Examination of Witnesses (Questions 240-259)
MR MARK
LYONETTE, MS
SUSAN DAVENPORT
AND MR
LAKSHMAN CHANDRASEKERA
28 FEBRUARY 2006
Q240 Angela Eagle: Billions, I think.
Ms Davenport: We are there to
give the members of the credit union the best possible service.
Mr Chandrasekera: If I may add
to that, what people believe in in the credit unions as well is
the mobilisation of the savings and the loans, so we start with
10,000 members, maybe grow up to 20,000-30,000, and that is the
time that we could be making enough profits to give back to the
members. So it is the mobilisation of the savings, we believe,
that is going to make this banking project successful.
Q241 Mr Love: Just to follow on from
the previous questions, you have made progress without the central
services organisation. That was originally your objective. What
would your objective be today having made the progression? Would
it be a central services organisation or would it be something
slightly different?
Mr Lyonette: No. We would not
be pushing for a central services organisation and have not been,
because we have achieved two and a half of the three things that
it was set out to achieve and we have done that through our own
steam, through ABCUL, through the trade association. We do think
there are things that the Government can do to support the credit
union movement and we are grateful for those changes the Government
has made legislatively over the last couple of years, but we would
not be pushing for a central services organisation. We are still
pushing for what it was trying to achieve in terms of a change
programme, in terms of transaction banking, in terms of better
marketing, but it does not need a new body in order to achieve
it, we do not believe.
Q242 Mr Todd: Are all the ABCUL numbers
signed up to the Co-operative Bank deal?
Mr Lyonette: Not at all. I do
not want to mislead you. Far from all of our 400 members will
be able to offer these transaction accounts. Initially, it is
only 13 credit unions that have worked this up over a couple of
years. We think that could expand to perhaps 80 of our members
in the next two to three years, but this is a major step forward
for the movement, a tiny, volunteer-only run credit union may
not just be open often enough to be able to liaise with the bank
to take part in the clearance.
Q243 Mr Todd: Of the group who have
signed up, what proportion is that of the membership currently
of credit unions? You referred to the fact you cover about 80%.
Mr Lyonette: Of the 13, it probably
represents about a third of the actual membership, because they
tend to be the larger institutions.
Q244 Mr Todd: Are both of your credit
unions signing up?
Ms Davenport: Yes.
Mr Chandrasekera: Yes.
Q245 Mr Todd: On dealing with identification
of customers, some of the processes have been criticised as being
quite difficult for many people to comply with. How have you dealt
with that?
Ms Davenport: We have obviously
tried to ensure that we are fair with people and try and ensure
we can help them. We have had some issues about people not providing
us with adequate identification, but we work very closely with
other organisations and other partners. For example, people might
bring their letter from the Department of Work and Pensions or
we have a partnership with the council for local housing allowance
and we will get confirmation from them of that person's address
and so on. Also, we are in the fortunate position of being able
to verify ID electronically if we need to as well. Some of the
smaller credit unions might find that more difficult but ABCUL
has set up a new scheme for credit unions to buy into whereby
they can do electronic verification. So we try and work as best
we can within the regulations to ensure we get adequate ID.
Q246 Mr Todd: Have you found it a
significant barrier?
Ms Davenport: It can be.
Mr Lyonette: Yes, particularly
for those credit unions operating over a large geographical area
and they have had to find a way of getting that information to
head office or whatever. That can be very difficult. I think the
difference is that we are coming to this very much with the desire
to be able to serve those people and open those accounts if we
can. We certainly do not use anti-money laundering as a reason
to turn people away or just to make it difficult for people. We
are very keen to try and get round this as much as we can. We
have just written sectoral guidance for the Joint Money Laundering
Steering Group as well, which, again, is a big step forward for
the movement, to be recognised at that level, where we were asked
to contribute particular sectoral guidance for our sector. There
are for employer credit unions some very particular things that
do not happen for mainstream financial services organisations.
The relationship with the employer, for example. We have always
thought it quite bizarre, shall we say, that police credit unions
have to ask people for their passport. When you think of all the
effort that employers like that go through to know who they are
employing, it seems also bizarre that they have to produce a passport
to the credit union. That can be a barrier, so particularly where
it is government employers, we have looked for the possibility
of being able to use existing approval verification processes
that the employer has already used.
Q247 Mr Todd: Would there be some
value in a collective marketing approach to credit unions? I think
you refer to that as being part of the purpose of the CSO if it
were ever established.
Mr Lyonette: Yes, although I think
it is one of the things we have had to work very hard with our
members on in terms of recognising that a lot of our members historically
have thought marketing is just simply about promoting what we
already have to offer, and one of the things we recognised probably
seven years ago is that many credit unions need to change what
they have to offer before they shout about it too loudly, because
shouting about something loudly is not going to mean that it is
going to meet people's needs. So, for example, we have had to
break this link between savings and loans. Historically, you use
to have to save in a credit union in order to borrow, and now
many credit unions do not make people do that. Some still have
not changed, some are still very much operating the way they have
for 15 years, and it is quite hard to change. So once people have
got the right products and services, then there is value in marketing
together collectively and promoting together. We actually think
the banking services will be a good opportunity for that, because
there will be a very common platform of what is being offered.
Q248 Ms Keeble: Based on the experience
that you have had of obviously working with financial excluded
people on low incomes, what features do you think are particularly
important for providers of credit in offering services to those
groups? Which are the features you think are most important?
Ms Davenport: They need it very
quickly, so you have to be able to have a fairly speedy assessment
process, and they also still tend to like cash; they tend to work
in a cash economy. We have had to introduce cash payments rather
than paying people by cheque or by transferring into a bank account.
They also tend to be quite small amounts, so you have to be conscious
of the fact that you have to keep the administration to a reasonable
level as well, because obviously it costs just as much to do a
small loan as it does to do a very big one, and you do not earn
as much on it. So there are lots of issues around making that
speedy and the payment method, but that generally tends to be
the main issue, about how quickly can you process it, because
usually if they want a loan, they need it quickly.
Q249 Ms Keeble: Lakshman, would you
add to that?
Mr Chandrasekera: Most of the
members want a loan immediately, and once they get to know about
the other services that we offer, like insurance and the savings,
they welcome those as well, especially the savings part, because
they like to build assets for themselves and they have not had
that opportunity. So it is a total package we offer to our members,
which they like.
Q250 Ms Keeble: What do you think
other providers should do? Sue, you mentioned personal contact
and if you go to an ordinary commercial bank that is sometimes
strikingly missing.
Ms Davenport: Yes, and in fact,
it is one of the reasons why the home credit companies are so
successful, because that is a very personal service, somebody
knocking on your door, and they are friendly and approachable.
That is why they are successful. For this particular section of
our membership, that is what we are competing with. What we have
to get over to them is that it is better to pay the credit union
interest rate than the 177% plus that they are paying there.
Q251 Ms Keeble: The description you
have given of the high-risk, small-sized, immediate access, speedy
assessments would argue for higher interest rates, so how do you
manage to keep them down, which you have done?
Ms Davenport: Yes. One of our
issues is, because we have had this cap on our interest rates,
it has been very difficult for us to be able to do some of the
more risky loans because we have no cushion against that risk.
Because we are a very large credit union and we have quite good
resources, we have been able to take a risk whereas perhaps smaller
credit unions would not be able to, so we actually welcome the
change in the interest rates because that will allow us to be
able to use that as a way of doing slightly more risky loans and
being able to get people to build their credit history with us
so that they can then pay lower interest over time. We see that
as really important for us to be able to deliver on some of the
more risky lending. I have to say that there will always be people
that we will not lend to, but just because we will not give you
a loan does not mean we would not help, because we offer a money
management service, so somebody who has lots of county court judgments
or lots of issues with other things, we could actually help them
in other ways.
Q252 Mr Newmark: What is a risky
loan to you? What does that mean?
Ms Davenport: It is if there is
not enough of a gap between the person's expenditure and income
to be able to afford the repayment, or if they have a poor credit
history or they have outstanding judgments against them. We have
to take all that into account, and we also recognise that people
always ask for more than they want, so they might apply for £500
but actually they only want £200 because they think they
might get turned down, so we might offer them a lower amount.
Each loan has to be assessed individually, and we would weigh
the risk, but there would always be some that we would say no
to, simply because there is too great a risk, whereas if we could
risk-weight it a little bit by adjusting the interest payments,
that cushions us against the loss. I am not saying that would
happen across the board. It would not, and the likelihood is that
we would expand the service of offering them money management
and other ways to help them other than a loan. Sometimes people
ask for a loan and it is not really what they want; they want
help.
Mr Chandrasekera: It is part of
the responsible lending. That is what we are doing right now.
We do not give loans if we know they cannot afford to repay. If
giving that loan is going to make the situation worse, we are
not helping them at the end of the day, so we are not giving loans.
Q253 Ms Keeble: I wanted to ask about
which bit of credit unions tackles the financial exclusion issue.
Both of you work in credit unions which are employer-based.
Mr Lyonette: Historically, they
both started as employer-based.
Q254 Ms Keeble: Let me finish my
question because I know the Southwark one very well indeed. They
have employer-based components. They have also, certainly Southwark
in the past has had a very strong community base where the common
bond is around the community, and there are also obviously some
credit unions now which are national; certainly the bakers' union
one has a national common bond, which is something very different.
Now, it has always been thought that the employer-based ones are
the ones with the higher volumes, higher savings, and the community-based
ones have sometimes been very small indeed and have been set up
to tackle financial exclusion but people have had to work very
hard for their money. To what extent do you think that the employer-based
ones are sometimes offering credit to people who can get it elsewhere,
and to what extent are they actually dealing with financial exclusion,
or is it still the community-based ones tending to deal with the
most excluded in the community?
Ms Davenport: We were an employee-based
credit union, and yes, that is true; a lot of those people would
be people who could go elsewhere for credit but chose the credit
union, for many reasons; mainly because they like us and we give
them a good service. Also, as an employee credit union, we would
have quite a lot of low-paid workers. We were a council credit
union, so a lot of the manual workers, weekly-paid, part-time
people, who perhaps would not be able to get credit easily, would
use the credit union as well. We are not interested in how wealthy
or otherwise you are, or what colour, creed or whatever else you
are. To us, you are member, a potential member, and that is all
that matters and everybody is treated the same. When we changed
to a live or work common bond, we actually merged with a number
of those small community credit unions whose focus was that they
were set up to help their community exactly on these issues of
financial exclusion, but did not, because they were so small and
volunteer-run that they did not have the capacity, whereas the
larger credit union with a good grounding and a good membership
that has been able to generate income to employ professional staff
does have the resources and the wherewithal to reach out into
the community, and that is what we do now. So yes, we have some
of our members who can afford to save and borrow, could go elsewhere
but choose not to, but if you like, those members are the ones
that generate the resources for us to be able to go out and help
those that are not.
Q255 Ms Keeble: Turning to the Southwark
one, your community-based work, are you still doing the outreach
and does that deal with the financial inclusion bit?
Mr Chandrasekera: It does, yes.
Even though we started as an industrial credit union, it gave
us good ground for good management teams and all that kind of
thing, but now we are really in the community and working in the
community. So because we have a good base on the industrial section,
we can at least cross-subsidise if we need to, so that is going
on right now, and it is working.
Q256 Susan Kramer: I wanted to pick
up on this. Lakshman was kind enough to give us advice in Richmond
on how to structure a credit union and exactly this combination
of having a core group of employees which gave you the resilience
and core to be able to reach out into the community and progressing
very much along the lines, and without that conversation with
you, we would not have realised the importance of that balance
and it is an issue that is worth highlighting. But just a couple
of questions, to follow on from this need, to meet the broader
range of needs reflected within your kind of credit union, where
you are not just reaching into the most deprived of the most deprived
but where you have a broader reach, there is obviously a number
of people who are now your members are also home owners, or would-be
home owners. Do we have to start thinking in terms of making secure
credit available, enabling you to get much more into the mortgage
market for credit unions to really reach their potential?
Ms Davenport: We already do secured
lending. We do second charge. We are actually one of the few credit
unions who have permission from the Financial Services Authority
to offer mortgages, but we have not introduced them because we
have a very high demand for our funds and the only money we can
lend on to people is the savings. We have not had a sufficient
savings pool to be able to do a very large loan. Our focus has
always been to service the small loan and the small borrower first,
because we see those as the ones that most need. You can go elsewhere
for a mortgage, for a secured loan, but the credit union might
be the only place you could go for a small loan. We have tried
to introduce new savings products that are drawing in the savings
pool that we need to be able to lend on, so we could over time
go into doing bigger loans. We have only done about 20 secured
loans, but those 20 loans amount to some quarter of a million
pounds, so it is quite a significant amount of money for a small
number of people, whereas we would rather have that quarter of
a million pounds across hundreds of people because we see that
as being of more benefit at this time. But if we can bring more
savings in, then we would be able to do more on the secured lending
side.
Mr Chandrasekera: We have some
secured loans, but it is important that we have a balanced loan
portfolio so all the loans are not high-risk. I have got the figures
for last year, why we gave loans. The biggest part, £858,000,
was going for home improvement. That is the highest category.
So it is not necessarily the home owners but everyone who would
like to do home improvements work.
Q257 Susan Kramer: Thinking of the
sort of range of needs, given that a significant number of credit
unions, especially the smaller ones you describe, have stayed
with their traditional pattern of requiring you first to save,
then once you have done that, you can start to move into borrowing,
but recognising that many people have the need for immediate credit,
have you considered at all proposals that the Government should
take a role in underwriting loans for consumers who do not have
savings built up with a credit union? Is that relevant to you?
Mr Lyonette: In some ways the
proposal at the moment, or more than the proposal, the actuality
of the DWP growth fund is in many ways a loan guarantee scheme.
Historically, that has not always been very successful in Britain,
because what tends to happen is two things. One is that at one
level, on the street, when people realise the money that is being
given away is government money, then sometimes that introduces
an element that is not going to help you keep hold of that money
and get people to repay it. Secondly, the credit union itself
historically has sometimes taken poor decisions, shall we say,
about lending that money and making sure that most of it comes
back, and if we are talking about lending people money rather
than making gifts, donations or just building people's wealth
through giving them money, then it is important that most of that
money comes back and is regenerated and can be recycled. However,
we are not opposed to loan guarantee schemes per se. We
just think they need to be focused in a way which incentivises
the right behaviours, both for the lender and for the member,
but also discourages the wrong behaviours. The DWP growth fund,
the £36 million of the financial inclusion fund, seems to
be heading in the right direction in terms of encouraging people
to do the most with the money rather than to perhaps, say, lose
it in fixed costs that are independent of how many loans they
make, et cetera.
Q258 Mr Newmark: Turning to the social
fund and debt advice, how well integrated do you feel the social
fund is with other sources of affordable credit? Are people rejected
by the social fund referred to a reputable third sector lender
where they might be able to get other forms of credit?
Mr Lyonette: Not in our experience,
no. Different parts of the Department of Work and Pensions are
beginning to refer people to credit unions, particularly Jobcentre
Plus. We are finding people are being offered a credit union to
deposit their benefit but not really much of a referral at all.
I do not know if you have any local experience?
Ms Davenport: No.
Q259 Mr Newmark: Do you feel the
Government should be improving links between the social fund and
other forms of credit unions?
Mr Lyonette: Absolutely. The social
fund I think lends £500 million or something approaching
that a year, so if there are people who do not qualify for those
loans that we could help, then obviously it would make some sense
for there to be some kind of referral system.
Ms Davenport: Our experience of
referrals from both local government and government departments
like DWP is referring people to us who need an account for receipt
for their benefit rather than needing a loan. It is about having
some mechanism for them to be able to receive their benefit.
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