Select Committee on Treasury Written Evidence


Memorandum submitted by the Association of British Credit Unions Limited (ABCUL)

EXECUTIVE SUMMARY

  1.1  The Association of British Credit Unions Limited (ABCUL) welcomes the opportunity to make a submission to the Treasury Select Committee follow up inquiry into savings for all and shorter term savings products. ABCUL is the principal national trade association for British credit unions and represents 70% of the 531 credit unions throughout England, Scotland and Wales and ABCUL members serve approximately 85% of credit union members.

  1.2  According to unaudited figures from the Financial Services Authority, in September 2006, credit union members held savings of over £428 million.

  1.3  Our evidence outlines the range of savings products which credit unions already offer to their members, and a range of convenient methods of saving. These include Christmas Savings Accounts, many of which were started in response to member demand in the wake of the Farepak collapse. All savings in ABCUL credit unions are covered by life insurance at no extra cost to the member.

  1.4  We explain how credit unions have found that the ability to access affordable credit as an alternative to high-cost home credit has a great impact on the ability of people on lower incomes to build savings. Also, by encouraging young people to save in specially designed young saver accounts, credit unions get people in the savings habit at an early age and encourage them to carry on savings once they reach adulthood.

  1.5  ABCUL believes that the ability to access safe and convenient savings products is essential for financial inclusion and encouraging these savings empowers individuals and builds financial capability. We welcome the extension of the remit of the Financial Inclusion Taskforce to include savings. We also explain why we believe the Saving Gateway should be rolled out and made available through credit unions.

  1.6  We go on to explain why we don't believe that allowing housing association saving with rent schemes to operate without deposit taking permissions is the best way to encourage tenants to save. Credit unions ability to serve housing association tenants and encourage membership through payroll deduction from large employers will be greatly expanded through legislative change which could allow every household in Britain is to be able to access quality credit union services.

  1.7  Legislation also needs to allow credit unions the ability to choose to pay interest on savings as an alternative to paying dividend on deposits. Credit unions ability to meet the savings needs of their members will also increase if their legal objects give them more flexibility to offer the products and services their members need and demand.

CREDIT UNION SAVINGS

  2.1  According to FSA unaudited figures, savings in credit unions stood at over £428 million at the end of September 2006. This figure has nearly quadrupled since 1997, when savings stood at £107.4 million. A table below shows the growth in credit union membership and savings since 1990 (taken from Registry of Friendly Societies and FSA figures from audited annual returns).

YearNo. of CUs MembershipSavings (£000s)
199027553,916 14,968
199132769,190 20,478
199238388,007 28,505
1993426110,079 39,492
1994475138,582 53,706
1995530161,502 70,012
1996550190,825 87,686
1997596224,674 107,394
1998630255,596 126,721
1999666295,826 153,850
2000687325,058 182,771
2001698365,934 223,847
2002686406,564 272,491
2003665451,819 338,006
2004594482,828 352,039
2005525501,879 387,709


  2.2  Credit unions offer a range of savings products to their members; as well as the basic membership account, which all members hold, members in many credit unions are able to choose from other accounts including:

    —  Holiday savings accounts

    —  Christmas accounts

    —  Longer term savings accounts

    —  Junior accounts

  2.3  People are encouraged to build up a longer term "nest-egg" in credit unions because life insurance is built in at no charge to the member. In the event of a member's death, the amount saved can be as much as doubled and passed to a nominated beneficiary.

  2.4  Credit unions also offer a range of ways for people to pay into their savings. This emphasis on making saving convenient for the community or workplace which the credit union serving is key to encouraging people to save. In research carried out for ABCUL by the Personal Finance Research Centre at Bristol Universityi, 58% of members gave the fact that the credit union offered "a more convenient way to save", as a reason for saving with a credit union.

  2.5  Credit unions offer a wide range of ways for members to access savings products including:

    —  Benefit Direct accounts—members receiving state benefits through the credit union can choose to have an amount diverted into a separate savings account.

    —  Payroll deduction—members can choose to have savings deducted from their wages/salary by their employer where a payroll deduction scheme is in place.

    —  Local collection points—as well as shop-front offices, many credit unions run local and accessible collection points, often in partnership with organisations such as SureStart schemes, day centres or housing associations.

    —  PayPoint Card—ABCUL credit union members can use the PayPoint card to pay into their savings and/or loan accounts at 16,000 locations around the country.

  2.6  Many credit union run savings clubs in schools. As well as encouraging young people to get into the savings habit and providing them with an element of financial education, the collection points may be open to parents and carers so also encourage adults to build their savings.

  2.7  Nine credit unions are now offering the Credit Union Current Account to their members and more credit unions are due to offer the account in the coming months. The ability to transfer money to separate savings accounts and/or instantly access savings through ATM machines and debit cards will encourage more people to save with credit unions.

SAVINGS AS PART OF FINANCIAL INCLUSION

  3.1  The ability for individuals to build personal assets is an essential ingredient in enabling that person to avoid financial exclusion. A small pot of savings empowers a person by:

    —  Enabling them to pay for unexpected costs without resorting to credit.

    —  Giving them the peace of mind that comes from knowing there is an amount of money that is available should they need it.

    —  Being able to budget for planned events such as Christmas.

    —  Enabling people to make choices about how and when they save, and how and when they spend builds financial capability and enables people to have more choices about how they manage their money.

  3.2  Sometimes people do not value the savings until they start saving by default in some way. Examples of this include:

    —  People who are paying high interest rates to doorstep lenders and then swap this to a credit union loan. Because of the reduced loan repayments, they are encouraged to start saving a proportion of the money they would otherwise by paying in high interest charges. Once people see the money build up, they value this and continue saving.

    —  Incentive schemes funded by employers—TransaveUK Credit Union provides services to employees of First Group the transport company. In an effort to reduce staff turnover, a new starters scheme was introduced. New employees have £10 per week paid into a credit union account that they can only access after they have been employed for a year. 99% of people introduced to the credit union in this way carry on saving.

    —  Encouraging people to save a small amount when they are repaying a loan means that many people start saving a small amount which they may increase when their loan is repaid. Many credit unions in recent years have been persuaded to break the link between savings and loans and not require people to save before they borrow. This is essential if affordable credit is to be accessible to those in need, but adding a small savings element to the loan repayment is an excellent of way of helping people to see the value of savings.

    —  When a member finishes repaying a loan they may continue paying the same amount into the credit union (especially if this is through payroll deduction or from a transfer from a Benefit Direct account). As they are used to not seeing the money they do not miss the money they are saving.

  3.3  "Kick-starting" savings in some way is an excellent way to numbers of people saving. Because credit unions offer a range of financial services, they are ideally placed to help people plan their finances in a more holistic way and encourage savings as well as provide a source of affordable credit.

  3.4  Because using the Credit Union Current Account gives people access to the full range of credit union services, it is far better placed to encourage people receiving benefits or wages into the account to save. Because of the limitations of most basic bank accounts and the Post Office Card Account, large numbers of people do not save using these products and are likely to withdraw all their income. The Government choosing to assist more credit unions with the set up costs of the Credit Union Current Account is a very welcome initiative which will enable large numbers of people on low incomes to start building up savings.

CHRISTMAS SAVING ACCOUNTS

  4.1  Prior to the collapse of Farepak in 2006, a number of credit unions did offer Christmas savings accounts to their members. Research carried out amongst users of the ABCUL members' website in January 2007 showed that 70% of credit unions responding had either just launched a Christmas account or were considering doing so. A further 20% had offered the account to their members for some time.

  4.2  Due to member demand, many credit unions place restrictions on when money can be withdrawn, or offer bonuses which are only payable after a certain date. This is a key factor in encouraging savings in this market; people want to know that they cannot use the money for other purposes.

SAVING GATEWAY

  5.1  Pilots of the Saving Gateway have shown how initial encouragement and incentive can help turn non-savers into savers. People on low incomes do not benefit from tax incentives in saving in the same way as higher income consumers but they do benefit from and value a matched savings scheme such as this.

  5.2  Working at the heart of often deprived communities, credit unions have already proven their ability to attract savings from lower income consumers. We hope that there will be an early roll-out of the Saving Gateway once the analysis of the second pilot has been completed and believe that credit unions are ideally placed to offer such an account.

  5.3  For the hard to reach group of people who do not trust banks or do not believe that they are "for them", credit unions represent an ideal way for a laudable scheme such as the Saving Gateway to connect with the people it needs to. Changes in legislation which will enable a scaling up of the credit union movement and close the gaps in geographical coverage will greatly assist in this aim.

HOUSING ASSOCIATIONS

  6.1  We do not believe that allowing Housing Associations to offer saving with rent schemes is the best way to encourage housing association tenants to build savings. Although we would not wish to question the governance of the associations or their handling of cash, the money would not be as safe as it would be in an FSA authorised deposit taker. We also believe that the fact that the scheme is being run by the landlord may prevent some people from using the scheme, as they may not wish their landlord to know about their level of savings.

  6.2  We believe that a better way forward for this is to encourage partnerships between credit unions and housing associations. This happens on a limited scale now; many housing associations have set up partnerships with credit unions which may involve marketing support, communicating information to tenants, or sharing of premises or staff time. Because of the restrictive nature of common bond legislation however, credit unions are only able to serve tenants of a particular housing association who live within a tightly defined geographical common bond.

  6.3  A less restrictive common bond regime would allow a credit union to define its own common bond which could encompass, for example, people living or working in a particular city along with tenants and staff of a housing association, wherever their tenants are based. This would enable people to access the credit union for savings, loans, financial information and enable them to receive benefits, including the Local Housing Allowance.

  6.4  Products could be designed to meet the needs of tenants. Through use of the Credit Union Current Account, people could also access transaction banking through their membership, ensuring all tenants have a useful bank account which can be used efficiently to pay bills. Enabling all tenants to access affordable credit rather than high cost doorstep lenders would free up income which could be used by the tenants to build up personal income. A holistic solution such as this would achieve far more than a saving with rent scheme; like any element of financial exclusion, saving does not sit alone and people need to be freed up from high cost credit if they are to be able to start saving.

BUILDING CREDIT UNIONS' SCALE, THE CASE FOR LEGISLATIVE CHANGE

  7.1  As outlined above, a more flexible definition of common bonds will greatly enhance credit unions' ability to offer services to housing association tenants. It will also greatly increase the ability of credit union to provide payroll deduction facilities to employees, one of the easiest ways to encourage saving.

  7.2  Where a common bond is based on employment, all employees of that particular company have access to payroll deduction. Saving money before you see it is an excellent way of building assets in a painless and convenient way. Many live or work credit unions have payroll deductions with employers within their common bond but there are may examples where negotiations to set up payroll deduction have broken down because the credit union is unable to provide services to all employees in a particular company.

  7.3  A company with multiple workplaces dotted around the country does would currently have to set up a number of payroll agreements with different credit unions, and may still have workplaces in areas where a credit union does not operate. If a credit union which may have, for example, the head office of a large employer within its common bond, was able to choose to serve employees of the company through payroll deduction wherever they are based this would greatly increase access to this convenient method of saving.

  7.4  A more flexible common bond regime will also enable geographical gaps in coverage to be more easily filled. Strong credit unions will be able to choose to provide services to areas currently excluded from credit union services without having to "prove" a tenuous link between all the people in the common bond. With increased social and geographical mobility and current technology (including the Credit Union Current Account ), it is not necessary for credit unions to be so restricted as to who they serve. This will bring savings facilities and other credit union services to many more financially excluded people.

  7.5  Launching Christmas accounts in the wake of the collapse of Farepak was a good example of credit unions quickly reacting to members' needs and demands. Unfortunately, due to restrictions placed on credit unions by their limited objects, innovation in products sometimes not possible within the current legal structure. Changing the objects of credit unions to allow them to offer related services which will benefit the financial well-being of their members is essential if credit unions are to be able to continue to meet members' needs.

  7.6  The Post Office network could be an extremely useful way of enabling people who are not within easy reach of a credit union to access services. The national network would lend itself ideally to helping improve access to credit union savings facilities, and would in turn increase footfall within post offices and benefit the network.

  7.7  Credit unions can currently only pay a dividend on savings. Credit unions with a Version 2 permission (which only number 11) are able to pay variable dividends and make payments more than once a year. Credit unions with a Version 1 permission can pay different dividend rates on different accounts if they maintain a capital/asset ratio of at least 5%.

  7.8  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 union for savings. Increasing the amount of savings in credit unions also increases the pot of money for affordable loans; this in itself is often the initial reason why people join a credit union, becoming savers once they have joined.

CONCLUSION

  8.1  Access to convenient savings products which meet the needs of lower income consumers is an essential element in the fight against financial exclusion. Credit unions are experts at mobilising savings; at the heart of their existence is the "encouragement of thrift". Credit unions have already mobilised over £420 million of savings, much of this from lower income communities and from lower income workers.

  8.2  The ability of credit unions to increase the work they do in this area will be greatly enhanced through:

    —  Changes in legislation to allow credit unions to provide services to all tenants in a housing association or all employees in a company, without geographical restrictions.

    —  The ability of more credit unions to offer the Credit Union Current Account to their members.

    —  Rolling out the Saving Gateway and enabling it to be accessed through credit unions.

    —  Mobilising the Post Office network to increase access to credit union services.

    —  Allowing credit unions to choose to pay interest on savings rather than just dividends.

    —  Allowing credit unions more ability to innovate by expanding the restrictive objects contained within the Credit Unions Act.

REFERENCE

  i  Membership Counts—Who uses credit unions? Sharon Collard and Nick Smith, Personal Finance Research Centre, University of Bristol, April 2006.

April 2007





 
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