Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 180-199)

MR MARK LYONETTE AND MS AMANDA WINKWORTH

6 JUNE 2007

  Q180  Mr Newmark: I am curious, do you have a breakdown at all—and I appreciate if you do not—of those customers that may be new to credit unions versus those that may be old Farepak customers?

  Mr Lyonette: No, we do not have any breakdown; we have lots of anecdotes about people who used to be Farepak agents who actually, fortunately before Farepak collapsed, decided to set up a Christmas savings account—Dumbarton credit union was one place like that—but we do not have any overall figures on the sector and we are not actually that large a trade body.

  Q181  Mr Newmark: One of the recurring themes with hamper products is the value of starting to save for Christmas early in the year, and I am curious as to how many credit union Christmas products were in place early in 2007?

  Mr Lyonette: Mandy might talk about hers. As I say, we do not know the answer but plenty have been doing particular Christmas accounts for several years, so it is not everybody who has just done it because of the disaster of Farepak.

  Ms Winkworth: Although Farepak brought to the national attention the problems of saving and unregulated savings deposits this year, in Portsmouth, where my credit union is based, it hit home a few years ago when a local Christmas club that was collected each week in the local community centre—not even quarter of a mile from the credit union office, I add—on payout day the guy who ran this went to the bank to collect his money for the Christmas club, and I am sure you can see what is coming next that, yes, he got robbed on the way out—£134,000 of unsecured Christmas deposits lost in an instant and all three weeks before Christmas. My credit union did bail out quite a few people in offering them instant loans to tide them over Christmas, but from that we then set up our own Christmas savings account, and as the title of our credit union says, Portsmouth Savers, we have been predominant in supporting savings of one way or another since the concept of the credit union was started.

  Mr Lyonette: It is perhaps worth saying that there are, for all the Park hampers, still huge amounts of unregulated savings clubs with employers, et cetera, that ought to be just as much a focus I think as traditional hamper schemes.

  Q182  Mr Newmark: Last December the OFT quoted Farepak victims' groups as saying that credit unions were not particularly popular because they were seen as getting people into debt when all they wanted to do is to save. Do you see any basis for this perception and are you doing anything in particular to counter it?

  Mr Lyonette: Yes. Sometimes people have said that those words, "credit" and "union" have been problematic words, shall we say, for some people in terms of their associations, and it is not difficult to see that a credit union would suggest that we are all about lending. I think for 20 years that actually was one of the problems in the sector; we were very focused on how could we help people with affordable credit and not really realising that if you were going to have a significant scale you actually need to build the savings pot and it is only if you build the savings pot that you can really have much of an impact. A poor credit union does not do much for anybody. So we have introduced a financial monitoring scheme to help credit unions to understand how to balance the balance sheet, if you like, and to make sure that they are mobilising savings at least as much as they are working on the credit because without it it really limits our impact. Much as it has been very welcome to have the government investment through DWP for us to lend government capital, actually 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.

  Q183  Mr Newmark: So is that a long-winded way of saying that that perception is not real?

  Mr Lyonette: No, we have no research to justify it or challenge it but we understand anecdotally that some people can see credit unions as being all about lending.

  Chairman: Peter Viggers.

  Q184  Peter Viggers: Do credit unions use door-to-door sales techniques?

  Mr Lyonette: No, not generally. One or two have experimented with door to door collection for loans in the way that the home credit industry does, but it is not very easy to sustain that on an employee paid basis as opposed to using a volunteer, and charge the really low interest rates that we charge. On the savings side as far as we know nobody has actually done that. I understand that when you have Professor Elaine Kempson in front of you she talked about the joint research project of business modelling project we are doing together with her university and NCC and policies to look at what would it take to set up a not for profit home credit collection service on the back of all the Competition Commission findings? If we were not to try and extract huge profit from this what sort of basis, what sort of model would we need to do home credit? Of course, if one of the ways that you might look at cost subsidies for that would be to do home savings at the same time as you did home credit, and that may be one of the ways in which we could get some internal cost subsidy for such a service. So we are looking at that as part of a Joseph Rowntree funded research project, but at the moment there is no on the ground experience of it.

  Q185  Peter Viggers: I take it that there are no statutory or legal restrictions which prevent you using door-to-door techniques and that you are studying what the Commission would need to be to make it worthwhile?

  Mr Lyonette: There is nothing that would apply to credit unions that does not apply to other people in terms of canvassing and all of those regulations, but it is something that we are looking at, yes.

  Q186  Peter Viggers: In your memorandum to us you talk of ways that it might be possible to increase the work of credit unions and one of the paragraphs is mobilising the Post Office network to increase access to credit union services. Who would you expect to do this? Is it not open to you to approach the Post Office and seek to use the Post Office network, and would this not be an ideal outlet for your services?

  Mr Lyonette: In fact it is probably no secret—because I have given up counting how many questions have been asked in the House about Post Office and credit unions working together—the Post Office and credit unions have been talking together since October last year. Absolutely we are not necessarily expecting anybody to do anything other than work out a proper partnership between us. One of the things I have already mentioned there in answer to the first question is that if we were really to use the Post Office to give us a face-to-face service in parts of the country where we do not have a counter based service then we need legislation change. One of the possibilities for credit unions would be to bid for the replacement of the Post Office card account, of which the DWP are starting the tendering process now with a view to it being implemented in 2010. If we were to have what are fairly small legislative changes in place by 2010 then we would be able to be, I would suggest, a very attractive offering in partnership with the Post Office to replace the POCA. It is not just legislation, we obviously have to work out a means of operating that would make sense because we are not envisaging sub postmasters being able to make lending decisions on the fly in a small rural post office. So we may be looking at something like a credit union direct model so that there is some kind of phone service, but actually there is a face to face person who is trusted, used, etc, to do the collecting cash in, cash out, perhaps doing the money laundering—anti money laundering requirements that we have to comply with, that kind of thing, somebody who is there in a branch of the post office to do that.

  Peter Viggers: Thank you, Chairman. Obviously work in progress which we will be following.

  Q187  Chairman: "Doing the money laundering" means making sure that there is no money laundering, does it!

  Mr Lyonette: I always say money laundering and not anti money laundering.

  Chairman: Just for the public record! Jim Cousins and Andy Love.

  Q188  Jim Cousins: You have mentioned the DWP already and the evidence of the Savings Gateway is that the DWP channel into the Savings Gateway brought in people from much lower incomes than the other channels that were used. Do you see yourselves having a role possibly with DWP in a future Savings Gateway?

  Mr Lyonette: We would be absolutely delighted to play a big part in the Savings Gateway. The ways in which we could do that are slightly dependent upon review of the legislation, but even without the legislative review many of our credit unions now receive people's benefit payments directly and one of the things we would say to you about people on low income saving—and I think this was actually backed up by the Park people—is that the key product feature is convenience, not necessarily return on interest for depositing your funds. We find that people paying in their benefit to the credit union are actually leaving part of that benefit in their account. That is not an argument for saying that benefit levels are set too high, it is an argument for saying that actually if the convenience and the mechanism is there people will save. One of the things that we found over the last 25 years is that credit unions used to make people save before they borrowed. That was not a very attractive credit product and we have reformed that and we do not do that any more, we do not encourage people to do that; but the irony of that was that that actually produced an incentive to save for people. So we have tens of thousands of bus drivers alone in that sector, who outside London earn less than £10,000, and they have hundreds of pounds of savings. That is because they had that incentive. We employee-based credit unions use payroll deduction and I would suggest that the OFT and others who are trying to encourage low income saving look at this as a tool because it is that whole thing of what you have not had you do not miss. If it comes out of your salary before you have seen it actually you do not miss it so much and before you know it you have a savings pot, and we found that that is a hugely powerful tool. I suspect that the banks would like to be able to arrange payroll deduction with employers too, but for employee credit unions, particularly in low income employment industries, it is a really powerful tool.

  Ms Winkworth: Could I just add there that we run a benefit direct account in our credit union and it is very popular, and 25% of the members who have their benefits paid through the credit union also put savings into the Christmas club account so that they are not going to be short come Christmas. It does help to save without even having to think about it—electronic transfer and it is done.

  Q189  Jim Cousins: It is suggested by the last question—have you had any approach from the DWP to perhaps extend that work bearing in mind the Social Fund operation of the DWP?

  Mr Lyonette: We have noticed over the many years the interest in reforming the Social Fund; we have followed the debates around the Savings Gateway. We would very much like credit unions to be in a place where we could offer to help in a significant way with both or either of those initiatives actually, yes.

  Q190  Jim Cousins: The Savings Gateway, of course, was a single channel thing and there was an argument, a discussion, a debate about whether it was possible to have a Savings Gateway type scheme with a multiplicity of providers, like the Child Trust Fund that was set up, and the conclusion was probably at this stage it was not. Presumably your view is that that would be a mistake?

  Mr Lyonette: I think so. We would very much like to be not just an intermediary as the research talks about it in terms of having good contact with people to encourage them to save, but we would also like to be the deposit taker as well.

  Q191  Jim Cousins: Yesterday we were told by Sir Ronald Cohen, who chaired the Social Investment Task Force, of course he reminded us that that task force had made a recommendation that banks should operate special schemes in the very less well off areas. Have you ever had any approaches from main banks, the main financial institutions perhaps in partnership with yourself to operate such schemes, picking up the idea he had those years ago?

  Mr Lyonette: Yes. Probably about ten years ago a number of the high street banks—two in particular—were very keen for credit unions to act on an agency basis providing in effect their current accounts, and perhaps alongside that the deposit account. I have to say that they got very short shrift, though, from the sector because what credit unions are interested in is providing those services themselves in a way that meets people's needs. So we actually waited five or six years until we were able last year to launch our own current account with the assets sitting on the credit union balance sheet working for the credit union and therefore working for its members rather than the assets sitting on the balance sheet of the bank and working for the bank. So we are not particularly interested in agency arrangements in that sense, which are very one way. We do, however, have strong partnerships with a couple of banks, both with Barclays and the Cooperative Bank, and they provide a range of services to us and indeed the Cooperative Bank is our processor for our current account offering, and we need that in order to partake in the payments system, the clearance system, etc.

  Q192  Mr Love: We talked earlier about the new Credit Union Act. Have you done any research on what the impact would likely be of an Act on the growth of the credit union movement?

  Mr Lyonette: We have done two things. One is that we have given the Treasury information about what has happened in other countries that have recently gone through a very similar legislative change. The closest credit union country is actually New Zealand—a very similar stage in development to here and it has had a massive impact on the growth of their sector. The other thing we have done is we are giving them evidence about just how many employers, for example—lots of national named employers—would like to offer credit union services to their employees on a range of incomes, but often quite low incomes, but at the moment they have a stark choice. Their choice is, we either create a new credit union for this company across Britain, across England or Scotland or Wales, or we cannot get them involved because our typical credit union model is one local authority area. We had an approach from a big retailer in the Midlands who wanted to say that this credit union that covers the whole of Birmingham, could you deal with all of our employees? No, they could only take the employees who lived or worked in Birmingham and employers do not particularly want to do something with their payroll that only works for the employees here and not all the employees everywhere else. So we are not asking for legislation in the expectation that it will create demand but what we are saying is we have demand from lots of people for us to serve them and at the moment we are frustrated from doing that. The demand is there. It is really disheartening to turn away major employers.

  Q193  Mr Love: I understand that, but based on those international comparisons would you confirm that in your view there would be a significant additional growth in the credit union movement as a result of a new Act?

  Mr Lyonette: Absolutely.

  Q194  Mr Love: You mentioned earlier about the research project that Elaine Kempson is carrying out under the Rowntree Corporation. In her comments to us she did cast shall I say just a little doubt on the ability of the credit union movement to undertake doorstep type activities, mainly based on a reputational issue—in other words, whether it would be appropriate for them to charge a very high rate of interest in order to gain a return when they are supposed to be providing low rates of interest. How much of a reputational issue is that for you or do you not see that as a barrier to going into home credit?

  Mr Lyonette: If you remember, the Association was one of the bodies that championed actually getting a bit more flexibility in our maximum interest rate precisely so that we could serve some more people than we were managing to serve at the old rate. So within reason—I do not want to sound like an apologist for the home credit industry but actually the costs of an agent network are huge and it is also something that is very dependent upon the length of time an agent has been there.

  Q195  Mr Love: When does it become a reputational issue—50%, 100%, 150%? When you are doing 12.8, 12.68 or—

  Mr Lyonette: 25% is our maximum. Obviously it is not something for the trade body to impose, I should say that, but I cannot see our members being comfortable lending people money at much higher rates than we presently have, so it would be a question of whether we could provide those services perhaps with an optional charge for home collection as opposed to paying in some other manner. Obviously we would want to be very transparent with people about if you switch from requiring home collection and you were to pay through some other means then obviously we could drop the rate really significantly. We are not looking to make profit from people; we are looking to cover our costs of that service.

  Q196  Mr Love: Turning to encouraging savings, in your submission you made a number of points to us, especially about those that are still in debt or are emerging from debt. What more needs to be done to promote savings amongst those in debt and what special role can credit unions play in all of that?

  Mr Lyonette: One of the things that some of our members do, when some of them themselves have consumer credit licences and develop debt management plans for people, many of those people will continue to save because if you are saving while you are paying off your creditors it actually gives you that protection against some emergency happening in that period, and if your typical debt management plan can last up to five years then it is quite likely that many people will have some kind of lump or lack of income or some kind blip or emergency.

  Q197  Mr Love: I am being pressed for time and I wanted to ask you—

  Mr Lyonette: I think the key policy issue—and we are working with Citizens' Advice on this, with whom we have a strong partnership—is to look at whether the common financial statement that debt advisers use and some creditors have agreed to, whether that could include as standard an element for savings as part of the agreed expenses. I think that would be very good.

  Q198  Mr Love: Let me just ask you finally, you mentioned earlier about the term credit union being problematic in terms of public understanding. Would a term "community bank" be more appropriate or do you think that there is confusion in that terminology as opposed to credit unions?

  Mr Lyonette: This is a really difficult question. I was asked this yesterday at the seminar. We know that some of our members want to use that term. I would say two things: I would say that credit and union are for some people problematic words. We have, however, found that where people are getting what they want from the credit union they get over that barrier. Glasgow Credit Union, which employed Credit Union originally for the council, 60% of everybody who works for the council and its ex private contractors, belonged to the credit union. No bank has penetration anything like that. So people clearly get over the name when they are getting what they want from the service. However, that said, in many ways using the term community bank would be a better description of the savings and loans products and the transaction banking that we are now doing. Our problem with it is what it would mean for the folk in Brussels.

  Q199  Chairman: Were you consulted by the OFT on their consumer campaign?

  Mr Lyonette: Yes, we were.


 
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