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The first PRA enforcement action against individuals involved in a credit union leads to two bans and three public censures

Posted on 6 February 2020

On 6 February 2020, the PRA took action to ban non-approved person Michael Grimsdale and former approved director Richard Nichols from the financial services industry on the grounds of lack of integrity (and dishonesty on the part of Mr Grimsdale). It has also issued public censures to Mr Nichols and former directors Gillian Birkett and Phil Neale, both of whom had been approved.

The PRA action follows the failure of Enterprise the Business Credit Union Ltd (EBCU) in 2015.  EBCU had 1,900 members and £7m in savings.  The PRA determined that the above individuals' misconduct contributed to EBCU's failure.  The Financial Services Compensation Scheme (FSCS) has paid out over £7 million to EBCU’s members, of which it has recovered only £3 million to date.

Mr Grimsdale

EBCU was a small credit union with only one employee and a board of three to five directors.  EBCU outsourced most of its day-to-day business operations to Mr Grimsdale and a company of which he was a director.  Mr Grimsdale was not appointed as a director of EBCU but in practice was significantly involved at every stage of EBCU's loans business, including approval of loans, effecting payments and maintaining accounting records.

Following EBCU's liquidation, Mr Grimsdale was found to have unilaterally changed the basis of how his service company was to charge fees and invoiced fees which he knew the EBCU had not approved.  This resulted in an overpayment of £539,774. Mr Grimsdale was also found to have misled auditors.

As EBCU's business grew, the level of capital the PRA required it to hold increased (as a percentage of assets).  During the course of 2014, the PRA raised concerns regarding EBCU's deteriorating capital position which the PRA considered posed a risk to EBCU's safety and soundness.  EBCU agreed to a restriction on its activities to prevent any further lending by the credit union.

However, Mr Grimsdale paid out £642,502.93 from EBCU's bank account relating to 176 loans, which meant EBCU breached the PRA requirement repeatedly.  With the exception of 15 loans that it appears were approved by the EBCU Board in January 2015, Mr Grimsdale concealed the full extent of EBCU loans he had paid out in contravention of the PRA requirement.

Mr Nichols

Mr Nichols was a director of EBCU holding CF1 approved status.  Like Mr Grimsdale, Mr Nichols was also a director of the outsourcing company.  He was found to have acted recklessly in providing information to auditors about the financial arrangements between EBCU and that company.  Although the PRA accepted that he was not dishonest, it nevertheless determined that Mr Nichols breached principle 1 by failing to act with integrity on the basis that he "deliberately closed his mind to the risk that [information he provided to auditors] was not accurate."  He also breached principle 6, failing to exercise, due skill, care and diligence by failing to appropriately manage the conflicts of interest in his roles at EBCU and the outsourcing business as well as failing properly to supervise the activities of Mr Grimsdale.

Mr Neale and Ms Birkett

Mr Neale and Ms Birkett were each directors of EBCU holding the CF1 function.  They were also directors of the not-for-profit company Dorset Energy Advice Centre (DEAC) whose clients were eligible to become members of EBCU and access EBCU loans and accounts.  DEAC was paid fees and commission in respect of EBCU products taken out by DEAC's clients.

The PRA found that both Mr Neale and Ms Birkett breached principle 6 by failing properly to identify and manage the conflicts between their positions at EBCU and DEAC.  In addition they failed to supervise Mr Grimsdale and the activities of the outsourcing company.


Mr Neale, Mr Nichols and Ms Birkett all received a public censure. 

The PRA took into account that Mr Neale and Ms Birkett were both volunteers receiving no remuneration for their positions at EBCU.  For this reason, the PRA did not consider a financial penalty to be necessary to deter them from committing similar misconduct in future.  In not seeking to ban Mr Neale and Ms Birkett the PRA took into account that both demonstrated insight into their failings, that they had both agreed a directors disqualification undertaking with the Secretary of State and that neither intended to work in the financial services industry again.

The PRA would have fined Mr Nichols £20,000, but were persuaded that this would cause him serious financial hardship and therefore reduced the penalty to nil.  Nevertheless the PRA considered that Mr Nichols is not a fit and proper person due to a lack of integrity and competence and accordingly imposed a prohibition order.

Mr Grimsdale was the only individual who did not settle with the PRA and instead argued his case before the PRA's independent Enforcement Decision Making Committee.  Nevertheless he could perhaps consider himself to be lucky that as the only non-approved individual involved, the PRA did not have power to impose a penalty.  He did receive a prohibition order on the basis of his lack of integrity and dishonesty.


Credit Unions

Credit unions are mutual co-operative financial institutions, which provide simple financial services to their membership such as loans and savings accounts.  The maximum interest rate on loans offered by credit unions is limited by statute and the PRA recognises that credit unions perform an important social role, including in the provision of financial services to vulnerable or marginalised individuals who may otherwise have difficulty accessing financial services.

In the UK, the credit union movement is relatively small and, traditionally administration has often been done by unpaid volunteers.  As a result, a high degree of commitment amongst at least some of the members is required for a union to be successful.  Accordingly, whilst credit unions are frequently subject to supervisory action by the regulators (FCA and PRA), historically those same regulators have been reluctant to use their disciplinary powers.

Nevertheless, as the PRA makes clear, like other deposit takers, credit unions undertake maturity transformation (borrowing short term but lending long term) and leverage their lending.  As such they are as vulnerable to a lack of confidence as their larger cousins – the banks.  This underlies the PRA objective to promote their safety and soundness.  Whilst the PRA recognises that it needs to take into account that many involved in the management of credit unions are volunteers, as this case demonstrates, where lack of integrity or fitness and propriety is involved, the PRA is prepared to take action.


This enforcement action is the latest in a long line of cases featuring outsourcing failures.  Small firms with limited internal resources may consider that they have little alternative but to outsource many of their functions.  Whilst the temptation may be simply to let the outsourcing provider "get on with it", as this case demonstrates, the risks of conflicts of interest and abuse of the relationship need to be recognised and managed.  The firm always retains responsibility for the outsourced function and this can never be delegated.

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