Select Committee on Treasury Thirteenth Report

6  Savings and credit unions

Credit unions and savings now

113. Last year we considered both the current and the potential future roles of credit unions. We observed that credit unions had been growing strongly in recent years and highlighted the role they could play in promoting financial inclusion.[369] We referred earlier in this Report to the signs of progress with the implementation of recommendations we made then to enhance the lending capability of third sector lenders including credit unions.[370] In the current inquiry we have been concerned particularly with credit unions as saving institutions.

114. There are 531 credit unions operating throughout England, Scotland and Wales.[371] According to unaudited figures from the FSA, in September 2006, credit union members held savings of over £428 million.[372] Mr Mark Lyonette, Managing Director of ABCUL, told that, in the past, credit unions had concentrated too much on their lending activities and not paid sufficient attention to saving, but that this weakness was being overcome:

Credit unions … are mobilising savings at least as much as they are working on the credit [side], because without [savings] it really limits our impact … The future of the sector depends absolutely upon raising savings from our members so that we can lend that money out rather than relying upon government handouts to lend.[373]

115. Although credit unions have done much to broaden the range of services they offer and the range of customers they attract, thus dispelling the myth that they are "poor people's banks", they remain well-placed to encourage saving among the financially-excluded.[374] We learned of a variety of ways in which credit unions were seeking to promote saving, particularly amongst individuals and families with low incomes:

  • by offering easy ways to pay into saving accounts, including through payroll deduction and at local collection points, such as day centres and the offices of housing associations;[375]
  • by encouraging young people to save in specially designed young saver accounts;[376]
  • through the offer of Christmas saving accounts, a development to which we referred earlier;[377] and
  • by offering life insurance cover to people who save with credit unions at no extra cost.[378]

ABCUL is also participating in an examination of the viability of doorstep collection, which has potential for use as a method of encouraging saving in credit unions, although there is no current experience of it within the credit union sector.[379]

Legislative change

116. At present, the potential of credit unions to develop is inhibited by a legislative framework which we characterised in November 2006 as "outdated".[380] We recommended then that the Treasury consult credit unions and other interested parties on a new Credit Unions Act to enshrine measures to enable credit unions to modernise their operations with a view to introducing such legislation in the course of the current Parliament.[381] Very soon after we agreed our Report the Minister announced a review of credit union legislation, along with that covering industrial and provident societies.[382] He admitted to us that the current legislative framework for credit unions was "very clunky and out-of-date".[383] In March 2007, the Government envisaged that a consultation document would be issued the following month.[384] A delay in the publication of that document caused concern to ABCUL,[385] but the document was eventually published on 21 June 2007.[386] On 19 June, the Minister indicated that he might be seeking a slot for the legislation in the legislative programme for Session 2007-08, but the proposed Bill did not appear amongst those listed in the draft legislative programme for that Session published in July 2007.[387] The Government's proposals for draft Bills will be published in November 2007.[388] We welcome the Government's commitment to consult on changes to the current, outdated legislative framework within which credit unions operate and the Government's subsequent publication of a consultation document. We note that a Bill relating to credit unions and co-operatives does not appear in the draft legislative programme for Session 2007-08. We recommend that the Government commit itself to publishing a draft Bill on that subject in the first half of 2007 in order to facilitate pre-legislative scrutiny and to enhance the prospects for the inclusion of such a Bill in the legislative programme for Session 2008-09.

117. As we noted earlier, the Government has established an objective of achieving a step-change in the coverage of third sector lenders.[389] As the evidence from ABCUL to which we have already referred indicated,[390] the capacity of credit unions to develop as lending institutions is inseparable from their capacity to attract savings. The Minister emphasised the potential of credit unions, referring to the

growing network of institutions around the country, particularly credit unions, which I think have got a much bigger role to play in providing opportunities for low income families to save.[391]

In order to provide further impetus and strategic direction to the preparation of new legislation relating to credit unions, we recommend that the Government match its objective to achieve a step-change in the coverage of third sector lenders with an objective of achieving a step-change in coverage of third sector saving institutions. We further recommend that it set a specific target by which progress in relation to that objective can be measured. That target might be to raise the savings held by credit union members of around £428 million in September 2006 to over £1 billion by the end of 2010.

118. During this inquiry, we considered four specific ways in which legislative change might enable such an objective to be met. First, credit unions are currently open only to those potential members who share the credit union's specified "common bond", which defines membership eligibility.[392] ABCUL told us that "the hurdles which credit union leaders have to jump through to prove a common bond exists in what are becoming larger and more disparate areas [mean] that that credit unions often stay serving a small area when the credit union may be more than capable of bringing more people into membership by expanding the area it serves".[393] Mr Lyonette suggested that legislative change in this area was "key": a more flexible definition of "common bond" would enable credit unions to broaden their membership, for example to include all tenants of a housing association or all employees of a particular company.[394] We recommend that the new legislation include a much more flexible definition of the "common bond" for membership of credit unions.

119. Second, credit union membership is restricted to individuals or "natural persons". This means that credit unions cannot admit corporate bodies or unincorporated associations to membership.[395] ABCUL told us that, if they were able to admit organisational members, this would not only help to capitalise the sector, but would also strengthen the credibility of credit unions and people's willingness to save with them if, for example, a housing association deposited its funds with a credit union.[396] We recommend that the new legislation permit organisations and corporate bodies to become members of credit unions.

120. Third, credit unions are not able to pay interest on savings.[397] Instead, credit unions can offer only the possibility of a dividend as a reward for savers, the level of which is determined retrospectively.[398] ABCUL told us that

Credit unions' ability to pay interest on savings would increase their capacity to offer different savings products to meet the needs of different people. Being able to advertise an interest rate, rather than a projected dividend, will encourage people to use the credit for savings.[399]

We recommend that the new legislation permit credit unions to pay interest on savings.

121. Fourth, there have been suggestions that difficulties relating to the perception of credit unions might arise from the use of that name. For example, the Farepak victims group told the OFT that credit unions were not particularly popular as a Christmas saving option "because they were seen as getting people into debt when they wanted to save".[400] Mr Pomeroy told us that he personally would favour some form of re-branding of credit unions, possibly as "community banks".[401] Mr Lyonette acknowledged that both the term "credit" and the term "union" could be problematic, particularly the implication of the form term that credit unions were predominantly concerned with lending. However, he also indicated that terminology was often not a barrier to credit unions' market penetration.[402] In supplementary written evidence, ABCUL noted that the credit union movement had different views on a change of name, and drew attention to the possibility that the use of the term "bank" might attract additional regulation.[403] The Minister agreed to examine the issue of terminology, and it was included in the Government's subsequent consultation document.[404] We welcome the inclusion of a possible name change from "credit unions" to "community banks" within the Government's consultation on legislation. We look forward to learning about the responses to that consultation. We recommend that, in parallel with legislative consultation, the Government explore with credit unions and others ways in which the modern role of credit unions, including their functions as saving institutions and providers of current accounts, could be more effectively promoted in the branding and promotion of credit unions, possibly by use of the term "credit and savings unions".

369   HC (2005-06) 848-I, paras 37-40 and 44 Back

370   See paragraph 24. Back

371   Ev 47 Back

372   Ibid. Back

373   Q 182 Back

374   Ev 49; HC (2005-06) 848-I, para 39; HM Treasury, Review of the GB cooperative and credit union legislation: a consultation, June 2007 (hereafter Review of the GB cooperative and credit union legislation), para 2.20, p 15 Back

375   Ev 48; Q 188 Back

376   Ev 47 Back

377   See paragraph 64. Back

378   Ev 48 Back

379   Qq 50, 184 Back

380   HC (2005-06) 848-I, para 64 Back

381   Ibid. Back

382   HC (2006-07) 437, p 9 Back

383   Q 318 Back

384   HC (2006-07) 437, p 9; Financial inclusion: the way forward, para 4.21, p 44 Back

385   Q 177 Back

386   Review of the GB cooperative and credit union legislation Back

387   Office of the Leader of the House of Commons, The Governance of Britain-The Government's Draft Legislative Programme, Cm 7175, July 2007 Back

388   Ibid., p 19 Back

389   See paragraph 24. Back

390   See paragraph 114. Back

391   Q 303 Back

392   Review of the GB cooperative and credit union legislation, para 1.11, p 6 Back

393   Ev 52; Qq 178, 192 Back

394   Q 178; Ev 50 Back

395   Review of the GB cooperative and credit union legislation, para 3.30, p 22 Back

396   Ev 52; Q 178 Back

397   Review of the GB cooperative and credit union legislation, para 3.31, p 22 Back

398   Ev 50, 51; Q 178 Back

399   Ev 50 Back

400   Farepak: review of the regulatory framework, para 23 Back

401   Qq 22-23 Back

402   Qq 182, 198 Back

403   Ev 53-54 Back

404   Review of the GB cooperative and credit union legislation, para 3.25, p 21 Back

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