What Boris Johnson’s appointment could mean for British credit unions

If the United Kingdom’s Prime Minister Boris Johnson delivers a Brexit package, then credit union regulatory and legislative affairs could see some momentum.

Brexit has loomed over the United Kingdom since 2016 when voters approved a measure for the country to leave the European Union. Former Prime Minister Theresa May, who was unable to secure a deal for the country to leave the EU, resigned in June. Johnson launched his campaign for prime minister five days later and won, assuming office on July 24.

Securing a Brexit deal has consumed the British government, leaving credit unions little room to promote their own priorities. Credit unions are hoping that once this issue is resolved they can push for reforms.

“It’s been really hard to get policy moving because of the demands of the Brexit process,” said Matt Bland, head of policy and communications at the Association of British Credit Unions. “Brexit sucks a lot of energy out of policymaking.”

The uncertainty of Brexit has cost the U.K. economy £550 million per week since the voters approved leaving the EU in 2016, according to Goldman Sachs. That totals £66 billion so far, according to Goldman.

Boris Johnson
Boris Johnson, U.K. prime minister, left, welcomes Juri Ratas, Estonia's prime minister, inside number 10 Downing Street ahead of their meeting in London, U.K., on Tuesday, Aug. 6, 2019. As Johnson hurtles toward a no-deal Brexit that could leave the U.K. diplomatically adrift and economically vulnerable, U.S. President Donald Trump is looking to seize an opportunity to lure the country away from Europe on some of his top foreign policy priorities: Iran and Huawei. Photographer: Simon Dawson/Bloomberg

Johnson previously said that the U.K. will leave the European Union by Oct. 31 “come hell or high water.” However, it remains to be seen what type of Brexit deal will be struck and what impact the move will have on the country.

British credit unions are working to ensure their interests are still being considered. The ABCUL has been in talks with the economic secretary to the Treasury, John Glen, who has promised to continue supporting the mutual sector in a recent statement to Parliament.

Bland’s top priority is a new Credit Union Act, since the country’s current legislation dates back to 1979. Despite a number of amendments, the association believes that a new, fundamental reform is required to unlock the full potential of credit unions.

Bland noted that ABCUL would specifically like to see an increase in credit union autonomy so that they can "engage in a range of lending activity through different credit products and to offer wider retail financial services established clearly in law."

The last big win for British credit unions was the Legislative Reform (Industrial and Provident Societies and Credit Unions), which was last updated at the start of this decade. That removed restrictions preventing credit unions from reaching out to serve new groups and communities.

Besides legislative priorities, British credit unions are keeping an eye on how any deal would affect the economy.

Brexit is expected to continue to hurt the economy, according to Harold D. Clarke, a political science professor at the University of Texas Dallas who has also co-wrote a book on Brexit. With the depreciation of the British pound, inflation is projected to increase, which has hurt Britain’s gross domestic product growth.

Inflation would erode the value of a credit union’s loan portfolios, but higher inflation may lead to higher interest rates, according to Bland. That would be welcome given the current low interest rate environment in Britain, which has been a challenge for credit unions.

Still, it will depend on what type of Brexit deal the U.K. is able to strike with the EU. Three types of deals are on the table. The first is a hard Brexit, where the U.K. would not only leave the European Union but also the single market and the customs union.

The second is a soft Brexit, which would still closely align Britain with the EU and is forecast as the least damaging. This is likely to be the most favorable for credit unions.

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The last option is a no-deal Brexit, which would mean that lawmakers fail to arrive at any sort of deal with the EU before the U.K.’s scheduled departure. The Bank of England has left rates unchanged amid an increasing risk of a no-deal departure.

Of the three, experts have been bracing themselves for a no-deal Brexit, which could further ding the British economy.

Financial institutions have readied themselves for Brexit for years but have ramped up efforts this year in preparation of a hard Brexit. Credit unions are considering the potential impacts that a hard Brexit would pose by identifying risks and implementing risk mitigation plans.

“As part of these arrangements credit unions have been regularly monitoring and reporting any potential Brexit associated risks they identify in areas such as identifying members and industries who may be exposed to changes in conditions in the U.K., Northern Ireland or Irish markets; stress testing of the loan book for potential Brexit impacts; and assessment of loan provisioning adequacy,” said Martin Fisher, regulatory and legal officer for the Northern Irish League of Credit Unions.

Even if Johnson successfully leads the U.K. out of the European Union by the Oct. 31 deadline, there is still the possibility of further turmoil with a new election.

Currently the U.K. has what is known as a “hung parliament” in which no party holds a clear majority. A post-Brexit landscape wouldn’t clear that up, so a new election needs to be held in hopes that Johnson secures a clear majority in Parliament to run the government.

That implies credit unions will have to be patient that much longer until the elections are over.

“It’s quite likely that there will be an election as early as this fall,” Clarke said. “Boris wants to assemble a broad electoral coalition as much as he can, which involves getting a lot of working-class people on board.”

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Brexit Economy Interest rates Loan-loss provisions Risk management U.K.
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