The purpose of this chapter is to provide rules and guidance relating to senior management arrangements, systems and controls that are specific to credit unions with a permission to accept deposits.

This chapter is also intended to remind credit unions that the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) also contains a number of high level rules relating to senior management arrangements, systems and controls designed to have general application to all firms, including credit unions. SYSC 1 and SYSC 4 to SYSC 10 apply to all credit unions in respect of the carrying on of their regulated activities and unregulated activities in a prudential context. SYSC 18 applies to all credit unions without restriction. This chapter does not seek to repeat the requirements of SYSC that are relevant to firms more generally.

The purposes of SYSC, which applies to all credit unions, are:

1. (1)

   to encourage directors and senior managers to take appropriate practical responsibility for the arrangements that all firms must put in place on matters likely to be of interest to the FSA because they impinge on the FSA's function under the Act;

2. (2)

   to reinforce Principle 3, under which all firms must take reasonable care to organise and control their affairs responsibly and effectively with adequate risk management systems;

3. (3)

   to encourage all firms to vest responsibility for effective and responsible organisation in specific directors and senior managers.

SYSC 4.1.1 R requires every firm, including a credit union, to have robust governance arrangements, which include a clear organisational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems.

For credit unions, the arrangements, processes and mechanisms referred to in SYSC 4.1.1 R should be comprehensive and proportionate to the nature, scale, and complexity of the credit union's activities. That is the effect of SYSC 4.1.2 R and SYSC 4.1.2A G.

A small version 1 credit union will not be expected to have the same systems and controls as a large version 2 credit union.

Guidance on business planning is given in CREDS 2.2.51 G to CREDS 2.2.58 G.

Guidance on documentation of policies and procedures is given in CREDS 2.2.59 G to CREDS 2.2.61 G.

Guidance on the documentation of systems of control is given in CREDS 2.2.20 G to CREDS 2.2.23 G.

1. (1)

   The term 'internal audit function' in CREDS 2.2.10 E refers to the generally understood concept of internal audit within a firm, in other words the function of assessing adherence to and the effectiveness of internal systems and controls, procedures and policies. The internal audit function is not a controlled function itself, but is part of the systems and controls function (CF28).

2. (2)

   Guidance on internal audit is given in CREDS 2.2.40 G to CREDS 2.2.50 G.

A credit union should ensure appropriate segregation of duties in order to minimise the risk of financial crime or contravention of requirements and standards under the regulatory system.

Guidance on segregation of duties is given in CREDS 2.2.18 G and CREDS 2.2.19 G.

Under section 4(1) of, and Schedule 1 to, the Credit Unions Act 1979, a credit union is required to have a committee of management. The committee of management should be competent to control the affairs of a credit union, and have an appropriate range of skills and experience relevant to the activities carried on by the credit union.

In accordance with Statement of Principle 7 of the Statements of Principle for Approved Persons, it is the responsibility of each individual member of the committee of management to understand, and ensure that the credit union complies with, the requirements of all the relevant Acts, secondary legislation and rules.

1. (1)

   As the credit union'sgoverning body, the committee of management has responsibility for ensuring that the credit union complies with the requirements of SYSC 4.1.1 R (see CREDS 2.2.1 G and CREDS 2.2.2 G). So, the committee of management has overall responsibility for:

   1. (a)

      establishing objectives and formulating a business plan;

   2. (b)

      monitoring the financial position of the credit union;

   3. (c)

      determining and documenting policies and procedures;

   4. (d)

      directing and coordinating the work of all employees and volunteers, and ensuring that they are capable and properly trained;

   5. (e)

      maintaining adequate reserves;

   6. (f)

      making provision for bad and doubtful debts;

   7. (g)

      recommending a dividend on shares to members subject to the credit union's financial position;

   8. (h)

      ensuring that the credit union complies with all statutory and regulatory requirements; and

   9. (i)

      ensuring that the credit union complies with the requirements of its registered rules.

2. (2)

   Where a committee of management has responsibility for these matters on a day-to-day basis (that is, they are not delegated to a chief executive or manager) it seems highly likely that each member of the committee would be performing the apportionment and oversight function, and would therefore require individual approval.

The committee of management should meet at least monthly.

CREDS 2.2.12 G states that all credit unions should ensure appropriate segregation of duties. Duties should be segregated to prevent one individual from initiating, controlling, and processing a transaction (for example, both the approval and the payment of an invoice).

Responsibilities of connected persons (for example, relatives and other close relationships) should be kept entirely separate. They should not hold key posts at the same time as each other. Where this is unavoidable, a credit union should have a written policy for ensuring complete segregation of duties and responsibilities.

CREDS 2.2.8 R requires a credit union's system of control to be fully documented. The documentation helps the committee of management to assess if systems are maintained and controls are operating effectively. It also helps those reviewing the systems to verify that the controls in place are those that have been authorised, and that they are adequate for their purpose.

1. (1)

   The committee of management should decide what form this documentation should take, but the committee should have in mind the following points.

   1. (a)

      Documents should be comprehensive: they should cover all material aspects of the operations of the credit union.

   2. (b)

      Documents should be integrated: separate elements of the system should be cross-referred so that the system can be viewed as a whole.

   3. (c)

      Documents should identify risks and the controls established to manage those risks. The controls should be identified and their purpose defined so that their effectiveness can be evaluated.

   4. (d)

      There should be named persons or posts for each control function and alternatives in case of absence.

   5. (e)

      Documents should state how the operation of the control is evidenced. Evidence might include signatures, records and registers. Documents should also state for how long that evidence is to be retained, taking account of SYSC 9.1.

   6. (f)

      Documents should be unambiguous. Instructions should be clear and precise, avoiding expressions such as "normally" and "if possible".

   7. (g)

      Documents should be practical and easy to consult and use when operating and reviewing systems.

   8. (h)

      Documents should be up to date. There should be an accurate description of the function that the control is to address. When changes are made to the function, the appropriate systems of control need to be updated and documented at the same time.

2. (2)

   The committee of management should, from time to time, seek confirmation that the systems of control are being complied with.

Documentation should not be restricted to "lower level" controls applied in processing transactions, but should also cover "high level" controls including:

1. (1)

   identifying those powers to be exercised only by the committee of management, and the powers delegated to others;

2. (2)

   the purpose, composition and reporting lines of sub-committees, and senior managers to whom responsibilities are delegated;

3. (3)

   the specific roles and responsibilities of individual officers;

4. (4)

   the timing, form and purpose of meetings of the committee of management and sub-committees, and the way in which policies and decisions are recorded and their implementation monitored.

The documentation of IT controls should be integrated within the overall documentation of a credit union's system of control.

SYSC 9.1.1 R requires that a credit union takes reasonable care to make and retain adequate records of all matters governed by the Act, secondary legislation under the Act, or rules (including accounting records). These records should be capable of being reproduced in the English language and on paper.

A credit union should have appropriate systems in place to fulfil its obligations with respect to adequacy, access, periods of retention, and security of records.

The main reasons why a credit union should maintain adequate accounting and other records are:

1. (1)

   to provide the committee of management with adequate financial and other information to enable it to conduct its business in a prudent manner on a day-to-day basis;

2. (2)

   to safeguard the assets of the credit union and the interests of members and persons too young to be members;

3. (3)

   to assist officers of the credit union to fulfil their regulatory and statutory duties in relation to the preparation of annual accounts;

4. (4)

   to provide the committee of management with sufficient timely and accurate information to assist them to submit the information required or requested by the FSA.

When forming their opinion of whether the accounting and other records are adequate, the committee of management should satisfy itself that they capture and record on a timely basis, and in an orderly fashion, every transaction. The accounting and other records should provide sufficient information in respect of each transaction to explain:

1. (1)

   its nature and purpose;

2. (2)

   the asset or liability, actual and contingent, which arises (or may arise) from it;

3. (3)

   the income or expenditure, current and deferred, which arises from it.

The committee of management should satisfy itself that the records are maintained in an integrated and orderly manner to disclose, with reasonable accuracy and promptness, the state of the business at any time.

1. (1)

   Depending on the nature, scale and complexity of its business, it may be appropriate for a credit union to have a separate compliance function.

2. (2)

   The organisation and responsibilities of a compliance function should be documented.

3. (3)

   A compliance function should be staffed by an appropriate number of competent staff who are sufficiently independent to perform their duties objectively. It should be adequately resourced and should have unrestricted access to the credit union's relevant records as well as ultimate recourse to its governing body.

Guidance on compliance is located in SYSC 6.1.3 R.

Some important compliance issues include:

1. (1)

   insurance against fraud and dishonesty;

2. (2)

   arrangements for the prevention, detection and reporting of money laundering;

3. (3)

   establishing and maintaining a satisfactory system of control;

4. (4)

   keeping proper books of account;

5. (5)

   computation and application of profits;

6. (6)

   investment of surplus funds;

7. (7)

   capital requirements;

8. (8)

   liquidity requirements;

9. (9)

   limits on shares and loans;

10. (10)

    maintenance of membership records;

11. (11)

    submission of financial reports to the regulator;

12. (12)

    approved persons regime;

13. (13)

    payment of regulatory fees.

Guidance on management information is located in SYSC 7.1.4 R.

A credit union should maintain information systems to enable the committee of management to direct and control the credit union's business effectively, and to provide the information required by the FSA.

The committee of management should be satisfied that:

1. (1)

   the information available is sufficient for the proper assessment of the potential risks for the credit union, and in order to determine its need for capital and liquidity;

2. (2)

   the information available is sufficiently comprehensive to provide a clear statement of the performance and financial position of the credit union;

3. (3)

   management information reports are prepared with sufficient frequency;

4. (4)

   sufficient attention is focused on key factors affecting income and expenditure and that appropriate performance indicators are employed;

5. (5)

   actual performance is compared with planned and previous performance.

In forming a view on whether the management information system is sufficiently comprehensive, the committee of management should consider whether, where relevant, the substance of reports provides a clear statement of:

1. (1)

   the capital position;

2. (2)

   the liquidity position;

3. (3)

   profits and losses, assets and liabilities, and flow of funds;

4. (4)

   loans, arrears, and provisions.

The matters listed in CREDS 2.2.35 G should be compared against limits, ratios and other parameters set by the committee of management, as well as regulatory requirements.

Credit unions should ensure that quarterly and annual returns required by SUP are reviewed at a sufficiently senior level before they are submitted to the FSA. The review should check for consistency between different returns, between various tables on the same return, and between information prepared for the committee of management.

Guidance on employees and agents is located in SYSC 5.1.2 G.

A credit union should identify present and future staffing requirements (including volunteers and paid staff) and make appropriate plans for their recruitment and training.

CREDS 2.2.10 E states that a credit union should have an internal audit function.

Guidance on internal audit and audit committees (otherwise known as the supervisory committee) is located in SYSC 6 and SYSC 4.1.11 G.

Depending upon the scale and nature of the credit union's activities, it may be appropriate for the audit committee to delegate the task of monitoring the effectiveness and appropriateness of its systems and controls to an employee or other third party.

The purposes of an internal audit are:

1. (1)

   to ensure that the policies and procedures of the credit union are followed;

2. (2)

   to provide the committee of management with a continuous appraisal of the overall effectiveness of the control systems, including proposed changes;

3. (3)

   to recommend improvements where desirable or necessary;

4. (4)

   to determine whether the internal controls established by the committee of management are being maintained properly and operated as laid down in the policy, and comply with relevant Acts, secondary legislation, rules, policies and procedures;

5. (5)

   to ensure that accounting records are prepared promptly and accurately, and that they are in order;

6. (6)

   to assess whether financial and operating information supplied to the committee of management is accurate, pertinent, timely, and complete.

The internal audit function (see CREDS 2.2.11G) should develop an audit plan, covering all aspects of the credit union's business. The audit plan should identify the scope and frequency of work to be carried out in each area. Areas identified as higher risk should be covered more frequently. However, over a set timeframe (likely to be one year) all areas should be covered. Care should be taken to avoid obvious patterns in assessing the different areas of the credit union's business, so that the audit plan produces a representative snapshot of the operation and effectiveness of the credit union's internal systems and controls, procedures and policies.

The internal audit work programme should include items such as:

1. (1)

   verification of cash (counting and reconciliation) without prior notification;

2. (2)

   bank reconciliation (checking records against bank statements);

3. (3)

   verification of passbooks or account statements;

4. (4)

   checking for compliance with policies and procedures;

5. (5)

   checking for compliance with relevant Acts, secondary legislation and rules;

6. (6)

   checking minutes and reports of the committee of management and other sub-committees for compliance, and assessing regularity and completeness;

7. (7)

   checking loan applications;

8. (8)

   verification of the credit union's assets and investments.

The key elements of a satisfactory system of internal audit include the following:

1. (1)

   Terms of reference. These should be specified with precision and include, amongst other things, scope and objectives of the audit committee and the internal audit function (see CREDS 2.2.11G), access to records, powers to obtain information and explanations for officers, and reporting requirements. These should be approved by the committee of management.

2. (2)

   Risk analysis. Key risks in each area of the credit union's business should be identified. The adequacy of the specific controls put in place to address those risks should be assessed.

3. (3)

   Internal audit plan. This should be developed on the basis of the risk analysis.

4. (4)

   Detailed programmes. These should be based on the internal audit plan, together with the controls and their objectives specified in the control documentation. Each programme should be comprehensive, specifying the frequency with which the various parts of the programme are to be carried out and how the work is to be performed.

5. (5)

   Working papers. These should be maintained to evidence who performed the work, how it was controlled and supervised, and to record the conclusions reached. They should be cross referenced to reports made and action taken.

6. (6)

   System of reporting. Formal reports should be submitted at the completion of each aspect of programmed work, stating the areas covered together with any recommendations and conclusions reached.

The internal audit function (see CREDS 2.2.11 G) should be independent of all of the functions it inspects.

The committee of management should be satisfied that the status and reporting relationship of the chairman of the audit committee is sufficient to maintain the independence and objectivity of the function.

The qualifications, experience and training of individuals performing the internal audit function (see CREDS 2.2.11 G) should be adequate in relation to its objectives.

The committee of management should be satisfied that the internal audit function (see CREDS 2.2.11 G) is being properly carried out. In order to review the overall effectiveness of the internal audit function it should consider the following:

1. (1)

   the adequacy and scope of planning;

2. (2)

   the adequacy and scope of work performed in relation to the plans and programmes;

3. (3)

   the regularity and level of reporting on matters arising from the inspections;

4. (4)

   the disposal of points and recommendations raised, and reasons for the rejection of any major points;

5. (5)

   a review of the overall effectiveness of the internal audit function.

CREDS 2.2.4 R requires that a credit union maintains a current business plan.

Version 2 credit unions should submit a copy of their business plan to the FSA. A version 2 credit union making any significant changes to the business plan should provide the FSA with a copy of the amended plan as soon as possible after it has been adopted.

Guidance on business strategy is located in SYSC 6.1.2 R and SYSC 7.1.2 R.

The committee of management should have a satisfactory planning system to provide a framework for growth and development of the credit union, and to enable it to identify, measure, manage and control risks of regulatory concern.

The business plan should cover a period of three years from the current financial year, in other words the remainder of the current financial year and the two following financial years.

The planning system should be defined clearly, documented appropriately, and planning related tasks and decision-making responsibilities allocated clearly within the credit union.

The conclusions, recommendations, projections and assumptions set out in the business plan should be supported by analysis, based on adequate data, and properly documented for comparison with actuals.

The committee of management should consider the range of possible outcomes in relation to various risks. These risks are increased when a credit union provides ancillary services such as issuing and administering means of payment and money transmission, which result, in particular, in higher liquidity and operational risks.

CREDS 2.2.6 R requires that a credit union maintains a manual of its policies and procedures.

Version 2 credit unions should submit a copy of their policy and procedures manual to the FSA. A version 2 credit union making any significant changes to their policies or procedures should provide the FSA with a copy of the amended manual as soon as possible after it has been adopted.

The policy and procedures manual should cover all aspects of the credit union's operations, including matters such as:

1. (1)

   cash handling and disbursements;

2. (2)

   collection procedures;

3. (3)

   lending, including large exposures (see CREDS 7.1 to CREDS 7.5);

4. (4)

   arrears management (see CREDS 7.2.9 G to CREDS 7.2.10 G);

5. (5)

   provisioning (see CREDS 7.5);

6. (6)

   liquidity management (see CREDS 6);

7. (7)

   financial risk management (see CREDS 3);

8. (8)

   money laundering prevention (see SYSC 6.3);

9. (9)

   internal audit (see CREDS 2.2.40 G to CREDS 2.2.50 G);

10. (10)

    information technology (see CREDS 2.2.23 G);

11. (11)

    business continuity, otherwise known as disaster recovery (see CREDS 2.2.62 G to CREDS 2.2.64 G);

12. (12)

    marketing;

13. (13)

    training;

14. (14)

    connected persons and managing conflicts of interest (see CREDS 2.2.19 G);

15. (15)

    complaints handling (see DISP 1).

Guidance on business continuity is located in SYSC 4.1.6R to SYSC 4.1.8 G.

A credit union should put in place contingency arrangements to ensure that it could continue to operate and meet its regulatory requirements in the event of an unforeseen interruption that may otherwise prevent the credit union from operating normally (for example, if there was a complete failure of IT systems or if the premises were destroyed by fire).

Business continuity arrangements should be reviewed and tested regularly in order to ensure their effectiveness.