Examination of Witnesses (Questions 260-279)
MR MARK
LYONETTE, MS
SUSAN DAVENPORT
AND MR
LAKSHMAN CHANDRASEKERA
28 FEBRUARY 2006
Q260 Mr Newmark: What work do credit
unions currently undertake with providers of debt and money advice?
Ms Davenport: We have our own
in-house service. We do not call it money advice, strictly speaking;
we call it money management, and we have two members of staff
who help people with budgeting, negotiating with creditors and
so on. We do quite a bit of that in house. What we have found
is it is very labour-intensive and very resource-hungry, and we
cannot manage the demand, and we are working very closely now
with other debt advice agencies in the city to try and partner
up, particularly with St Vincent's, who do a lot of work on debt
advice, and we are looking also at partnering with our CAB, who
are fortunately located in the same building as us.
Mr Lyonette: We did a survey recently
of those credit unions that are doing most of our financial exclusion
and about 40% of them had a formal referral arrangement with Citizens'
Advice or some other money advice agency locally. We have also
entered into a partnership with CAB nationally to fill the gaps
where there were not already those good relationships. We are
looking to develop the service, which is a little bit more than
straight money advice, in terms of we are wanting to make the
links to help people with bill payment and budgeting, very much
along the lines of the Money Advice and Budgeting Service in Ireland.
Together with CAB, we are working up a model to allow us to do
more than the basic straightforward debt advice.
Q261 Mr Newmark: Which? has
suggested that CAB and consumer credit counselling services might
recommend clients with a need for emergency funds to credit unions.
What is your reaction to that sort of proposal?
Mr Lyonette: Yes, but we will
exercise the same rigour and processes as we do know now in terms
of whether a loan is actually the best route forward for somebody.
Mr Chandrasekera: Most of the
time we usually refer members to the CAB or other agencies who
need money advice. They generally come to us and elect to borrow
the money from us.
Q262 Mr Newmark: Looking at debt
repayment, going back to a point you made earlier, the Government
has announced that it will consider arrangements whereby in certain
circumstances private and third sector lenders can apply for debt
repayment to be made by deduction from benefits where normal repayment
arrangements have broken down. Would you be in favour of such
a move?
Mr Lyonette: The Association officially
thinks we need to have done a bit more thinking with this before
we launched into it, because it is not clear to us from a third
sector lender's point of view amongst credit unions what demand
there would be for this as a tool they could use, particularly
because those credit unions that receive benefits directly into
the credit union already have that same tool, if you like. They
have that comfort that if they are making a loan to somebody,
the payment will be coming next week. That is quite a lot less
risky than waiting for the cash to come next week over the counter.
So we already have that comfort. We understand that the private
sector is not particularly interested in this initiative. I think
it would have been prudent perhaps to have done a bit more research
on what the demand for it might be before committing.
Q263 Mr Newmark: I am curious that
you got that comfort from knowing that effectively the full weight
of the credit, if you will, of the UK Government stands behind
the money going into the benefits. I am curious as to why you
are making the margins that you are, because you have a pretty
secure form of cash coming into people's benefits. Intellectually,
I do not understand why you are effectively charging the poorest
members of our society, who are the least sophisticated financially,
spreads, and the Government, I gather, is now saying you can charge
2% per month. Is that completely unsecured?
Mr Lyonette: Yes. It is probably
worth saying it is only a couple of years since we managed to
persuade the DWP to allow benefits to come directly into credit
unions, so it is very much in its early days in terms of adoption,
and remember that people can change where they want their benefit
paid, so it is not a cast-iron guarantee. There is still risk
in that system.
Q264 Mr Newmark: No, but in terms
of best advice to people who are unsophisticated, in my view best
advice would be to have a link between that, because if there
is a link between that, you would have no right really to be charging
the huge spreads that you are, because you have a secure income
flow coming in weekly or monthly that you know is coming in from
the Government, and if I am wrong, tell me.
Ms Davenport: No. You would only
get that money from the Government deducted from benefit if that
person had gone into default. So you have already racked up quite
a lot of charges before getting that back.
Q265 Mr Newmark: But why wait for
that problem to happen? You know what their cash flow is per month.
Why not in your advice to them help them manage that cash flow
so they do not get into that situation?
Ms Davenport: That is what we
do, but the issue at the moment is somebody can have their benefit
paid into their account with their credit union, we can give them
a line of credit and that is then repaid out of that benefit,
but they can ask the Benefits Agency to send that benefit to somewhere
else. So we have no guarantee that is going to come in, because
they can stop it, or their benefit could stop for some reason,
we get no money coming in, they do not respond to us, then they
go into arrears, and then we are racking up charges try to chase
them and no guarantee of any money back. At the moment, if that
person opts to have that benefit paid somewhere else, we have
basically lost it. There is no way we are going to get it back.
This is a proposal that once that person has gone into default,
we can apply then for a deduction from the benefit. That is likely
to only be quite a small amount of money and actually might be
administratively more expensive than the amount of money we are
going to get.
Q266 Mr Newmark: It is quite a small
amount of money up front, but if you are racking it up at 26%
per annum—
Mr Lyonette: I do not think anybody
could argue that credit unions in Britain have a very large spread.
If you borrow £100 from credit union at 1%, it is £6.30
a year; it is £12.60 if it is 2%, which is not a huge amount
of money to cover the cost of making a loan to somebody for £100.
I do not think anybody could argue that we were profiteering.
Ms Davenport: Also, 24% has to
be better than 177 plus that they are paying on the doorstep.
Q267 Mr Gauke: Can I ask about what
steps the Government could be taking to help credit unions attract
capital, and in particular, given that the Treasury is already
consulting on this in respect of the Community Investment Tax
Relief scheme, what sort of changes you would want there, and
if indeed there is anything else the Government could be doing?
Mr Lyonette: I think this is something
where we are very much in unison with the Community Development
Finance Association in terms of arguing that the Community Investment
Tax Relief should be extended to personal lending. We know that
a number of high street banks put in their consultation responses
that they would find it useful to be able to extend that investment
to credit unions as well as to community development financial
institutions, and I think it is something that we must make sure
does not drop off the agenda in terms of the investigation that
needs to go on in order to make sure that a clear decision is
taken as to how valuable an initiative this would be. So we would
think that that existing tool would be something that would be
of benefit to credit unions as well as CDFIs.
Q268 Mr Gauke: Do you have a feel
as to how significant that would be?
Mr Lyonette: We have not quantified
it but we would be more than willing to do that as part of a development
process.
Q269 Mr Gauke: Turning to another
taxation matter, the recent changes to corporation tax on income
earned by credit unions, I would be grateful for your views on
that and defaults of changes you would like to see.
Mr Lyonette: As it stands at the
moment, credit unions only pay corporation tax on interest earned
from bank deposits. We do not pay corporation tax on interest
from our members' loans. Up until a few years ago, of course,
we did all pay the 19% rate. It is only in comparatively recent
times that we have had the 0% band, so as it stands in the Chancellor's
announcement in the Pre-Budget, we are going to have to pay more
in terms of corporation tax. The Association has not taken a view
that that is inequitable, and it is not something we have lobbied
to change at all. The largest credit union has £50 million
in assets, about £35 million on loan, they are paying corporation
tax at 24% and have been for quite some time. For the smallest
credit unions, they have been in that zero band, and they will
have to pay more come the Budget if that comes into place, but
it has not been something we have seen as one of the most important
things to be pushing for.
Q270 Mr Gauke: Can I also ask about
regulation of credit unions and how the FSA interact with you,
whether you are happy with the performance of the FSA and how
appropriate the current regulatory regime is?
Mr Lyonette: I sometimes find
myself at financial services functions where I am practically
the only person there who has a good word to say about the FSA.
By and large, from our perspective, they set out to produce a
proportionate regime, and they did it. That does not mean to say
that there are not things that we take up with them on a monthly
basis; of course there are, but all the anxieties that the movement
had about becoming regulated in 2000/2001 have not really transpired.
That does not mean to say that some of the weakest credit unions
that were set up in the eighties or nineties in a way never really
had a chance; for them that has still been too onerous and that
has meant that some credit unions have closed or merged, albeit
with the safety of people's deposits being protected, etc, but
by and large, we think it has been a success story and it is something
which has actually produced very positive benefits for the movement,
not just in terms of financial discipline but also in terms of
credibility, the fact that deposits are protected as part of the
compensation scheme.
Q271 Mr Gauke: We received evidence
that perhaps the authorisation was more demanding.
Mr Lyonette: It has become an
awful lot harder to start a credit union but, from the Association's
perspective, we would support that. One of the criticisms we had
that much of the local authorities inspired in the eighties and
nineties was that they were in the business of creating lots of
credit unions, regardless of their strength and their chance of
sustainability. So we do not want it to be too easy to start a
credit union. At the end of the day, you are looking after other
people's money; it is quite important that you do that in a prudent
and responsible way. I think initially, when we first came under
the FSA, they took some time to find their feet around the authorisation
process. At this point in time we are comfortable that the balance
is about right in terms of the rigour they need to apply to that
process.
Q272 Kerry McCarthy: If I can return
to the question of how you can extend your capital base, at the
moment you are prohibited from receiving deposits from community
groups; it is just individuals. What efforts are you making to
lobby? I know the movement is very much in favour of being able
to take deposits from such groups. What are you doing to try to
change that?
Mr Lyonette: The Treasury is our
main port of call in terms of legislative change but interestingly,
the FSA may also. Because they are charged with policing a fair
amount of that, it may also be there are some things there where
we have common ground with the FSA. Organisational deposits are
something that our members have lobbied for largely because local
community groups have been lobbying them, saying, "Why can't
we bank with you? Why can't we put our deposits with you?"
So it has come very much up from the bottom, with people saying
this is something that seems quite important, it would be able
to help regenerate the community, and of course, around the world
credit unions will have organisations as members, not just as
depositors but people who can also be lent to, people who can
also be provided other financial services. So it is a big thing
to push for because we understand it involves primary legislation,
which of course is not something that we could be pushing for
on a regular basis.
Q273 Kerry McCarthy: Presumably,
discussions on this topic have been going on for some time. Apart
from the fact it would require primary legislation, have there
been any other objections put forward? What are the obstacles
standing in your way of achieving this?
Mr Lyonette: That seems to be
the main reason we are getting. 1979 was our main primary legislation.
Perhaps 30 years later is time for a more appropriate set of primary
legislation for the credit union sector, but that seems to be
the main barrier that we are facing.
Q274 Kerry McCarthy: I think you
touched on this slightly: as well as accepting deposits, do you
see a potential role for credit unions in perhaps channelling
regeneration funding where, say, loans are being offered to community
groups? For example, I have a community group in my constituency
that is suffering from a cash flow crisis at the moment. It is
basically dependent on New Deal for Communities funding and cannot
get the money until the next financial year, so it has had to
go to a commercial bank for a loan. Do you see a role for credit
unions in perhaps assisting community groups in that way?
Mr Lyonette: Yes, although a word
of caution. There are different skills around business lending
in terms of making credit decisions than personal lending, and
we would not want to see credit unions going into that without
the right skills and expertise to do it, but in principle, there
is no reason at all why not.
Q275 Peter Viggers: You mentioned
that your overheads are much lower than those of the high street
clearing banks. How do your cost ratios compare?
Ms Davenport: I do not have a
clue. The truthful answer is I do not know. All I know is that
we are able to sustain our business; we are able to pay our staff,
pay all our overheads, and give our savers a reasonable return
on their savings. We do not make massive profits but we manage
our loan portfolio very well. We keep our bad debt to a minimum.
We make our provisions. Because we are small-scale, I think it
is easier for us to be able to manage that. We also have other
huge advantages in that, because we are partnered with other organisations,
we can share facilities. For example, our new branches are all
in council buildings so it is not actually costing us anything
to operate a branch, and that makes a huge difference. It keeps
our overheads down.
Q276 Peter Viggers: You told us that
Barclays and the Co-operative Bank provide money to the Association
of British Credit Unions. In what manner? Is this a subsidy or
a loan?
Mr Lyonette: I was not talking
about just to the Association but to our members as well. Really,
they are the only two banks, I would suggest, that put any monies
at all into the credit union sector. Barclays' support has been
for some years now. They helped us introduce the PEARLS programme
into Britain back in 2001 and have continued to do that. They
have also sponsored occasional conferences and events, that kind
of thing, for us. It has not been a commercial loan or anything,
but a sponsorship. The Co-operative Bank has been a long-term
sponsor of the movement, and probably 70% of the credit unions
bank with the Co-operative Bank. Their sponsorship of the Association
has been much smaller, actually. It has been for our quarterly
newsletter, annual conference, that kind of thing, so our total
sponsorship each year from banks is probably less than about £60,000
in total.
Q277 Peter Viggers: Earlier this
month, in the United States, the Committee heard about the manner
in which large financial institutions subsidise or provide funding
for other banks which specialise in community lending. Is there
such a relationship here? Is this basically philanthropy by the
two banks concerned or are they looking for customers, the establishment
of a ladder?
Mr Lyonette: You would have to
ask them about their motivations for doing that. From the Association's
point of view, we think we need to all distinguish between what
are window dressing, corporate social responsibility initiatives,
which perhaps are, by definition, not scalable, and the sort of
things that happen in the States under the CRA, where actually
quite significant movement of money has actually helped the low-income
credit unions in the States to get off the ground over the years
and to be successful. We are not in that place in Britain at the
moment, as far as I can see.
Q278 Peter Viggers: On savings, what
is your reaction to those who say that benefit recipients cannot
afford to save?
Ms Davenport: Rubbish! It is just
not true. They can. We have proved that. One of the reasons that
they can afford to save with us is that, if you are paying a much
lower rate for your lending, it frees up your available income
to be able to save a little each week, so that is one advantage,
but also, generally, people who live in the cash economy are used
to handling their money, used to apportioning it out, putting
so much aside for the electric and so much aside for the gas,
and it is really helping them to do that on a slightly wider scale
and, say, put a little bit away for emergencies. It is not true
that they cannot save. It is just that usually they are paying
out so much to doorstep lenders and other organisations that they
do not have any free income. If we can free up their income by
giving them a more affordable loan, then they can and do. I think
we have proved that.
Mr Lyonette: Collectively, about
7% of all benefit payments in credit unions at the moment are
being retained, and we were staggered when we discovered that.
I think the only way we can explain it is partly in terms of the
process. One of the things we know employer credit unions have
had as a powerful tool is payroll deduction, the idea that it
is taken from your payroll before you see any of it, so that whole
thinking that you do not miss what you have not had, and in a
sense, thinking of benefit as payroll by Government, if you like,
it has that same sense about it, that whereas people would previously
come in and lift it all from the post office, there is now a sense
in which we are leaving some of it there. It is extraordinary.
No-one is arguing that benefit levels are such that they should
be reduced, but people are saving 7% of all the benefits that
are paid in.
Q279 Peter Viggers: You have referred
to previous initiatives. What more could the Government do to
encourage savings amongst those on below average income, individuals
and families?
Ms Davenport: We have been very
successful with the Child Trust Fund, for example. We welcome
that initiative. We have obviously been able to demonstrate that
we are reaching some of the lower income consumers because we
are receiving a very high proportion of supplementary endowments
based on the number of accounts we have. We have about 185 accounts,
and about a third of those have had supplementary endowments paid
to them, so we are obviously reaching those lower income people,
because they only get those if they are on Income Support. We
think there may be some other ways that people could be encouraged
to save. People get out of the savings habit, but it is more about
a general education, because people do not know how to save, and
a lot of people on low income do not save because they are paying
over the odds for everything else, so it is more about trying
to reduce the fact that they are having to pay out so much for
things. As you know, the poorest people in society pay the highest
rate for everything, and that needs to change in order to be able
to encourage them to save more.
Mr Lyonette: We would support
things like the Savings Gateway, for example, because one of the
things we have known anecdotally for years but we have seen it
coming back to us from think-tanks in recent years is this whole
idea of the asset effect. In credit unions we have known that
for years, that a small amount of savings can change how people
feel about their life, not just the economic value of having £100
or £200. That is something that we can tap into.
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