Following previous articles in the Nautilus Telegraph, Nautilus members sent in a number of questions about the project, which are answered in detail below by Olu Tunde, Nautilus director of finance. (An edited version of these answers appeared in the June 2016 edition of the Telegraph.) Further updates on progress will be given as information becomes available.
No. The credit union will be totally independent from the union; it is a separate legal entity and must conduct its affairs accordingly.
From share purchases by its members, deposits from its members and interest earned from loans made to its owner-members only.
The credit union is authorised to trade by the PRA and regulated in trade by the FCA, both of which are ultimately responsible for their roles to the Bank of England.
The credit union will have its own independent board of directors elected from the owner-members of the credit union after the appointment of the initial board of directors (a regulatory requirement).
The credit union in UK law does not exist until ‘A’ (Authorisation Day) but it must have a board of directors in place to obtain ‘A’ at the first Annual General Meeting. The chartering board of directors can stand for re-election at the AGM if they wish to do so. Of course, other suitably skilled and experienced owner-members in credit union matters and operations can also put themselves forward for election.
All those people holding key offices with the credit union must be ‘approved persons’ with the UK regulators before assuming formal office. This requirement is to protect the financial and welfare interests of owner-members.
The board of directors can appoint a professional chief executive officer who can appoint other staff. The chief executive officer can advise, and is answerable to, the board of directors in session, and has a regular reporting role to the president of the credit union. All directors outside of these meetings as volunteers must perform tasks on land and at sea at the behest of the chief executive officer, who is also responsible for all of the operations of the credit union and answerable to its board.
The credit union is owned by all of its owner-members on a one owner-member/one vote basis, not based on the amount of money deposited by any one person; this is what makes credit unions distinct from limited liability companies. No other parties can have any ownership control over the credit union.
This is a decision to be made by the board of directors, but it is likely that the operation of the credit union will be undertaken electronically, because of the nature of maritime life and the desire to provide many of the services 24 hours a day.
However by UK law, the credit union must have a UK head office, which will control all transactions. This office will be a part of but separate to (a legal requirement) the London office of the Nautilus International trade union.
The trade union will commit itself to support the credit union with this infrastructure initially, but when the credit union is trading successfully, in fairness and legally it cannot be a drain on the resources of the trade union and will have to meet its own costs.
Upon the decision of the board of directors, advised by the chief executive Officer, the credit union can have service (not transaction) offices anywhere or with any party.
The credit union, along with all other deposit-takers in the UK, must be part of the UK Financial Services Compensation Scheme. Deposits will only be accepted in other currencies if the depositor protection in force in those countries is at least equal to that currently in force in the UK.
As of 1 January 2016, the amount covered under the protection scheme is £75,000 per person, per deposit taker. The compensation kicks in if the credit union fails in trade.
In addition, it is mandatory in UK credit union law that every credit union each year must have a fidelity/surety bond in place to safeguard all moneys held by it from dishonest acts by those working for the credit union; this includes volunteers or untoward acts committed by others towards it.
Just like any new company starting in trade, the Credit Union cannot pay any interest or dividends at outset. Why? Because it hasn’t earned any money!
The credit union earns most of its money from the interest received on the loans issued to its owner-members. At the end of each trading period, a statutory audit is undertaken and any trading surplus made is allocated first to the credit union’s reserves (a cushion fund to mitigate against any possible trading reversals in future) and this is a regulatory requirement. After this, a dividend payment – all moneys deposited are £1 shares – can be recommended by the board of directors to the Annual General Meeting of all the owner-members.
The owner-members can by resolution accept/reject/vary this recommendation; they cannot increase it. The dividend is paid to every owner-member based upon the amount saved and over what period. This is to prevent unfair ‘share pushing’ (deposits) just before a dividend is declared for them to be withdrawn immediately afterwards. All dividends are paid gross of tax. All owner-members are responsible for declaring the receipt of dividends in their own tax returns. There can be certain tax free allowances given in certain countries on amounts of dividends received from a closed (not open to everyone) mutual fund.
After a period of time, if the reserves of the credit union are high enough under UK regulation, it is possible for a credit union to allow deposits of shares when called for over a set period into a special account paying interest regularly to investors. Usually (subject to the judgement and consent of the board of directors), these accounts are not open to regular deposits. Again, it is usual for these accounts to be intended for investment return and not to be used as a factor for a loan application, but can be taken into account to secure it. A loan application is based on moneys deposited into an ordinary share account.
The reasons for the above is that high dividends or interest on shares can only be paid based upon the overall profitability of the credit union; which is largely underpinned by the interest received on loans issued to owner-members.
The loan policies for any type of loan will be determined by the board of directors advised by the chief executive officer (who cannot propose/second a motion or vote), who will meet in a session from time to time.
The rate of interest to be charged on a particular type of loan will depend upon certain factors such as:
This list is not exhaustive.
Under current UK regulation for credit unions, the maximum rate of interest that can be charged on a loan is 3% per month on the declining balance that is equal to 42.6% APR. This higher rate of interest is usually charged on very small loans taken over very short periods. Larger loans taken over a longer period can and frequently will attract a much lower rate of interest each month. Credit unions in the UK are unique in having a legal ceiling on loan interest charged, so they are not subject to movements in the money markets.
All the prevailing rates of interest for different types of loans will be published regularly; interest rates are fixed for the duration of the loan.
In addition, almost all loans taken for a UK credit union are protected by block loan protection life assurance that is taken out on owner-members and paid for by the credit union as an allowable expense of its operation. The cost of this is not met directly by the owner-member. It is only in very unusual circumstances that completion of a medical questionnaire will be required. This means that any outstanding debt dies with the named borrower and is not inherited by others.
Under current UK regulation for credit unions, the maximum rate of interest that can be charged on a loan is 3% per month on the declining balance that is equal to 42.6% APR. This higher rate of interest is usually charged on very small loans taken over very short periods to meet the processing costs, basically the same for a small or large one. Credit unions in the UK are unique in having a legal ceiling on loan interest charged, so they are not subject to movements in the money markets.
Larger loans taken over a longer period, taking into account the factors in the bullet-point list above, can and frequently will attract a much lower rate of interest each month. On the one hand the credit union must be competitive enough to attract loan business, but on the other hand it must exercise a duty of care to other owner-members’ funds whose funds it is lending out, so an individual risk assessment will conducted on all applications for loans.
All the prevailing rates of interest for different types of loans will be published regularly by the Credit Union; usually loan interest rates are fixed for the duration of the loan.
In addition, almost all loans taken for a UK credit union are protected by block loan protection life assurance that is taken out on owner-members and paid for by the credit union as an allowable expense of its operation. The cost of this is not met directly by the owner-member. It is only in very unusual circumstances that completion of a medical questionnaire is required.
This means that any outstanding debt dies with the named borrower and is not inherited by others.
A small start-up credit union cannot lend for a period longer than five years unsecured and for ten years secured.
A larger credit union (which must have a total capital to assets ratio of at least 5%) can lend for an unsecured period of ten years and secured 25 years.
A credit union must obtain mortgage consent from the UK regulators before being allowed to secure first or subsequent charges on property. For owner-members with property in other countries, these mortgage conditions can vary.
It is usual that a charge (a lien) is taken on all the shares held in the credit union as a condition of the loan, up to the outstanding balance due to the credit union.
Subject to these conditions, the financial strength of the credit union, state of the market, status of the owner-member applying for the loan, and appraisal (underwriting) decision of the credit union, the repayment terms cannot be longer than those terms noted above, but can be shorter, according to the prevailing policies of the credit union for each type of loan and the ability of the owner-member to pay it.
This point is responded to above under ‘Who will own the credit Union’ (point 5) and ‘What is the interest rate paid upon deposits?’ (point 8).
Yes, you will. A credit union is acting illegally under UK law if it makes loans to any person not an owner-member of the credit union.
To become an owner-member you might have to pay an entrance fee, paid with your owner-member application, and/or a monthly service fee deducted from share deposits – to meet the costs incurred by the credit union in setting up the account. The level of these entry and service fees will be determined by the board of directors, advised by the chief executive officer, and will be published through the media of the credit union.
An owner-member has to deposit at least £1.00 to qualify to apply for a loan under UK law, but a credit union is not able to make loans if it is not in possession of enough money to loan out. It can only obtain this money continuously from owner-members; therefore, as a practical necessity all owner-members are asked to deposit lump sums or make regular savings to provide the increasing demand for loan capital.
Once a comfortable level of money deposited has been reached and the pattern of loan demand has been tested by experience, then, subject to the consent of the board of directors guided by the chief executive officer, the loan qualification for owner-members can be changed from time to time.
Then you can! Unlike many other sources of loans, there are no early redemption fees (from the written terms of the original loan) payable. All you need to pay is the outstanding balance at that time. Partial repayments are also permissible under the same terms.
It is also worth noting that, depending upon the tax regime applicable to the country in which you are taxed, career development loans could be offset against earnings for the purpose of taxation.
No. Nautilus is not in any danger of financial loss, as the proposed credit union will be a separate legal entity, not run by Nautilus International.