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Westminster Hall

Wednesday 18 July 2001

[Sylvia Heal in the Chair]

Credit Unions

Motion made, and Question proposed, That the sitting be now adjourned.—[Dan Norris.]

9.30 am

Mr. Gareth R. Thomas (Harrow, West): I am delighted to introduce the debate on credit unions today and will begin by declaring my membership of the Rainbow Saver credit union.

There has been much focus since the general election on the modernisation of services used by our constituents and the possible role of the private sector in that process. I have long thought that the third sector of the economy—the mutual and co-operative sector—could have a key role in improving those services, on which our constituents rely. Developing the credit union movement throughout the country offers just such a solution. At some time, all our constituents will need a loan and a facility to save. Developing the credit union movement—thus helping to continue the process of reforming the financial services industry—is one way to help support that key service.

I sought today's debate for four reasons. First, I wanted to impress on the House the need to establish a central services organisation to help drive the expansion of the credit union sector. Secondly, it will highlight the case for further deregulation of the rules governing credit unions. Thirdly, I will highlight our disappointment at the lack of effort so far by regional development agencies to expand credit union coverage in their regions. Finally, I believe that the Housing Corporation and key housing associations could be much more proactive in helping to extend access to a credit union.

Credit unions throughout the world have an open and voluntary membership. They are run on the basis of one member, one vote. They cannot discriminate within the terms of their common bond, and they help to create a sense of belonging and responsibility in the communities or the workplaces that they serve. They seek to provide high-quality, affordable, ethical financial services. They distribute any surplus that they create to their members. They provide continuing financial education for their members and support co-operation among co-operatives. The key attraction of credit unions is their affordability. They also encourage self and mutual responsibility—it is impossible to borrow without saving.

The Minister's predecessor attended a conference on financial exclusion before the general election, at which the Consumer Credit Trade Association outlined the cost of a loan from a home credit company. It gave the example of a £400 loan, repayable over 24 weeks. It indicated that a person borrowing that sum would have to pay £160 in interest. In comparison, a credit union is allowed by law a maximum annual percentage rate of only 12.68 per cent., so the loan of £400, again repayable

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over 24 weeks, would incur interest of just £11.62—resulting in a considerable saving when compared with a loan by the home credit company route.

We can consider the impact, too, on a particular community. For example, 500 people, each with a £1,000 loan from a home credit company, would spend £775,000 on credit over a 31-week period. The same loan over a 26-week period with a credit union would cost those 500 people £515,725, resulting in a considerable saving for their community. A local authority making a capital investment of £250,000 to establish a credit union would, within six months, have helped to keep more than £259,000 in its community, and in the pockets of those 500 people. That financial investment by the local authority could make a real improvement to the financial position of local people.

It is arguable that credit unions are, internationally, the most successful co-operative structure on offer. There are more than 37,000 credit unions in more than 85 countries, with more than 100 million members. There are 680 credit unions in England, Scotland and Wales, with almost 300,000 members and assets of almost £200 million. I am told that the growth rate of credit union membership is 10 to 15 per cent. a year. That may sound impressive, but that membership is drawn from a relatively low base. In London, for example, there are only 44 credit unions, with 25,000 members and just £20 million in assets.

Workplace credit unions have been the most successful type in the United Kingdom to date. Nicred, which serves the employees of News International, is one such example. It has 1,000 members and assets of £1.3 million. The London Taxi Drivers Association is perhaps the most famous credit union in London. It has existed for 22 years and is one of the oldest credit unions in Britain, with more than 2,100 members and £3 million in assets. It has been proved to offer an excellent service to taxi drivers, helping them to obtain loans to undertake repairs to keep their taxis on the road. Taxi drivers can also use loans to pay for insurance.

Credit unions that serve the boroughs of Newham and Lewisham are being explored. Three existing credit unions in Lewisham would have to merge, and anyone who works or lives in that borough could join and benefit from the service provided by a single credit union.

The new work-live model for credit union development has perhaps been best demonstrated by the Southwark credit union. That credit union, which is also long established, began life serving the employees of Southwark council. It expanded two years ago to provide services to the 250,000 people who live in the Southwark borough.

Another example of that model for credit union development can be found in the neighbouring borough of Tower Hamlets. A brand new community credit union serves the 250,000 people who live or work in the borough, and the staff of the Financial Services Authority, which is based in Canary wharf, could join it. The Tower Hamlets credit union has produced bilingual publicity and information material to address the language difficulties that the substantial number of Bengali speakers in the borough face. It has also ensured that volunteers who speak Bengali help to provide the services that the credit union offers. That is an example

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of a credit union that has provided—because of its size, local responsiveness and position in the community—a specific solution to address the needs of its community.

Credit unions provide access to affordable credit. They promote a regular savings culture that embraces even small deposits and they actively work to improve the financial literacy of their members through educational programmes. Credit unions are based around their members' financial needs. Some members will need a savings facility and others will need to borrow. Credit unions help to match members' savings needs to other members' credit needs. As credit unions offer local community-based financial services that are owned and controlled by the people who directly benefit from them, they provide a service that meets their members' needs, not the requirements of private shareholders or external stakeholders.

Since the publication of a research report in 1999 by Liverpool John Moores university, credit unions have sought to strengthen and modernise themselves. They have merged, opened high street premises, employed more staff and actively sought to improve their image.

Credit unions now provide a professional service. They have formed partnerships with other organisations, such as local housing associations, trade unions or local authorities. Leeds City credit union has 8,000 members, who are mainly public sector employees, and it provides services to more than 1 million people who live or work in Leeds. Telford and Wrekin council offers a similar service.

The Social Enterprise London project, now in its third and final year, is funded by the single regeneration budget, and has sought to equip credit unions in London with the professional tools and marketing material that they need in order to expand. We need more local authority initiatives, such as those in Tower Hamlets and Southwark, to make credit union membership available to everyone who lives or works in London.

Other examples of strategic programmes specific to particular areas and designed to strengthen credit unions include the work done by the National Assembly for Wales to extend credit union coverage to all the people of Wales. The Scottish Executive are developing a Scottish credit union partnership to deliver a strategic plan for credit union development in Scotland, and to that end launched a document called "Unlocking the Potential" in March.

Well financed strategic initiatives in London, Scotland and Wales demonstrate what a sustainable credit union can achieve if it has sufficient capital. Credit unions should receive capital from direct funding. Recent developments in Lewisham, Tower Hamlets and Telford have shown that it costs about £300,000 to capitalise a credit union—to provide staff, premises, information technology and operational systems—so that it can provide financial services to the community that it serves.

Once a credit union is properly established, it requires no further financial support from outside sources. Members of the Scottish Parliament have demonstrated both political and actual support for credit unions; all MSPs can now join Capital Credit Union, which has

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7,000 members and assets worth £5 million. It pays a 4 per cent. dividend on savings. Members of the National Assembly for Wales and the Assembly's staff are also seeking to join or establish a credit union. Members of Parliament might wish to enjoy the benefits conferred on Scottish and Welsh colleagues—and on American congressmen and senators, who also have a credit union. The leading credit union trade association has approached the House authorities; perhaps the Minister will shed light on how that initiative is progressing.

Credit unions provide a powerful model for the delivery of core financial services. In the United Kingdom, however, it is still difficult to gain access to a credit union. There has been a series of problems, some of which remain to be addressed. When our party came to power in 1997, a series of regulatory issues needed attention in order to make credit unions more attractive. We needed to develop a central finance facility and, crucially, the Government needed the will to expand the credit union sector.

The Government have taken many positive steps since they came to power. From 1 July 2002, the Financial Services Authority will regulate credit unions as well as the other financial services industry players—the banks and building societies. Credit unions will have access to the same compensation scheme as those organisations, so that money deposited in a credit union will be as safe as that in a bank or building society.

The credit unions are concerned about the nature of the FSA's regime, because future regulations must be affordable and proportionate, and should provide safety for credit union members, while enabling growth and an increased range of services. To date, the credit union movement has had a positive response to the FSA's attitude. I hope that the FSA continues to work in partnership with the credit union movement to implement the regulations governing credit unions.

A central services organisation is needed to help to drive the expansion of the credit union sector. A visible demonstration of the Government's political will to establish such a body would be welcome. The taskforce on credit unions recommended a central services organisation. That taskforce was established by my right hon. Friend the Secretary of State for Scotland during her time as Economic Secretary to the Treasury. The Government accepted that recommendation, and it has been highlighted consistently in Government policy.

Today, I hope that we shall discover the time scale for the establishment of such an organisation, its financing, and an outline of its possible work programme. A central services organisation could be the Government's way to provide national strategic support for the credit union movement, which would result in a larger and stronger credit union sector. That could provide credit unions with a central finance facility, which would enable them to pool their liquidity to get a better return than they do currently. Moreover, such an organisation could make arrangements with the banks to ensure a lender of last resort for the credit union. It could focus on helping credit unions to combat financial exclusion through a challenge fund, so that they could contribute to financial inclusion. It could also support credit union development, for training and for business planning.

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The Treasury taskforce's idea of a central services organisation did not just emerge out of thin air. In the international credit union movement, there are several similar bodies. Canadian Central is the Canadian equivalent of a central services organisation. Its priorities for the next 12 months include: developing the capability of credit unions to deal with e-commerce; launching a national branding and awareness campaign for credit unions; developing the liquidity efficiency of the Canadian credit union movement; and looking for further efficiencies in the handling of payments and clearing. A similar body in Australia provides business services to credit unions, including information technology support, financial management and planning. New Zealand has a central banking fund for the credit union sector. Even in South Africa, where the credit union movement is smaller than in Britain, a central finance facility has been established; its main objective is to put money back into credit unions.

Throughout the world, the credit union sector benefits from central services organisations. Such an organisation, providing expertise and resources for credit unions to rely on, would clearly be an enormous benefit. I hope that my hon. Friend will outline whether the Government intend to deregulate credit unions further.

Three particular changes would be welcome. First, the ability to declare a dividend more often than just annually and to offer variable dividend rates on different savings accounts would be beneficial. That would enable credit unions to attract more savers and thus meet other members' credit needs, and it would specifically help credit unions to meet the new liquidity requirements set by the Financial Services Authority.

The second key change would be to allow borrowing from external sources, such as housing associations or local authorities. Borrowing from sources such as other banks and credit unions is currently allowed, but additional flexibility would benefit the credit union sector and enable it to raise the capital that it needs. The regulators require new credit unions to raise that capital, as has been demonstrated by the practicalities of getting large projects such as the Lewisham and Tower Hamlets credit unions off the ground. Both have required approximately £300,000.

The final welcome change would be the ability of credit unions to charge for additional services—to pay bills to utility companies, for example. I understand that the consultation period for deregulatory change usually takes a year. That one-year period usually includes the time for a consultation document to be issued, and a three-month consultation period to allow responses, which have to be collated and assessed. Only then can a deregulation order be drafted and come into force.

The Financial Services Authority is due to increase its responsibilities to credit unions in July 2002. It would make particular sense, therefore, to allow the deregulation of the rules that apply to credit unions in those three areas in line with that time scale. I hope that my hon. Friend will outline her view on that, and say whether the Government will move in that direction. I also hope that she will be able to give a clearer steer to regional development authorities, so that they work in partnership with housing associations, the newly established central services organisation and local authorities to increase access to credit unions.

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I was surprised that no mention was made of credit unions in the economic strategy that was published by the London Development Agency. There was, it is true, mention of the need to develop the wider social economy in London. Mention was also made of the excellent Social Enterprise London, to which I referred earlier, which has been doing work with credit unions. Given the need to expand access to available financial services in many London communities, the absence of a specific commitment to develop the credit union is disappointing.

The London Development Agency and other regional development agencies could provide a clear strategic lead to develop credit unions in their regions. London boroughs or other local authorities could then take up that lead. Such a strategy could include encouraging the boroughs, other partners and local employers to become involved in establishing and developing credit unions at a rate of knots. The London Development Agency could have a role in ensuring that any funds or assistance for credit unions are applied in an appropriately sustainable way. In London, for example, who could better lead approaches to the more traditional financial services community—the banks, the insurance companies, the pension funds and the building societies—to find and secure resources to help establish credit unions?

Mr. David Drew (Stroud): I apologise for missing the start of my hon. Friend's remarks. I was at the opening service.

Does he also agree that there is a role for the universal bank in relation to the postal network? In rural areas there is no better way for people to have access to savings facilities. Could the Government explore that angle in opening up the real possibilities for credit unions?

Mr. Thomas : My hon. Friend makes an excellent point. The universal bank, once established, could help credit unions to provide further services or access to their members.

There is a need for the Housing Corporation and local housing associations to be more active in helping credit unions to develop. Richard Newcombe, writing for the Housing Corporation in March 2001, emphasised that direct attempts by housing associations to set up credit unions had generally been unsuccessful and that, given the need for a more professional and more heavily resourced set-up, housing associations were unlikely to be the key appropriate agency. Why cannot housing associations, in partnership with a central services organisation or with regional development agencies, be part of a coherent strategy to develop credit union coverage in their area that their tenants can afford and that is properly thought through?

The credit union movement offers excellent services around the country. Those who are lucky enough to have access to a credit union in this country are generally offered an excellent service. People are enthusiastic about the services that credit unions can provide. The tragedy in this country at the moment is that too few people have access to a credit union. The Government have made a series of positive steps towards developing credit union coverage, but I hope that my hon. Friend

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the Minister will give that development a further sharp push so that, by the end of our second or third term, there will be far greater coverage of credit unions throughout Britain.

9.54 am

Mr. Paul Truswell (Pudsey): I congratulate my hon. Friend the Member for Harrow, West (Mr. Thomas). He is establishing quite a reputation as an assiduous advocate for the credit union movement. I declare an interest as a founder member of what is now Leeds City Credit Union Ltd.

I became involved with credit unions as a Leeds city councillor in the mid-1980s, when I was asked to chair a working group to consider how the city council could promote the development of credit unions in the city. We made two recommendations: first, that we should provide financial and other support to council employees to enable them to set up their own credit union; and, secondly, that we should appoint a credit union development worker to support the establishment of credit unions, particularly in deprived parts of Leeds.

We were fortunate to have an extremely supportive leader, whom we now know and love as my hon. Friend the Member for Leeds, East (Mr. Mudie), and we pursued both initiatives. As my hon. Friend the Member for Harrow, West said, the first initiative has been a huge success, but the second—the development of credit unions in small deprived communities—has had a more chequered history. I shall return to that.

The great advantage of credit unions is in respect of people in deprived areas who have difficulty accessing credit and who all too often, especially in cities such as Leeds, fall victim to loan sharks. The credit union for Leeds city council employees was registered in August 1987 and it grew slowly but steadily for about four years. Since 1991, its membership has been sustained and currently stands at 9,000 adult members and 600 junior members. The latter group is the result of an extension of the union's common bond.

Leeds City credit union is the largest in England and Wales and the third largest in the United Kingdom behind two Scottish credit unions—I do not know whether the affinity of Yorkshire and Scottish people with their purses, wallets and sporrans has anything to do with that development or whether it is pure coincidence.

The common bond of the Leeds City credit union was changed in 1996 to reflect the fact that compulsory competitive tendering and the removal of further education colleges from city council control had changed the nature of the people who had worked for the city council. That is one aspect of the way in which that credit union has developed organically and responded to changes in the needs of its members and potential members. As I said, membership was extended in 1996 to include families and junior members, which helped to boost the union's size. To reflect the changes in its role, its name was changed to the Leeds City Credit Union Ltd.

More recently, the credit union was granted a further extension to its common bond to include anyone living and working in the city of Leeds. That crucial

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development gives the union a target audience of about 800,000 people and makes it, I think, the largest common bond in the country by far. With the assistance of core grant funding from the city council, the union employs a development manager to take forward city-wide expansion of credit unions.

In December 1999, the union assumed responsibility for the support of other credit unions in Leeds. The new support officer conducted an extensive review of how smaller community and church-based credit unions were faring in the city. Unfortunately, it was found that some unions had great difficulties. They had the usual difficulties of finding a sufficient number of people to form the board to carry out the nuts-and-bolts mechanics of running the union. The unions also had difficulty generating a sufficient number of members to provide the assets that are essential if they are to provide the services that my hon. Friend so graphically described. It was also obvious that, although Leeds was a successful pioneer in developing credit unions, far too many people there still lacked access to the services that such a union can provide.

Five existing credit unions merged with the Leeds City credit union, but it was not a takeover or financial aggrandisement. The situation was more like that of an adoptive parent providing support and succour to orphans of a storm. It reflects what has happened in many other parts of the world. My hon. Friend demonstrated clearly how credit unions have caught on and developed over decades in other countries. There is absolutely no reason why that cannot happen in this country, particularly if the Government support the credit union movement.

I have tried to paint a picture of the experience in Leeds. It is fair to say that Leeds has been an effective trailblazer in promoting credit union development. As such, the lessons that have been learned there and the views of the people who are involved in running the credit union in Leeds are worthy of serious consideration. I do not intend to go into great detail; my hon. Friend the Member for Harrow, West made the case coherently and cogently, and it does not need repetition. However, as someone who has been involved with the credit union movement for many years, I associate myself with everything that he said in support of the measures that are needed, particularly on the part of the Government, to ensure that credit unions develop more effectively.

I have had discussions with people who are involved more closely and in more detail than I am with the Leeds credit union to ascertain what they regard as the major priorities that will enable the movement, not only in Leeds but generally, to progress further, reach out to more people and become even more relevant to potential members. As such, my hon. Friend's comments came as no surprise: first on the list is the establishment of a central services organisation as recommended in the Goodwin report. In particular, a central finance facility must be established to allow credit unions to pool their resources. I join my hon. Friend in pressing the Minister for an indication as to how speedily she anticipates that process taking place.

Along with everyone associated with credit unions in Leeds, I accept that organisations, particularly financial organisations, must walk before they can run. To some extent, Leeds is an exception—it is already up and

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running. However, established credit unions such as the one in Leeds should be allowed to broaden the scope of their activities to make them even more attractive and relevant to existing and potential members. They could be given the ability to offer tax-free savings accounts—the son or daughter, one might say, of individual savings accounts. They could be given opportunities in the development of the new baby bond accounts, as they are colloquially called. Credit unions could be allowed to offer fixed-term deposit savings accounts to help them generate more share capital, and approved credit unions—perhaps this is a very ambitious suggestion—could be given permission to conduct mortgage business.

As my hon. Friend said, the Government could do a great deal towards generating enthusiasm for, and spreading the word about, credit unions and, where necessary, directly or indirectly providing some of the essential pump priming that is necessary to get them up and running. The experience of Leeds is worthy of wider promulgation. Organisations such as the Association of British Credit Unions do a fantastic job, but the more organisations that recognise the work of credit unions and encourage their growth by exhortation or, perhaps, with pump-priming cash, the better things will be.

The intervention of my hon. Friend the Member for Stroud (Mr. Drew) touched briefly on the part that credit unions can play in the development of the universal bank, which I endorse from my knowledge of the Leeds experience. Broadening out the evangelical approach—I hesitate to call it that—there may be ways of instigating discussions and learning about credit unions in schools; that would be a helpful development.

I hope that my hon. Friend the Minister will take all of those ideas on board but, in particular, will pursue with some urgency the issue of a Central Services Organisation. The Leeds experience clearly demonstrates that credit unions work, but support from the Government and other agencies is needed to make them work even better and to extend their services to more of our fellow citizens.

10.4 am

Mr. Andrew Love (Edmonton): I too congratulate my hon. Friend the Member for Harrow, West (Mr. Thomas) on securing the debate. We all recognise his expertise and commitment to the credit union movement. Like him, I should declare my membership of a credit union and the fact that I benefit from a small loan at a low interest rate.

Credit unions are unique community-based financial services organisations that are owned and controlled by their members. Perhaps most importantly, they foster both self-help and thrift. They share a community and collective responsibility in the form of a common bond that brings people together for their mutual benefit. There are two common misconceptions about the credit union movement. First, we must understand that their function is primarily to promote thrift and savings. People often talk about the attractions of low interest rates, certainly for those who suffer from being financially excluded from the marketplace. However, people must save before they may take out a loan. Secondly, credit unions are prudential financial institutions, not a social service or an anti-poverty strategy.

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Credit unions did not originate in this country. They came primarily with immigrants from Ireland and the Caribbean, and it was some time before there was a legal framework, which eventually emerged with the Credit Unions Act 1979. Since then, we have seen steady, if modest, growth, which has been disappointing. However, growth has increased since the 1997 election, and I was pleased to see that there has been a 30 per cent. increase in membership since then, which shows some progress at least. The penetration of the movement is still insignificant compared with that in some other countries. In Ireland, more than 40 per cent. of the population are members of credit unions, while the figure for Canada is 15 per cent. Sadly, Britain does not compare to them in any way, with credit union membership totalling only 1 per cent. of the population.

There are many reasons for those figures, not least the contribution of other mutual financial services organisations, which have traditionally attracted the savings of the people who would most benefit from credit union membership. Certain factors are important in the context of the growth of credit unions and their attempt to address financial and social exclusion. The first reason is the fragmentation of the leadership of the credit union movement. Since its inception, there have been disagreements about its role, ethos, objectives and even its values. Many believe that small is beautiful and that growth in itself is almost a bad word, while others would like the movement to expand and develop.

We have ended up with a disparate movement, with some large and expanding credit unions that offer a wide range of services and other smaller community credit unions that seem to take pride in not expanding or being able to offer so much. That has bedevilled the movement's ability to act in unison and, perhaps more importantly, to speak with one voice. I therefore strongly support the recommendations of the National Consumer Council, the Treasury taskforce and the financial services organisations that there should be one national representative body. The movement needs to consider that carefully if it is to respond to the need to develop and expand the movement.

The restricted legal framework in which credit unions are currently set has already been mentioned. There have been two recent deregulations measures: the first was in 1996 and the second will be implemented mainly through the Financial Services and Markets Act 2000. Nevertheless, we still have the most restrictive regime in the world for credit unions. If they are to grow we must be able to provide a broader range of savings, lending and financial services to compete with the high street organisations. Of course, even if we have those changes they may not lead to any spectacular growth along the lines of what has happened in other countries, but they would boost both the membership and, perhaps more importantly, the asset base of the credit union movement. I certainly endorse the deregulation measures that have been carried out, in particular those increasing the flexibility of the common bond. That is an area where further deregulation could assist growth.

I should like briefly to comment on a couple of areas that are critically important if credit unions are to grow and develop and play a part in addressing social and financial exclusions—which the Government are seeking to do. First, both previous speakers mentioned the need for a central services organisation, which will

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be the main body that could sort out some of the shortcomings of the credit union movement. There is a need for more professional provision of services. All reports on the movement have commented on the need for premises, qualified staff, management skills and new technology, or back office services, as they are commonly known. Everyone needs to work together. Growth is extremely difficult to achieve. A centrally-based organisation to foster that growth, along with the member organisations and the development agencies, would go a long way to sustain and perhaps increase the recent growth.

Small and community-based credit unions face considerable difficulties in this respect. That was commented upon by both the taskforce and the recent report by John Moores university. Many credit unions are far too small in membership. They lack the dynamism to grow. They have reached a plateau and are not really going anywhere. We need to intervene to assist them to develop the services that their communities need. I am greatly attracted to the idea of a challenge fund set up for CSO to help it tackle some of the problems of community credit unions.

The CSO is an ambitious business plan and it is on an ambitious time scale. If that is to be implemented, as I think would be the Government's wish, it needs the Government's support and assistance. I hope that the Minister will tell us what measures she intends to take to get the CSO up and running.

The second issue is further deregulation. As I have already mentioned, the current framework is perhaps the most restrictive in the world. I support the Treasury's decision to bring credit unions within the regulatory regime under the supervision of the Financial Services Authority. That is the right way forward; it provides a compensation scheme for depositors and an ombudsman scheme for those who may feel they have been hard done by in their dealings with a credit union. I hope that will increase consumer confidence and promote greater trust in credit unions. We must ensure that the regulatory regime is robust, as that will offer an opportunity further to deregulate the legislative regime in which the credit unions operate.

Credit unions are worried about being supervised by the Financial Services Authority because of concerns about affordability and about having a regime that is proportionate to the risks that are faced by their membership. However, I am pleased that the FSA is responding to both those concerns, so matters can proceed. If the problems in relation to regulation have been solved, it should give credit unions the opportunity to develop the wider range of affordable and accessible services that are necessary if credit unions are to grow and respond to the issue of financial exclusion. Further deregulation measures are being considered, which I very much welcome, because it will help to stimulate future growth.

With FSA regulation kicking in in July 2002, it would be appropriate and sensible, if there are to be further deregulation measures, to consult on the issue and for implementation to take place at the same time so that when the credit union movement is taken under the wing

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of the FSA, it is also encouraged to develop a wider range of services. That would produce a positive response to the movement.

Credit unions are not the only solution to financial or social exclusion but they are the only self-help, co-operatively owned and run financial organisations that promote thrift and savings. Credit unions present a unique opportunity to end financial exclusion and provide affordable and appropriate financial services, but they need Government support and help to achieve that aim.

I look forward to the Minister's response to what I have said this morning.

10.18 am

Mr. Adrian Bailey (West Bromwich, West): I join my hon. Friends in congratulating my hon. Friend the Member for Harrow, West (Mr. Thomas) on securing the debate, and endorse many of the arguments that have been advanced in support of my hon. Friend.

I want to pick up one or two points made by my hon. Friend the Member for Edmonton (Mr. Love) about the nature of a credit union. He said that it was not a financial social service but rather a financial institution designed to encourage thrift and savings. The perception that credit unions are a social service has been extremely damaging to the movement's development.

Before becoming a Member of Parliament, I was a member of the Sandwell Credit Union Development Agency, an organisation introduced in the borough of Sandwell with the specific objective of promoting the development of individual credit unions. It may be a reflection on the success—or lack of it—of that body that I have never been a member of a credit union. The lack of success of credit unions in this area highlights the need for our debate and explains why we are asking the Treasury for changes.

Sandwell is a traditional black country inner-city area with relatively low incomes, low car ownership—only 50 per cent.—and relatively low membership of any financial institutions. The Government's attempts to promote social and financial inclusion should be targeted to make savings and thrift part of a wider culture of regeneration.

The financial deficit has been aggravated in recent years by the closure of bank and post office branches, which is a big issue in urban as well as rural areas. Combined with low car ownership, it makes it difficult for some people to gain ready access to financial services.

I mentioned earlier that credit unions are not a financial social service. However, as my hon. Friend the Member for Harrow, West said, they are able to take in savings from people not targeted by the major financial institutions and can offer loans at a much cheaper rate. They are by definition appropriate for people on low incomes in urban areas, so they have a potentially important role to play in such areas.

The Government are anxious to promote the culture of financial management among lower income people. On the surface, credit unions would seem an ideal vehicle to promote such a culture, so why are only 300,000 people in this country members of a credit

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union? In the United States 25 per cent., in Ireland 50 per cent. and in some Caribbean countries 70 per cent. of the population are members.

David Taylor (North-West Leicestershire): My hon. Friend makes a valuable point and I apologise to him for not being present at the start of the debate. Ireland has been very successful. Our credit union in North-West Leicestershire—I declare an interest as a member of the Money Tree credit union—has been twinned with Ballinasloe credit union in southern Ireland. Picking up the threads of its ideas and suggestions has led to a new lease of life and a new period of expansion for our credit union. Perhaps that arrangement could be replicated in other areas.

Mr. Bailey : My hon. Friend makes a valuable suggestion, which should help us to develop credit union policy further. It has sometimes been difficult for other areas to develop the kind of policies that have proved appropriate for North-West Leicestershire.

I was commenting on the small number of people who are members of credit unions in this country. Given the enormous potential for development, it is obvious that that lack of growth is the result of cultural, financial and other obstacles. I hope that the Government will tell us how they will break down those obstacles.

As other hon. Members have done, I give credit for the progress that has been made. Changes in regulation enabling the relaxation of the common bond have undoubtedly been a major step in that progress. Prior to that, work-based credit unions in this country had most members—people with a secure income—and facilities to carry out the necessary financial functions; community-based credit unions had relatively few members. Extending the common bond has made it much easier to have larger, geographically based credit unions that can incorporate a far wider section of the community and far wider income bands. That is a positive development.

However, there are three obstacles. First, there is a lack of trained and confident personnel who are capable of understanding the credit union movement, promoting it and carrying out its day-to-day administration. During my years as a member of the Sandwell Credit Union Development Agency, we made strenuous efforts to find volunteers in local communities who would be prepared to put in the time to undergo training. We found some.

The poor public perception of credit unions and the lack of confidence in certain low-income and traditionally deprived communities are undoubtedly major obstacles. Tying credit unions into the regulatory framework of the Financial Services Authority and having a central services organisation that is highly professional in its approach to training could play an important role in removing one of the main cultural and institutional obstacles to their development.

Another obstacle is the status of credit unions as a social service geared only at poor people. The irony is that if one is on a low income, saving is much more difficult and one is less likely to choose as a safe haven for hard-won savings an institution that appears to be just a social service and does not have the safety and regulatory framework of an established financial

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institution. Credit unions have therefore been missing some of the people who might benefit most from them. That obstacle could be removed by incorporating credit unions into the regulatory framework and by having a training and promotional body for them.

Mr. Drew : Does my hon. Friend accept that one of the biggest difficulties with training is the amount of time that credit union staff—who are volunteers—are expected to give up? Anything that can be done to support people during their training period is important. Could my hon. Friend comment on that?

Mr. Bailey : My hon. Friend makes an important point. As my hon. Friend the Member for Edmonton said, some £300,000 of investment in the financial infrastructure is needed to get a credit union going. My own experience substantiates that. One must have appropriate premises and staff to generate the image of professionalism necessary to encourage people to invest their savings.

That brings me to my final point, which is the difficulty that credit unions have with a lack of premises and inadequate security. The somewhat romantic notion promoted by some of the credit union evangelists is of people starting a credit union in someone's front room, with volunteers totting up the money, banking it and so on. In my experience, that approach is a great deterrent to those who want to invest their money. Potential investors want to see proper offices, proper security and properly trained staff, and the Government or other financial institutions need to invest in the system to guarantee that they are available.

For those reasons, I support the move for a central services organisation. The credit union movement needs to be tied into the existing financial structure so that those who might benefit from its services have confidence in it. It offers a distinctive additional means of providing financial services to people who otherwise would not have access to them.

David Taylor : I am interested to hear my hon. Friend's argument. I accept that the minimum number of people required in a credit union to justify a shop-front approach of the sort that he recommends and to ensure its viability is quite high. Will he comment on the possibilities opened up by the era of the internet, although I acknowledge that a good number of those who may benefit from credit unions may not have ready access to the internet?

Mr. Bailey : My hon. Friend raises a valuable point. Promoting the internet should be part of the package of training, promotion and investment that the Government and allied financial institutions need to introduce, although it would not be accorded the highest priority in inner-city areas such as mine. However, there must be considerable potential in that direction in the long term.

The institution of credit unions potentially conforms to a number of Government objectives: first, it deals with financial exclusion; secondly, it promotes thrift and good financial planning—certainly, the proposed baby bonds would be well within that sort of financial framework; and, thirdly, it has a potential for

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community and urban regeneration. By working together to save and invest in the locality, local communities have the potential for expanding community activity, which benefits the area socially and financially.

10.33 am

Mr. David Drew (Stroud): I shall keep my remarks deliberately short, so that the Opposition Front-Bench Member and my hon. Friend the Economic Secretary have the chance to make a good summing up. I shall concentrate on one perspective.

Like other hon. Members, I declare an interest: I am a founder member of the Stroud credit union. I want to speak about the difficulties of running a credit union in a rural area. Although I agree with everything that has been said by my hon. Friends, they represent more urban parts of the country. It is good to see my hon. Friend the Member for North-West Leicestershire (David Taylor) here; however, mine is a slightly different perspective.

The key problem in rural areas is access. Important though it is to talk about bulking up numbers and about increasing the financial base of credit unions and the services that they provide, in rural areas the key issue as regards the common bond is maintaining the local strength of credit unions by making them as accessible as possible while keeping the financial position as sound as possible. That is why I want to reiterate a point that I made in an intervention on my hon. Friend the Member for Harrow, West (Mr. Thomas), who did an excellent job of explaining the value of credit unions. There is a synergy with the opening up of the universal bank in the postal system. As part of the negotiations on that, we could—I am looking directly at the Minister—ask the postal network to consider making available sub-post offices, particularly in rural Britain but also, as my hon. Friend the Member for West Bromwich, West (Mr. Bailey) said, in urban Britain. If we make sub-post offices places where people can access savings and if we open up the network—as I am sure we will—so that we keep sub-post offices open and make them useful for people, the need to be able to access savings from them will be all too obvious.

David Taylor : Does my hon. Friend support my request to the Minister carefully to consider what is happening in Leicestershire? The pilot scheme for post offices—the linking in of the network in the county's numerous post offices—could be twinned with the potential for expansion of, and access to, credit unions. That is true in particular of rural areas and not least of the monetary union in the town of Coalville.

Mr. Drew : I thank my hon. Friend, because he has taken my words from me. He gives an excellent example. Given all the initiatives in the postal network in Leicestershire, we could, with a push, have a win-win situation. The Government are the only people who can provide a real push.

I ask the Minister, not necessarily in direct response to today's debate and to my pleadings, but certainly over the course of developments, to understand, along

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with her colleagues in the Department of Trade and Industry, which will obviously be the lead Ministry, that the issue could open up. So many advantages can be gained by giving people access through the universal bank to the savings network that I do not need to keep going on about it. However, unless someone provides the drive and a reason to act, we shall not take that opportunity and we shall all rue the day when we failed to do so.

10.38 am

Mr. Howard Flight (Arundel and South Downs): May I add my congratulations to those already given to the hon. Member for Harrow, West (Mr. Thomas) on securing this debate on an important subject? I also note the valuable contributions made by the hon. Members for Pudsey (Mr. Truswell), for Edmonton (Mr. Love), for West Bromwich, West (Mr. Bailey) and for Stroud (Mr. Drew).

The objective of the debate has been to push the Government to get a move on with establishing a central services organisation, which was proposed four years ago. I cannot resist noting that I have lived through three Economic Secretaries to the Treasury waxing lyrical about how credit unions would solve the problem of social exclusion, but little has happened. Something has been made of the legislative changes, which are necessary and arguably just as important as a central services organisation. Those changes would make credit unions much more useable and viable financial services providers than they are at present.

The objectives of a central services body are perfectly sensible. The pooling of liquidity management is important if credit unions are to be competitive and professionally run. There is a need to train people in an area where there are many potential problems. The provision of automated teller machine cards for the payment of bills will be important. The legislative changes would involve arrangements to pay interest—called dividends in credit unions—in a regular way, analogous with other bodies, and to permit credit unions to borrow from other bodies so that they could constitute capital by subordinated loan. A number of those changes will be necessary when the new regulatory regimes begin this time next year. I understand that some credit unions cannot start operating until those changes have happened.

That all seems very sensible, and I congratulate the Association of British Credit Unions and Shaun Spiers, its chief executive, on the vision and leadership that they have provided. The Conservative party supports mutuals, as it supports diversification and a wide choice of financial services providers. Over the years, many of us have supported friendly societies and mutual building societies. However, so far, credit unions are immaterial in a wider UK context. With assets of only £180 million, they are tiny—as has been observed, only 0.4 per cent. of the population belong to them, compared with 25 per cent. in the United States and 50 per cent. in Ireland. The main reason is not just that credit unions are a fairly recent import from Ireland and the Caribbean, but that we already have building societies and friendly societies. Let us not forget our other mutuals when we wax keen on this new form.

Credit unions that have succeeded materially, both here and overseas, are those that are tied in with employment, particularly those provided by large

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employers—British Airways is the main example, although Leeds, Birmingham and the taxi drivers' credit unions are employment-oriented. They are a low-cost and convenient benefit for an employer to offer to staff. If the credit union movement takes off in this country, as I think it will, that will be the main area in which it will succeed.

However, the movement is not the solution to the lack of financial services in deprived areas. It will become—as it has substantially in the United States—predominantly a middle-class movement. There is nothing wrong with that, or with the fact that it can help in deprived areas, as it plans to do in Leeds and Tower Hamlets, but it is much more important, as has been said, to keep post offices open. Friendly societies have an important role and banks could, too, if they would return to areas from which they have withdrawn. Worthy though the cause of credit unions is, it is mistaken to think that they provide a solution in deprived areas.

That brings me to the central services organisation. I assume that the Government have dragged their feet because it is difficult to justify providing taxpayers' money for one type of mutual and not for others. Why should friendly societies or even the many worthy remaining building societies not have similar funding? To the extent that taxpayers' money is to be made available, it should, if at all possible in the long-term, be on a self-liquidating basis—potentially by loan to be repaid by the movement, rather than by the provision of a grant.

In conclusion, the aims are excellent; the Conservative party supports mutuals and I am pleased to see some oomph behind the credit union movement.

David Taylor : If the Conservative party is as supportive of mutuals as the hon. Gentleman says, why did it stand by and let them be targeted by corporate raiders and others, the result of which is that the mutual sector has been enfeebled during the past 10 to 15 years?

Mr. Flight : We are not debating building societies. As the hon. Gentleman knows, a protection against that problem was built into the original proposals, but it proved not to work on two scores. When building societies and mutuals were liberalised, the intent was to create a fair and level playing field. However, members' ballots came to be important and building society management noted them when it need not have done. Also, methods were used to get round paying out to people who had not been members for long, some of which have been changed. The Conservative party intended to create a fair and level playing field, while offering choice. What developed was not caused by the then Government.

The regulatory changes to credit unions have mainly been sensible, and the FSA has responded to concerns that they would be over-tight on liquidity requirements. I do not see how the arrangements for money laundering and credit unions can be any different from those for any other financial intermediary. That presents a problem in deprived areas, which are essentially cash economies. I do not know how that circle will be squared. There will be a major issue about whether credit unions can be helped by larger parentages, such as Tower Hamlets, to achieve success in providing services in deprived areas.

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Credit unions will grow enormously, but people should not be blind to the fact that most of their success is likely to be related to employment, as in the United States. They will probably provide services to the great rump of people in the middle of society, and will not be the key solution to increasing financial services in deprived areas.

10.47 am

The Economic Secretary to the Treasury (Ruth Kelly) : I am grateful to my hon. Friend the Member for Harrow, West (Mr. Thomas) for securing the debate. He and other hon. Members aired issues of real importance to the credit union movement, to the people who benefit and to others who could benefit from the services that credit unions offer. He is an extremely active champion of credit unions and their work, and I hope to work closely with him and other interested hon. Members on the issues in future.

Credit unions have an important role to play in the campaign to reduce financial exclusion. They make a real difference to the people and the communities that they serve, not only by providing financial services to which communities would often otherwise have limited access, but through their ethos of self-help and thrift, which plays a valuable role in educating people about managing their finances, bringing greater independence and security.

I assure hon. Members that the Government share their support for credit unions, and their hopes for a large and flourishing credit union movement in our country. The Government have already been involved in several initiatives to help credit unions grow to realise their full potential in the United Kingdom, and we shall continue to support their further development.

There are more than 700 credit unions in Britain, with around 300,000 members and assets of about £200 million. As several hon. Members have pointed out, the development of credit unions in the UK is much smaller than in other countries. Fewer than 1 per cent. of the population are members of them, compared with around 20 per cent. in Australia, 30 per cent. in the United States and 45 per cent. in Ireland. The small size of the membership of the credit union movement in this country has arisen for several reasons. It is partly because it is relatively new here. Nevertheless, it is important and clearly has the potential to grow.

With that growth in mind, the Treasury set up the credit unions taskforce in July 1998, bringing together stakeholders from the credit union movement, along with those from the wider financial services community. The taskforce was asked to explore ways in which the banks and building societies could work more closely with credit unions to increase their effectiveness. It also looked at ways of expanding the range of services on offer from credit unions, and expanding the credit union movement as a whole.

The taskforce recommended the establishment of a central services organisation, or CSO, which in addition to offering the facilities to manage resources, would create a central pool of expertise on which credit unions could draw. The taskforce also felt that such an organisation would be a straightforward way for the banks and building societies to play their part in helping develop credit unions as complementary institutions in the financial services sector. I shall say more about that later in my speech.

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The Government's approach to neighbourhood renewal and social inclusion acknowledges the central importance of improving access to financial services. The social exclusion unit was set up by the Prime Minister to develop integrated and sustainable approaches to the network of problems faced by people in our most deprived neighbourhoods. The SEU established 18 policy action teams—PATs—bringing experts together with people living and working in deprived areas, to take forward an intensive programme of policy development. One of those action teams, sponsored by the Treasury, focused on issues relating to financial exclusion.

That team reported towards the end of 1999, making 44 recommendations under five headings: credit unions, banking, insurance, regulation and education. The team's recommendations reflect the complexity of the issues that make up financial exclusion, and it suggested a number of joined-up solutions. It called on central and local government, the banking and insurance industry and many other organisations to work together to deliver greater financial inclusion.

In January 2001, the SEU published a report that audited progress against the recommendations, and I am pleased to say that we are making significant progress on all the report's key recommendations, including those covering credit unions. For example, the Local Government Association has issued a good practice guide to all local authorities concentrating on the development of sustainable credit unions. It is now up to local authorities to act on the guidance, but the Department for Transport, Local Government and the Regions is continuing to lend support in what is, of course, an on-going process.

The Treasury's role is to help create the right conditions for credit unions to expand. Earlier this year, we introduced two changes to give credit unions greater freedom. We increased the maximum loan repayment periods that credit unions may offer borrowing members, and we increased the amount that junior members may save with a credit union, bringing it into line with the amount that adults may save.

We shall also be introducing a further package of three deregulatory changes, when the relevant sections of the Financial Services and Markets Act 2000 are brought into effect on 1 July 2002. The forthcoming changes will abolish the maximum limit on the number of members a credit union may have, and abolish the statutory distinction between the large credit unions that are able to take advantage of the additional powers conferred by a section 11C certificate, and other credit unions. They will also abolish the requirement on credit unions to dispose of repossessed collateral as soon as possible.

We also plan to consult on a range of further measures aimed at relaxing some of the restrictions on credit unions' operational powers. This exercise will include a number of proposals that have been put forward by the sector, many of which remove or reduce legislative constraints, and which will also include some of the proposals that my hon. Friend the Member for Harrow, West made today.

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I know that these measures are eagerly awaited in the movement, and I am keen that we make progress with the assembly of a package of measures for public consultation as soon as possible. I am also aware that it would be helpful to introduce those deregulatory changes that consultees consider desirable at the same time as the Financial Services Authority commences its regulation of credit unions, next year. A great deal of work still needs to be done before we can release the consultation document, but I hope that we shall be in a position to start the consultation process before the end of the summer.

The movement is known for its diversity, so I hope that when the time comes as many credit unions as possible—large and small, community, associational and employee based—will respond, to enable us to take account of all the different perspectives and needs before we come to take decisions about how to proceed.

The Treasury has also used the Financial Services and Markets Act to bring credit unions under the rule-making powers of the Financial Services Authority. In future, credit union members will be given similar protection to that afforded to depositors with banks and building societies.

The Government received strong support from across the movement in November 1999 when we decided to transfer the regulation of credit unions to the FSA. Since then, the FSA has been working to develop a regulatory structure that is proportionate to the nature and scale of the risks that credit unions face. As several hon. Members have pointed out, the response has been overwhelmingly positive, despite some concerns about whether the degree of regulation would be proportionate to the credit union sector. The FSA has been paying close attention, and responding positively, to such concerns.

All hon. Members mentioned the need for a central services organisation. The taskforce and the policy action team both pointed out how establishing such an organisation would be to the advantage of the credit union movement in this country. That has always been a project for the movement to take forward, and the taskforce felt that the banks and building societies could usefully support it. However, the Treasury has maintained regular contact with the Association of British Credit Unions, which is finalising its business proposals in consultation with other key stakeholders.

Under the latest plans, a CSO would offer all credit unions—regardless of the representative body to which they might be affiliated—a finance facility that should be able to achieve better rates of return on deposits, assistance with liquidity management and help with training and development. It would, however, remain a matter for each credit union to decide whether to use any or all of the facilities on offer, which means that the take-up, or otherwise, of those services would rely exclusively on their overall desirability and cost.

My hon. Friend the Member for Harrow, West, among others, questioned me about the timing and financing of a CSO. I hope that the organisation will be set up soon, but, as I said, it is primarily a matter for the movement to take forward.

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Mr. Flight : Have the Government worked out how the proposal will be financed? Many hon. Members are aware of discussions taking place with banks and, not unreasonably, many banks have taken the view that it is not fair, when they are being leant on to finance the universal bank, to be asked to finance a future competitor as well. The crucial issue seems to be where the money will come from.

Ruth Kelly : My view is that the crucial issue at present is how the movement will take the matter forward and finalise its plans. After that, it will be possible to examine funding arrangements. However, I think that banks and building societies have a duty to support any organisation that is set up.

Mr. Love : Will my hon. Friend undertake today to bring the parties together, to try to find an effective and quick way of setting up a central services organisation?

Ruth Kelly : I certainly will undertake to try to facilitate those discussions. I am interested in any proposals from hon. Members that might advance the process. I would also seriously consider representations about the future work programme of the CSO. I hope that, once it is established, credit unions throughout the movement will want to support it and take advantage of the services that it offers. I believe that a CSO would provide an important foundation for a stronger credit union movement in the future, and I fully intend to keep in touch with developments.

My hon. Friend the Member for Harrow, West mentioned the role that regional development agencies, the Housing Corporation and housing associations could play in developing the credit union movement. That is primarily a matter for my colleagues at the Department for Transport, Local Government and the Regions. However, I understand the significance of the points that my hon. Friend raised, and I shall consider the matter in the hope that progress can be made.

My hon. Friend the Member for Pudsey (Mr. Truswell) and other hon. Members considered the role that credit unions can play in their localities. Clearly, they have an important role in the development of local community life, as well as in encouraging the virtues of thrift. There is clearly much scope for the future expansion of credit unions, not only in size and membership but with respect to their products. However, quite a lot of flexibility exists in them already, and I believe that some credit unions already offer facilities such as mortgages. When the relevant powers are finally transferred to the FSA in July 2002, large credit unions will be able to offer mortgages or loans over a period of up to 15 years. I am sure that some will want to take advantage of those facilities.

Credit unions make a significant contribution to tackling financial exclusion. I am keen for them to bring the benefits of their unique approach to many more of those who lack access to mainstream financial services.

The Government support credit unions, and on the Government's behalf I should like to thank all the dedicated people who run them, many of whom are volunteers. They do valuable work for their members and for all the people of this country, which is why we have, and will continue to encourage, a strong and flourishing credit union movement.

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