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The current economic situation has highlighted the number of people in this country who have been and are being failed by traditional, commercial financial institutions. Recently, we have seen the consequences of lending institutions that are too relaxed about the scale and focus of personal debt. Those suffering the most are those who were most vulnerable in the first place. That some people have felt the need to resort to unscrupulous and illegal loan sharks is highly regrettable and a sad indicator that, as a society, we have not been able to take care of our most vulnerable. There have been horrible incidents where people have been treated very badly by the loan sharks.

The credit union network currently makes up only a very small share of the financial services market, but that can and should change. That change in culture is necessary, if we are to avoid the debt trap that so many families have fallen into. Credit unions foster a culture

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of thrift and responsible lending within a community. They can provide those who may not normally have access to loans from the more traditional banking sector with a responsible and ethical way of borrowing. Unlike many traditional banks, credit unions will usually offer debt management and counselling for those in financial difficulty in a non-judgmental and unintimidating way. There are well noted examples of credit unions being a positive force for change in disadvantaged communities.

There is still a huge divide in this country between those who are able to access the types of financial services that many of us take for granted and those who have to resort to the financial black market. Government have a role to play in closing this gap and in ensuring that financial exclusion is tackled. Credit unions can and should be part of the answer.

The benefits and rewards gained from being a part of a mutual organisation such as a credit union are far greater than just financial. Because credit unions are owned and managed by their own members, usually voluntarily, there exists a huge incentive to make the union successful. This, coupled with the obligation that members share a common bond, means that the community element is incredibly strong among these unions. We have heard much recently about communities in Britain, about their breakdown and about the need to return to the days when people felt a common bond and were willing to help their neighbours. Credit unions can help in communities where a common bond may have been lost by bringing together people who live in the same area, share an occupation, belong to the same organisation or attend a place of worship.

Credit unions, and other good mutuals, offer good services to their customers and are able to show strong accountability to their members. They are able to combine a public service ethos with a strong customer focus, something normally better attributed to the private sector. They should be part of the overall mix of financial services available to people, increasing choice in the market and promoting more than just profit. It is also important that credit unions remain true to their savings ethos and protect themselves from becoming just another financial institution. Credit unions have the potential to reach many more communities and customers than they do at present, but this will require extra effort on the part of the Government. I look forward to seeing the growth of these community-based unions.

7.52 pm

Lord Haskel: My Lords, I am most grateful to my noble friend for reminding us that there is an alternative to the high street banks. There are financial institutions that pay reasonable rates of interest but do not take huge risks or deal in dodgy paper; they pride themselves on their low overheads and reasonable pay and, as the noble Lord, Lord Sheikh, reminded us, they are ethically run. It is these qualities that make me think that perhaps the age of the credit union is upon us. As my noble friend explained, credit unions are owned and controlled by their members for the common good. This was the subject of Professor Sandel's Reith lectures this year. And for what was Elinor Ostrom awarded the Nobel economics prize last week? It was, in the words of the Nobel Committee:

"For work on the right of users to self organise".



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In other words, as my noble friend put it, people helping people-a phrase straight out of credit union literature.

This debate is about credit unions in Britain, but they operate in most countries and offer us a lot to learn. They are extremely varied in size, membership and the services that they offer. In Ireland, half the population belongs to a credit union; in other countries, hardly anyone does so.

I think that it is in the developing countries where we see the most benefit, because credit unions are a form of low-tech banking. One of the messages consistently received from aid organisations is how valuable low-tech solutions are in third-world countries. This came across loud and clear last Wednesday in Committee Room 9. The All-Party Engineering Group met about 50 young engineering graduates from the best universities who had been working with two organisations, Engineers Without Borders and Engineers Against Poverty. They told us how they had been to third-world countries, or were going to developing countries, to do fairly simple things such as designing a sewerage system, making the electricity supply more efficient, organising public transport, designing and helping to build a road or a bridge or distributing fresh water. All this was done to help to lift people out of poverty and move them from subsistence to sustainability. Frankly, I found their idealism uplifting. A senior engineer from Arup told us how £100 invested in a family helps to raise their income by as much as 60 per cent, and how £1,500 invested in a home helps to eliminate disease, provide better living standards and enable the children to go to school. What is required, she said, is some kind of social entrepreneur to organise and manage this finance, modest as it is.

We have heard about Engineers Without Borders and we know about the humanitarian work done by Doctors Without Borders, such as that done by Médecins Sans Frontières, so my question to the Minister is this: what about bankers without borders-that is, young bankers to provide the low-tech solution that is so effective in medicine and engineering? Cannot the Treasury and my noble friend help to find some young bankers driven by a wish to help to lift people out of poverty by means of self-help and to organise credit unions, micro-finance and local enterprise? They could introduce proper accounting principles and internal controls and procedures, plan financial operations and introduce proper governance. All these things are the bread and butter of banking. It seems to me that a corps of idealistic young bankers from Britain, working in the emerging economies through credit unions, would not only be an important part of fighting poverty but would help to raise the positive profile of credit unions here in Britain and perhaps renew our faith in bankers.

7.57 pm

Lord Rogan: My Lords, I, too, welcome this short debate initiated by the noble Lord, Lord Tomlinson, on furthering the development of credit unions in the United Kingdom of Great Britain and Northern Ireland. There is a geographical area of that union where the development of the credit union movement is out of kilter and is indeed being impaired compared with the movement in the remainder of the kingdom.



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This evening I specifically ask the Minister what plans the Government propose to especially encourage the credit union movement in Northern Ireland, and in so doing to give the movement there parity with the credit unions which operate throughout the rest of Great Britain. There are several inconsistencies in how credit unions are regulated in Great Britain and in Northern Ireland. I shall mention four. The most critical anomaly is that we in Northern Ireland are not covered by the Financial Services Compensation Scheme. Credit union members in Northern Ireland do not enjoy the same protection as credit union members in Britain or, indeed, in the Republic of Ireland. Just look at the current plight of the Presbyterian Mutual Society savers-and they were savers.

Secondly, credit unions in Britain can apply for funding under the Growth Fund. Substantial assistance can be obtained for credit unions to introduce new savings and loan schemes, whereas in Northern Ireland that is denied to them. Further, the Department for Work and Pensions in Britain sponsors credit unions to administer the Social Fund hardship loans. Credit unions in Northern Ireland are not permitted to do so. In Britain, the unions are being encouraged to set up a gateway savings incentive scheme. No such savings product has been implemented in Northern Ireland.

In two areas, Northern Ireland credit unions do not have parity with other financial institutions. They are not permitted to provide a mini cash ISA service to their members. Instead of members being rewarded for saving with their credit union, they are penalised because they are taxed on any income earned. If Northern Ireland credit unions were to provide mini cash ISAs, their members would be permitted to put into savings £3,000 per annum, tax free, just as in Britain, where credit unions are allowed to offer these facilities, as are all other financial institutions. Similarly, credit union members in Northern Ireland are not permitted to avail themselves of the child trust fund service. I am aware of a credit union with in excess of 3,200 juvenile members with deposits totalling more than £1.6million, yet it cannot offer any child trust fund product.

The main obstacle that credit unions in Northern Ireland face is that the primary legislation, the Credit Unions (Northern Ireland) Order 1985, has not kept abreast of changes in the financial services market. In fact, the Northern Ireland order expressly prohibits credit unions from performing the functions of banking. Credit unions in Britain, regulated under the Financial Services Authority, have been able to provide these services from their inception. In addition, by virtue of being regulated by the FSA, they are covered by the Financial Services Compensation Scheme.

I am conscious that my remarks have had a negative edge. I shall finish on a positive note. I am aware that a review is currently under way in Northern Ireland and, I hope with political support in Stormont and Westminster, credit union members in Northern Ireland should start to enjoy a more level playing field.

8.01 pm

Lord Graham of Edmonton: My Lords, I should say at once how indebted we are to my noble friend Lord Tomlinson for seizing the opportunity to allow us to

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become members of the credit union supporters' group. He has said everything that needs to be said about them statistically and on their aims and references. We are grateful to him. Every contribution has enhanced not just this House, but the value of credit unions in the economy of this country.

I declare a general interest, which is not related to my interest in the Co-operative Group declared in the Register of Lords' Interests. Sixty years ago, I was an employee of the Newcastle Upon Tyne Co-operative Society. I would stand in the general office with other colleagues on what was known as a red letter day-dividend day. When I and my colleagues paid out the dividend, we knew that this was a good community activity because the way that the Co-op worked in those days, and perhaps does now, was that its share capital was accrued dividend which had been earned and not drawn. On dividend day, the money was drawn and some 50,000 of the 60,000 members of the society who withdrew a portion of their dividend spent it on shoes, boots, shirts, suits and things of that kind. The money was raised in the community, for the community and spent by the community.

It has often been said that the Co-op movement never made a millionaire and never made a pauper. The first has been overtaken by events-some millionaires have been made-but I have yet to hear of paupers.

One of the bugbears for credit unions in getting off the ground was, sadly, that they were not being wholly policed and serviced by competent officials. In other words, there was the question of security. In those days, there were three elements to investment for the working class: liquidity, profitability and security. All are important, but the most important element was security. People wanted to make sure that their money was safe, but because they left their money in their share passbook, there was cheap capital available for the society to use.

This is all part and parcel of the current situation. My noble friend Lord Tomlinson has allowed us to say why we believe that the theory and practice of credit unions have a part to play today. Like him and others around the House, we have watched the situation, nationally and financially, go from bad to worse. I make no comment on that, except to say that the credit union movement stands tall and upright in its service to its members.

In conclusion, I received a document called Credit Union News. It states:

"Time for credit unions to reach out. Credit unions are poised to benefit from major changes in legislation and according to Mark Hoban MP, Shadow Financial Secretary to the Treasury, they now have a tremendous opportunity to seize the moment and become the real alternative to the High Street banks".

The article also states:

"He goes on to say that a key objective should be the provision of 'universal coverage'. 'I want to see the development of credit unions across the UK and I want to see them able to provide services and products to the whole population so that everyone has access to a credit union'".

Those of us who know the credit union movement know of the bond which binds together communities, trade unions, the police and local government. As an

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aspiration, the more that people have access to an organisation such as a credit union, the more they will sleep easily in their beds.

I look forward very much to what the Minister has to say, because the credit union movement has problems, aspirations and desires. They have served their apprenticeship in the field of financial management and responsibility. They deserve attention, which I know they are getting, from this Government-now and in the future. I congratulate my noble friend Lord Tomlinson, and everyone else who has spoken, on being very much to the point.

8.07 pm

Lord Howarth of Newport: My Lords, I add my thanks and congratulations to my noble friend Lord Tomlinson for enabling us to debate the important subject of credit unions this evening, and for his commitment and hard work in the cause of credit unions.

What I shall say this evening is informed by my awareness of the work, successes and problems of credit unions in Newport and Norwich. Newport is the city that I represented in the House of Commons and Norwich is the city in which I now live. Newport has needed its credit union. In my former constituency of Newport East, there were communities traumatised principally by the vicissitudes of the steel industry. There were people in those communities who were not only poor but lacking in confidence, lacking in the most basic understanding of how to manage money and certainly lacking in access to banks. We have come to understand that, while the banks were happy to engage in sub-prime mortgage lending, they were not happy to provide the generality of banking facilities to many poor communities. When people in those deprived communities had access to banking facilities, too often the charges on overdrafts that they suffered compounded rather than eased their problems. People in my former constituency were prey to loan sharks charging APRs of several hundred per cent and enjoying the assistance of Alsatian dogs in collecting the money they claimed as owing to them. Even in very recent weeks, in the Larkman area of Norwich leaflets have been distributed offering pre-Christmas loans at an APR-if you study the small print and have the ability to comprehend it-of 128 per cent. In the recession, of course, more people have become vulnerable to such temptations and pressures. Credit unions have certainly been needed.

In the past 10 years, Newport Credit Union has expanded from operating in four wards of the city to the whole of the city and now has 1,500 members. In Norwich there are four credit unions: three community-based and one employee-based-the employees of Norwich City Council and other local authorities in the area. Over the past 20 years, the credit unions in Norwich have achieved a membership of about 1,500. At the moment, Ketts Credit Union is developing collection points in schools, helping young people to learn to save.

What are the lessons that should be learnt from the experience of credit unions over the past decade? One obvious lesson is that establishing and building a credit union is a difficult and slow process. It is difficult, in part, because it takes time to find local people with the confidence and skills to take on these responsibilities.



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How, then, should credit unions be helped? I warmly endorse the agenda for assistance to credit unions set out by my noble friend Lord Tomlinson and would add only a very few reflections. One is that we should respect localism and local variety in credit unions. I do not think that we want standard models, and we should be very wary of how big government, and big central government in particular, approaches and deals with credit unions. One has to respect the local ownership and local control to which my noble friend Lord Haskel particularly drew attention. The needs that credit unions meet are local, as is their contribution. Word of mouth is probably the best way to expand membership. Their volunteers are local, motivated by community loyalties. Let us take this opportunity to praise and thank those who commit so much time and energy and community and civic spirit to helping credit unions to do the invaluable work that they do.

I think that support for credit unions should also be local. Small amounts of public funding might constitute a very good investment in helping credit unions to achieve critical mass and cross the hurdles of development that they need to cross-for example, support for part-time finance officers or, as the Welsh Assembly Government have recently provided, help in Newport for part-time officers to extend financial inclusion. It must be a good investment to help to avert personal disaster and to build community strength. If grants are available to provide some stiffening of professional help, that will of course be very welcome. I suspect that it is better that the grants come through local authorities, and if central government or the Welsh Assembly Government wish to support local authorities, so much the better.

However, help might also be provided by way of deposits. I am advised that there are areas in the United States of America where credit unions are relatively well capitalised and this is because it is a custom for local institutions to make deposits with them-deposits that are no doubt small in the terms of those institutions but significant for the credit unions. So might it not be attractive and helpful if it became conventional practice for local authorities, local banks and other local businesses to deposit money with their local credit unions? They would be at least as safe as they were in depositing money with Icelandic banks-indeed, much safer-and it would be an aspect of corporate social responsibility.

I shall be very interested to hear the Minister's view of the value of credit unions and of what can sensibly and sensitively be done to promote and assist them.

8.13 pm

Lord Newby: My Lords, I too congratulate the noble Lord, Lord Tomlinson, on initiating this debate, which has been extremely well informed and interesting. I was particularly interested in the description of the noble Lord, Lord Graham, of handing out the dividend in 1949, a time when my mother was working in the divvy department of the Leeds Co-op. I grew up with stories of the divvy and I have seen its value to the person as well as in a policy sense.

It is also a pleasure to be talking about an aspect of the financial world that is miles away from the bonuses that we tend to get bogged down with. We are talking

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about a significant proportion of the population. The noble Lord, Lord Tomlinson, referred to 500,000 or 600,000 people who are members of credit unions. Provident Financial, one of the door-to-door lenders which is not a loan shark but which certainly charges very high rates of interest compared with credit unions, has 1.8 million customers. We are talking about a big pool.

I believe there is general agreement on the value of credit unions. When Mark Hoban says that he would like credit unions to become the real alternative to high-street banks, I hope that he will continue to promote that as part of the financial services agenda if he is ever in a position to influence it. Over recent months, we have seen a number of ways in which credit unions have taken on new responsibilities, which most people would be pleased to see. A number of noble Lords may have seen that the Audit Commission in a report in August looked at the way in which local authorities are increasingly working with credit unions, not least dealing with redundancies in parts of the country and using resources under local authority control in innovative ways to help credit unions to grow. In some parts of the country, libraries are now being used as collection points for credit unions, which seems a sensible use of a community resource. If, once it has sorted itself out, the Post Office were to play a role in developing credit unions, that would be extremely good.

Although we all agree on the value of credit unions, if one looks at how one establishes and sustains a credit union, one sees that it is extremely difficult. My wife was involved in establishing a credit union in Lambeth and for months on end she returned home late at night, weary from a meeting where she, together with a group of enthusiastic volunteers, grappled to put together the Lambeth credit union. I was very relieved to see from the web that that institution still exists, but it has only 500 members. The effort that went into creating it was disproportionate to the number of people who use it, particularly as within Lambeth many thousands of people could more sensibly be in a credit union rather than dealing with their finances through their current method.

I would like to pursue three very different ideas to help make the life of credit unions easier. The first relates to staff volunteering, as a number of noble Lords have mentioned. I do not know about bankers without borders but getting bankers to be attached to nascent credit unions, as solicitors carry out pro bono work with law centres or other bodies, is an extremely good idea. I suspect that many middle-ranking bankers would quite like it. I hope that can be pursued.

Secondly, I hope that we get the Co-operative and Community Benefit Societies and Credit Unions Bill through quickly in the new Session. It would help if the Government were to adopt it and put it in the Queen's Speech. I believe that it would go through like a dose of salts. I hope that goes through because it is another building block.

The third thing which has been drawn to my attention by my colleague Peter Black, a Member of the Welsh Assembly, is that currently credit unions are paying

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£8,500,000 to the Financial Services Compensation Scheme, which seems disproportionate given the risk attached to credit unions. That is a cost that they could well manage without. I hope that the Government will look at that.

To sum up, I think we are agreed that credit unions deserve our support and acts of encouragement.


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