If you’re reading this as a director of an ailing credit union, you’re probably worried about two things at once:

• protecting members, especially savers who may rely on the credit union day-to-day

• doing the right thing as directors, under regulatory scrutiny, sometimes with imperfect information and always limited time

Credit unions are verydifferent from normal businesses. When they get into trouble, the human impact can be immediate, and the regulatory and payout mechanics matter.

Below I set out the key issues and the practical steps that help.

1) Main reasons credit unions struggle financially

Most credit unions don’t fail because of one dramatic event. They fail because several pressures build up and stay unresolved.

Common root causes

• Loan losses are higher than the accounts show

  • Arrears rise, but provisions lag behind reality.

  • Collections are inconsistent or too slow.

  • Rescheduling becomes a habit rather than a solution.

• The lending margin is too thin

  • Interest income does not cover the true cost of:

    • bad debts,

    • staffing and premises,

    • systems and compliance,

    • plus a sustainable surplus.

• Fixed costs grow faster than income

  • Small credit unions can be tipped into loss by modest cost increases.

  • New products and system projects can be financially fatal if launched too early.

• Liquidity pressure and concentration risk

  • A small number of savers can represent a large chunk of funds.

  • A change in benefit/payment patterns can create sudden strain.

• Governance gaps

  • Board reporting is slow, unclear, or over-optimistic.

  • Too much reliance on one key person.

  • Decisions are delayed because the board wants harmony rather than action.

• Compliance strain and loss of regulatory confidence

  • Returns become late or need repeated correction.

  • Weaknesses repeat in audit findings.

  • The regulator starts to doubt ‘grip’.

2) What directors can do to try to avoid these

The best director-led recovery work is not complicated. It is disciplined, honest, and fast.

A practical prevention and stabilisation checklist

• Make the numbers brutally honest

  • Reassess arrears and provisioning using evidence, not optimism.

  • Require a one-page monthly dashboard answering:

    • Are arrears improving or worsening?

    • Are provisions keeping pace?

    • Are we making a surplus after provisions?

• Control liquidity

  • Move to weekly cash forecasting if things are tight.

  • Identify ‘top savers’ concentration risk and plan for sudden movements.

  • Set internal trigger points where action must happen, not just be discussed.

• Get serious about collections

  • Put a clear, consistent arrears process in writing.

  • Track:

    • arrears by age,

    • roll rates (how accounts deteriorate),

    • recoveries achieved per month.

• Stop cost drift

  • Pause non-essential spend.

  • Challenge recurring contracts.

  • If staffing is too heavy for the income base, face it early.

• Fix governance quickly

  • Make it clear who owns each risk area.

  • Record key decisions properly and consistently.

  • Bring in missing skills via co-option or recruitment.

• Engage early on merger or transfer options

  • The best member outcome is sometimes a transfer into a stronger credit union.

  • Leaving it too late reduces choices.

The Prudential Regulation Authority expects credit unions to monitor prudential position and engage early where sustainability is in doubt.

 

3) Warning signs of deep-seated problems

Some difficulties are temporary. Deep-seated problems have patterns.

Financial warning signs

• Arrears rising for 3+ months with no credible improvement trend.

• Provisioning that does not match reality, with repeated ‘we think it’ll recover’ explanations.

• Chronic monthly losses, even small ones, with no workable turnaround plan.

• Liquidity stress

  • frequent ‘workarounds’,

  • or growing reliance on a small number of savers.

Control and governance warning signs

• Board packs are late, inconsistent, or too rosy.

• The same risks reappear every month with no closure.

• Audit findings repeat.

• Regulatory returns are late, incomplete, or repeatedly corrected.

• The board avoids hard calls (collections posture, cost reduction, leadership change, transfer discussions).

4) Is there a clear measure of credit union insolvency? When is it deemed insolvent?

There is no single ‘magic ratio’ that announces insolvency. In practice you have two overlapping realities: legal insolvency and regulatory failure.

Legal insolvency tests (simple description)

• Cash-flow insolvency: cannot pay debts as they fall due.

• Balance-sheet insolvency: liabilities exceed assets. 

Regulatory reality for credit unions

Because a credit union is a deposit taker, the real-world trigger is often:

• weakening capital and liquidity with no credible recovery plan, and

• loss of confidence by the regulator in governance, controls, and data quality.

Credit unions are regulated by the Financial Conduct Authority and the PRA.

 

5) The regulator’s approach, and how directors should manage the relationship

How regulators tend to act when a credit union is weakening

• They prefer early, factual engagement over late reassurance.

• They look for evidence of control:

  • accurate records,

  • realistic provisioning,

  • timely reporting,

  • a credible plan with deadlines.

How directors should manage the relationship

• Do not surprise the regulator

  • Bad news early is manageable.

  • Bad news discovered late is a credibility collapse.

• Be factual and consistent

  • If numbers change, explain why and what you have done to fix the underlying cause.

• Show a plan with owners and dates

  • Regulators respond to action, not intention.

• Minute decisions properly

  • If the situation worsens, your governance record matters.

6) Formal insolvency options: administration and liquidation (‘CVL-style’), and how they progress

Credit unions are not companies, but legislation allows administration-style processes to apply. 

Option A: Administration

Used when there is a realistic objective such as:

• achieving a better outcome than immediate winding up, or

• creating order while transfer/merger options are pursued, or

• protecting members while the position is stabilised.

Typical stages (simplified):

• Pre-appointment assessment

  • viability, liquidity, loan book quality, data readiness, transferability

• Appointment

  • control passes to the administrator

• Stabilisation

  • cash controls, communications plan, collections strategy

• Outcome

  • transfer where possible, structured wind-down, or move into liquidation

Option B: Liquidation (often described in conversation as ‘CVL style’)

In practice, directors secure a formal winding up where an insolvency practitioner is appointed to:

• stop and control operations,

• realise assets (including the loan book),

• handle claims and reporting,

• work with regulators and the FSCS payout process.

   

7) What the IP expects of directors, and what directors should expect in return

A credit union insolvency needs a different tone and process from almost all other insolvencies because members are also customers and often vulnerable.

What I expect from directors

• Straight talking

  • full disclosure on arrears, provisioning, liquidity, and control weaknesses

• Fast access to accurate data

  • member balances, loan ledgers, arrears status, write-off history

• Calm, consistent member messaging

  • no minimising, no blame, no false reassurance

• Cooperation and speed

  • quick answers, signed documents, prompt decisions

• Respect for member dignity

  • tone matters as much as technical process

What you should expect from me

• A member-first communications plan

  • plain English, realistic timelines, consistent updates

• A controlled process

  • reducing chaos, rumours, and unnecessary distress

• Regulator-aware handling

  • because regulatory obligations and expectations continue through the process

• Hard truths when needed

  • including whether transfer is realistic, or whether payout and wind-down is the safest member outcome

Also, a critical correction we discussed:

• In a credit union failure, withdrawals do not ‘accelerate’ in the normal way because member savings are effectively frozen once the credit union stops and the payout process is triggered.

• The real risk is hardship during the freeze and reputational shock.

So directors must plan for desperate members.

A hardship plan for the ‘frozen savings’ period

• Set up a member support line and triage mailbox.

• Prepare a one-page member explainer:

  • what has happened,

  • what happens next,

  • what members need to do (often very little),

  • warning about scams.

• Identify likely hardship cases and create a script and escalation route.

• Signpost to emergency help (local authority, housing team, debt advice) while being clear you cannot release funds early.

 

 

8) What directors can expect of the IP, the FSCS payout process, and limited transfer options for loan debtors

This section is where precision matters most, because it directly affects how quickly savers are paid and how borrowers are treated.

Who prepares the SCV file, who submits it, and why accuracy matters

• The credit union must prepare the Single Customer View (SCV) file.

• The SCV must be:

  • up to date (right balance point, right member status),

  • accurate (no duplicates, correct identities, correct balances),

  • complete. 

• The insolvency practitioner will typically check and challenge the SCV because errors cause delay and member harm.

• The IP then submits it to the Financial Services Compensation Scheme to enable payment. 

How savers are paid, and the “no offset” point

• FSCS pays protected savings based on the SCV and does so on a gross payout basis.

• FSCS does not deduct or set off a member’s loan or other liabilities against their savings compensation.

• The loan does not disappear. The insolvency process will still pursue loan repayments separately. 

What the IP should do operationally

• Drive the process to get:

  • SCV produced, validated and submitted quickly,

  • member messaging clear and consistent,

  • loan collections stabilised and then optimised.

• Ensure the credit union meets ongoing regulatory expectations while it remains authorised, following FCA guidance on how insolvency practitioners should approach regulated firms. 

Transfer of loan debtors to another credit union: possible, but limited

A transfer of the loan book to another credit union can sometimes be the best outcome, but opportunities are limited.

Why it’s limited:

• A receiving credit union must want the loans and be confident in:

  • documentation quality,

  • arrears position,

  • affordability evidence,

  • data integrity.

When it is more realistic:

• Records are clean and complete.

• Arrears are contained. 

  Note that when I’m appointed to a credit union, I prefer to transfer only the ‘good loan book’ across to another credit union so as not to pass on the difficulties that caused or at least contributed to this credit union’s financial problems over to the transferee.  This leaves me collecting out the ‘bad book’.  I do so sympathetically but firmly as I recognise many of the loan debtors cannot as opposed to will not pay.   I also have the ability to short settle or write off debts. 

• Engagement happens early, before reputational damage and operational breakdown.

If you’re worried, talk early

If you think your credit union is moving from ‘strain’ to ‘serious risk’, do not wait for the position to force your hand.

Call me, Paul Brindley, on 07813102014 or email paul@midlandsbusinessrecovery.co.uk.

• Initial meeting is free of charge

• No commitment

• The aim is to protect members and give directors a clear, calm route forward

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