The Prudential Regulation Authority (PRA) has issued a letter clarifying the current regulatory position for UK credit unions that invest in, or use, Credit Union Service Organisations (CUSOs), and set out its intention to consult later this year on changes to PRA rules to remove uncertainty. The PRA indicates it is supportive of CUSOs that meet legislative requirements and where associated risks are managed prudently. CUSOs are typically owned by credit unions and provide shared administrative, professional, management and technology services. The PRA notes potential sector benefits but highlights risks including reliance on third parties without adequate governance and controls, activity moving to non-supervised entities, single points of failure and step-in risk. Whether a credit union can use a CUSO under the current framework depends on how the CUSO is established and funded, including legislative constraints in Great Britain on owning a subsidiary and the PRA Rulebook’s restrictions on investing surplus funds in non-specified instruments. The planned consultation is expected to propose amendments to Rules 6.3 and 6.4 of the Credit Unions Part of the PRA Rulebook to make clear that surplus-fund investments in CUSOs are permitted where legislative requirements are met, alongside supervisory expectations covering due diligence and risk assessment, limiting liability to the amount invested (potentially including investment limits and legal separation checks), and outsourcing risk management including oversight, substitutability and exit planning. The PRA will contact credit unions already investing in a CUSO to check compatibility with current requirements and may use temporary rule modifications where appropriate to align arrangements with existing PRA rules.

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