Credit unions are regulated and supervised at the member-state level, but are nonetheless affected by European policy-making with respect to a number of issues:
Capital Requirements Directive (Basel II)
Due to their structure and small-scale business operations, Article 2 of the Capital Requirements Directive (CRD) exempts credit unions in the Republic of Ireland, the UK and Poland from the application of the CRD. Credit unions are instead subject to appropriate regulatory capital requirements at the national level.
However, credit unions in some new member states, such as Romania, are not on the list of institutions excluded from the CRD. This results in a different treatment of credit unions in these countries as well as their ability to provide services. The European Network of Credit Unions assists colleagues in these countries to achieve a legal status for credit unions equal to the one they benefit from in other EU member states.
Deposit Guarantee Schemes
Most credit unions operate their own (regulated) protection schemes. These schemes have a systemic function in the sense that the protection mechanism is activated in case an individual credit union within the movement requires additional funds. (These are known as the Savings Protection Scheme in Ireland or the Credit Union Stabilization Fund in Poland.) In some member states, credit unions also are members of national deposit guarantee system. This results in a two-tier structure with a double protection for the deposits of credit union members.
IFRS for SMEsIn 2009, the International Accounting Standards Board (IASB) in London adopted the IFRS for SMEs which provides for a simplified accounting standard for small and medium-sized entities (SMEs). The IASB excluded credit unions from the scope of the SME standard arguing that credit unions are publicly accountable and as such need to be covered by the full IFRS.
The European Network of Credit Unions strongly advocates that the IFRS for SMEs can and should be used by credit unions. They serve a restricted membership (within the common bond) and differ substantially from mainstream financial providers in terms of structure, organisation, business operations, etc. The vast majority of credit unions fall within the definition of micro and small entities. Compliance with the full IFRS (as opposed to the IFRS for SMEs) would be very burdensome in particular for the small, rural credit unions.
Mortgage Lending
Credit unions in the EU provide mortgage lending services to their members on a very limited basis. In the UK, for instance, only five credit unions provide mortgages (i.e. those that have a special FSA permission.) Mortgages are usually offered only by the largest credit unions.
Mortgage lending by all credit unions occurs within strict loan policies that encompasses rules for the assessment of a borrowers’ credit worthiness, loan portfolio diversification, maximum loan sizes per product type, etc. These limits as well as the strict regulation and supervision of credit unions at member-state level ensure safe lending practices by credit unions to their members.
Commercial practices (tying, bundling)
In order to strengthen consumer protection and guarantee switching of products/ providers, the European Commission has recently started looking into certain commercial practices, including tying and bundling of products. Credit unions are committed to providing the best service to their members and employing certain practices as part of:
Member service: members benefit from life savings and loan protection insurance which ensure that the "debt dies with the debtor".
Linking Lending to Saving: credit unions mobilise and therefore rely on their members' savings to provide loans. Saving prior to receiving a loan is a method to discern capacity to repay and is used in particular by smaller credit unions.
Risk reduction: credit unions help people accessing financial services who are often excluded from the commercial sector. Providing loans to people on no (or no regular) income bears specific risks which can be reduced by, for instance, payroll deductions. In cases of mixed bundling instruments, the insurance (e.g. automobile insurance) is used as a loan security and can be sold from another institution as well. In addition, reduced loan rates are at time given to those members that have their loan payment automatically deducted from their accounts.
Responsible lending and financial education: credit unions extend services often to financially excluded and people with low or no regular income. Through obligatory savings they encourage members to accumulate assets and be prepared for an unexpected event. In addition, payroll deductions enable members, often unable to access a bank account, to actively manage their finances.
Consumer Credit
Credit unions’ provision of consumer credit is regulated at the national level and by the European Directive on Consumer Credit. Taking into account credit unions’ small-scale business operations, the Directive provides for lighter regulations for credit unions. As a result, credit unions only have to comply with a limited number of Articles of the Consumer Credit Directive (Article 2.5).
Microcredit
Credit unions are globally recognized microfinance institutions (MFIs) which help people to access financial services. Microloans are provided by credit unions to their members including those who are financially excluded and rely on low (or no regular) income.
The average amount of a credit provided by credit unions in EU member states is far below the threshold used by EU institutions to define microcredit (EU definition: >€25,000.) The average credit union loan in Poland: €1,000; in the Republic of Ireland: €8,150; in the UK: ₤1,000; and in Romania: €700. Loans are used by members for various reasons, including consumer purposes, starting a small business, growing an existing small business or financing a university education or other studies.
A number of credit unions across the EU also provide micro insurance services to their members.
Financial Inclusion
Credit unions operate on a not-for-profit basis. All excess earnings are re-distributed to members through dividends and affordable credit. This is particularly valuable for low-income people. They often face difficulties borrowing at affordable interest rates from mainstream financial providers and might otherwise turn to loan sharks. Credit unions represent for many the only affordable and safe way to access financial services.
In recent years, credit unions also started to offer account services to their members, including the unbanked and those with low incomes. Rather than being just basic transactional accounts, the newly established credit union accounts take into consideration the particular needs of low-income and financially excluded people. For a small fee, the account allows members to access ATMs, use debit cards, and provides for saving and borrowing opportunities. Most importantly, credit union members receive personal assistance to help them fully understand the account and deal with its management. Experience has shown that only this holistic approach provides formerly unbanked people with a real alternative to cash-based money management.
Financial Education
Enhancing members’ financial literacy is a crucial part of the work done by credit unions. The institutions operate on a face-to-face basis with members and thereby assist them in understanding financial terminology, products offered and the financial implications of each. Credit unions also have developed concrete programmes aimed at helping members and non-members to better understand financial services, including seminars, videos, leaflets/ brochures, and partnerships with other relevant national stakeholders.
Credit unions’ engagement in the field of financial education has been acknowledged by a Commission survey on financial literacy schemes in the EU. In addition, the European Network of Credit Unions is represented in European Commission consultative groups including FIN-USE (credit union representation by Patrick Fay, director of the Irish League of Credit Unions) and the Expert Group on Financial Education (credit union representation by Wiktor Kaminski, vice president of the National Association of Co-operative Savings and Credit Unions, Poland.)
Volunteering
Credit unions are partially run and fully governed by volunteers who constitute the board of directors. In credit unions’ experience, volunteering plays a crucial role in modern society, with positive impacts not only on people’s personal lives, but also on the whole community. Credit unions therefore support and encourage European initiatives emphasising the important role of volunteers and promoting such activities further.
Payments
Most credit unions provide payment services to their members; however, in most countries they do not have direct access to clearing and settlement infrastructure. Instead, credit unions use these facilities indirectly by being bank customers themselves. This lack of direct access results in an avoidable cost for the credit union movement. The European Network of Credit Unions advocates direct access for credit unions to national-level clearing and settlement systems at affordable prices.
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