116. At present, the potential of credit unions to
develop is inhibited by a legislative framework which we characterised
in November 2006 as "outdated".
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
Very soon after we agreed our Report the Minister announced a
review of credit union legislation, along with that covering industrial
and provident societies.
He admitted to us that the current legislative framework for credit
unions was "very clunky and out-of-date".
In March 2007, the Government envisaged that a consultation document
would be issued the following month.
A delay in the publication of that document caused concern to
ABCUL, but the
document was eventually published on 21 June 2007.
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.
The Government's proposals for draft Bills will be published in
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to the current, outdated legislative framework within which credit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
As the evidence from ABCUL to which we have already referred indicated,
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
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.
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".
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.
We recommend that the new legislation include a much more flexible
definition of the "common bond" for membership of credit
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.
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.
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. Instead,
credit unions can offer only the possibility of a dividend as
a reward for savers, the level of which is determined retrospectively.
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.
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".
Mr Pomeroy told us that he personally would favour some form of
re-branding of credit unions, possibly as "community banks".
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.
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.
The Minister agreed to examine the issue of terminology, and it
was included in the Government's subsequent consultation document.
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".