Memorandum submitted by the Association
of British Credit Unions Limited (ABCUL)
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
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
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.
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).
|Year||No. of CUs
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
Longer term savings 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 accountsmembers receiving
state benefits through the credit union can choose to have an
amount diverted into a separate savings account.
Payroll deductionmembers can choose to
have savings deducted from their wages/salary by their employer
where a payroll deduction scheme is in place.
Local collection pointsas 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 CardABCUL 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.
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
Being able to budget for planned events such as
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
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 employersTransaveUK
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.
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.
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.
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.
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
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
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
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.
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
i Membership CountsWho uses credit unions? Sharon
Collard and Nick Smith, Personal Finance Research Centre, University
of Bristol, April 2006.