Select Committee on Treasury Written Evidence


Supplementary memorandum submitted by ABCUL

INTRODUCTION

  1.1  Following Mark Lyonette's and Amanda Winkworth's appearance before the Treasury Select Committee on 6 June, [1]we were asked to provide extra information on a number of issues, namely:

    —  The importance of legislative change

    —  Social Fund reform

    —  The Post Office Card Account

    —  The Savings Gateway

    —  The term "Community Bank"

THE IMPORTANCE OF LEGISLATIVE CHANGE

  2.1  The three key aspects of legislative change that we believe have the potential to have a significant impact upon access to safe savings products are:

    1—The ability to pay interest on savings rather than just a dividend.

    2—The ability of a credit union to determine its own common bond.

    3—The ability of a credit union to accept organisations as members.

The ability to pay interest on savings rather than just a dividend

  2.2  Credit unions need the ability to offer an interest rate as well as a dividend on savings. The increased level of regulation and the subsequent boost in public awareness and sophistication of credit unions means that this is a natural step for the movement to take (credit unions already pay an interest rate on junior deposits.)

  2.3  Version 2 credit unions can offer different rates of dividends for different accounts and pay dividends more than once a year. Some credit unions also offer Cash ISAs to their members. For this they need to be able to confidently predict the dividend they will be able to pay and this has been well within their abilities, operating as they do an accruals based accounting system. The ability to pay interest would be a natural progression and one which would not cause technical or operational difficulties.

  2.4  In addition, the ability to pay interest, rather than a dividend at the end of a financial year would increase the ability of credit unions to attract savings, as interest is a much more widely understood concept and this is how many, more sophisticated, savers choose where to put their money. This in turn would generate funds to lend to members and communities in need.

The ability of a credit union to determine its own common bond

  3.1  Despite the expansion of common bonds in recent years, there are still many communities which lack access to the credit union services they need. The historical difficulties of proving a "common bond" between a group of people, although less restrictive than it was in the past, is still a major barrier to ensuring everyone in Britain has access to quality credit unions. 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 means 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.

  3.2  Most credit union movements around the world maintain some element of the "common bond" or "field of membership" in the way they operate. It is, however, often left up to the discretion of the boards of credit unions to determine to whom they provide services and where. New Zealand Credit Unions have recently secured legislative change which will enable them to choose who they serve from a range of objectively verifiable membership qualifications. For example, they will be able to choose to serve residents and employees based in a particular city, along with employees from a particular firm who may be based in other locations as well as within their geographical location.

  3.3  Payroll deduction is a painless and convenient method of saving which many employees benefit from currently. Because savings are taken from wages/salary before it reaches the employee the individual does not miss the money. In Glasgow Credit Union, which originally served employees of Glasgow City Council, 60% of council employees pay into the credit union by payroll deduction, including a large number of part time and/or low paid employees. The majority of the largest credit unions in Britain are either employee credit unions or started that way before expanding to cover people living or working in a geographical area.

  3.4  Negotiations on payroll deduction agreements between a number of credit unions and employees have broken down because the credit union is unable to provide services to all employees, because some are based outside the geographical common bond. Legislative change along New Zealand lines would enable a credit union to provide payroll deduction services to all employees of a company and greatly expand access to convenient savings products.

  3.5  This change would also assist housing associations, many of which are keen for their tenants to access credit union services. But where a housing association has stock in many locations around the country, it would be faced with setting up partnerships with dozens of credit unions and leaving some tenants without services. If a credit union could choose to add in tenants of this housing association to its common bond, then all tenants would be able to access services from one credit union, ensuring full access.

The ability of a credit union to accept organisations as members

  4.1  Well respected local organisations and businesses using a credit union show local people that the credit union is to be trusted. While these organisations can show support now by offering payroll agreements and entering into partnerships, there is no substitute for them being able to demonstrate their trust by depositing money into the credit union. Organisational membership can increase a credit union's credibility and encourage people to save in this way.

SOCIAL FUND REFORM / POST OFFICE CARD ACCOUNT

  5.1  For credit unions to be able to play a role in any future reform of the Social Fund and/or to play in role in the replacement of the Post Office Card Account, legislative change to enable full coverage of credit union services across Britain would be necessary.

  5.2  Anticipated changes in legislation will expand the coverage and capacity of credit unions and mean that many more people can benefit from credit union services. However, it is inevitable that even after these changes have taken place, there will be gaps in coverage. A "default" credit union, Credit Union Direct, which can provide services to people wishing to, for example, use a Credit Union Current Account to receive their benefits, or who wish to save safely or borrow affordably would provide a solution to these gaps in provision.

  5.3  A credit union which could take in members who are unable to join a local organisation would ensure that no-one in Britain would have to face the prospect of remaining in financial exclusion. By using the back-office facility described above, this credit union could offer the Credit Union Current Account to anyone who wished to use it.

  5.4  This "default" credit union would work in partnership with local outlets including perhaps post offices, housing associations, local authorities etc to provide a face to face presence. Providing universal coverage across Britain would transform the credit union sector's ability to deliver on a number of important social policy goals. Credit unions participation in the government reform of the Social Fund, the future successor to the Post Office Card Account and indeed the potential Savings Gateway would all be enhanced by the ability to provide universal coverage. It is anticipated that the combination of the "default" credit union and the supply of existing quality credit unions would offer complementary provision.

  5.5  We have had initial discussion with the Post Office and the DWP respectively about the ability of a scaled-up credit union movement to assist in the delivery of a replacement for the Post Office Card Account and the Social Fund.

  5.6  We are organising a series of meetings for credit unions and a meeting for Stakeholders during July to inform the work of the sub-group of the Financial Inclusion Taskforce which is investigating how banks can assist credit unions to scale up.

Saving Gateway

  6.1  We have been following the evolution of the Saving Gateway through the pilot projects and evaluation reports with interest over the past few years.

  6.2  We believe that any future roll-out of the Saving Gateway should be made available through credit unions for the following reasons:

    6.2.1  In many low income communities, credit unions can be the only financial institution with a physical presence. As the recent evaluation report noted, the proximity of the saver to a branch was a key factor in whether that individual opened an account, showing the importance of ease of access.

    6.2.2  Individuals who do not feel comfortable dealing with mainstream financial institutions are often very happy to deal with a local credit union.

    6.2.3  Through a range of access methods, including Benefit Direct account, payroll deduction, outreach points and PayPoint, credit unions already mobilise savings from people from a wide range of income groups.

    6.2.4  Anecdotal evidence we have from credit unions which are offering their own Child Trust Fund accounts tells us that people who may need more support in opening an account will invest their voucher with the credit union because the staff take the time to ask if they have used the voucher, explain how it works and assist with the application process. In a number of cases, credit union staff have been approached by members who have lost information they have been sent on this and/or have ignored information which they found difficult to understand. In cases like this, the credit union has helped people find out where their voucher has been invested and in many cases the individual has chosen to transfer their CTF account to the credit union as they know they can get the support they need there. People accessing the Saving Gateway through a credit union would be able to receive that little bit of extra support which some people need when dealing with financial products that they are not familiar with, having been used to managing a small cash budget and not engaging with mainstream financial providers.

    6.2.5  Credit unions have also told us that their CTF accounts attract interest from people who want to make sure that the money they invest is kept within the community. This ethical aspect to a credit union account means credit unions are receiving calls from way outside their common bond because people like the idea of investing in a credit union rather than another type of financial institution. Enabling credit unions to offer Saving Gateway accounts would give people an extra choice in where their money was invested if they would wish to support their community in this way. Legislative change and the scaling up of the movement outlined above would enable anyone who wanted to have a Savings Gateway account in a credit union to have that choice.

Community Bank

  7.1  We are aware of some credit unions which have reported that the name credit union generates a negative reaction from some people who they are seeking to recruit members and which wish to use a different name for their organisations.

  7.2  This is not, however, by any means a universal opinion. By successfully marketing a range of quality products in their communities and workplaces, many credit unions have built up a strong and sustainable organisation with thousands or even tens of thousands of people happy to join because it provides them with the services they need.

  7.3  While the name does not perhaps particularly reflect the savings products which credit unions provide, the same could be said of Building Societies, which provide a range of services that people value and therefore use. In areas where the credit union is providing a range of services in an accessible way, then this barrier has been overcome.

  7.4  The name "credit union" is a global brand. Credit unions affiliated to the World Council of Credit Unions provide services to over 160 million people worldwide. The name credit union has not been a barrier to attracting membership in the US, Canada, Australia and Ireland, all of which provide services to between a quarter and half of their respective populations. The name has also not been a barrier in many parts of this country where strong credit unions can attract tens of thousands of members.

  7.5  Through their ability to offer Child Trust Funds, ISAs and now the Credit Union Current Account, credit unions have only just started in the past few years to offer a wider range of services to their members. As these services continue to roll out people in more areas will come to understand what a credit union is and value them for the range of products they provide, including savings even though that is not explicit in the name.

  7.6  It is only in the past ten years that credit unions have started to have a presence on the high-streets of our towns and cities in any great numbers. Before deregulation in 1996, and the realisation by local authorities and funders that investment should be in credit unions themselves and not development agencies, most community credit unions operated on a part time basis from collection points in community centres or churches and simply weren't visible in most areas.

  7.7  ABCUL and member credit union have also made great inroads in the past few years with regards to media coverage about credit unions and the work they do. This, and the wide range of partnership which credit unions and ABCUL are developing at a local and a national level are leading to a wider awareness of what a credit union is.

  7.8  Despite credit unions' 40 year history in this country, it is only really in the past ten years that growth has started to take off, trebling during this time. With the new products that credit unions are now starting to offer and great potential for legislative change and a major scaling up of the movement in the next few years, we believe that it is too early to write off the name credit union. Any rebranding exercise should, we believe, focus on improving the products credit unions offer and making sure they are able to meet the needs of the people of Britain.

  7.9  Any use of the term "bank" could also cause problems within Europe. Credit unions have managed to secure proportionate regulation within a range of European Directives. Any name change which seem in Brussels to reflect a change in the operation and scope of credit unions could attract regulation aimed at banks to the credit union movement, something which would not, at this point in time, be affordable for credit unions and which could lead to a number leaving the movement.

June 2007





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