Written evidence submitted by the Association
of British Credit Unions Limited (ABCUL)
1. EXECUTIVE
SUMMARY
1.1 Credit unions are financial co-operatives
owned and controlled by their members on a "one-member-one-vote"
basis. They offer safe savings products and affordable loans and
an increasing range of other services.
1.2 Credit unions are legally constituted under
the Credit Unions Act 1979. They are regulated deposit takers
with the same protections and safeguards as those afforded to
banks and building societies.
1.3 Credit unions provide inclusive services
to the whole of their communities rather than simply the better-off.
1.4 Over the past decade savings, loans and assets
held by credit unions have grown four-fold and membership has
tripled.
1.5 Impending reforms of the Credit Unions Act,
which has been described by the World Council of Credit Unions
(WOCCU)[58]
as amongst the most restrictive in the world, will see
credit unions able to reach out to new groups and develop new
services.
1.6 At present, the Legislative Reform Order
(LRO) which will bring in these vital reforms is still making
its way through Parliament. We are keen for this process to be
completed as quickly as is possible, so that credit unions and
consumers can start to benefit from the reforms
1.7 "The Coalition: our programme for government"
states a commitment to "bring forward detailed proposals
to foster diversity in financial services, promote mutuals and
create a more competitive banking industry". We believe that
the continued development of credit unions is vital to this process
as the only true, local alternative to the mainstream banking
system.
1.8 Internationally, there is a proven model
for credit union development which—following professional
development, strengthened governance and the flexible and proportionate
application of regulatory and legislative frameworks—rests
on the development of centralised shared services to enable credit
unions to benefit from economies of scale whilst retaining their
localised nature and autonomy.
1.9 With a back-office system in place, all credit
union services could be made available through the Post Office
network. This would greatly increase the accessibility and visibility
of credit union services whilst providing a new source of revenue
to the Post Office network and boosting its sustainability.
1.10 The development of the back-office system
and Post Office partnership would cost somewhere in the region
of a one-off £10-£15 million. Given its potential to
address several key areas of government policy, this represents
significant value for money. The system would increase diversity
and competition in banking, improve the sustainability of the
Post Office network and address the present lack of universal
financial services provision.
2. INTRODUCTION
2.1 We welcome the opportunity to respond to
this inquiry. ABCUL is the main trade association for credit unions
in England, Scotland and Wales, and our members serve around 85%
of Britain's credit union membership. Credit unions are not-for-profit,
financial co-operatives owned and controlled by their members
providing 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 almost £600 million in deposits with around
£475 million out on loan to members. An additional 107,077
young people were saving with credit unions. [59]
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 Credit unions in Britain are small, co-operative
financial institutions often extending financial services to those
unfairly excluded from the financial services the majority take
for granted. They are owned and controlled by a restricted membership
and are operated for the sole benefit of this membership. The
Credit Union Act 1979 sets down these operating principles in
law. The central, local and devolved governments of the UK have
consistently supported credit union expansion and development
in recognition of the benefit that they provide.
2.6 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.[60]
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:
"We are determined to help credit unions grow
and expand into the future. But growth and expansion must be established
on the basis of credibility—credibility that can only come
as credit unions build sustainability. And it is in the interests
of credit unions, the members of credit unions and the movement
as a whole that sustainability is built."
"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."[61]
2.7 Internationally, credit unions are a successful
alternative to mainstream financial services providers—the
chart below compares international market penetration.[62]
| Country | Market Penetration
| Total Assets (USD) | Average Assets (USD)
|
| Ireland | 75.4% | 20,052,172,916
| 39,865,154 |
| Canada | 47% | 229,693,740,409
| 243,062,159 |
| USA | 44.3% | 896,823,977,926
| 116,349,763 |
| Australia | 24% | 42,172,247,180
| 379,530,154 |
| Great Britain | 2% | 1,072,321,685
| 2,220,127 |
2.8 Credit union in Britain have not yet achieved their full,
internationally proven potential—although there are pockets
which exemplify what is possible with the right support, such
as Glasgow where one in five people is a credit union member.
2.9 Measures taken to develop the credit union sector have
built a strong base from which to expand into the future. With
radical legislative reforms in train and a decade's foundation
building behind the sector, the right support over the next few
years has the potential to push British credit unions into a comparable
position with their international counterparts nationally—injecting
a strong element of diversity, choice and extra competition into
British financial services and providing a better deal for consumers
of all incomes and a more stable financial services system overall.
3. CREDIT UNION
DEVELOPMENT SO
FAR
3.1 In the decade since the turn of the century, credit unions
in Britain have undergone a fundamental shift in their developmental
philosophy and have earned significant recognition and support
as a result.
3.2 Beginning with a seminal research project published in
1999 by Paul A Jones of Liverpool John Moores University, Towards
Sustainable Development,[63]
British credit unions—led by ABCUL—began to implement
a new model of development based around a recognition that credit
unions needed to be professionally-run, financial businesses before
they could be socially effective ethical financial services. Credit
unions would need to have a broad membership, operate from high-street
premises and provide a quality of service comparable with that
of the mainstream financial services.
3.3 Developments that have contributed to this transformation
include:
— 3.3.1 Increasingly
credit unions began to employ trained staff, implement sound governance
and provide services to a wider range of people - requiring a
greater level of sophistication of product offering including:
ISAs, Child Trust Funds, insurance and mortgages.
— 3.3.2 In
2002, credit union regulation became the responsibility of the
Financial Services Authority which meant, for the first time,
credit unions were prudentially regulated and supervised. Furthermore,
savings were guaranteed by the Financial Services Compensation
Scheme and complainants had recourse to the Financial Ombudsman
Service.
— 3.3.3 ABCUL
successfully lobbied for various regulatory and legislative changes
which have allowed for, amongst other things, an increase in the
upper-rate of loan interest, greater flexibility around common
bonds and a package of legislative reforms ongoing which will
put British credit union legislation on a par with any other movement
in the world. It is imperative that these final legislative changes
are passed as soon as possible to promote the unrestricted, natural
growth of British credit unions.
— 3.3.4 A
new era of financial support was begun—epitomised by the
DWP Growth Fund—which tied funding to contractual growth
targets and developmental goals. The Growth Fund to April 2010
has provided 260,000 loans totalling £113 million and saving
recipients in the region of £86 million compared with the
leading doorstep lender, Provident Financial. Furthermore, according
to DWP's interim evaluations of the scheme's effectiveness, participant
credit unions have grown significantly in organisational strength
and asset size compared with their non-Growth Fund counterparts.
Average loan-processing costs have been reduced by 60% to £66
per loan.[64]
— 3.3.5 A
major training and development project—DELTA—was undertaken
by ABCUL to support the continued development of credit union
staff and volunteers and to ensure the institutional soundness
of the credit union movement.
— 3.3.6 The
Credit Union Code of Governance was developed to ensure strong
standards of internal governance were standardised across the
credit union movement as an essential prerequisite to positive
growth.[65]
— 3.3.7 ABCUL
and some our leading members—with infrastructure support
from the Co-operative Bank—developed the Credit Union Current
Account (CUCA) which brought a full current account facility with
debit card functionality to the British credit union movement
for the first time.
3.4 As a result of these and other initiatives
the credit union sector has built over the past decade to a position
of strong fundamental foundations. The decade to 2007 saw savings,
loans and assets all grow by more than four-fold and membership
almost treble.[66]
3.5 Below we set out how a further package of
one-off support will enable the British credit union movement
to emulate our international counterparts through developing a
strong infrastructure which will afford credit unions the same
economies of scale enjoyed by much larger institutions whilst
retaining the local, ethical ethos which sets credit unions apart
from their financial services counterparts.
4. A CREDIT UNION
BACK-OFFICE
4.1 Credit unions in Britain, whilst currently
being a small feature of the financial landscape, have taken great
developmental strides in the past decade.
4.2 The imminent introduction of the Legislative
Reform (Industrial and Provident Societies and Credit Unions)
Order (LRO), having undergone an extended period of review and
consultation begun in 2006, will cement the significant legislative
and regulatory recognition already secured with a modern, proportionate
and flexible framework on a par with the best in the world and
removing significant barriers to growth.
4.3 It is vital that the LRO is passed as soon
as protocol allows; many credit unions and potential partners
are keen to use the new legislation to bring benefits to consumers.
4.4 The missing piece in the developmental jigsaw,
based on international best-practice, is the development of a
centralised, back-office system which would provide the economies
of scale necessary to bring great efficiencies and consistency
of service to the credit union sector building capacity and resulting
in a step-change in credit union development.
4.5 Those services which the back-office might
provide include:
— 4.5.1 A
common accounting platform for credit unions enabling central
treasury and liquidity management.
— 4.5.2 Central
loan processing, credit control and marketing resource.
— 4.5.3 Human
resources, legal and compliance services provided centrally.
— 4.5.4 Significant
cost reductions in providing more sophisticated products, including
CUCA, pre-paid debit cards, insurance, ISAs and mortgages.
— 4.5.5 Potential
for centrally managed internet and telephone banking.
— 4.5.6 A
conduit through which full collaboration with the Post Office
could be achieved in that, through the common platform, all credit
union accounts and services can be accessed at all Post Office
branches earning a transaction fee for the Post Office and greatly
increasing the accessibility and visibility of credit unions.
4.6 The implementation of a back-office for credit
unions would result in a significant step-change in the sector's
development leading to a fast growth in scale and reach and introducing
the sector as a significant new player in the financial services
market.
5. THE POTENTIAL
EFFECTS OF
A CREDIT
UNION BACK-OFFICE
5.1 Even on conservative estimates, the potential
for credit union growth with a back-office system in place is
enormous. We anticipate credit union membership to grow from 750,000
to two million in five years—potentially by much more.
5.2 This would have the effect of increasing
the diversity, choice and competition in financial services as
per the Coalition's commitment in its programme for government.
5.3 It would also have the effect of bolstering
the credit union business model and creating a much more sustainable
credit union sector. This was outlined as the Government's vision
for the movement in the Financial Secretary to the Treasury Mark
Hoban's recent speech to the All-Party Parliamentary Group on
Credit Unions, and this was a vision similarly articulated and
supported by the previous Government.
5.4 A collaboration with the Post Office could
also meet the government's commitment to ensuring that the Post
Office network is freed to develop its range of services and increase
revenue and sustainability. This would improve the situation further
by making inclusive, ethical financial services available through
the network which is already the leading provider of financial
services to those most in need of access to fair financial support
through the Post Office Card Account (POCA). Pensioners, benefits
claimants and small businesses are the main users of the Post
Office's services and credit unions have a strong role to play
in serving these groups.
5.5 The Government has also committed to altering
the prevailing culture of borrowing to one of savings and investment.
A greatly strengthened credit union sector would boost this effort.
Under the Credit Unions Act, credit unions have as part their
statutory objects both the promotion of thrift amongst members
and the training and education of members in the wise use
of money and the management of their financial affairs. There
are several key ways in which credit unions do this most notably
through payroll deduction which, drawing on the insights of Behavioural
Economics and Richard Thaler's Nudge theory, deducts
savings at source before an individual has had seen the money
and greatly increases the likelihood that they will stick to their
saving plans.
5.6 The on-going consultation jointly conducted
between HM Treasury and the Department for Business, Innovation
and Skills, Financing a Private Sector Recovery, is seeking
views on ways in which private finance can be utilised to finance
a growth in private enterprise and credit unions have a role to
play in this. The upcoming LRO will enable credit unions to serve
bodies corporate as well as individuals and therefore funding
small enterprises will be an area in which credit unions could
potentially play an important role following its passage—particularly
should their capacity be strengthened by the back-office.
5.7 The Government's "Big Society"
policy has received much attention and is another area where a
stronger credit union movement can have an important role to play.
The Big Society Bank could be used to support the activities of
credit unions, both in themselves as social enterprises, but also,
pending legislative reforms, as conduits for finance to small
social enterprises in their communities. Similarly, an expanded
and strengthened credit union sector will have more capacity to
support social enterprise through its own resource.
6. OTHER AREAS
FOR SUPPORT
6.1 Credit unions, under their co-operative structure,
are directed by an elected board of volunteer directors. We feel
there is a potential role that large banking groups could play—jointly
with ABCUL—in creating a volunteer hub which would match
skilled banking employees with eligible credit unions to strengthen
credit union governance.
6.2 Currently, credit unions are restricted from
accessing capital markets. A liquid secondary capital market for
credit unions would assist greatly in increasing their scale.
Potential avenues for this are greater emphasis on Subordinated
Debt, the imminent introduction of Deferred Shares—as per
the Building Society sector—and Social Investment Bonds.
6.3 Another feature of the credit union sector
internationally is the appearance of Stabilisation Funds which
work to intervene where credit unions are in difficulty through
various means. ABCUL have recently commissioned a research project
into the viability of such an initiative in Britain and we feel
there is great potential for supporting credit union strengthening
in such a scheme.
7. CONCLUSION
7.1 Credit unions in Britain operate on an internationally
proven model which has great potential to increase diversity and
competition in financial markets.
7.2 In the past decade, credit unions have undergone
a reassessment of their development model leading to a great strengthening
of the sector due to various initiatives involving reform of the
regulatory and legislative framework, strengthening governance
and management, increasing the sector's capacity and securing
appropriate investment.
7.3 A credit union back-office—as well
as several other strengthening initiatives—and a full partnership
with the Post Office network has the potential to transform the
credit union movement and build upon the strong foundations laid
over the past decade. This would assist in various areas of government
policy and as such, any investment represents excellent value
for money.
September 2010
58 See www.woccu.org Back
59
Figures from unaudited quarterly returns provided to the Financial
Services Authority Back
60
The Coalition: our programme for Government: http://www.cabinetoffice.gov.uk/media/409088/pfg_coalition.pdf Back
61
See: http://www.hm-treasury.gov.uk/speech_fst_300610.htm for full
speech Back
62
Figures taken from the World Council of Credit Unions' Statistical
Report, 2009. See: http://www.woccu.org/publications/statreport Back
63
See: http://s.coop/towardssustainabledevelopment Back
64
See: S Collard & L Day, Evaluation of the DWP Growth Fund-Interim
Report, PFRC / Ecotec, May 2010 Back
65
See: www.credituniongovernance.coop Back
66
See P A Jones, Breaking Through to the Future, Liverpool
John Moores University, 2008:
http://s.coop/breakingthroughtothefuture Back
| 
