Written evidence submitted by the Association
of British Credit Unions Ltd
EXECUTIVE SUMMARY
1.1 As the main trade association for credit
unions in Britain, we welcome the opportunity to respond to this
inquiry on behalf of our members who serve around 85% of credit
union members in the country.
1.2 Credit unions provide services to over
850,000 people in Britain and look after over £600 million
in savings.
1.3 As financial co-operatives, credit unions
only exist to meet the needs of their members, who own and control
the credit union on a one member one vote basis. Credit unions
provide inclusive financial services and work with local, regional
and national governments to tackle financial exclusion in communities
around the country.
1.4 As financial mutuals, credit unions
have a key role to play in Government plans to foster diversity
in financial services and promote mutuals.
1.5 Many credit unions employ staff and
of those that do, the vast majority employ less than five. The
size of credit unions, coupled with their simple business model
means that a proportionate approach to regulation is essential
if they are not to be adversely affected by burdensome red tape.
1.6 Our submission to this inquiry represents
the early thoughts of our members. Credit unions are keen to be
able to access focussed communication and guidance in the run
up to any changes. Credit unions have concerns about the following
points:
— that the regulatory compliance burden
may not be proportionate to the size of the sector and institutions;
— that regulation by two bodies may cost
more to deal with and may require significantly more time from
credit union volunteers and staff;
— that staff and directors of the new organisations,
if new to the regulation of the sector, may not have sufficient
understanding of the unique features of credit unions and that
briefing these people becomes a further burden for credit unions
and the trade body;
— that consultation with practitioner panels
and public consultation should continue to be a key part of the
policy making process; and
— that costs may be increased due to an
overcomplicated structure for raising levies for the FSCS.
1.7 In the work of both the PRA and the
CPMA, consideration should be given to promoting financial inclusion
and recognising the value of financial mutuals.
1.8 The key regulatory needs for the credit
union sector are for proportionality, a recognition of and understanding
of credit unions' unique features and a simple structure which
will not place undue burdens on credit unions in terms of time
and money.
INTRODUCTION
2.1 We welcome the opportunity to respond
to this inquiry. ABCUL is the main trade association for credit
unions in Britain. The Association represents approximately 70%
of credit unions in England, Scotland and Wales who in turn represent
about 85% of credit union membership. Credit unions are not-for-profit,
financial co-operatives owned and controlled by their members.
They provide safe-savings and affordable loans facilities. Increasingly
credit unions offer more sophisticated products such as current
accounts, ISAs, Child Trust Funds and mortgages.
2.2 At the end of March 2010, credit unions
in Great Britain were providing financial services to 761,708
adult members and held £599 million in deposits with £474
million out on loan to members. There were also 107,077 young
people saving with credit unions.[1]
2.3 At 30 September 2009, the 325 credit
unions belonging to ABCUL were managing around £568 million
of members' savings on behalf of over 470,000 adult members.
2.4 The Credit Unions Act 1979 sets down
in statute the objects of a credit union; these are four-fold:
— the promotion of thrift among members;
— the creation of sources of credit for
the benefit of members at a fair and reasonable rate of interest;
— the use and control of their members'
savings for their mutual benefit; and
— the training and education of members'
in the wise use of money and in the management of their financial
affairs.
2.5 The Coalition Government, since coming
to office, has committed to bring forward detailed proposals to
foster diversity in financial services, promote mutuals and create
a more competitive banking industry.[2]
At a meeting of the All-Party Parliamentary Group on Credit Unions
on 30 June 2010, the Financial Secretary to the Treasury, Mark
Hoban MP, explicitly identified credit unions as part of this
drive to support mutuals in financial services saying:
"This Government believes that strong credit
unions will greatly enrich British society, so it is in our interest
to do whatever we can to help the credit union movement to prosper."[3]
2.6 Over the past decade or more credit
unions in Britain have developed significantly towards emulating
the successes of their international counterparts. According to
the World Council of Credit Unions (WOCCU) there are 49,330 credit
unions operating in 97 countries and with $1.4 trillion dollars
in assets—in Ireland more than 50% of people belong to their
credit union whilst in the US and Canada it is around 45%.[4]
2.7 The credit union business model is a
simple one. With limited exceptions—notably the DWP Growth
Fund with which over 100 credit unions have delivered 300,000
affordable loans in low income communities using money from the
Financial Inclusion Fund—the money that credit unions lend
out to members comes from members' savings.
2.8 The latest information available to
us (from 2007) shows that 150 credit unions that are ABCUL members
(out of 330) did not employ any staff. Only 25 credit unions employed
5 or more full time staff. This demonstrates the small size of
credit unions and the need to ensure that regulation does not
result in a disproportionate burden on their operations.
2.9 ABCUL recognises the need for good governance
and management in credit unions and works with its members in
a number of ways to raise standards of governance and ensure that
credit unions are well run, sustainable and effective financial
co-operatives. As well as a range of training and information
services, we have launched a Code of Governance for Credit Unions
and introduced the PEARLS financial monitoring system. We have
always been supportive of FSA regulation and the raising of standards
for credit unions, but given the size and development stage of
the sector, have always stressed the need for proportionate regulation
which does not place undue burdens on credit unions.
2.10 We have concentrated in our response
on some early thoughts from our sector on how credit unions could
be affected by this proposal, informed by a survey of our members.
We have also included some views informed by the last transition
for credit union regulation—the move to FSA regulation in
2002.
3. THE MOVE
TO FSA REGULATION—2002
3.1 Credit unions have been regulated by
the Financial Services Authority since 2002. A specialist sourcebook
within the FSA Handbook sets out prudential rules and guidance
for credit unions.
3.2 Prior to the FSA regime, credit unions
were regulated by the Registry of Friendly Societies. This was
largely a light touch regime and the move to FSA regulation therefore
represented a challenge for the sector, especially for smaller
credit unions.
3.3 In recognition of this, staff at the
FSA worked closely with the sector and trade associations to ensure
that credit unions were prepared for the new regime. A series
of road shows took place at which credit union staff and volunteers
were able to find out more about the new regime. FSA staff helped
ABCUL to prepare a range of information and training.
3.4 Comments received from our survey of
members shows that these efforts were appreciated and helped credit
unions to make the transition to the new regime.
3.5 Credit unions were, on the whole, appreciative
of the efforts that the FSA took to communicate the changes to
credit unions, and the time that was taken to allow credit unions
to familiarise themselves with the new regime. But the view that
FSA staff did not, at the beginning of the regime, have enough
knowledge and experience of credit unions was also raised.
3.6 We believe that it is important that
the communication and education efforts that the FSA put in place
to prepare credit unions for transition in 2002 are repeated when
these proposed changes take place. Efforts should also be taken
to ensure that experienced and knowledgeable staff are in place
at the new regulatory authorities to ensure the smoothest possible
transition.
4. THE CURRENT
REGULATORY REGIME
AND PROPOSED
CHANGES
4.1 Credit unions are currently subject
to rules and guidance in the Credit Union Sourcebook (CRED) as
well as being required to conform with Banking Conduct of Business
Rules (COBS).
4.2 Credit unions are required to keep a
basic level of solvency, maintain a minimum liquidity ratio, and
key staff and volunteers are subject to the FSA's approved persons
standards. Credit unions are also part of the Financial Ombudsman
Service and must comply with rules on complaint handling and they
must comply with reporting requirements as part of their membership
of the Financial Services Compensation Scheme.
4.3 Credit unions operate either with a
Version 1 or Version 2 permission. Along with some variation because
of a credit union's size, this determines the powers credit unions
have and the regulatory regime they are subject to.
4.4 This regime reflects the risk based
approach to credit union regulation that the FSA has taken. Smaller
credit unions are mainly supervised using a desk based approach
using regulatory returns—credit unions will be visited and
more attention will be paid to their business planning and operations.
4.5 As the FSA has to cover the costs of
regulation through fees paid to firms, it is essential that the
regulation is efficient, proportionate and does not impose a financial
or resource burden on credit unions.
4.6 The FSA has taken the opportunity of
forthcoming legislative reform for credit unions to review the
prudential standards for the sector. We have worked closely with
our members and the FSA during the consultation period for these
changes and broadly welcome the near final rules which will increase
the minimum capital-assets ratio for credit unions, so that the
majority of credit unions will not just have to meet bare solvency
to be compliant. We also welcome the commitment of the FSA to
review their use of regulatory returns to ensure that problems
are picked up in credit unions in a speedier manner.
4.7 Credit unions have a simple business
model which is not affected by the vagaries of international financial
markets. Credit unions have not been responsible for risky and
short term business practices which have severely damaged the
economy in recent years. As financial mutuals, credit unions have
democratic internal checks and balances built in to their business
models. Proportionate and effective regulation, which recognises
the volunteer led nature of credit unions and effectively uses
financial information to spot early signs of trouble, need not
place a financial or resources burden on credit unions. The FSA
has been reasonably successful in reaching this balance and this
should continue under a new regime.
5. THE PROPOSED
NEW STRUCTURE
FOR REGULATION
5.1 In order to ascertain the views of our
members, varying in size from 200 to over 20,000 members, we carried
out an online and postal survey during August 2010. 64 credit
unions responded to the survey, representing over 20% of our membership.
The survey attracted responses from a broad cross section of credit
unions.
5.2 The proposed new structure—The
majority (53%) of credit union respondents did not know at this
stage whether these proposals overall were a good idea. Only 22%
thought that the proposals were a good idea.
5.2.1 Major changes in regulation can be
extremely disruptive for small firms which operate with few or
no staff. Communication and explanation about how the changes
will affect credit unions and assistance to prepare is essential
if understanding is to be raised and if credit unions are to be
able to confidently comply with a new regime.
5.3 Dealing with two regulators—A
large majority (73%) had concerns about dealing with 2 regulators
instead of one.
5.3.1 Reasons to be concerned focussed around
cost, time and level of understanding:
| Costs of dealing with regulation may increase
| 87% |
| Fees for dealing with regulation may increase
| 91% |
| Time taken to deal with regulation may increase
| 83% |
| Regulators may not understand credit unions as well
| 72% |
5.3.2 A number of credit unions were also concerned about
the potential for conflicts that could arise because of more than
one regulatory body, and potential problems that could be caused
by lack of communication between different regulators. This could
possibly lead to duplication of work and/or credit unions being
pulled in two different directions.
5.3.3 It is essential to ensure that in building a new
system any duplication is avoided and efficiency as well as effectiveness
are the main considerations in its design. Credit unions only
exist to meet the needs of their members and operate on very tight
margins. They have limited resources and unnecessary regulatory
burdens can place the operations of smaller credit unions at risk.
It is essential that care is taken to ensure that these reforms
do not impact unduly upon the compliance burden for credit unions.
5.4 Cost Benefit Analysis and consultation requirements—
Of those who had made up their mind, a large majority of respondents
(88%) thought that the PRA should be required to carry out a Cost
Benefit Analysis and consult with practitioner panels and the
general public before making rules.
5.4.1 The consultation process is a vital part of the
FSA rules making process, and will continue to be so under the
new regime. As a small part of the financial service sector, credit
unions have no representation on the FSA board.
5.4.2 Credit union inclusion in practitioner panels and
ABCUL's engagement with consultations in the past few years has
been an essential way of demonstrating the needs of the sector
and ensuring that unnecessary burdens are not placed (whether
inadvertently or not) on credit unions. It is essential that the
consultation process should continue under a new regime.
5.5 COMPENSATION AND
LEVIES
5.5.1 A large proportion of our members who expressed
a view (82%) believe that a single scheme for funding the Financial
Services Compensation Scheme should continue, as should cross-subsidy
across the classes. This is likely to be a simpler and more cost
effective system and is more likely to be able to cope with any
future crisis and ensure that consumers receive compensation in
the most efficient way possible. We would be concerned about proposals
which would place a higher financial burden on credit unions.
5.5.2 A single levy raising system for the FSCS should
continue, as should cross subsidy between different classes of
firms under the Financial Services Compensation Scheme. It would
make sense for the CPMA, as the responsible body for the FSCS
to have responsibility for the levy raising function.
5.6 Considerations under which the CPMA should operate:
Establishing considerations or "have regards" under
which the CPMA should operate represents a great opportunity to
ensure that social goals and Government commitments are at the
core of the operations of the CPMA.
5.6.1 The Coalition Agreement commits the Government
to "foster diversity in financial services, promote mutuals
and create a more competitive banking industry". Having a
built in requirement to promote diversity in the financial services
industry and require the CPMA to ensure that rules do not disadvantage
mutually owned financial services providers will be of benefit
to the aims of the Government as well as to consumers.
5.6.2 Ensuring that the needs of all consumers and not
just those on higher incomes are met should also be a key consideration
for the CPMA. Commercial financial services providers tend either
to not provide the services that people on lower incomes need,
as they are not profitable, or, in the case of so called `sub-prime'
lenders, charge much higher rates than customers of mainstream
financial services providers enjoy. Promoting financial inclusion
by encouraging access to suitable products and services should
therefore also be a key consideration within the work of the CPMA.
5.6.3 We agree with considerations proposed and believe
that the suggested public interest considerations will be an important
factor in the effectiveness of the CPMA and its ability to meet
the needs of all consumers. Promoting diversity by ensuring that
the unique needs of financial mutuals are taken into account in
the work of the CPMA, and promoting financial inclusion are essential
in ensuring that all consumers can benefit from the work of the
new agency. Other agencies in the new regulatory structure should
also have regard to these considerations, and that of promoting
competition in the financial services industry in their work.
One way in which this could happen will be ensuring that the make
up of the boards of the agencies have representation from mutual
and consumer experts, not just individuals from the commercial
financial services sector.
6. CONCLUSION
6.1 This submission represents the early thoughts of
the sector and we will be preparing a full response to the FSA
consultation on the proposals. We would be very happy to submit
further information that the committee requests.
There is often a risk in the design of new systems that the
needs of smaller sectors are not fully considered or considered
last, often leading to unnecessary burdens. It is essential that
the new regime recognises the unique position of credit unions
as not-for-profit, volunteer led organisations providing inclusive
financial services to a wide range of people, including those
on low incomes.
September 2010
1
Figures from unaudited quarterly returns provided to the Financial
Services Authority. Back
2
The Coalition: our programme for Government: http://www.cabinetoffice.gov.uk/media/409088/pfg_coalition.pdf Back
3
See: http://www.hm-treasury.gov.uk/speech_fst_300610.htm for full
speech. Back
4
See: www.woccu.org Back
| 
