Anyone promoting credit unions finds they are swimming with a very strong tide at the moment. The collapse in confidence in the banks has led to an increased interest not just in mutuals, but specifically in credit unions.
“The recent crisis has highlighted the benefits of mutual ownership and credit unions have been successful in this country and all over the world because of the way they look after their owners – the members,” says ABCUL’s chief executive Mark Lyonette. ABCUL reports what it calls a “surge” in interest by people looking to invest in credit unions as they look for a better alternative to the high street banks.
A similar point was made recently by Kitty Ussher MP – then Economic Secretary to the Treasury and since moved to being minister for credit unions at the Department of Work and Pensions. “Now more than ever it is important that people have access to affordable lending which is why the government is doing everything it can to enable credit unions to realise their potential,” she told a Labour Party fringe meeting.
One of Ussher’s other recent speaking engagements was at the inaugural meeting of the All Party Parliamentary Group on Credit Unions. She not only explained how “passionate” she is about credit unions, but indicated she is determined to increase their legal capacity. She announced to the group that the Treasury intends to allow credit unions to lend to, and take deposits from, incorporated and unincorporated bodies as well as individuals, offer cash ISAs and Child Trust Funds and raise the interest rate ceiling.
Ussher’s speech was a mixed blessing for the Parliamentary group – it was exactly what they wanted to hear, but lobbying for these moves was the reason why the group had been established. Almost uniquely for a political body, it had achieved its objectives at its very first meeting. Except, of course, that intentions are not quite the same thing as introducing the regulatory order to implement them.
Kerry McCarthy MP is the founding chair of the Parliamentary group and says that the major task for it, now, will be to ensure that the Treasury is not sidetracked by taking action to save the financial system from also supporting moves that can be very important to individuals with low incomes in enabling them to personally cope with a climate of crisis.
“There is a suspicion of banks and a reluctance by banks to lend to anyone with risk attached to them,” says McCarthy in explaining why credit unions are now even more relevant. “So credit unions have a vital role in lending small amounts of money.”
But where credit unions have established a niche in lending to low income individuals, McCarthy wants them to extend that to lending to and advising small co-operatives, social enterprises and other small firms. That would be permitted, for the first time, by changes in the regulatory framework as intended by the Treasury.
McCarthy is a member of the Co-operative Party, though is not a Co-op Party sponsored MP. She says that in her Bristol seat, credit unions are strong and well organised. But she is committed to the principles of retaining close links between credit unions and their local areas, with a strong common bond. Discussing the optimum size for a credit union and how the common bond should operate will be one of the key questions the all-party group will discuss in coming months.
There is a clear tension between the benefits of enlargement and those of being local and it something that the credit union movement as a whole needs to address. The Financial Services Compensation Scheme has had to rescue several credit unions that have collapsed this year in Preston, Edgbaston, Wrexham and Edmonton. Each was small, with memberships between 150 and 1,100. This raises questions about the ability of such small organisations to operate effectively and with sufficiently strong corporate governance.
It is therefore likely that more of these very small credit unions will merge to become large enough to operate on a more professional basis. Another option might be for credit unions to merge with local building societies, or other mutuals. McCarthy asks: “Does it go against the whole ethos, which is about serving a discrete group of people? There is a danger if you start merging with other organisations and lose control of your destiny and get swallowed up.” Others will no doubt be discussing similar questions in coming months.
Another issue is how credit unions should work more closely with the rest of the co-operative and mutual sector, given that it feels as if they are usually perceived as more of a niche than part of the same movement. “They are not as integrated as I would like them to be,” says McCarthy. “Because they are only allowed to lend to individuals, perhaps that stops them being integrated with local co-ops. If they were allowed to be the bank of choice for those organisations, they could become more ingrained. At the moment they are very much about being an institution for lending to low income people.”
McCarthy wants her committee to consider in the coming months other aspects of integration – how to ensure that credit unions are seen as a key aspect of the financial services sector, addressing financial exclusion and how they can learn from microfinance institutions across the world. As McCarthy says: “I think we will be very busy for quite some time.”
Co-operative News asked ABCUL for its take on the current situation for credit unions.
Mark Lyonette, chief executive of ABCUL – the Association of British Credit Unions Ltd – says that credit unions are thriving in the tough economic conditions. He answered questions fot the News about where the movement goes from here.
What is the place of credit unions in the current financial environment? Can they play a significant role for people in hardship?
“Credit unions are well sheltered from the current economic turmoil. The vast majority of funds they make available to borrowers comes from the savings of other members so they are not reliant on money markets. Credit unions only exist to benefit their members; their policies are not influenced by the need to make short-term profit to meet bonus targets or by speculation on share prices
“In recent weeks, many credit unions have reported that they are attracting new savers as people recognise the attraction of local, mutual financial services providers that are not caught up in the global situation and also as people move their savings around to make sure all their savings are covered by the Financial Services Compensation Scheme.
Credit unions have been at the forefront of Government plans to tackle financial exclusion; over 100 credit unions are using the Department of Work & Pensions (DWP) administered Growth Fund to make more loans available in low income areas. I think credit unions already make a significant contribution to reducing hardship, many people are already being helped by credit unions but credit unions need to scale up to have more of an impact. New legislation is vital to bring credit union facilities to new groups and to enable them to develop new products and attract more savings.”
There have been several credit union failures where the FSCS has had to step in. This presumably indicates a weakness in the sector – what is it?
“Current legislation means that credit unions which may be struggling are usually not able to use other options, such as merger, because of restrictions on common bonds. Other sectors, such as building societies and banks, can and do fail, but mergers and takeovers are more easily achieved. Legislative changes expected next year will make it easier for credit unions to merge with one another.
“I think we need to put credit union failures into perspective; the few credit union failures represent a really small percentage of the small businesses that fail each year. Credit unions that have failed have often been developed without the necessary resources to build a sustainable business, they may have been developed before it became more of the norm for credit unions to set up with the capacity to run accessible and attractive services, for instance with shop front premises and staff. Again, I believe that new legislation will make it easier for credit unions to come together to form stronger and therefore more sustainable and robust institutions.”
It seems that corporate governance practices are variable across the sector. Is this true? How can this be strengthened?
“Project DELTA is the biggest training and development initiative the sector has ever seen. Funded by the DWP, it is bringing tailored training and mentoring to Growth Fund credit unions but the capacity this has given ABCUL to develop and make available training and develop new ways of delivering that training – including web based training – is having a great impact on the whole credit union sector. This is also expanding the World Council of Credit Unions developed PEARLS financial monitoring system to more credit unions. This is designed for credit unions to help them to improve their financial strength and social reach.
“We are also about to launch a corporate governance code. This has been developed in conjunction with the Financial Services Authority and Co-operativesUK.
“Plans are in place to launch an online volunteer hub to encourage corporate volunteering. This will match up the needs of credit unions with companies and individuals who wish to give their time and skills to help credit unions. This will tie in with banks’ commitment (detailed in HM Treasury’s 2007 Financial Inclusion Action Plan) to help scale up the provision of affordable credit in 25 ‘red alert’ areas where there is a mismatch between the supply of and demand for, affordable credit.
“Research due to be published in December is a ‘ten years on’ look at the sector, following on from a 1998 report, which set out many recommendations for credit unions, trade bodies, regulators, policy makers and funders, and has been a major catalyst for change. We are looking forward to the recommendations in the new report which will set out a vision for the next decade.”
Credit unions feel sometimes rather on the margins of the mutual and co-op sector. Does it feel like this for credit unions? How can this be addressed? Is there any appetite to create structurally closer links? Could this include mergers with friendly societies, for instance (as will potentially be permissible under new legislation)?
“It doesn’t feel like that to me. ABCUL has close links with Co-operativesUK, of which it is a member and a tenant in Holyoake House, Manchester! The Co-operative Group is a major sponsor of ABCUL events and projects.
“We liaise with the Building Societies Association and other groups in the mutual and social enterprise sector. Many local credit unions also have close links with local co-operative societies. Credit unions exist for employees of co-operative societies and for members of the Co-operative Group. We are pushing for new legislation to allow corporate bodies to join credit unions and make use of their services, and know of a number of co-operatives which are keen to be able to use local credit unions for their financial services.
“We don’t see mergers taking place with other sectors; the credit union model is proven around the world but we need the flexible legislation and appropriate regulation to be able to do this.
“Expanding access to products such as the Credit Union Current Account will also help credit unions increase their impact and bring inclusive financial services to many more people.”