Evidence submitted by the UK Government

 

1. The Government welcomes the Scottish Affairs Committee's inquiry into credit unions, following on from their recent investigation into poverty in Scotland. We are pleased to have the opportunity to highlight work to support credit unions, and also our broader agenda in relation to financial inclusion and capability.

 

BACKGROUND ON CREDIT UNIONS

 

2. Credit Unions are mutual financial organisations providing savings, loans and other financial products to members. They are legally obliged to define a group of people who share a 'common bond' from whom they can recruit their membership, and to whom they can provide services. This is often the workplace and/or the local community. Currently membership is only open to individuals, although this issue is being considered under the current review cooperative and credit union legislation, discussed below. Since 2002 Credit Unions in Great Britain have been registered and regulated by the Financial Services Authority.

 

3. The Government recognises that Credit Unions can provide a vital alternative to expensive forms of credit often used by people on low incomes, such as home credit, pawnbrokers, or far worse, illegal loan sharks.

 

4. As well as support for low-income families, the Government and credit unions realise the importance of attracting more affluent members of the community. Larger credit unions are offering an increasingly diverse product range, for example:

· 11 credit unions now offer transactional bank accounts, with more expected to follow in 2008. These accounts allow their members to access ATMs worldwide, and to make payments by direct debit and standing order. There is a small monthly charge for these accounts, but no penalty charges.

· Credit unions with the necessary IT to receive BACS payments are able to have DWP benefits, tax credits and child benefit paid into accounts.

· Credit unions are able to offer Child Trust Funds and Cash ISAs.

· A number of credit unions offer a range of insurance products through an arrangement with CUNA Mutual Group.

 

SCOTTISH CREDIT UNIONS

 

5. Out of the 355 credit unions registered under the Association of British Credit Unions Limited (ABCUL) there are 73 Scottish credit unions. Scotwest Credit Union Ltd and Glasgow Credit Union Ltd are the two largest credit unions registered with ABCUL, with Capital Credit Union Ltd coming 6th on the list.

 

Scotwest Credit Union Ltd-Members: 19,700:

Open to anyone who lives or works in the West of Scotland. Offers a range of financial services including savings accounts, personal loans, mortgages, HomeSecure loans and current accounts.

 

Glasgow Credit Union Ltd-Members: 18,302:

Established in 1989, open to anyone who lives or works within Glasgow or the 'G' postcode area. Offers savings, loans, mortgages, current accounts, insurance and much more.

 

Capital Credit Union Ltd-Members: 11,967:

Established in 1989, Capital now has a live or work Common Bond for Edinburgh, the Lothians and Scottish Borders. Capital offers excellent service in a friendly, member driven environment.

 

GROWTH FUND FOR CREDIT UNIONS

 

6. The Government has committed a total of £80 million over five years (2006-11) to a Growth Fund for credit unions and other third sector lenders. The Growth Fund provides credit unions with:

· Capital for making small-sum affordable loans (typically £400 or less) to financially excluded people

· Revenue support to meet the staff costs and overheads associated with this additional lending activity; and

· Further support for training and development.

 

7. In Scotland, the Growth Fund has provided support to five credit unions-1^st Alliance (Ayrshire), Capital (Edinburgh), Dumbarton, Glasgow, and Western Isles-and one Community Development Finance Institution (Scotcash, Glasgow). Up to December 2007, 3,284 affordable loans, totaling almost £1.5 million, had been made to financially excluded people in Scotland through Growth Fund support.

 

8. To support the Growth Fund, in 2006 the Government increased the maximum interest rate that credit unions are permitted to charge, from 1% a month to 2% a month. This change has been vital to the success of the Fund, allowing new lending to low-income and higher-risk consumers, without requiring a minimum savings balance.

 

REVIEW OF COOPERATIVE AND CREDIT UNION LEGISLATION

 

9. The Treasury published Review of the GB cooperative and credit union legislation: a consultation in June 2007 to identify the need for updating what is essentially a consolidation of 19^th Century legislation. The long-term aim of the review is to provide cooperatives and credit unions with an effective legal framework to enable them to continue their valuable social role.

 

10. Responses were received from over 200 individuals and organisations, and a summary was published in December 2007. Treasury are now working with key stakeholders, including trade bodies that represent credit unions in England, Wales and Scotland, to consider the key issues in more detail.

 

11. Some of the key issues for credit unions highlighted through the consultation were: Common Bond definition; restrictions on non-qualifying members; prohibition of corporate membership; ability to pay interest on savings; and electronic communications. It is thought that resolving these issues could help to attract more affluent members of communities, as well as enabling the use of credit unions by small community groups. This would be achieved by relaxing the common bond restrictions to allow more people and groups to join credit unions, and by allowing increased flexibility to offer a wider range of savings products that might appeal to more affluent members of the community.

 

FINANCIAL INCLUSION

 

12. In December 2007, the Government published Financial inclusion: an action plan for 2008-11[1], setting out how the Government will support financial inclusion activity over the next three years. Since 2005, the Government has invested £250 million through a Financial Inclusion Fund, including:

 

· Over £120 million to recruit, train, and support more than 450 new debt advisers, collectively advising more than 90,000 financially excluded and low-income customers;

· £80 million to establish a Growth Fund for third sector, 'not-for-profit' lenders, as highlighted above.

 

13. The action plan announced a new £12 million financial inclusion Champions initiative, which will support dedicated financial inclusion teams in key local areas across Great Britain. Champions teams will be responsible for developing local action plans on financial inclusion, increasing access to and take-up of appropriate home contents insurance schemes for social housing tenants, and establishing new affordable credit provision through credit unions and other third sector lenders in priority areas.

 

14. The action plan also included an agreement from the chief executives of the major banks to support third sector credit, including establishing new third sector lending provision in 25 high priority areas identified by a Financial Inclusion Taskforce Working Group. 3 of these high priority areas are in Scotland-North Ayrshire, Dundee City and Inverclyde.

 

15. The action plan builds on the Government's March 2007 document Financial inclusion: the way forward, setting out the Government's strategy to ensure that everyone has access to appropriate financial services, enabling them to:

· manage their money on a day-to-day basis, effectively, securely and confidently;

· plan for the future and cope with financial pressure, by managing their family finances to protect against short-term variations in income and expenditure, and to take advantage of longer-term opportunities; and

· deal effectively with financial distress, should unexpected events lead to serious financial difficulty.

 

16. In February 2005, the Government established a Financial Inclusion Taskforce comprising senior figures from the financial services industry, academia, the third sector, and consumer groups. The Taskforce, which has been extended to 2011, monitors and evaluates the Government's financial inclusion initiatives. The Taskforce has a specific remit to monitor a goal, shared by Government and the banks, to halve the number of adults without access to a bank account, from a baseline of 2.8 million in 2002-03, and will make a final evaluation later this year.

 

FINANCIAL CAPABILITY

 

17. The Government has an active role to play in meeting the financial capability challenge. The aim is to raise consumers' financial capability-the knowledge, skills and motivation to manage their finances-in order to achieve lasting long-term benefits for individuals, the financial services industry and the wider UK economy. The Government recognises that education is key to improving levels of financial capability, and there is an associated need to engage with young people.

 

18. In January 2007, the Government published its long term approach to financial capability, which set out aspirations for the next 10 to 20 years. These are:

· all adults have access to high quality generic financial advice;

· a planned programme of personal finance education; and

· a range of Government programmes focused on improving financial capability, particularly on the most vulnerable.

 

19. The Government will set out how it intends to deliver these aspirations in the Financial Capability Action Plan, to be published shortly. The Plan will include information on access to high-quality financial advice across the UK-impartial information and guidance on a range of money matters, which is personalised but does not recommend or sell products.

 

20. Otto Thoresen, CEO of Aegon UK, was commissioned by the Government to conduct a feasibility study into a national approach to generic financial advice. His report was published on 3 March 2008. The Government has already announced that it will take forward his central recommendation of a £12 million two year Pathfinder (large scale pilot) for a 'Money Guidance' service. The Pathfinder will be delivered by the FSA, and jointly funded by the FSA and Government. The Financial Capability Action Plan will set out the steps for taking this forward, including a target date for the launch.

 

21. The forthcoming Action Plan will also provide information on boosting financial literacy in schools. It will explain how a £11.5 million package of support for personal finance education in English schools will be spent. Given education is devolved in Scotland, the Scottish Executive received an associated allocation of funds through the Barnett formula-it is for them to decide how these funds are spent. The Action Plan will provide information on how Scotland, Wales and Northern Ireland are taking forward financial literacy in schools. Scotland does not have a statutory curriculum, but financial education will be included as a cross-cutting theme in the Curriculum for Excellence, which will be implemented from 2008/09.

 

CONSUMER PROTECTION

 

22. The Government recently undertook a three-year review of consumer credit law, culminating in the Consumer Credit Act 2006. The Act introduces a stronger, more effective consumer credit licensing regime, and gives the Office of Fair Trading (OFT) increased powers to take action against unscrupulous lenders and unacceptable practices. Many key provisions have come into force, and the Act is due to be fully implemented by October 2008.

 

23. From 6 April 2008, OFT are now able to assess a company's ability to run its business in a fit manner in the future, as well as assessing past conduct, and to monitor the conduct of a licence holder on an ongoing basis. OFT will be targeting businesses that work in areas where there is high consumer detriment, such as the home credit market, subjecting these businesses to more in depth scrutiny.

 

TACKLING ILLEGAL LENDING

 

24. The Department of Business Enterprise and Regulatory Reform (BERR) are funding a project to tackle illegal lending and provide support to victims in every region of England, Scotland and Wales. The Scottish team based in Glasgow has been funded since 2004, and all projects will be funded by BERR until 2011.

25. The Illegal Money Lending Project includes additional financial inclusion objectives:

· to develop formal relationships and processes for referring victims/enquiries to local debt advisers, sources of legal affordable credit or other sources of support, and to record these referrals; and

· to develop an understanding of the victims' needs in the medium to long term and the interventions required for a sustained move away from illegal lending.

 

26. The Illegal Money Lending teams identify loan sharks and remove them from the community, but without access to affordable and legal alternative sources of credit it is hard for their victims to make a permanent transition towards financial inclusion. The credit union movement, supported by the Growth Fund, is striving to fill this gap by increasing its outreach to the most financially excluded.

 

27. BERR and DWP are collaborating on a number of mini pilots between the established loan shark teams and Growth Fund supported credit unions. The aim is to identify cost effective and easily replicable actions which can be taken up more widely by the credit union movement, and others active in frontline financial inclusion.

 

28. In Scotland, the Glasgow illegal money lending team and Scotcash are working in partnership with Growth Fund contractors in their area to trial intensive support and advice for illegal money lending victims, with a view to improving these borrowers' capacity to access and successfully manage affordable third sector loans.

 

 

May 2008

 

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[1] HM Treasury, December 2007