Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by the Association of British Credit Unions Limited

  1. The Association of British Credit Unions Limited ("ABCUL") is pleased to provide this submission on behalf of its 434 member credit unions in England, Scotland and Wales. Our member credit unions account for 81 per cent of the individual members and 85 per cent. of the assets of all credit unions in the country, and they represent a cross-section of credit unions of all types and sizes.

  2. Credit unions are mutual, self-help, co-operative financial institutions, registered under the Credit Unions Act 1979. They operate under the simple principle of pooling the savings of their individual members to provide members with low-cost loans. Credit unions are governed by unpaid volunteers, elected by their members on the principle of "one member, one vote." They are regulated by the Registry of Friendly Societies, and, since the beginning of this year, on the Registry's behalf by the Financial Services Authority ("FSA").

  3. The purpose of this letter is to propose two amendments to the Financial Services and Markets Bill ("FSMB") which are essential to the future growth and success of credit unions, as discussed more fully below.

  4. Background. Government has correctly recognised that credit unions offer great potential to meet the financial needs of those millions of Britons who are currently excluded from affordable and accessible financial services. A major impediment to credit unions accomplishing this objective has been the very restrictive limitations on credit union powers under the Credit Unions Act 1979. For the last year and a half, ABCUL and other credit union organisations have been united in seeking major changes to that law.

  5. In her preface to a Treasury Consultation Document on Amendments to the Credit Unions Act published last November, the Economic Secretary to the Treasury stated that "Government supports fully [credit unions'] ethos of self help and thrift and is determined to encourage the sector." Last year, 206 Members of the House of Commons signed an Early Day Motion supporting the changes in the law that are being sought by ABCUL.

  6. The de-regulation proposals published by Treasury last November are responsive to many of our goals. However, we are informed that two important objectives can only be addressed through primary legislation. Accordingly, we are submitting this letter to propose two specific amendments to the FSMB:

  7. Our first proposal is to amend Section 2(3) of the FSMB to add an additional consideration which FSA must have regard to in discharging its functions: namely, the desirability of maintaining corporate diversity among enterprises providing financial services, in order to widen consumer choice.

  8. FSA has been given the unprecedented challenge of regulating all financial services providers in this country. The entities coming under its authority range from some of the largest financial institutions in the world, with thousands of employees and billions in assets, to small credit unions with only a few hundred members, operated entirely by unpaid volunteers. FSA supervision must therefore accommodate a diverse range of organisational structures: sole traders, not-for-profit credit unions and other mutuals, as well as stock companies, both large and small.

  9. This tremendous diversity represents a great strength of the financial services marketplace in Britain, and it must not be lost as a result of consolidating financial supervision under a single regulator. At present, consumers can choose among huge companies that offer a wide range of financial services—but consumers can also choose the alternative of credit unions and other small mutuals that are community owned and democratically controlled by their customers. As Government has recognised, the existence of community-based mutuals such as credit unions helps assure that no one will be left without access to financial services, so that those individuals excluded by the large providers will have an alternative in locally owned financial institutions.

  10. Accordingly, it is surprising that the Bill does not impose on FSA any specific duty to assure that its regulation preserves this necessary diversity among providers of financial services. Nothing would appear to require the Authority to adapt its regulatory approach to fit the unique needs and statutory purposes of financial providers of different types. In the absence of such a duty, we fear that predictable bureaucratic tendencies will result over time in a "one size fits all" approach to regulation. Such an outcome would further erode mutuality as an alternative for consumers—to the advantage of large for-profit providers who have the resources to handle any kind of regulation and which already enjoy huge advantages of scale and market dominance.

  11. It is therefore imperative that FSA have a clear remit to preserve this diversity, in the interest of all British consumers. We respectfully submit that an obligation to do so should be written into the law.

  12. It should be emphasised that in all our discussions with FSA officials we have been impressed by their dedication to this principle. We should also emphasise that credit unions desire effective supervision and regulation and welcome the transfer of supervision for credit unions to FSA. We believe that FSA's expanded resources and expertise will lead to improved supervision. We are concerned, however, that FSA have a clear statutory mandate to consider the differing needs and objectives of the diverse kinds of financial organisations it regulates.

  13. Accordingly, we recommend that the FSMB be amended to add to Clause Two Subsection (3), Page 2 after line 15, the following: "(g) the desirability of maintaining corporate diversity among enterprises providing financial services, in order to widen consumer choice."

  14. Government has correctly perceived credit unions as offering a unique solution to pressing social problems. That credit unions can serve such a role follows directly from them being fundamentally different from other financial institutions. They are, in fact, true mutuals, organised without any profit motive, and directed by volunteers who serve with no compensation. To assure that credit unions remain true to their fundamental social purposes, whilst assuring they are financially sound as well, requires a very different regulatory approach than is appropriate to other financial institutions.

  15. For example, credit union members are not merely customers. They have the democratic power to change things if a credit union is not being operated in their best interests. Regulation should encourage and respect that democracy, not discourage it. At a time when mutuality is in the decline elsewhere in the financial sector, Government policy and legislation must assure that it stays alive in credit unions. For it is the mutual ethos of credit unions—not the profit motive—that steers them in the direction of serving those most in need of credit union services.

  16. Therefore, it is crucial that the law governing FSA recognise the importance of different regulatory approaches for different types of providers—such as credit unions with a unique ethos of volunteer democracy and service. We believe the change we are suggesting will assure this result, while being entirely consistent with the other considerations and objectives that are proposed for FSA.

  17. Our second proposal is to include a provision in the FSMB to amend the Credit Unions Act 1979 to permit creation of a credit union-owned and controlled central finance facility.

  18. Experience in other countries where credit unions have been most successful demonstrates the essential importance of there being a credit union-owned and controlled central finance facility or similar central service organisation that can provide credit unions with the back-office financial and liquidity management services needed to provide economies of scale. Such an organisation typically contracts with commercial banks to acquire the specialised expertise necessary for such services. By its nature, it is itself a regulated financial services provider, subject to more intensive supervision than the credit unions it serves.

  19. Such a central facility is essential if credit unions are to achieve Government's ambitious goals for serving the financially excluded. Compared with other financial services providers, credit unions are relatively small, community-owned and community-controlled institutions.

  A central organisation would provide the management expertise and economies of scale required to allow even small credit unions to offer a broad range of services, whilst retaining their community focus and their local governance by unpaid, democratically elected volunteers.

  20. We have requested HM Treasury to provide for such a central facility in the de-regulation proposals described above. Treasury has informed us, however, that in its view such a facility could not be provided for under a de-regulation order but would instead require enactment of primary legislation.

  21. We believe the most economical way of doing so would be to include a simple provision in the FSMB. Specifically, we request that a new clause be added to the FSMB to amend section 1(3) of the Credit Unions Act 1979 to add a new subsection (e) creating an additional object of a credit union, as follows:

    "(e) to invest in an authorised central credit union organisation established to provide credit unions with liquidity lending, investment management, information systems and other operational support and administrative services."

  22. Conclusion. We believe that these two changes to the Financial Services and Markets Bill are essential if credit unions are to achieve their potential of bringing accessible and reasonably priced financial services to those millions of citizens who are currently not well served by other providers. We respectfully commend these two amendments for consideration by the Joint Committee on Financial Services and Markets.

30 March 1999

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