DUBLIN, Ireland — A defining feature of the credit union model may have outlived much of its original purpose, with new research from the Swoboda Research Centre concluding that the common bond should no longer be a legal requirement while credit unions that value the concept should remain free to retain it.
The executive briefing, “The Common Bond Enigma: The Credit Union Common Bond — Is It Still Fit for Purpose?” by former credit union CEO Chris Smyth, examines the evolution of common-bond requirements in Britain, Ireland, Australia, Canada, the United States and Poland.
The common bond originated in 19th-century Germany as a practical way to manage lending risk. In small communities, personal knowledge, shared relationships and social accountability provided confidence that borrowers would repay loans and members’ savings would be protected.
But the Swoboda Centre–which was cofounded by former CUNA President Ralph Swoboda after he left the organization and became active in working with Ireland’s credit unions–said modern credit assessment, credit scoring and regulatory oversight have largely replaced that function, raising a more fundamental question: whether governments should continue determining who is eligible to join a credit union.
Common Bond Has Evolved
The research said there is no single international approach to the common bond.
Australia has largely moved beyond common-bond restrictions, with many credit unions operating nationally and accepting members broadly. Canada generally emphasizes cooperative ownership rather than common-bond membership restrictions.
The United States, by contrast, continues to treat the common bond as an important part of credit union identity and as part of the rationale for the industry’s distinctive regulatory and tax treatment. Poland maintains a more restrictive system that limits expansion but has not prevented challenges from commercial banks.
Ireland continues to view the common bond as a core characteristic of its credit union movement. A 2012 commission found no compelling case for changing it, although consolidation has gradually produced larger credit unions with broader membership bases.
The report focuses particularly on Britain, where the common bond was incorporated into the Credit Unions Act 1979 through four categories: locality, occupation, employer and association.
Reforms in 2011 allowed multiple overlapping bonds and eliminated the requirement to demonstrate a genuine social connection among members, effectively transforming the common bond from a relationship among members into a regulatory membership category, according to the research.
Restrictions Can Complicate Growth, Mergers
The Swoboda Centre identified several practical problems with Britain’s existing framework.
Locality limits can constrain growth and complicate mergers, while occupational common bonds are not subject to equivalent restrictions. Rules governing association bonds also require “bona fide” organizations, a concept the report argues reflects an earlier era of how people form social connections.
Changing a common bond requires both member approval and regulatory consent, adding time and expense that commercial competitors do not face. Rules covering nonqualifying members and households create additional complexity with little apparent benefit, the report said.
Three Paths for Reform
The research examines several potential reforms following HM Treasury’s 2024 Call for Evidence on the common bond.
Increasing Britain’s population cap could remove some obstacles to growth but would leave the larger question about the common bond unresolved.
Another option would replace the four existing common-bond categories with a single “community of interest” test, simplifying compliance but requiring primary legislation.
A third option — full abolition — would put credit unions on a footing more similar to other mutual organizations while allowing individual institutions to impose their own membership restrictions voluntarily. The report argues that existing regulatory exemptions for credit unions are based more on member ownership than on the existence of a common bond.
Report Calls for Removing Legal Requirement
Ultimately, the Swoboda Centre said the debate comes down to whether the common bond remains necessary to protect the credit union model or has become an unnecessary regulatory restriction.
The argument for retaining it rests largely on credit union identity and regulatory distinction. The argument for removing it centers on competition and the principle that consumers, rather than legislation, should determine which cooperative they join, the report said.
Serving a community can remain central to the credit union model without requiring government-imposed membership restrictions, according to the research.
The report concludes that the common bond should be removed from primary legislation while allowing credit unions that consider it important to continue using one voluntarily.
“The question is no longer simply how it should be adjusted, but whether it should remain a legal requirement at all,” the executive briefing said.
The full Swoboda Centre report examines legislation and regulatory practices across the six jurisdictions, academic research on cooperative membership and HM Treasury’s 2024 Call for Evidence and its implications for British credit unions.
For the full report, go here.
