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CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 437-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE SCOTTISH AFFAIRS COMMITTEE
CREDIT
UNIONS IN
MR MARK LYONETTE, MR FRANK McKILLOP and DR PETER GOTH Evidence heard in Public Questions 80 - 160
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Scottish Affairs Committee on Members present Mr Mohammad Sarwar, in the Chair Mr Alistair Carmichael Mr Jim Devine Mr Jim McGovern Mr Angus MacNeil Mr Ben Wallace ________________
Witnesses: Mr Mark Lyonette, Chief Executive Officer, Association of British Credit Unions Limited, Mr Frank McKillop, Scottish Policy Officer, Association of British Credit Unions Limited, and Dr Peter Goth, Manager, Scottish League of Credit Unions, gave evidence. Q80 Chairman: Good afternoon. I would like to welcome today's witnesses to our session. Can you please introduce yourselves for the record? Dr Goth: Peter Goth. I am with the Scottish League of Credit Unions. Mr Lyonette: Mark Lyonette from ABCUL, the Association of British Credit Unions. Mr McKillop: Frank McKillop the Scottish Policy Officer for ABCUL. Q81 Chairman: Before we start on detailed questions, do you have any opening remarks you would like to make? Mr Lyonette: Not particularly, no. We are delighted to be here. It is the first time we have been in front of the Scottish Affairs Committee. We have spoken to the Treasury Select Committee a few times but we are very pleased you are undertaking the inquiry. Q82 Chairman: Why do you think membership of credit unions in Britain is lower than in other countries such as Ireland and Australia? Mr Lyonette: Probably the history of
credit unions in Q83 Chairman: Since the start of the credit union movement in Britain, do you believe the support extended by the British Government, the Scottish Government and local government matches the support given to the credit union movement for instance in Ireland or Australia? Mr Lyonette: Interestingly, in many
countries around the world, credit unions have not been pump primed by the
state at all. Certainly at central and
perhaps even local level, that has not been the case. Some of what has happened in Britain and Scotland
certainly within that has been putting government money into credit unions and
local government money as well, on the premise that they can do a job almost
solely for poor people, for the most excluded, the most disadvantaged. By definition, that is going to be
problematic. While present government
investment is welcome both in Dr Goth: I agree with what my
colleague is saying but I come from a bit of a different angle. The credit union movement in GB - I
intentionally exclude Q84 Mr Devine: The paper was outstanding and was really very helpful. Mackintyre is somebody who was involved in setting up a credit union within the Glasgow Health Board when I was previously the head of health for Unison. The board were very sympathetic and there was a lot of publicity. I had the feeling at times that the credit unions themselves seemed to be fighting like ferrets in a sack. I have local examples of behaviours from one where they have very good local credit unions and yet we have somebody from Edinburgh trying to get into that area. The bond covers the whole of the union but we have other small ones, one of which I am a member of. I get this feeling that there is no control or coordinated strategy from the credit unions and yourselves on how to manage this. Dr Goth: That is a very valid
point. In the environment in Mr Lyonette: When I first got involved 10
years ago, there was a lot of talk of different trade bodies and that is really
unhelpful. I know that is the history of
many democratic movements and parties even, but it is not very helpful. What we have set about doing for the last 10
years is just trying to deliver as much as we can in terms of value for our
members and not be interested in trade wars.
As a result, the sector has grown quite considerably in the last 10
years. One of the other issues you are
perhaps alluding to which is something we recognise and are doing some work on
is around corporate governance. Credit
unions will have challenges at board level with very small businesses. As they grow, perhaps they need to renew the
skills that are involved in the board.
Some of our larger credit unions now are bigger than the smaller
building societies. The sort of board
you need to successfully drive that is obviously quite different than a church
based credit union with a couple of hundred people on a Sunday. That is a constantly evolving process. You have grown from here to here; it is not
always easy to change the board as you go along and that can be a
challenge. One of the things we are
launching at the FSA[1]
in September is a new corporate governance code for credit unions. Credit unions have had regulation for five or
six years now in Q85 Mr Devine: Who is the referee? Who is the body that says to one credit union, "Leave that part of Livingstone alone. Leave that part of West Lothian alone because it has its own credit unions"? Mr Lyonette: There is not one, I am
afraid, in that sense. That is not a
role for the regulator either, the FSA.
Our belief is, while it is unhelpful to be fighting for members on the
ground, in a different sense if I was living in Livingstone, it might be quite
good for me to have a choice of which credit unions I could use. People will often belong to two or three
credit unions. Having some choice helps
drive up the standards of the credit union, what services are being offered,
the fees that are being charged, the interest rates, dividends, etc. Sometimes it can be really helpful. Obviously it should not deteriorate into
people spending all their time trying to poach members from one credit union
because the reality is, even in Q86 Mr MacNeil: You are saying, rather than fighting each other, fighting banks and other financial institutions for some members should be going on. Why do you think membership is so low in the UK? Is it anything to do with confidence? Is it services that the credit unions provide? Are they just not seen as being bluechip? Mr Lyonette: It is a number of things. Peter has already put his finger on one of them. Credit unions here by and large did not set out to serve a broad part of society. Often, the people who started them were aiming solely at quite a small segment of society. Q87 Mr MacNeil: Those excluded by banking? Mr Lyonette: Not necessarily. In the eighties and nineties, it was probably the working poor rather than the non-working. One of the issues is what is the image of the credit union and that is quite a hard thing to change. Also, you are right. Credit unions that have grown big around the world do not just do £300 loans. We are really pleased that we do a lot of £300 loans but they do much bigger loans. They do mortgages. They offer current accounts. Some of the things that we have done with our members over the last three or four years - we have produced a current account for example. That has been one of the key things around the world that has really helped credit unions grow. It is about access and convenience. The credit unions in the eighties and nineties might be open two or three hours on one or two afternoons a week. For many people, particularly today, that is not a realistic way of servicing them. Q88 Mr MacNeil: Having been in Canada and seen how credit unions are perceived in Canada, it is very different. The credit union was not a credit union as I might imagine it here. It may have been a credit union that became a bank. Dr Goth: A lot of it has to do with
the whole idea and perception of what credit unions are. It is a very unique perception that seems to
be in place in GB from Q89 Mr MacNeil: How does GB go about changing that perception? That seems to be the crux of your problem. Dr Goth: At government level, what
perception do you see for credit unions?
When I look at Q90 Mr MacNeil: Is not one of the biggest issues social inertia associated with banking? There is a statistic that shows you are more likely to change your wife than your bank account. Mr Lyonette: Peter and I are absolutely on
the same page. We need to project that
broader image. The key thing is we need
to get there. How do we get there? One of the things we are engaged with the
Treasury on at the moment is having legislation that would allow us to offer
the sorts of modern services that other credit union sectors around the world
offer. In Q91 Mr MacNeil: Canada has been mentioned. I am interested in the history of credit unions in Canada. Did credit unions in Canada grow in a vacuum where there was no other financial service? Did they displace banking going back to the inertia of financial products from people? Where do you think credit unions should be pitching themselves? If I am going to be talking to my constituents and saying, "You should be with a credit union" and they say, "Why?" it is a general good thing. People are unlikely to move on the basis of a general good thing when they have just met a fellow in the street saying that. Dr Goth: The credit union started in Q92 Mr Carmichael: You have already identified that there is in Scotland at the moment an accelerating process of retrenchment of services from - I hate to use the word - the periphery to the centre. The communities that are at the periphery are the smaller communities, by and large. In your submission you are talking about a process that has seen the number of credit unions shrinking but getting bigger and inevitably that is going to be the case if you are going to be providing the sorts of services and the whole range of things that you are currently providing. In a small community, how do you create that range of services, working with a fairly small pool of what are effectively volunteers? Dr Goth: What we are trying to do now in the Scottish League is to start networking with credit unions. With a lot of that technology we are looking at a centralised service where even small technologies can link together for their back office. I agree with you. You cannot put a credit union into a small community and say, "Off you go." Q93 Mr Carmichael: My mother is involved in the credit union and, when you start talking about doing the sorts of things you are talking about, I can just imagine the blood draining from her face. Mr Lyonette: Peter is right. We need a legislative platform so that we can
compete. We have to face it. Competing in Mr McKillop: It is something special in
more rural areas if they had access, for example, to the credit union current
account. It would make a real difference
there where maybe it does not have the same impact in more urban areas. A lot of the rural credit unions might not
have the infrastructure there. That is
why we said in our submission it is hand in hand with shared back office
services. It is quite important all
across Q94 Chairman: In recent years the amount of interest credit unions can charge has been increased. In fact it has been doubled from 1% a month to 2% a month. Are you comfortable with this increase? Mr Lyonette: Yes. The Association thought that was a very good thing. Peter has talked a lot about how the image of credit unions was the "poor man's bank". There are still challenges there, clearly. In reality, a number of credit unions were making loans at the previous 1% - about 12.6% APR[3] - and they were using state subsidy in order to be able to do that. That seems to me not necessarily a very smart move. In a sense, the state was paying for these principals that will only lend at 1%. Since we have been able to lend at 2%, many more credit unions have used that and they have realised that, by being able to charge just that little bit more - let us be honest, 2% in the way our interest is calculated is such a small amount of money anyway - and if you are competing with people who are paying hundreds of per cent for their credit - and you often are - to be able to offer credit at all to people at 2% has to be a good thing if previously you would have had to turn them down because you would not have been able to take that credit risk. Q95 Chairman: An increase of 100% you think is a small increase? Mr Lyonette: It is a small increase. Our interest rates are calculated on a reducing balance. I know this is quite technical but if you borrowed £100 for a year, instead of paying £6, you would pay £12. In the scheme of things, when people are paying hundreds of a per cent for catalogues or through the home credit companies etc., if you can make a loan to people, say, a £500 loan, people will save £250 with the credit union if that is the market you are serving. If that enables credit unions to serve many more people, which indeed I believe it has, and has earned the income to make the credit unions sustainable, pushing them in the right direction, although on the face of it it seems a bad thing to increase the interest rate, it has allowed us to do much more. Dr Goth: Mark and I disagree on this. I have a concern about going to that type of interest rate for a number of reasons. One, I think it is a high rate. Two per cent a month is a high rate. It does not address some of the problems that we know we have to address. We cannot broaden the scope of our borrowers if we have rates at 2%. If you have variable rates from 5% up to 24%, maybe, but that is a very difficult concept for a lot of credit unions. Some members are paying 24%; some members are paying 5%. If we are trying to look at a community approach to lending, a standardised rate becomes a big issue as well. Mr Lyonette: Most of our members do not
just lend at that maximum interest rate.
It is not like they used to lend everything at 1% and they now lend
everything at two. It is about having
the power to lend at that rate. Many of
the strongest credit unions lend at much less than 1%. For example, in the police service in Q96 Chairman: Committee Members are extremely concerned that financial institutions are exploiting the people who are most vulnerable in communities. They are charging up to 100%. Therefore, I am very strongly in support of having a cap on the financial institutions and the banking system because it is ridiculous that these banks are charging as much money as loan sharks on the streets to the most vulnerable. I can live with up to 24% which is almost five times more than the base rate but when you said it was a small increase that worried me a bit in case you support further increases of interest rates in the future. Mr Lyonette: Not at all. A lot of people in the mainstream have store cards which are at more than 24%. If you are competing in that part of the market, as you rightly say, it is not 100% people are paying. It is often 300 or 400%. That is part of what credit unions want to do. We want to make sure that more affordable credit is available to those people. The reality is that, with some of those customers, half the people will not pay half the time so you have to be able to have an interest rate which is fair but which enables you to cover your costs. If you cannot cover your costs, you are not going to be around next year to be able to offer the service to those people. It is about being sustainable and able to compete with those providers. Those providers are rarely the banks at several hundred per cent. It is usually the non-bank lenders, although even the banks tend to have sub-prime subsidiaries that they lend through. Q97 Mr MacNeil: When you say 1% and 2%, is that 1% and 2% absolutely or 1% and 2% above base rate? Mr Lyonette: It is 2% on a reducing balance. Q98 Mr Devine: Per month? Mr Lyonette: Yes. Q99 Chairman: That is 24% a year. You mentioned the introduction of ISAs, a credit union current account and a child trust fund. Do you believe that the introduction of these facilities within the credit unions has helped in stimulating growth in credit unions? Mr Lyonette: Yes, absolutely. If we want to project an image for a broad
part of Scottish society and it is community or employer based or whatever, we
need to have products that people want.
You are not going to get that sort of penetration into the country if
all we have is small loans and simple savings that we cannot promise any
interest on. Those credit unions that
have introduced a cash ISA for instance with a tax break have found that has
really grown the share pot, which is what Peter is talking about. Then of course you can increase the amount
that you lend. That brings in more
income. That makes the credit union work
and thrive moving forward. It has been
really important to do some of those things.
Not many credit unions can yet offer mortgages. There is a different financial risk in
there. If you look around the world,
credit unions have not become large by not having that full range of
products. Even in very low-income
communities in the States - never mind just the mainstream credit union sector
- and even the very low-income focused credit unions in the States will all
offer mortgages. They are very
definitely not part of the sub-prime problem in terms of ratcheting up people's
repayments. We need a product range that
will match our ambitions to serve a broader part of Q100 Mr MacNeil: What support does the credit union movement receive from various forms of government in Scotland? Mr Lyonette: Probably six or seven years
ago the Scottish Executive first put some money into credit unions. Going further back, any support tended to be
at the local level, at local authority level.
Inevitably, if central government starts to fund something, sometimes it
has a bit of displacement at local level.
I would not want to see support from central government all about money
at all, partly because of some of the dangers of becoming grant dependent and
those sorts of things. Some of the most
important things government can do are to support things like the legislative change,
regulatory change that will need to go alongside it, but also to promote credit
unions as a viable alternative, so some of the things we have done with the UK
Government around the Savings Gateway which is now being launched, around child
trust funds, even being able to offer those.
The Scottish Government could do similar things, although it is not in
control of the regulatory regime or indeed most of our legislation that affects
this. Just being able to promote credit
unions not just for the most disadvantaged but as a broad alternative for the
people of Q101 Mr MacNeil: How joined up have you found the various levels of government, both the Scottish Government and Westminster? Mr Lyonette: Not necessarily. We have had a good relationship with the
Scottish Government for many years. We
have had a good relationship with the UK Government. There is not always necessarily joined-up
thinking, even within any two departments within one of those governments. People can sit in the same room apparently
day by day and not necessarily join things up.
We try hard. There have been some
challenges. Some of the things that
credit unions do around financial education for example and around
schools. There are some really good examples
of that in Q102 Mr MacNeil: Peter, you are shaking your head. Dr Goth: There are a couple of new funds that the Scottish Government is coming out with now. One is the Enterprise Fund and the other one is an investment fund. The investment fund would not be applicable so much to credit unions because it is for larger amounts but the Enterprise Fund might be. I have a double edged sword here. If we see credit unions as financial cooperatives, there is a significant role for us to enhance the delivery of credit unions. We can talk about all the products we want, but if we do not have the capacity within the credit unions to manage the credit unions or to deliver those products, it becomes somewhat academic. There is a real shortfall there in managerial skills and business attributes in credit unions. Very few governments give any money to credit unions in any other jurisdiction in the world. The other side of my sword is I do get apprehensive because of "the golden rule", "the one with the gold makes the rules." If a local authority is giving money for the credit union, whose agenda is it? If the Scottish or the Westminster Government is giving, what is the agenda behind it? I get a little apprehensive about this whereby we have been steered down the route that we are on now. Q103 Mr MacNeil: Looking at your knowledge and expertise and looking for a comparable jurisdiction elsewhere in the world, where do you see an example of better governance in the same historical situation for credit unions? Is there anything glaringly obvious where you would say, "Yes, you know what they have done in Belgium? That is what we should have done years ago"? Dr Goth: If you start looking at other
jurisdictions outside North America, Q104 Mr MacNeil: Given the history we have with banks and post offices to a certain extent and credit unions, and that there is social inertia, is there a jurisdiction that has had that similar background where credit unions due to government legislation or whatever have taken quite a different path and been more successful? Dr Goth: I would say Mr Lyonette: It has had a very different history in terms of banking and lending availability. Q105 Mr MacNeil: Has that been in both communities or is that an overspill? Dr Goth: No; you have a big divide in
both communities, like everything unfortunately in Q106 Mr MacNeil: The concept of credit unions has got into both communities? Dr Goth: Yes. Q107 Mr Devine: This is a point that one of the DUP[4] members asked about when we visited Northern Ireland. They were saying that within the Loyalist communities credit unions were not successful because they were seen as Republican. I wondered if you could comment on that. When Farepak collapsed, the Scottish Government and Allan Wilson as Enterprise Minister allocated, off the top of my head, about £800,000 that credit unions could tap into. People who were directly affected by Farepak went to the credit unions. Are you saying that was wrong? Dr Goth: I was not here for Farepak so I could not really answer. Q108 Mr Devine: Northern Ireland? Dr Goth: There is a big difference between the two associations. The Ulster Federation has intentionally seen itself as a voluntary organisation. They only have one paid employee in the whole setup. The ones affiliated to the Irish League are very much more community based. They started up as church based but they have tended to become far more community based and of a different size, with a different approach. Mr Lyonette: One of the problems credit
unions have in Q109 Mr Carmichael: I wanted to explore with you the part of your submission on the future of credit unions in Scotland, but we have covered a lot of this already. If there is anything else to mop up, I will just give you the opportunity. You made an observation about the number of people in credit unions growing but the number of credit unions themselves declining. What effect do you think that is going to have on the future shape of the credit union movement? Mr Lyonette: There is a very powerful
phrase that small is beautiful. In so
far as that can mean local and friendly service, which is really important in
financial services along with other things, it is hard to argue that small is
not beautiful. What I would argue is
that tiny is not beautiful. If we are so
tiny that we are not financially viable and we do not have the income coming in
from loans and other products, we can think we are as beautiful as we want but
we will not be there for the people of Scotland in five or 10 years' time
unless we have a business model that makes sense. There are three key things around that. There is the right legislative platform so
that we can offer attractive services; there are the right products that flow
from that, things that people will want to use and are mainstream. We cannot become more mainstream if we do not
have mainstream products. Thirdly, we
have to look at things around efficiency really. In many other countries, it is not 500 credit
unions, which there are in Dr Goth: I still come back to
networking between the credit unions. I
gave you an example of Desjardins, with $150 billion in assets. Right next to Desjardins, where one of the Desjardins
branches is, there is a place called Q110 Mr Carmichael: I guess the challenge is how you get this network, this broadening of the range of services and the increase in the size of credit unions while still maintaining the image of what you have, which is essentially good, local and community based. I have an involvement with the RNLI[5] as a member of their National Council. The RNLI is a very big charity. It runs into hundreds of millions every year. The head of corporate fund raising says that the image most people have of the RNLI is that it is run by two old ladies in a cottage in Cornwall. That is really what we want to keep. How do you strike that balance? Mr Lyonette: It comes back to some of the things we have said. Behind the scenes we have to be smart and efficient. We have to get the best value for our members that we can and produce sustainable credit unions. What I would really worry about is if, as a result of that drive, credit unions started to only act remotely and make remote loan offers and it was all internet banking. I do not think that is the future for British credit unions at all. There will always be a place for a local, friendly set of financial services that are on your side. That is absolutely key. Q111 Mr MacNeil: That is a good slogan. You mentioned fishermen on the island off the east coast of Canada going for a mortgage for a boat. Would they be using other financial institutions as well or would their sole financial institution for all their transactions be that credit union, or would it also be the Bank of Nova Scotia, or whatever it is called? Dr Goth: I will be quite honest with
you on this. We did a survey of our
credit union. We are not a huge credit
union. We have about 16,000 members. We reckon that probably 88% of our members
will deal with other financial institutions.
People do price shop. In our
credit union in Q112 Mr MacNeil: At the moment with the global credit crunch and the financial headlines we see in the news and in the newspapers, do you think credit unions will be seeing an opportunity for themselves in this sort of environment? We are in a period of flux and change, when people are forced to change; things are happening out of the norm. Is that an opportunity for you or have you recoiled from the situation? Dr Goth: I think it would be from an image point of view. Because of the figures you are looking at, I do not know how realistic it would be from a financial point of view. Credit unions are not in a financial position to be an alternate financial intermediary because they do not have the size. Mr Lyonette: We have found, even since
last September with Northern Rock, that credit unions are getting many, many
more applications for loans.
Unfortunately they are having to turn down more of those as a percentage
than they might have done in the past.
That tells us a lot about how indebted some people are. Unfortunately,
we cannot be seen to be irresponsible lenders.
There are people who come to you and ask for money to borrow and it is
just not a sensible thing. That is where
we do believe the credit union emphasis on saving as well is really
important. We would wholeheartedly
support the UK Government's proposition around the Savings Gateway because
credit unions' history here tells us that getting people to save is not
something that you can easily teach them in a classroom. It is good that there will be personal,
financial education. All those things
are important but saving is something that you learn by doing. In our experience people only value savings
when they have them. The trick is how do
you get people to have them rather than saying to them, "You must have
savings. They are really good." One of the most powerful tools the credit
unions do have here is payroll deduction.
We have 20,000 bus drivers across Q113 Mr MacNeil: It is like the granny and her various jars. You said you have had an increase in applications for loans since last September. Is there any corresponding increase in the amount of people coming to you to save since last September? Mr Lyonette: We only have anecdotal evidence of that, I am afraid. We do not have system wide figures to be able to plot that in the way building societies have done. Q114 Mr MacNeil: What does the anecdotal evidence say? Mr Lyonette: Anecdotally, yes, but I could not quantify that for you. The credit unions that have the cash ISA are finding those are really taking off. That unfortunately is not too many of our members at the moment but it is a very successful product. I do not know whether that is people losing confidence in the equity ISA but that seems to be a really big growth area. Q115 Mr Devine: Recently the government has announced changes to the Treasury, making it easier to join and I am delighted to be able to say that part of that was making groups able to join as well, which I was lobbied very severely with in my locality. Is this going to make a significant difference? Mr Lyonette: Yes. We have yet to see all the detail as it plays
through, obviously, but we were talking yesterday with the Treasury about the
sort of reform order that might be needed to make this happen. There are three broad things. One is making the common bond more
flexible. At the moment, we are denied
in many ways access to many national employers, whether that is across Q116 Mr Devine: Peter, obviously the changes that we are proposing are going to make you even more like a bank and therefore any public subsidy, whether it comes from the Scottish Government or local authorities, is going to be more unlikely. Dr Goth: With those changes, especially the one on interest, we are going down a certain route. On those recent announcements, I think the common bond one and the changes in interest are welcome. I must admit both of them give me a bit of concern because of the internal confrontation within the movement, not necessarily working in harmony. The interest one is good but it changes the relationship with the member because now you are in a contract with the member to pay that. Previously we paid a dividend if we had a surplus. If credit unions are now paying interest, they are contractually bound to pay that interest. Some credit unions are going to be fine with that. There are some provisions in there to say that, to go down this route, they have to have a reserve of a certain amount and I think that is beneficial. What were you saying about government funding? Q117 Mr Devine: If you are now behaving like a bank, subsidies that may have been available from either the UK Government, the Scottish Government or local authorities may not be. Dr Goth: I get back to the same thing. Q118 Mr Devine: I know you want to be away. Dr Goth: Not necessarily that. It is really an understanding of how Government
perceive what credit unions are for. If
it is still seen as a sort of delivery system, I must admit that I get
concerned with that; I really get concerned with that because that becomes
restrictive. If it was for education of
volunteers and boards and capacity building within credit unions, I think that
would be great. I think it is urgently
needed; with the potential opportunity in Mr Lyonette: I think it is hard to find an argument. No credit union system in the world has grown with the legislation we have now. So, yes, it is the interest rate; yes, it is the common bond, but also the organisational membership. It is really important. Credit unions tend to be small groups/small organisations knocking on the door each week saying, "Couldn't we put our funds with you while we run our business?" etc. It could be a grant from the council, it could be small fibre businesses, it could be any number of things. At the moment, we cannot do anything about that. The legislation is absolutely key and, as Peter said, obviously we will look to the FSA to put in place appropriate regulations so that those things are not dangerous. For credit unions that are not used to making a promise on paying interest and just look at what is left over at the end of the year, then obviously that is a big change and we would expect the FSA to put in place appropriate regulation to protect the members' savings so that things were done properly. I think that goes without saying. I should say that I do not expect necessarily all credit unions to very quickly be able to pay interest on members' savings. It may be something that takes some time. Similarly with organisational group deposits or lending. If credit unions go into business lending, that is a very different thing overnight. You would not necessarily feel that people were going to do that without some good preparation and hiring the right expertise. All of these things will need to be with the right protection and the right regulation around that as well. Mr McKillop: I think the key thing is that it is really the legislation that is giving the opportunity for credit unions to offer these things. It is not so much a case that the Government are saying that they have to do this. It is really just allowing for more products that they will be able to offer and, as Mark said, when the new legislation comes in, we would not imagine that credit unions could immediately take on corporate members. Again, maybe some of the larger ones can immediately offer a competitive interest rate to compete with some of the banks that are doing these things, but again it will not be across the board. It is not something that is being forced on them, but what we certainly very much support is giving these opportunities to our members to be able to offer the sort of products which, as we discussed earlier, may bring more people who currently do not join credit unions and, as I think as you said, just trying to come with an argument as to why they should, the best argument is that we can offer these sorts of products to them. So, certainly we support the legislation for giving us that opportunity. Q119 Mr Devine: You do not expect an overnight change? Mr McKillop: No. Q120 Mr MacNeil: I have been listening to what you are all saying and you seem to be saying that you do not want money for a credit union as such, you want it for training or for working ... I wonder if the context of what you are saying is that basically people just do not get credit unions. I know the Northern Ireland situation (inaudible). Dr Goth: I would agree with that. I think that the perception of credit unions is misunderstood. Q121 Mr MacNeil: I have been in the misunderstanding bracket, to be honest with you. Mr Lyonette: I would disagree to some
extent. I am absolutely with you that
the image of credit unions in some places in some ways has not been good, but I
do not think it is just looking over the water.
If you look at the Glasgow Credit Union which came out of the council,
the Glasgow Council Credit Union had at one point, before it opened up to the
whole of Glasgow, 61% of all the employees who worked for the council and the
various bodies that used to be part of it but are now separate to the council. Any bank in Q122 Mr MacNeil: That 61% go the credit unions as the first stop and then wander off to the next (inaudible). Mr Lyonette: Until very recently, they had
to have a bank account somewhere else because the credit union could not give
them a current account and they had to go elsewhere for their mortgage because
the credit union could not do any of those things. In time, as in Q123 Mr MacNeil: I am not saying that, I am just cross-examining my understanding of it. Dr Goth: On that same theme, one thing I would like to indicate is that what Mark is talking about is employee-based credit unions which originally were employee credit unions which, by the very definition, were not for the most part necessarily addressing a disadvantaged section of society. Basically, all their members were employed. Q124 Mr MacNeil: Which is what you want. Dr Goth: Which is obviously what you
want, but what I am saying is that, in this case, it has allowed you to
financially capitalise to a point where they can grow. They have got to that stage; they can offer
those products; they have their core base where you can start offering
products. The vast majority of credit unions
are not in that position. We have an
office in Cranhill in Q125 Mr Devine: Surely, that is the conundrum. Dr Goth: That is the conundrum. Q126 Mr Devine: The changes that we are making will make you more like a bank and the consequence of that is that we are taking you away from the community. Dr Goth: Exactly. Q127 Mr MacNeil: Is that right? Is what Jim has said exactly what you think is going to happen? Dr Goth: Where I am coming from is, if you look at the large credit unions, if you look at the Glasgow, the Scot West and Edinburgh, obviously --- Q128 Mr MacNeil: And Desjardins in Quebec? Dr Goth: Desjardins does but it cannot through legislation deal with disadvantaged individuals financially. It does but it cannot do it through the legislation. It can do that because it does it out of its profits and they make very good profits; they have by definition because they will need good profits. It is easy in Scotland to say, "Okay, we have this but we need more products, we need more products, we need more products" and there are certain credit unions - I would agree with Mark 100% - that would do fine with that increase in products, very much so, but there are a lot of credit unions that are not at the capacity to do increased products and I think that it is important that we do not and, maybe to answer the question that we would become like banks, I think the worst scenario is that you end up with three or four dominant credit unions that can act as banks because then you have just drawn a division between them. Q129 Mr Devine: Surely that goes back to what I said at the start about basically fighting like ferrets in a sack. Should we be prescriptive as politicians and be saying, "Here you are"? or draw up a set of guidelines that says that, "If you are based in Edinburgh, you cannot come out to Livingston". Do we need to do that? You say you cannot do that. Dr Goth: I think --- Q130 Mr Devine: To take your argument that you want a community base and it obviously worked and not to get it as a big bank, what else are you going to do? Dr Goth: To make a community base without it becoming a big bank? Q131 Mr Devine: Yes. Dr Goth: Why would it necessarily have to become a big bank? Q132 Mr Devine: I know a lot about them in Ireland; they are on the main streets; they are very well known and very well used. The Irish Allied Bank is there and the Credit Union Bank is there. When you go in, there is no difference in the frontage and there is no difference in any of the service. I was saying to you earlier on about the conundrum which is, can you say that that is a community-based organisation as a credit union there or is it basically just a bank that competes with other banks in the main street? Dr Goth: The big difference and if you
look at large credit unions is what they do with their profits. At our credit union in Q133 Mr Devine: You are not going to be able to do that here with size. Size is important in the issue. Dr Goth: Yes. Q134 Mr Devine: If it is big and you are making that sort of profit, you can invest back in. You are not going to be the community bank that you are talking about or, the community service that you are talking about. Dr Goth: If you take an item like
that, like I was saying to you, that credit union, the one next to it is Q135 Mr Devine: Why would I join that credit union you have just talked about if I can go to the big credit union where I can get all these benefits that the other one does not have? Dr Goth: It has all the benefits. You can go to Mr Lyonette: We are talking on a different
scale of the diversity of credit unions in Q136 Mr MacNeil: It may be that there are too many credit unions because if Edinburgh is competing with Livingston as Jim was mentioning ... Can Desjardins and Bay St Lawrence cope? Do we have too many credit unions being set up with the initial evolution of credit unions? Dr Goth: You can look around the world
and you can see very clearly a pattern of credit union growth. It is very common and it is consistent with
every jurisdiction you look at. To give
you an example in Q137 Mr MacNeil: Has that been a good thing? Dr Goth: I would say that it has been a good thing. It has completely changed the way we operate. Although it is down to 635 credit unions, it is still round 2,000 branches or units. Q138 Mr MacNeil: In essence, the number of credit unions does not matter. It is the size and access to them for financial services. Dr Goth: To follow on from that
pattern, with regard to the financial health and credit unions in these
jurisdictions, Q139 Mr MacNeil: There are only so many credit unions that a set population is going to hold. Mr Lyonette: Yes. The credit unions in Dr Goth: I 100% agree with that. The problem is that Mark and I can sit around the table and we can agree with this but it is what that --- Q140 Mr MacNeil: The problem is that you do not fully agree. Dr Goth: It is, how do you present this overall image of what credit unions are about and I think that we have gone a full circle in this discussion, but I think it comes back to that: what is the perception of credit unions? Mr Lyonette: I think that Peter and I
agree on the vision of credit unions. I
would in many ways look to the Canadian system in terms of the way the credit
unions work and also I have to say the co-operative movement generally is a
very much bigger part of society there than it is still here in some ways, even
in Q141 Mr MacNeil: What is the percentage of use of credit unions in Canada? Dr Goth: It is about 65% although you have to be very careful with those numbers because, like with all credit union movements, it depends on the sophistication of the credit union movement. We have a central data system --- Q142 Mr MacNeil: In all provinces? Dr Goth: In all provinces but it is
more in the west. Outside of Q143 Mr MacNeil: Can you answer for me what seems to be a simple question: why are all Canadians not in credit unions? Dr Goth: Maybe some because of logistics; they cannot get to them because they are all over the place. Some are not for whatever reason you can think of. It is an alternative to a banking system for people. Mr Lyonette: Some of it is probably a bit
like we have as well that, if you have been with RBS and your mum and dad were
with the RBS, there is a bit of inertia as you were saying before as well. You may never even in Q144 Chairman: Credit unions have a cap on maximum interest rate; they charge 2% a month. Do you support this cap on other financial institutions, banks and building societies? Dr Goth: I do. I am surprised that one is not in place in
the Q145 Chairman: Mark, you disagree on a few things with Peter. Mr Lyonette: We do, actually. It is more a question of timing than in absolute because unfortunately, at this point in time, if the Government were to legislate now and put in a cap of any percentage rate for the people who were paying 700%, you would actually put a lot of those people, two or three million people who are using even just home credit for example, in a position where they would not have access to any kind of affordable credit at all. It is more a question of timing. Q146 Chairman: But, in principle, you support it? Mr Lyonette: In principle, we do not want to see anybody paying anything like that for their credit. However, if you were to do it overnight and while the credit union sector has not grown and there were not alternatives for people, we could actually cause more problems than we were initially solving. Dr Goth: That is a good point. Mr Lyonette: Of course, we are absolutely horrified by people paying that kind of money. Mr McKillop: In principle, the idea of people paying 200, 300 or 400% APR in some cases but I think, as Mark says, how you do that has to be timed very carefully because if there was a way of bringing that in that would not have that effect on people ... The argument you always get from Provident, Greenwoods and people like that, is that these sort of people would not get credit anywhere else; they have wriggled out a few times in the past and used that argument. Unless there was a capacity for credit unions to bring in these people as members, financially excluded people who cannot get credit anywhere else, bringing in that sort of legislation would cause more problems. Q147 Chairman: These financial institutions are in business to give loans to people; that is the only way in which they can make a profit. If a cap is there, they still have to give loans. Mr Lyonette: There have been examples
where this has caused a problem. In
Poland where the credit union movement has grown very strong since the
solidarity movement, the Government legislated to bring in a cap which I think
was linked to today's rate, something like five times base rate, and of course
what happened was that lenders who were wanting to charge extortionate rates
get very creative about how they can get round it because, as Peter said, you
might have people putting on an insurance product, "You won't get the loan if
you don't take that insurance product".
We have to be very careful that we do not create more problems than we
try to solve. One of the key motivations
for being involved with credit unions for most of the members in our trade
association would be around trying to get people a better deal than people are
getting on the doorstep. Remember, the
rate in Q148 Mr Devine: I do not see what the difficulty is here. One of the side effects of Fairpak was the National Provi of 188%. If we are saying that, as of 1 January of next year, there is a 29% cap and basically there are no exceptions to it, where is the problem? Mr Lyonette: Certainly from our sector's point of view, from the credit unions sector, we would not have scaled up significantly enough. We are quite healthy but not enough to capture that two or three million people. Where will those people go for credit on 2 January? Q149 Mr Devine: So, that is where you see the difficulty. Mr Lyonette: Yes. Q150 Mr Devine: Our assumption was that they would stick with the National Provident because instead of charging 188%, they are now only charging 29%. Are you assuming that there is something ---? Mr Lyonette: We have just carried out a piece of research with the Joseph Rowntree Foundation, the University of Bristol and the National Consumer Council looking at whether we could introduce a not-for-profit home credit service because we know that the product is valued but it is the cost of it that is exorbitant and one of the things we found in that study is that that industry is actually in many ways withering away. As people have other options, the scale of the home credit industry ... Some of the big players ... People like Cattles and their shopper check brand has been withdrawn and they tried to put forward a direct debit kind of product because it is actually very hard, I would suggest, to try and make that business go particularly because it is all dependent on the agent. Once you lose an agent who has been working in an area and is known by people for 20 years, they have all found it very hard to replace him with somebody new coming along. Obviously, there has been the Competition Commission inquiry into the scale of profits in that industry and they said that they overcharge by 100 million. If you overnight said that the interest rate is here and they are charging up here, I think that a lot of those players would disappear. I do not think that they would continue to think that they could run a successful business at, say, 30%. That would be the danger. That would not be a good place. Mr McKillop: It is important to note as well that we are talking about some of the extortionate rates that the legal doorstep lenders charge because there is also trouble with illegal lenders, loan sharks. Straightaway, as Mark said, the financial model that the doorstep lenders, the legal ones, use, if there was a cap that they found unviable to their business, they would probably just take the money they have made and close up. Obviously, being illegal, it is difficult to get a figure of how many people across the country are using illegal loan sharks at the present time and there may be a danger of pushing more people towards that if the legal if unethical interest --- Q151 Chairman: That is not justification to allow the banks to stick in whatever they want to. Mr McKillop: Yes. I am concerned about an overnight change. Mr Lyonette: I think that we have a duty to try and --- Q152 Chairman: The loan sharks are committing an illegal act and financial institutions are allowed to charge legally people up to 500%. How can you justify that? Mr McKillop: Our concern would be the fact that people use loan sharks; they are illegal but there are people using them and you would be pushing more people toward them. Q153 Mr MacNeil: We have heard about the credit crunch and we know that debt in society is quite substantial. What do you think that credit unions in particular can do for people on low wages? Is there anything specific that jumps out at you? Mr Lyonette: I think the biggest thing we can do is in many ways what our members have been doing more or less successfully for many years and that is giving one of the most basic messages which is that we all have to live within our means. We cannot spend money that we do not have. One of the things which credit unions have been very good at is encouraging people to get a mixture of savings and borrowing and not just living off endless credit. Having a bit of money put aside, even if it is only a few hundred pounds, can actually make all the difference to people. If you talk to people like Citizens Advice and all the debt advice agencies, they will tell you that having even a small buffer is a way that stops you getting over the precipice. Q154 Mr MacNeil: They are teaching us some sort of responsibility with money. Mr Lyonette: Yes. Credit unions have a legal requirement in Q155 Mr MacNeil: So, after the credit boom we might see the old word like "prudence" coming back into fashion. Mr Lyonette: With all of these things, you have to look for the good things, do you not? You have to look for the things that might help people make the most of their money. Potentially, whilst the credit crunch is clearly leaving some people in difficulties with renewing mortgages and things like that, over a period of time, we might learn some lessons from it I suppose is what I am saying. Q156 Mr Devine: May I ask one question just to wind up. We obviously at the end of this make recommendations. What would be your two recommendations here? Dr Goth: For the credit unions? Q157 Mr Devine: Yes. Dr Goth: I think that it is promoting the image of credit unions and increasing the capacity of credit unions, not just product-wise but education-wise within the credit union with training. That would be my favoured approach. Mr Lyonette: It is probably some of the things that we have said several times. I would like to think that, as it passes through hopefully Parliament in the next year, it would be good to have support for the legislative change. We cannot have too many politicians supporting that, I do not think. We would like to see perhaps a recommendation that the credit union current account or some kind of banking service is important in terms of credit union growth but also a recommendation that we should explore together perhaps in partnership with the whole range of bodies, for example the Post Office. We are working quite closely with the Post Office which might be part of the challenge for the rural issues that we were talking about before to encourage the credit union sector to work both on its own and in partnership with others to see whether there cannot be models of a back office/models of partnership that would allow us to serve many more people across Scotland. Mr MacNeil: Should it not be credit saving unions? Q158 Chairman: I am surprised that these words of wisdom have not come in over the last 90 years! Mr McKillop: I think it is again encouraging a savings culture and, as Mark has said, certainly new legislation would give support for that and the opportunities that will allow the opportunities to introduce the credit union current accounts more. Another thing I would emphasise is what we have seen in Scotland from the Scottish Government more and more is the emphasis on credit unions as a social enterprise encouraging credit unions in many ways to tap into funding streams and the resources that have been available for co-ops, community recycling groups and so on as possibly some types of credit unions have not regarded themselves and I think that by various funding streams were not regarded officially either as coming under the social enterprise banner, so we are seeing that more and it is something you get with the investment fund and the third sector enterprise fund. That will bring more opportunity, so that would help credit unions perhaps to think of themselves more as a thriving local community co-operative and an ethical alternative to banks for people to turn to in their communities. Dr Goth: With that percentage rate that I mentioned to you, perhaps I could track down the legislation behind that because I do not know if it was in the Bank Act or within the loan sharking control, but I will certainly get something to the Committee to confirm that rate.[7] Q159 Chairman: If there is anything that you want to send to us later in writing, please, do so before we compile this report. Dr Goth: It will confirm that percentage rate. Q160 Chairman: I would like to thank the witnesses for their attendance. Before I declare the meeting closed, would you like to say anything in conclusion perhaps on anything which we have not covered in our questions? Mr Lyonette: We have talked a lot about
some of the negative things and some of the challenges which the credit union
sector has faced over the last 20 or 30 years, but I think that we should also
take stock of how much has changed and how much has grown. Ten years ago, you used to have to save with
the credit union before you could borrow.
Now we are much more flexible about those things. We still encourage saving. We are now at nearly 700,000 people across Chairman: Thank you.
[1] Financial Services Authority [2] Individual Savings Account [3] Annual Percentage Rate [4] Democratic Unionist Party [5] Royal National Lifeboat Institution [6] Correction by witness:
The maximum interest rate chargeable in [7] Correction by witness:
The maximum interest rate chargeable in |