Select Committee on Treasury Minutes of Evidence


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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