Adequate consultation
39. The proposal has been subject to a substantial consultation process. In assessing whether the proposal has taken appropriate account of the consultation responses, we sought further information from the Department on two points relating to amendment A. These points are discussed below.
40. The Department published a consultation document on the proposal on 21 October 2001. The document was sent to approximately 820 organisations and individuals, including all 700 registered credit unions.[13] Its publication was announced by way of a Treasury press notice, and the document itself was also made available though three government web sites. Consultees were given fourteen weeks to respond, although all late representations were taken into account.
41. The Department received 23 responses to the consultation document, of which 65 percent were supportive of the three proposed amendments, whilst a further 23 percent offered no view.[14] The remaining 12 percent did qualify their support, although none of the respondents rejected the proposal outright; points raised by two credit unions are discussed below.[15] The Department has not made any changes to the draft proposal in light of responses received. Minor amendments were made to the proposal in light of concerns raised during the drafting process but, because the Department considered that these changes did not affect the fundamental purpose of the proposal, it did not consider it appropriate to consult further on the proposal.[16] The amendments were, however, discussed with the FSA.
42. We resolved to follow up minor concerns raised by two credit unions in relation to amendment A. On the point that credit unions would be allowed to charge members for no more than the cost of providing ancillary services, the Fairshare Credit Union commented that:
we ... believe that a credit union should be able to charge at cost plus to include reasonable charges incurred in providing the service. By doing this it will avoid "hidden" charges being borne by other members not using the services.[17]
43. The Department's response was to the effect that it did not favour enabling credit unions to charge on a "cost-plus" basis because of the motivations behind mutual organisations such as credit unions.[18] Clearly, given the nature of credit unions, it is important that members be charged on a cost-recovery basis, rather than on a profit-making basis. However, on the face of it, there is nothing in the relevant provision in the proposed order that would prevent a credit union from charging for what the Fairshare Credit Union describes as "cost plus ... reasonable charges incurred in providing the service". The relevant provision is article 5 of the proposed order, which would insert a new section 9A into the 1979 Act, providing that:
(1) A credit union which provides an ancillary service to a member or any other person from whom the credit union has accepted a deposit may charge a fee to cover the cost of providing that service. [emphasis added]
The "cost of providing a service" does not appear to be defined anywhere in the proposed order or in related legislation.
44. We therefore asked the Department to provide further information on the following two points:
how it envisages the phrase "the cost of providing a service" will be interpreted by credit unions
why it considers that credit unions will be prevented by proposed new section 9A from charging for what the Fairshare Credit Union describes in its submission as "reasonable charges incurred in providing the service".
45. The Department told us that its intention in enabling credit unions to charge a fee to cover the cost of providing an ancillary service is to allow credit unions to recover any of the costs that they can identify as associated with undertaking the ancillary service. The phrase "the cost of providing that service" is not defined in the draft order because the Department did not consider it appropriate to define it, given the many different types of expenses that a credit union may or may not wish to attribute to undertaking the ancillary service. The Department notes that the 1979 Act refers to similar terms without definition.
46. In relation to the specific point raised by the Fairshare Credit Union, the Department states that its original interpretation of the response was that Fairshare was seeking a power for credit unions to charge members to whom they provide ancillary services on a non-cost recovery basis. The Department believes that credit unions should not be able to make a profit when they charge for ancillary services; as indicated above, we agree with this principle. The Department concedes, however, that Fairshare's point may in fact have been related to the extent to which charges incurred by a credit union in providing an ancillary service might be considered as part of the "cost" of providing that service and thus as recoverable from the member receiving the service. In this case, the Department considers that credit unions' ability to recover any of the costs that they can identify as associated with undertaking the ancillary service should include what the Fairshare Credit Union describes as any "reasonable charges incurred in providing the service".
47. As regards various credit unions' likely interpretation of the phrase, the Department notes that:
Trade bodies are extremely active in disseminating information on regulatory changes to credit unions and also tend to be an early port of call for queries from the movement. We have been approached by trade bodies in the past where they have wanted to clarify certain aspects of reforms and we would be happy to discuss these provisions with them if they were uncertain of the intended effects. The FSA may be able to assist credit unions in this by including some guidance on the matter in their Credit Unions Specialist Sourcebook.[19]
The Department also notes that, if a dispute were to arise over the phrase's definition, it would ultimately be for a court to decide what "cost" means in this context.
48. We also followed up a point raised by a second credit union in its response to the consultation document. The Credit Union Forum (Tayside) commented that, in relation to this amendment, "we would wish to have clarified the responsibility regarding third party payments as it has been rumoured that credit unions may be liable for goods [and] services as are credit card providers".[20] The Department did not comment directly on this point in the explanatory statement.
49. We therefore asked the Department to comment on the "rumour" that credit unions may be liable for paying goods and services in relation to third party payments, in the same way that credit card providers are liable. The Department told us that the proposal would not place a liability on credit unions for goods or services related to payments made by credit unions on behalf of their members. The Department interpreted the Credit Union Forum (Tayside) consultation response to be a query relating to the possibility of credit unions becoming subject to the consumer credit regulatory regime. Given that credit unions are not subject to the Consumer Credit Act 1974, the Department did not consider that the point required any further consideration.
50. Having considered the additional information provided by the Department, we are satisfied that the proposal has been the subject of, and has taken appropriate account of, adequate consultation.
Defective drafting
51. We consider that the drafting of a proposed new subsection that would be inserted by amendment B appears to be defective and would benefit from a minor amendment. Article 3 of the proposed order would insert new section 1(2)(b), (3A) and (3B) into the 1979 Act. New section 1(2)(b) would provide that a credit union's rules governing admission to membership must meet the requirements specified in either new section 1(3A) or 1(3B). New section 1(3A) would essentially preserve the current position as regards the qualifications for establishing a common bond, as set out in paragraphs 11 and 12 above. New section 1(3B) would implement the substance of amendment B, whereby credit unions' rules would be allowed to specify a qualification for membership falling into category (e) and one of categories (a), (b), (c), (d) and (f). The intention of new section 1(3B) is therefore to permit members to be linked by association (category (e)) or one other permitted qualification.
52. However, new section 1(3B) has been drafted ambiguously and therefore appears to require amendment. Proposed new section 1(3B) provides:
(3B) The requirement specified in this subsection is that admission to membership of the society is restricted to persons all of whom fulfil either-
(a) the qualification for admission to membership specified by paragraph (e) of subsection (4) below as being appropriate to a credit union; or
(b) the same specific qualification for admission to membership, being a qualification which is so specified in paragraph (a), (b), (c), (d) or (f) of that subsection.
Two possible meanings can be taken from this drafting:
admission to membership must be restricted to persons all of whom fall into subsection (3B)(a) or all of whom fall into subsection (3B)(b) but not some into one subsection and some into the other, (that is, into either category (e) or into one of categories (a), (b), (c), (d) or (f)), or
admission to membership must be restricted to persons who fall into one or other subsection (that is, into either category (e) or into one of categories (a), (b), (c), (d) or (f)).
In the context of new section 1(3A), the latter meaning is obviously the one intended.
53. The ambiguity is caused by the use of the words "all of whom fulfil either". We appreciate that the Department has probably used these words in an attempt to stick closely to the wording of the 1979 Act. Nevertheless, we consider that the drafting of new section 1(3B) could be improved to convey the intended meaning at first sight.
54. We asked the Department to comment on whether the current drafting of proposed new section 1(3B) is defective because it is ambiguous and on whether the drafting could be improved to make the intended meaning clear. The Department told us that it agreed with the Committee that the drafting of this provision could be improved. The Department suggested that substituting "each of whom fulfils" for "all of whom fulfil" might address our concerns and make the provision less ambiguous. It also undertook to consider if further assistance could be provided to the reader by way of an example in parenthesis or an expanded explanatory note.
55. We are pleased that the Department agrees with us that the drafting of new section 1(3B) could be improved, and we support the suggestion that the phrase "each of whom fulfils" should be substituted for the phrase "all of whom fulfil". We do not consider that it is necessary for either an example in parenthesis or an expanded explanatory note to be included in the proposed draft order.
Preventing exercise of right or freedom
56. We are satisfied that the proposal does not prevent any person from continuing to exercise any right or freedom which he or she might reasonably expect to continue to exercise. The only proposed amendment that could be said to affect any person in exercising his or her rights or freedoms is amendment C. However, amendment C would expand the rights and freedoms of persons falling within the three new categories of exception to the general prohibition on the use of the name "credit union" (see paragraph 16 above), rather than preventing the exercise of any right or freedom. It therefore presents no problem in terms of the Regulatory Reform Act.
57. If the proposal is made, there will remain a category of persons whose rights and freedoms are currently affected by section 3 of the 1979 Act and would continue to be affected. This category is made up of any person who might currently be operating or who may wish to operate in Britain under the name of "credit union", but who is not a credit union, and who is neither:
a non-British person who is legitimately accepting deposits in Great Britain and who is using the name "credit union"; such persons will be authorised or exempt under the 2000 Act,[21] nor
a non-British person who has a legitimate reason to use the name credit union (because that person is subject to a regime which is similar to the British credit union regime) who does not accept deposits but carries on other activities in Britain.
Any person who is not a credit union and who does not fall into either of these two categories would have to seek specific FSA approval in order to continue to use or to begin to use the name "credit union".[22]
58. The proposal itself does not, of course, further curtail the rights and freedoms of this category of persons. Nevertheless, it is worth considering the position of these persons because of the fact that the proposal would enable the Department to bring section 3(2) and (3) into force for the first time. In practical terms, this means that persons whose rights and freedoms are not currently curtailed will find themselves restricted in the exercise of their freedom to use the name "credit union" and to represent themselves as being a credit union. However, this is clearly not a freedom which a person could reasonably expect to continue to exercise. It is entirely reasonable to expect Parliament to regulate this area, given the nature of credit unions as mutual savings and loan organisations with responsibility for members' funds, and Parliament has in fact demonstrated its intention to do so, by passing the original section 3 in the 1979 Act.
Costs and benefits
Amendment A
59. We are satisfied that amendment A has been the subject of, and takes appropriate account of, estimates of increases or reductions in costs or other benefits which may result from its implementation. The Department appears to have appropriately assessed the increases or reductions in costs or other benefits likely to result from the implementation of amendment A. The Department considers that the cost to credit unions will be neutral, because they will be able to move from the current position, of recovering the expense of providing ancillary services to some members from the whole membership, to charging only those members that take advantage of such services.
60. The Department also believes that the proposal would benefit individuals by allowing them to make savings by paying their utility bills by direct credit transfer. A further benefit of the proposal would be that more credit unions are likely to offer bill payment services, thus increasing the number of people with access to money transmission services and giving greater consumer choice.
Amendment B
61. This amendment would not result in any increases or reductions in costs.
Amendment C
62. We are satisfied that amendment C has been the subject of, and takes appropriate account of, estimates of increases or reductions in costs or other benefits which may result from its implementation. The Department considers that the FSA may incur costs in seeking a legal remedy against a person misusing the name "credit union". However, the Department believes that simply having the power to seek legal recourse would help to minimise the incidence of misuse, and any actual cost incurred would be worth paying where it provided greater consumer confidence in the credit union sector.
63. The Department also expects that organisations operating in Great Britain under the name credit union could incur costs associated with establishing whether their home state legislation is "similar" to that in Great Britain or in obtaining approval from the FSA to continue using that name. Again, however, the Department believes that any costs associated with the protection of the name "credit union" represent a fair balance in the context of the protection of the reputation of British credit unions.
Conclusion
64. On the evidence currently before us,[23] we conclude that a draft order amended in the manner explained in paragraph 55 above should be laid before the House.
13 For a complete list of consultees, see the explanatory statement, Annex A. Back
14 The consultation document contained seven proposals; four of these proposals were dealt with by way of the Financial Services and Marketing Act 2000 (Consequential Amendments and Transitional Provisions) (Credit Unions) Order 2002, which enabled the FSA to make rules giving effect to these four proposals. The remaining three proposals make up the present proposed order. Back
15 For a more in-depth analysis of the responses received, see the explanatory statement, Annexes B and C. Back
16 For a more detailed discussion of the amendments made, see the explanatory statement, paragraphs 61 to 63. Back
17 HM Treasury, Regulatory Reform (Credit Unions) Order 2002: Consultation responses, response 14. Back
18 Explanatory statement, Annex C, p 24. Back
19 Response from HM Treasury, dated 30 October 2002. Back
20 Above note 2, response 12. Back
21 Accepting deposits in the United Kingdom without being either authorised or exempt is a criminal offence under the 2000 Act. Back
22 Specific FSA approval would be sought under section 1(4) of the 1979 Act. Back
23 See paragraph 1 above. Back
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