents may answer all or only those questions most relevant to them. Respondents are also encouraged to provide supporting evidence where possible.

Chapter 2: Overview

Q1: Do you consider that the outcomes the regulators have set out are appropriate, and will support the development of a regime that fosters sustainable growth while preserving safety and soundness? If so, how should these outcomes be prioritised? If not, are there other outcomes the regulators should consider?

Chapter 3: Delivering proportionate prudential regulation

Q2: Does the current prudential framework strike an appropriate balance between financial resilience, proportionality and supporting sustainable growth in the credit union sector?

Q3: Are there existing prudential, reporting or governance requirements that could be simplified for small and simple credit unions without materially weakening risk management, member protection or supervisory oversight? What are your views on the options discussed here to reduce prescribed documentation, internal audit requirements and reporting requirements?

Q4: Do the existing capital thresholds in the Credit Unions Part of the PRA Rulebook remain fit for purpose? If not, which thresholds should be reviewed and why?

Q5: Should larger or more complex credit unions be subject to a more risk-sensitive prudential regime and, if so, what form should that regime take?

Q6: Are there risks in the way credit unions currently raise or service capital that warrant changes to the regulatory framework? Are there other capital-related issues the PRA should consider?

Q7: Do you agree that there may be benefits in considering packages of prudential measures, rather than individual requirements, when designing a proportionate framework for credit unions? If so, what combinations of measures would you favour?

Q8: What balance should be struck between simplicity, capital requirements and risk sensitivity for:
(a) smaller and simpler credit unions; and
(b) larger or more complex credit unions?
Please provide reasons and, where possible, supporting evidence.

Chapter 4: Competition, innovation and long-term sustainability

Q9: Are there aspects of the current regulatory framework that may unnecessarily constrain the ability of credit unions to grow, innovate or compete effectively?

Q10: Are there any regulatory or other barriers discouraging or preventing credit unions from offering conditional sale agreements, hire-purchase agreements or insurance distribution services?

Q11: Should the FCA provide additional guidance in CREDS clarifying the application of existing oversight and risk management expectations to third-party arrangements with CUSOs? If so, what additional clarification would be helpful?

Q12: What demand is there for credit unions to invest in social housing or other social-purpose funds?

Q13: How could such investments support the sector’s social purpose while remaining consistent with safety and soundness?

FCA Fees

Q14: Are there any potential risks or unintended consequences that the FCA should consider if it were to consult on reforming FCA fees for credit unions in the future? The FCA would also welcome any evidence on the potential benefits of any such changes.

Chapter 5: Ensuring consumer confidence and protection

Q15: What factors are most important in supporting confidence in the credit union sector, and are there any regulatory changes that could strengthen confidence while remaining proportionate?

Q16: Are the current risk management and governance requirements appropriately calibrated to credit unions’ size, complexity and risk profile? If not, what changes should be considered?

Q17: What opportunities and risks arise from the use of aggregators and other growth strategies, and how should the regulatory framework respond to those risks?

Q18: What opportunities and risks would arise from greater credit union participation in mortgage lending and other fixed-rate products, and what prudential safeguards should be required?

Q19: Would credit unions benefit from additional guidance within CREDS on the application of existing FCA expectations relating to outsourcing and third-party arrangements? If so, which areas would be most helpful and why?

Q20: How can regulators, trade bodies and the sector work together to improve communication, understanding and implementation of regulatory requirements?

Chapter 6: Facilitating orderly market exit

Q21: What changes, if any, could be made to the current framework for solvent exit, restructuring and transfers to support orderly market exit while maintaining appropriate member protection and prudential safeguards?

Q22: What benefits, risks, or unintended consequences could arise from allowing credit unions to transfer or sell non-performing loans to non-credit union entities where recovery actions have been exhausted?

8: Responding to the discussion paper 

Your personal information

8.1 By responding to the DP, you share personal data with the Bank of England (including the PRA), which may include your name, contact details (including, if provided, details of the organisation you work for), and opinions or details offered in the response itself. For more information about how the PRA handles responses to PRA consultations see PRA consultations and discussion papers – your personal data. You have several rights under data protection laws in relation to data held about you. For further information on exercising these rights, including how to contact our Data Protection Officer, view our full privacy notice. 

8.2 The PRA will share responses with the FCA. They will also review the responses and may also contact you to clarify aspects of your response. 

Responses 

8.3 The regulators invite feedback on this DP by Friday 5 March 2027. Please address any comments or enquiries to DP2_26@bankofengland.co.uk.