Competition and choice in the banking sector
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) 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. 2
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:
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The promotion of thrift among members;
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The creation of sources of credit for the benefit of members at a fair and reasonable rate of interest;
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The use and control of their members’ savings for their mutual benefit; and
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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.3 At a meeting of the All-Party Parliamentary Group on Credit Unions on 30th 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." 4
2.7 Internationally, credit unions are a successful alternative to mainstream financial services providers – the chart below compares international market penetration.
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Country
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Market Penetration
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Total Assets (USD)
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Average Assets (USD)
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Ireland
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75.4%
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20,052,172,916
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39,865,154
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Canada
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47%
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229,693,740,409
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243,062,159
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USA
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44.3%
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896,823,977,926
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116,349,763
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Australia
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24%
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42,172,247,180
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379,530,154
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Great Britain
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2%
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1,072,321,685
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2,220,127
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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 1 in 5 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, 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.
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.
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.
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 2 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
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