Credit Unions
(12 years ago)
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Lord Kennedy of Southwark
That this House takes note of the development of credit unions in the United Kingdom.
Lord Kennedy of Southwark
My Lords, I am delighted to open this debate on the development of credit unions in the United Kingdom. I have been a supporter of the credit union movement for well over 25 years. Since coming to the House two and a half years ago, I have tried to raise the profile of credit unions and to campaign for positive reform that will enable the movement to grow and to better serve its members. I firmly believe that a vibrant credit union sector is vital as part of the landscape of different financial organisations offering a range of financial products to citizens. I am a member of the Rainbow Savers credit union and have been for many years. I am also one of the vice-chairs of the All-Party Parliamentary Group on Credit Unions. Credit unions are financial co-operatives. I am delighted that in addition to being a Labour Party member, I sit in this House as a member of the Co-operative Party and as one of the 18 Labour and Co-operative Peers.
It is estimated that more than 90% of the UK population are eligible to join a credit union, either because of where they live or the industry in which they work. I am delighted that there is cross-party support in this House and in the other place for the development of credit unions—as there is in the devolved institutions, town halls and council chambers across the United Kingdom. More than 1 million people in Great Britain use credit unions. In June this year, credit unions held savings for their members amounting to £776 million and had £602 million out on loan to members.
In recent years, growth has been impressive. The previous Labour Government and the present coalition Government have both been supportive of the movement. The average membership of a credit union has increased from 200 members in the 1990s to more than 2,000 members today. Many of the bigger credit unions, such as Manchester, Glasgow and London Mutual, often get 200 to 300 applications for membership per month.
However, on an international scale credit union membership and penetration into communities here is on a small scale. Much more needs to be done. Compared with the UK’s 1 million members, the Republic of Ireland, which has a much smaller population, has more than 3 million members of credit unions. Two-thirds of the population of the Republic are members of credit unions. They have well over 10 times the amount of members’ money on deposit that we have in the UK. In the United States of America, 93 million citizens—just over 30% of the population—are members of credit unions, which have $845 billion on deposit. I hope that will give noble Lords some idea of where we fit in on the scale, and of what can be done if we work together.
One positive thing that credit unions do is encourage their members to save. Getting into the habit of saving and putting money aside for a rainy day, for Christmas or for something for the home is a good thing to do. It is a good discipline and a good habit to get into, and it will serve people well throughout their life. Credit unions also provide affordable sources of credit to members at a maximum interest rate of 2% per month, or 26.8% per annum. A £300 loan repaid over 26 weeks will cost a member less than £20 in interest. A similar loan from a home credit provider would cost well in excess of £170 in interest—and that is the nub of the problem.
If you are on a low or fixed income you often get the worst possible deal for finance, and all noble Lords should be angry about that. Why is it acceptable that those with the least should have to pay the most for finance? It is an outrage. With all the changes taking place in benefits and welfare, and with the introduction of universal credit, we should all agree that a sustainable fair-price mechanism to enable people to get the finance they need is desperately needed. An expanding credit union movement fits the bill nicely.
As I have said, if the big society initiative means anything, surely it means people coming together to help themselves and their communities. I contend that credit unions are the big society in action. I was delighted last week when we agreed an amendment to the Financial Services Bill that will cap the interest rates and other charges levied by payday lenders such as Wonga. I hope that the days of 4,000% interest rates from payday lenders will soon come to an end.
London Mutual Credit Union entered the payday lending market because it saw that local people had a need for that. People in desperate situations were coming in through its front door. They were drowning in a sea of debt and paying exorbitant interest rates, to unsympathetic companies whose only solution was to offer them another payday loan and rack up interest, charges and fines. People were offered another big loan that then could not be paid, so London Mutual stepped in. Its interest rate is 26.8% per annum, so if you borrow £400 for one month, you pay £8 interest, not the £120 you would pay with some high street payday lenders.
I accept that no credit union will be able to grow and be financially stable on payday lending alone. The London Mutual added this facility to a suite of products it offers to its members because it saw that there was a desperate need for it as people were being ripped off. Credit unions need to grow and prosper. That cannot be done just through government schemes and grants. They have to grow by attracting new members and savings and building their business on solid foundations. Credit unions must also be attractive to a wide cross-section of the population. They cannot be just institutions where poor people go for finance because no one else will give them any finance. Therefore, credit unions have to have a suite of products. Many of the large ones offer ISAs to their members at very competitive interest rates. Five of the biggest credit unions in the UK now offer mortgages to their members. Credit unions should offer traditional savings and lending, where possible and, where there is a need, look to provide short-term finance in addition to other financial products such as ISAs and much longer-term loans and mortgages where their financial strength allows. The movement should work towards providing financial services that are needed and wanted but do so on a firm footing with a strong financial base and using best business practice to achieve that. The challenge is for the Government, banks, business in general and local authorities all to play their role in supporting the industry to enable credit unions to grow their financial strength and robustness and deliver for their members reasonably priced financial products and services.
What should we be doing? The Government and Parliament need to ensure that the legislative framework in which the credit union sector operates is modern, up to date, flexible and enables it to develop and meet the challenges and take up the opportunities offered by the modern world. A start was made with the passing of the legislative reform order early this year but much more needs to be done. The DWP expansion project is a good government initiative and up to £35.6 million is available to credit union consortia. The aim of the project is to increase membership of credit unions by half a million by March 2015 and a million by March 2017, and increase access to affordable credit so that members save an additional £1 billion in interest payments compared with what they would have paid to high-cost commercial lenders between the start of the project and when it ends in 2019.
The Government should also ensure that the link-up with the Post Office happens. It would be good for the Post Office, develop the back office functions and give every credit union in the country a counter service at every post office, which is a trusted brand and presence on virtually every high street. This link has the potential really to boost confidence in the sector and create expansion.
We have on many occasions in this House spoken about banks and how these financial institutions have let us down. Not all but many banks do indeed have to earn the trust of their customers and the nation at large. Their practices have not been acceptable and people have rightly been cross at their actions. Many banks do some work in the field of credit unions by sponsoring events, reports and activities and some bank staff do a few hours’ work with a local credit union. While this is commendable and welcome, the banks have to do much more. If there are people in the community to whom banks do not want to provide financial products for whatever reason, they have a responsibility to enable the credit union sector to provide those services to people.
I would like to see all the banks—Barclays, HSBC, NatWest, Lloyds TSB and the Co-operative Bank—agree to second staff to work in credit unions. This would not be people just helping out for five hours but the banks identifying bright young people—those who they believe could be running their banks in the years to come and who will have major roles to play—and seconding them to work for credit unions for a year or two as part of their training and development programme. They could help build capacity, improve the management, practices and procedures, and build the robustness of the credit unions to provide financial products to those in the local community to whom the banks do not wish to provide financial services. This is socially responsible and I believe that the banks have a duty to put much more back into the community.
Local authorities have an important role to play in promoting credit unions to their residents. There are excellent examples of partnership working that are a real benefit to the local population and the local economy. Salford University did some research on behalf of Leeds City Council. It found that for every pound invested in credit unions there was a £10 benefit in retained income for the local economy as money was not lost in interest payments. Islington Council automatically signs up every new council tenant with the local credit union. It opens an account for them and puts £2 in it. Southwark, the borough in which I grew up, also works very closely with the London Mutual and actively promotes its services. Glasgow City Council deserves particular praise for the work it does—with its active support and engagement it has the largest credit union membership of any city in the UK. Some 22% of the population of the city of Glasgow are members of credit unions. The work in Glasgow was targeted to overcome organisational barriers to growth and to help the credit unions to become self-sufficient and standing on their own two feet. This is where we have to seek to go. I would like to see the Local Government Association and CoSLA actively encouraging their members to be fully engaged with, and supportive of, credit unions, playing a leading role in ensuring that credit unions in their areas have active agreements and active plans for growth and capacity building.
The social housing sector has also seen the potential for credit unions helping people with the transition to universal credits with jam-jar and ring-fenced accounts for regular outgoings, paying the rent to the landlord before releasing the remainder to the tenant. This has to be an area for further expansion with housing providers working in partnership so it is better for the tenants, the housing provider and the credit union and the work it is seeking to do.
There is also a role for employers to work with credit unions and there are some excellent examples, but quite a lot of them appear to be in the public sector. The private sector should look to engage more as there are real benefits for companies, their staff and local communities with minimal cost on their part.
As I bring my remarks to a close, I am delighted that my noble friend Lord Collins and the noble Lord, Lord Freud, will respond for the Opposition and the Government respectively. I thank all noble Lords and the right reverend Prelate who are going to speak today and look forward to their contributions.
Lord Griffiths of Fforestfach
My Lords, I am delighted to take part in this debate and I thank the noble Lord, Lord Kennedy, for initiating it. First, I must declare my interest. Last year I was appointed by my noble friend the Minister to the project steering committee of the DWP credit union expansion project, which reported earlier this year. More recently, I have also supported, but in a very small way, the initiative of the right reverend Prelate the Bishop of Durham to explore the potential for developing a credit union within his diocese and, more generally, in the north-east of England.
This involvement grew out of my interest in the subject as a result of being asked back in 2003 by the then shadow Chancellor of the Exchequer, Oliver Letwin, to set up and chair a commission on the subject of debt among low-income families, why people get into debt spirals and what might be done to help them. The commission was independent of any political party and reported in March 2005. In that report we made it very clear that we welcomed the growth in alternative sources of credit, especially in relation to commercial banks and doorstep lending, and we made a number of recommendations. On the basis of that, and subsequent involvement, I would like to make three broad points that really support what the noble Lord, Lord Kennedy, has already said.
The first is that although credit unions are small in number and in the volume of lending, they are nevertheless an important part of the financial services industry for a number of reasons. First, they provide low-income families with access to credit at interest rates lower than those of home credit and payday loans, let alone those of loan sharks. Credit unions have also never been accused of bringing undue pressure on the doorstep in encouraging potential borrowers; nor have they been accused of a lack of transparency.
Secondly, credit unions are an important way of reintroducing the personal element back into banking. The personal element exists today, but only for high net worth individuals. Many customers complain of the lack of the personal element, a problem that has been added to by technology. Credit unions have a key role in reintroducing this personal element into banking.
Thirdly, credit unions are an attractive form of ownership that gives borrowers confidence that they are not being exploited. Those who use these services and have taken part in credit unions speak particularly of the importance of the local and regional dimensions.
Finally, credit unions, as the noble Lord, Lord Kennedy, said, have at their heart a culture of saving that is desperately needed in this country. If you look at what has happened in the past five, six or seven years in the financial crisis, all elements of our society have gone into debt and have been overspending. The banking sector issued far too much debt through leverage and was a major cause of the financial crisis. As was made clear in the Autumn Statement last week, the percentage of government debt to income is expected to increase over the next three years. Consumer debt still stands at a horrendously high level and is, frankly, not sustainable. Therefore, at the level of individual families, in schools and among young people, credit unions have an important part to play in helping people to manage their finances.
Credit unions have changed over the past decade very much for the better. Membership has doubled and loans to low-income families over the past five years have tripled. Credit unions have recognised the need for change. Surveys have suggested that the people who are using them are very happy with them. The working party of which I was part commissioned a study from Experian. It found that the potential market for credit unions is 7 million people.
However, there is one fundamental problem about credit unions at present. They are not financially viable and, to exist in their present form, they need a continuing subsidy. Some credit unions, the most successful, are financially viable, but they are a small minority. Credit unions have been helped in the past six years, first by the initiative of the previous Government, the Financial Inclusion Growth Fund and, more recently, by reforms that this Government have made. However, in spite of this, in recent years the DWP has ceased to fund 55 credit unions, 25 of which have been forced to close or merge. Credit unions are important but they are not financially viable.
My second broad point is to welcome the initiative of this Government, particularly the interest shown by the noble Lord, Lord Freud, as the Minister responsible, which carries on from the previous Government. The working party faced three scenarios. The first was to do nothing; the second was to figure out how one could help those credit unions which wanted to change and which were viable or could easily become viable; and the third was to look at the issue of a cap on the interest rate. On the first scenario, if we do nothing, then the credit union movement is going to go into decline. Membership will go down and large parts of the country will have no credit unions. On the second scenario, we can support a programme of modernisation and expansion, which is what the Government are doing. Through that programme, you can really see membership of the credit unions doubling with a corresponding increase in the loans they make and the deposits they take and in the value of what they are doing. On the third scenario, the question arises of whether we should have an increase in the maximum rate of interest. At present it is capped at 2% per month. Through research we found that, if you could increase that to 3%, you could make the whole sector financially viable by 2015 or 2016. The argument against that is that you are then raising the annual rate of interest from something like 26% to 44%, which is true. If you were able to increase the rate of interest for limited periods for short-term loans—not for long-term loans—that would make a real contribution to credit unions.
I welcome what the Government are doing and the initiative they are taking. At present, they are very supportive of the credit union movement. However, I have been thinking about this issue for about 10 years and I have to say that I am frustrated. Here is the credit union movement which is what society wants—what people want when they hear more about it—and yet it is always small and struggling. Should we as a society not have a larger vision of what credit unions can do? We know that they play an important role at present. I am a great believer in the free market but we know that it alone is never going to solve the problem of credit unions. The Government continue to invest, which is a good thing, but the quid pro quo is that the credit unions must change.
Following the financial crisis, we have a unique opportunity in this country to restructure our banking system. Back in the 19th century, we had a very competitive banking system with a large mutual sector. In the First World War Lloyd George insisted that the banks financed the war effort by buying gilts, which they did. However, the banks said that, in return, they did not want to compete against each other. As a result, for 60 years, all areas of the City of London had cartels. Only since the 1970s has there been some increase in competition. Banks provide a service that is a public utility. Therefore, there is a strong case for the Government thinking about lifting the rate.
The noble Lord, Lord Kennedy, mentioned the big society and the banks being part of that. What can we as a society do to increase the role of the trade unions, churches and sports organisations and of the middle class in this area? We know that campaigns relating to things such as cycling, adoption, family courts and tax avoidance can be successful. Is there not something we can do to get the banks more involved? Last week we were told that two of the leading British banks were paying a $2.5 billion fine in the US. If banks can pay fines like that, surely, when the contribution of the Government is only £38 million, they can make more of a contribution to getting credit unions robustly established as part of our society. I make the following proposal, noting that two members of the banking commission are taking part in this debate. Could we not make it a condition of retail banks having a licence that they engage in some way in helping to create stronger mutual organisations, especially credit unions? I suggest that that is where the issue should rest.
Lord Graham of Edmonton
My Lords, it is a joy and a pleasure to take part in this debate. I cannot recall a debate during my time in this House and the other place that has got off to a better start.
I was fascinated by the previous speaker, with his knowledge and his candour about who was doing what and what else should be done. Very often when I listen to a debate, I come to the conclusion that everything that could be said has been said but not by everybody, and those of us who follow inevitably need to tap into the resources of the previous speakers and quote what has already been said. However, this debate provides a first-class opportunity not just to remind the Government about aspiration but to congratulate the many people—I call them the “small people”—who have struggled for a long time in their communities to achieve things.
As noble Lords who are here today will know, my background is in the Co-operative movement. I shudder to say it but it is 70 years since I worked in the general office of the Newcastle Co-op. People used to come in to collect their dividend, which, in a co-operative society and in society in general, was looked upon as a way to save for a rainy day. Of course, coming from Newcastle and having been born in the 1920s, the rainy days came often, and people looked to the aggregation of the value in their passbook. My memory is that people used what they had there to buy a pair of shoes or a pair of towels or whatever, and it was a means by which to save for a rainy day.
When I was studying many years ago, I came across Raiffeisen, the German who helped to create the germs of the credit union movement. Not only do I congratulate the speakers in the debate today but, looking at the speakers list, it is clear that we are going to be well served by experience.
My two pennyworth goes along these lines. The Co-operative movement relies on people helping each other. We are speaking in a year known by the United Nations as the International Year of Co-operatives. Recently, 10,000 people from all over the world from all kinds of co-operative societies and movements gathered in Manchester to celebrate what the Co-operative movement had done for them. Having worked with the movement all my life, I pay tribute to the fact that the zeal still burns in the breasts of those who call themselves co-operatives.
I am very grateful for a document called the Mutuals Yearbook which came through my door. It deals exclusively with mutuals. Not that we get confused, but what we are talking about comes under different names in different places. For instance, the yearbook shows that within the mutual sector there are 424 credit unions. However, that figure may vary and is part of a total of 17,897 mutual organisations in this country, all of which are part of the family of co-operative ideas. The sector includes clubs and societies, football trusts, employee-owned businesses, mutual insurers and building societies, all of which have impressive totals. The co-operative movement has recognised not only that it needs a number of shops, bank accounts and insurance policies but that it is part of a family.
I am heartened by the previous speaker, who encourages me to believe that there is a way of developing the credit union movement. Looking at the general nature of credit unions, we see that they are modest and ambitious. However, the previous speaker was right that we need some fundamental thinking to take us forward to the next step. I was delighted to hear that this was not a new idea. I pay tribute to the Government, their agencies and Ministers as they have certainly recognised the value of credit unions to ordinary working people. We can see the extent of the growth of the credit union movement in this country. I have met many enthusiasts who do what they can, but it is big business as well. For instance, there are credit unions in the police force and retail banking in higher education. When I queried that I was told that the Open University has a credit union. I am very pleased about that as I am a graduate of the Open University, and it warmed the cockles of my heart.
The fire service, the Post Office and local authorities are involved. Local authorities have a great opportunity. I am not saying what they should or should not do. It is incredible to think of it but 50 years ago I was the leader of the London Borough of Enfield, so I recognise the complexity and width of the responsibilities. I believe that for anyone who is serious about helping ordinary people, a credit union is a good adjunct to that.
How we go about widening and deepening the credit union movement is a very big topic. I am conscious of the financial situation of the nation and for individuals. We all know about the banking crisis and its effects, the amount of pay-offs, and so on. It is a different world from the credit union movement, which is what I am talking about. It is heartening that in the past 12 months, 100,000 people have changed their banking arrangements and transferred to the Co-operative Bank, which has a reputation as the ethical bank. Trust is the most important factor. People must feel secure and there must be modest profitability.
The greatest issue for ordinary people is security—they want to know that their money is safe. The number of credit unions going out of existence because they have put their members’ money in peril or difficulty is infinitesimal although one or two do fail. The greatest contribution this debate can make is to ask the Government—because the Government are the Government and they want to do their best—to look seriously at ways and means of providing a service for training and an understanding of the money world. Some people, perhaps naively, believe that all they have to do is make an announcement in the newsletter of the tenants’ association. Unfortunately, in this world, that is not all that is needed.
My contribution to the debate is to thank the opening and second speakers and hope that noble Lords will congratulate the third speaker in due time. However, whether or not they do, as far as I am concerned the credit union movement is part of the family of co-operatives, which have been in existence for a very long time. I hope sincerely that when the dust dies down and Ministers are talking about us all being in this together, they will see that there are people at the bottom end of the scale who are desperate and need encouragement and support. The reputation of bankers and banks has gone down and the reputation of credit unions and their ilk has gone up. That is simply because of trust. People who have great responsibilities to run a family or a community are beside themselves with perils and we need to build up the picture, even more than now, that credit unions are not only worth while but that they are safe and sound.
I congratulate the mover and second speaker on bringing their experience to the debate. The House has been very well served.
Lord Stoneham of Droxford
My Lords, I declare an interest as chair of Housing 21, a national provider of retirement homes, and as former chair of First Wessex housing group, which is heavily involved in supporting credit unions on the south coast.
I congratulate the noble Lord, Lord Kennedy of Southwark, on initiating the debate at a very timely period in the development of credit unions. I also thank the noble Lord, Lord Griffiths, for all the work and dedication he has given to social inclusion and the development of credit unions. I also congratulate the noble Lord, Lord Graham, on his speech and on his dedication and commitment to the co-operative and mutual movement.
I warmly welcome the initiatives being taken by the Government, led by my noble friend Lord Freud and the Minister of State for Pensions, Steve Webb, in building on the work of the previous Government on credit union development. We all know—we heard some of the figures this morning—that 1.4 million adults have no bank account; that 7 million people are using high-cost credit lenders; and that social exclusion and the disadvantage of not having access to bank facilities are big problems.
This comes at a time when, frankly, the clearing banks—I certainly welcome the suggestions and initiatives proposed by the noble Lord, Lord Griffiths—have been largely removing their risks and their unprofitable businesses so that they probably no longer have the day-to-day regional and local branch network contacts that they could develop into this market within their current structures.
We also know that pressures from the recession are contributing to social problems, with more changes of jobs, more part-time work, more uncertainty in households, more debt. Together with the changes in the welfare system, where we will have to confront the move to monthly universal credit, the changes in the discretionary Social Fund and the direct payment of housing benefit to individuals rather than to their housing provider, all these issues stress the importance of the work of credit unions.
If we look at the last decade, there has been a huge growth in the use of credit unions, which suggests that the market is large. I welcome the work of the project steering committee of which the noble Lord, Lord Griffiths, was a member; we must be aware in this debate of the problems it raised. The cost of the existing credit unions is too high, and as the noble Lord, Lord Griffiths, told us, they are not financially viable—unless there are changes. Their processes need modernisation; they are not currently fit for purpose. Many people simply have a lack of awareness about them and how to get in touch with them. However, we know that the market potential for credit unions—the noble Lord, Lord Griffiths, mentioned the figure of £7 million, which the working party concluded on—is very significant.
The Government are already pursuing a number of initiatives to follow up that report. They are raising the interest rate chargeable and allowing interest on deposits. They are welcoming a more flexible approach to extending areas of lending, recognising that these organisations will not be viable if we confine their activities to small, risky loans. The Government are also sensible in adopting a phased approach towards sustainable development.
Credit union development needs renewed impetus. It has problems of capacity and development potential; there are simply too many small credit unions. As a result, there are concerns about governance and competence. There is too little awareness in the market of what they can do, and their activities are too restrained. There is a danger that we will have very cautious regulation, when we should be encouraging them. I welcome the partnership between local authorities, the DWP and social housing providers, which is vital to the development of credit unions. These are key interested parties, and they have the most to gain from improving financial awareness, using banking facilities and helping people to better manage their debt.
There are a number of avenues, therefore, that provide a way forward. As somebody involved with housing associations, I certainly welcome a very strong link with housing associations. They could provide help with governance; they could get involved with the process of how rent is paid in the future, particularly with people who do not have bank accounts; and they could make appropriate investment in credit unions. They have an interest in doing so, to reduce their own debts. They have the resources. The best housing associations have a very strong social commitment, as well as being social entrepreneurs. Local housing associations, particularly ones that are regionally based, have a very important role to play in the development of credit unions. They should be using some of their funds to invest in and develop local credit unions in their areas. Local authorities will be central as well.
However, there has to be a greater size for credit unions; this is one of the areas we must encourage. The small, area-based credit unions need to move to a bigger scale, to the counties or the regions, to be viable and have the capacity to expand. To be sustainable, they must also expand their services; they simply will not be viable if they are concentrating on small loans, although that will be a major part of their work.
I welcome the proposed possible links with the Post Office, as one part of the banking offer. Many of these credit unions need the systems and the payment facilities to pursue their activities. The awareness of the Post Office—its strong brand—and its security will help to promote the use of those facilities. We must also encourage more volunteering from the financial sector. On the south coast we had people on secondment from banking and financial services. They are vital in understanding how to make loans, evaluate risk and manage the process. Such people need to be encouraged to come into the credit union sector.
We have to get the balance right between regulation and enterprise. We have to recognise that there will be failures in the sector. We have to protect those who could suffer through those failures, but that is inevitable when you are developing enterprise. However, we must ensure that the successes are greater.
Finally, I leave this thought with noble Lords: in many respects we are returning to an era of the previous century where a lot of people were involved in mutuals and co-operatives, developing services particularly for the poor, out of which grew major businesses and commercial enterprises. Sometimes society venerates the large entrepreneurs, the Richard Bransons and Rupert Murdochs, and gives them credit for building up million-pound businesses, but I recall the housing association I was first involved with, the Portsmouth Housing Association. That was started up by a vicar, Canon Bill Sargent, a very disciplined and determined man. He bought the first house for the housing association in 1972; in 2007 the business was capitalised at over £1 million and now it is part of a business several times that size. That is a huge achievement and these people need to be venerated as much as those who are involved in more publicity-conscious commercial enterprises. Local building societies, the Co-operative Bank and even some other banks started up through somewhat similar local initiatives in the 19th century and before, and they met a social need. Now we must find that combination of localism, meeting social need and social enterprise as we go forward.
The Lord Bishop of Durham
My Lords, like other noble Lords, I warmly welcome the debate and have had the pleasure of entering into discussions with the noble Lord, Lord Kennedy, around this subject. The powerful contributions of the noble Lords, Lord Griffiths, Lord Graham and Lord Stoneham, have taken away much of what I wanted to say, so I shall be surprisingly brief. In looking at credit unions, we need to remember that one of the most significant aspects of modern life is that accessible finance and affordable credit have become as much a basic utility as many other areas that we considered to be utilities. It is because of that, along with the move towards universal credit and particularly the changes to housing benefit, which have just been referred to, that the time for credit unions has come in a way that we have not seen since the 19th century. Many of the suggestions that have been made today speak to how credit unions can come into their own.
A few weeks ago I held a meeting in my office with leaders of the credit union movement in north-east England, especially in my own diocese. We had three credit unions, a large one based in Newcastle, a middle-sized one based in Stanley Crook and a small one from the Darlington area. There one could see the whole range of what credit unions do, from mortgages at the large end down to very small loans made on a voluntary basis out of someone’s front room at the other. In some ways, the middle-sized one was the most interesting because it was run by a woman of extraordinary entrepreneurial gifts—we have just heard that kind of thing mentioned—who moved the credit union from its office into the back of a white-goods and furniture store so that those who needed washing machines or furniture, instead of going to the payday or household lender to get the money at an exorbitant rate, could talk about their financial situation in the store with someone from the credit union. That move made good finance and access to credit available in an extremely deprived area. However, in the same meeting we saw the problems that have been mentioned so eloquently this morning.
The credit unions tend to be quite parochial. They tend to split, to divide, to have strong rivalries and not to be good enough at co-operating with each other. Their IT systems are notably lacking. Their management is often well meaning but without the profound expertise that we have seen over the years developing in more sophisticated companies. Also, of course, they face the problem we have heard alluded to, notably by the noble Lord, Lord Griffiths, of the interest rate cap. All these things are holding the credit union movement back and therefore, like other noble Lords, I very much welcome the DWP report—which was extremely powerful, very carefully put together and extremely thoughtful—and the Government’s commitment to follow it through with significant investment of funds over the next few years in a way that will make a substantial difference.
The DWP report showed very clearly that there is huge potential in the credit union movement. It keeps capital and profit at a local level. Speaking as someone on the Parliamentary Commission on Banking Standards, which has been referred to already this morning, one of the clearest things coming out is the immense centralisation of our financial system, which has got stronger and stronger, particularly since 2008. In a recent, very powerful piece of evidence, Andy Haldane from the Bank of England said that all the evidence shows that even major banks, once they get more than £100 billion in total balance sheet size, cease to have any economies of scale. Yet our banks are multiples of that and it all happens down in London. I am very fond of London—I am not saying anything about London; I have enough correspondence already—but keeping capital and profit local, beginning at the bottom of the tree rather than the top, is essential and is done most effectively by the credit union movement. This is especially needed in the north-east, where we are grievously underbanked, particularly since the demise of the Rock.
The DWP report was extremely optimistic about the feasibility of changing credit unions, provided that they modernise and that there is investment in them. It commented that investment in credit unions by Government is cost-effective, good for consumers and a good investment of government money: it is an effective use of government money with very high levels of gearing to the benefit of local communities. However, Government still have a significant role to play other than in investment. The regulatory environment for credit unions is particularly important. Other the past six months in this House we have been wading through the Financial Services Bill in excruciating detail, brilliantly led by the noble Lord, Lord Sassoon, on many occasions. The Bill sets up an entirely new regulatory structure for financial services in this country. The Government agreed, very imaginatively, to certain changes and amendments to the Bill which will make the role of credit unions more central and more important, but it is essential that the Financial Conduct Authority has its feet held to the fire in order that it delivers the kind of regulatory environment and systems that enable these small organisations to develop and grow and contribute significantly in their local areas.
In addition to the regulatory environment, there is also the convening power of Government. We have heard about the importance of getting the banks involved. The noble Lord, Lord Kennedy, spoke eloquently about the need for secondment, not just for a few hours once a week, but for the brightest and the best of up-and-coming bankers, who find the excitement of working in local communities, who are motivated by seeing the difference they can make, who learn about the ethics that come when they see their clients face to face and who end up running our big banks with all that experience in their background and lodged in the way they do their job. In addition to the banks, which can second staff and help with IT systems, we have heard much about the Post Office, but in my diocese every pit village has a branch of the Co-op. We have had two members of the Co-op speaking to us today. The Co-op is used to handling money and well trusted in the local community. There is also the third sector. The Church of England, of course, and the Roman Catholic Church have branches, if I can put it that way, in every community. We are used to handling money—not as much as we like, often—and we are rather good at it. We have very low levels of fraud. We need to get involved and contribute to this in a powerful and effective way.
I want to sound a brief word of warning. We need to keep the distinct purpose and nature of credit unions. In the 1980s, we saw the growth of the building society movement. As building societies demutualised they became banks, went up with the rocket and down with the stick. We need to prevent that happening to credit unions. Their distinct purpose and nature, their geographical links and their membership links are all essential.
This has been a debate about how we bank at the local level; a very important subject at the moment. It is a cause of much interest, because we are seeing in banking around the country this centralisation of which I have spoken and much criticism of the top level of the banks. Here, we are talking about the other extreme. We need to have a great ambition for the credit union movement to be transformative in local finance and for the ultra-small SMEs, which create the most and the most frequent jobs. The noble Lord, Lord Graham, spoke about the importance of local finance in his own experience over more than half a century. We have heard about the links to housing. This debate is warmly welcomed. The Government have started very well; I hope that they will continue to use their convening power and their ability to bring people together, to hold regulators to account and to get the major players in the financial service sector contributing to credit unions in a way that does not compete with them—because they do not want to be in that area—but that will enable a healthier society.
Lord Cormack
My Lords, it is a very real privilege to be able to follow the right reverend Prelate the Bishop of Durham, who has brought a new dimension to our debates on financial matters and will, I trust, continue to do so when he is elevated to an even higher station. We are very fortunate to have him and it is good to have someone in a position of moral authority in our country who is so aware of how society works and aware, too, of the problems surrounding financial institutions.
I was provoked into taking part in this debate because over the past few months the noble Lord, Lord Kennedy, has asked a number of pointed Questions on credit unions and I have chipped in. It is not a subject that I have studied in great detail in the past, although no one can represent a constituency in the other place, as I did for 40 years, and not be aware of the enormous problems faced by so many of those less fortunate in society, not be aware of the appalling activities of loan sharks, not be aware of how families are often torn apart, with distress, disintegration of family units and, sometimes even worse, with people being driven to suicide. That is really the background to the debate we are having today. We have had some fascinating and important contributions, not only from the noble Lord, Lord Kennedy, who introduced the debate so splendidly, but my noble friend Lord Griffiths of Fforestfach, who has tremendous experience in these areas and who injected a new reality into the debate, for which we are all, I am sure, extremely grateful.
No one in public life who is concerned about the welfare of the less fortunate can fail to be full of admiration for those pioneers of Christian socialism and the Co-operative movement in the 19th century. That is part of the warp and weft of our civilisation, and I honour those people. As a young Conservative, I was just as inspired and motivated by the great speech made in 1872 by Benjamin Disraeli—of course, Mr Miliband is on to this now—when he talked about the need for the Conservative Party to have as one of its prime objectives the elevation of the condition of the people. Those two things march side by side.
One can say, here in 2012, that although credit unions have been around for quite a long time they are an idea whose time has come. We need to have an ambitious acceleration of this movement in the way that my noble friend Lord Griffiths sketched in his speech—as did my noble friend Lord Stoneham, who brought to the debate his great experience of the housing association movement. When my noble friend the Minister comes to reply, I hope that we will hear a sense of real determination to be more ambitious. We are all grateful for what the Government have done and are doing but we need to be more ambitious. The two figures that stuck in my mind from the speech of the noble Lord, Lord Kennedy, were that two-thirds of the population of the Republic of Ireland and something like a third of the population of the United States are involved in credit unions.
At a time when people are often bemused by the advance of technology and the impersonality of the technological society, we need people who can talk to people. How many of your Lordships have not been exasperated when ringing a bank or some other institution on being confronted with a metallic voice instructing you to press button one if you want to inquire about a debit balance and button two for something else? It is bad enough for those of us who have had reasonable educations and think that we are moderately intelligent, but for people who are struggling in the face of debt and difficulty, that sort of thing can be daunting to the point of destruction. The great thing about the credit union, when properly administered, is that people are talking to people.
I was greatly taken by the suggestion of the noble Lord, Lord Kennedy, endorsed by others in this debate, that some of the brightest and the best from our banking system—I speak as the father of a banker—should give some time or be seconded to assist the development of these extremely important parts of society. Our bankers should believe, as I hope the best of them do, in responsible capitalism. Like my noble friend Lord Griffiths, I believe in the market economy and in capitalism, but I believe in responsible capitalism.
I have had the privilege, for the last 10 or 12 years, of being involved in the annual award run by First magazine for responsible capitalism. The first chairman of our judges was Lord Dahrendorf and our present chairman is the noble and learned Lord, Lord Woolf, the former Lord Chief Justice. Each year, we try to give an award to somebody who has really demonstrated responsible capitalism. In the last two years, we have instituted a second award for the SME sector and named it after Lord Dahrendorf. If we believe in responsible capitalism, we believe that the benefits of the market should extend to all our people. It is through the intelligent development of credit unions that that can happen.
Although debates in your Lordships’ House are not always as widely and as well reported as we would like, I hope that people will read today’s speeches by the noble Lord, Lord Kennedy, my noble friends Lord Griffiths and Lord Stoneham, the noble Lord, Lord Graham, with whom I worked often in the House of Commons many years ago, and of course the right reverend Prelate the Bishop of Durham. Running through all their speeches is a coherent thread, saying that those who are among the least fortunate in our society must not be overwhelmed by that society. Because of the rapid advance of technology, there is a real danger that that happens, just as there is a real danger that many of our children and grandchildren will grow up with myriad virtual friends and very few real ones. We have to be aware of these things.
The intelligent development of the credit union movement can help inject a new sense of belonging and community in and throughout our land, so perhaps my noble friend the Minister should ask my noble friend Lord Griffiths to head another inquiry into how we can accelerate the development of the credit union. I would like to see that. My noble friend Lord Griffiths talked about the banks paying these enormous fines and asked whether they could not find relatively small sums of money to augment the development of the credit union. Yes, they could and they should—especially as the taxpayer has such a large stake in those banks. From this debate, a message should go out to those in charge of our great financial institutions, saying that they have an obligation and a responsibility to make it possible for people who are perplexed, and very often greatly worried, to understand the system and to be able to have those in whom they can trust.
The importance of trust is another theme of this debate. That importance runs right through our society, which at the moment is, frankly, in danger. We have had so many examples in recent years of people feeling let down. I will not go into details because your Lordships know the sort of things that I have in mind, However, there is a real chance for the development of this movement, not only in areas such as the diocese of Durham—we had a very good account of that a few minutes ago—but throughout the country. Whether it be my in own rural county of Lincolnshire or the county of Staffordshire, which I had the honour to represent for so long, all over the country there are people who can benefit.
One point that has not been taken up since the noble Lord, Lord Kennedy, mentioned it is the need for people of all financial classes, if I can use that word, in society to take part in this movement. This is not merely a helping hand for the poor. It can help those who are in poverty and encourage them to save, making them cope with their debts in a realistic and proper way. We should indeed all be in this together and I would hope that when my noble friend comes to respond on behalf of the Government, a new sense of urgency will have been injected into government quarters and that he will be able to give us a rather more encouraging response than he gave to the last Question from the noble Lord, Lord Kennedy, on the Floor of the House. Although that answer was entirely benign, it indicated progress that would be far too slow. We have a duty to speed it up.
Baroness McDonagh
My Lords, I thank my noble friend Lord Kennedy for bringing about this debate. I also thank him for all the support and advocacy that he gives to the credit union movement. I declare an interest as a member of the Merton & Sutton Credit Union. This debate is so timely. In the last year alone we have seen the average family’s indebtedness increase by 50% in unsecured loans—credit cards, overdrafts and so on. We have seen people retiring £5,000 more in debt. Yet we are spending millions of pounds on financial capability and debt advice, which in itself does nothing if people have nowhere to go. We know that those on low incomes pay the most for everything: for fuel, food, energy bills and housing, and they have the least access to financial services. If they go to a cash withdrawal machine near where they live, they have to pay a fee—often £1.50 for getting out £10.
We also know that those living on the breadline in our country are most likely to be in employment, working very hard and are most likely to have children. Let us think of the individual who may not have access to credit or whose credit may be maxed out. Think of them needing their car for their work. What happens if that car needs fixing? If today they go to a payday company like Wonga and borrow £300, within four weeks they have to pay back that £300, plus £50 interest. We know that this is not possible and they cannot afford to pay £350 within four weeks, so what happens is that they borrow more and get further into debt, often leading to unemployment—a thing they had tried to avoid. However there are alternatives in credit unions. If that same person were a member of a credit union and went today to borrow that same £300, they would be entitled to pay it back over six months and would be charged £20 interest.
The Minister does not need a long litany of stats and facts from me. He will understand all too well these problems and know that every day people have to grapple with indebtedness and everything that it brings: the misery, stress, ill-health, unemployment, poor outcomes for children, homelessness and the overall cost to our society. Instead, I will make some practical suggestions of the sorts of things we might do. First is to encourage employers to bring credit unions into their organisations and organise check-off, so that people can make small regular payments. My second suggestion is to understand the nature of government as one of the biggest employers in this country. Credit unions and check-off should be made known and available to all civil servants. Half of civil servants work in administrative grades. Women earn on average £17,000 a year and men £17,500. They would really benefit from check-off and access to a credit union. The Civil Service also has the beauty of grades where people earn more money and are able to save.
Furthermore, will the Minister support the initiative by my noble friend Lord Kennedy in persuading the authorities at the Houses of Parliament to set up a credit union here at Westminster—which is due to happen soon—and to encourage staff here to save with this credit union by check-off? Will he also extend that facility to Members of this House and of the other place? The noble Lord, Lord Cormack, extended praise to Christian Socialists and to Disraeli for understanding these problems and issues. I would broaden this praise out to all parties, by reminding ourselves of the lesson that Beveridge taught us: that a service for the poor will always be a poor service. It is really important that we ourselves join and understand credit unions. With that experience we can take this knowledge into all the organisations that we work in. We all have an individual as well as a broader responsibility for them.
Lastly, it is fantastic that the Government have made money available for credit unions to bid for, but as a preference I ask them to support all sustainable bids, which brings about greater access to the credit unions, whether it be through the post office system or the internet. I am not for a moment suggesting that any of these recommendations are a panacea or a magic wand. If you are on a low income, raising a family and working hard, it is really tough in today’s environment, but these things will make credit easier to access at reasonable amounts of interest. I thank the Minister for thinking about these suggestions and I would like to thank my noble friend Lord Kennedy again for bringing about this debate.
Baroness Armstrong of Hill Top
My Lords, I pay tribute to my noble friend Lord Kennedy, not just for today’s debate, but for continually reminding us of the importance of supporting credit unions and changing the environment in which they operate. I have had long-term experience of credit unions in the north-east. I used to teach at what was Sunderland Polytechnic. I taught only mature students, who had come into higher education without the traditional qualifications, on a course where they would eventually become qualified community or youth workers. There was one incredibly strong woman who came from south Tyneside and who had had a difficult life, but was an incredibly good community organiser. We put her on a placement in an estate in Jarrow where there were real problems. These led to significant intimidation and threats because of the number of lenders and so on who operated on the estate without any controls or proper attention. We discussed this and talked about whether she should set up a credit union, which she did. It is now a strong and powerful credit union.
Subsequently, I joined my local credit union as an investor, along with the then Prime Minister. Even so, it did not succeed and I was part of winding it up. However, in the process of doing it, we encouraged other credit unions in Durham to look at merging. They did not quite get that far, but we were able to get housing providers in Derwentside and Wear Valley to support their local credit union. They made this a major issue in their tenants’ away days and in other ways when they put on events for tenants. They really got them to look at how they manage their money and brought in the credit union to help that thinking and spread good practice. Actually, in the housing association in Derwentside, some senior staff got very involved in running the credit union, so it is absolutely strong and has a very good base now. Again, I recommend that to others.
I also managed to get Barclays Bank to come and give advice, support and some publicity to the credit union. The banks could do more, and I very much support the ideas that both my noble friend Lord Kennedy and the noble Lord, Lord Griffiths, had about them. Banks have a great a responsibility but also they would learn an enormous amount about customer relationships and how to work with people who may not have much money but want to be careful with it and use it effectively. As my noble friend Lady McDonagh said, this debate is very timely. At the beginning of this week, I was talking about food banks. A young MP said to me, “I can’t remember: did we have poverty at this level with this effect during the period of Mrs Thatcher?”. Actually, we did not because the safety net was stronger.
I do not know whether the Minister ever gets the opportunity to wander around towns in poor areas but when I go into Consett, in the constituency that I used to represent, I am horrified at the number of shop fronts that are now easy credit shops. They advertise to folk who I know do not just have nothing but already have massive debts to go in and get another instant loan. Too many of those folk do not have pay days for it to be anything but ridiculous that they are offered that sort of opportunity. They then go into a shop where they get white goods and furniture, and they are charged the most incredible rates of interest on a weekly basis. Of course, in the past social fund loans funded that. The experience that the right reverend Prelate talked about in Stanley—“Big Stanley” as we call it in County Durham—links to that directly. Your cooker has broken down and you need a cooker to cook the kids’ tea so what do you do? What you do now is go to one of those shops where they give you extortionate prices for goods, even sometimes for second-hand goods.
I do not think the Government will be comfortable with that or with that being the end result of stopping social fund loans. We have to rethink this. I am not saying, “Go back to the old system”, but there needs to be something that gives people an opportunity to be able to feed their children without getting into that level of debt. Credit unions are one way—not the only way—but they are simply not there on the high street, certainly not in the north-east. I know that one or two of the very big ones have shop fronts but that is not there for most. The Government have to really think through some of the excellent recommendations that there have been and act quickly. The problem out there is getting more and more serious.
I had a Christmas greeting this week from someone that the Minister may have heard of: Bob Holman. Bob works and lives in Easterhouse, and was many years ago my tutor when I trained to be a social worker in Birmingham. He has more integrity than anyone I have ever met in my life. He left university teaching because he wanted to work on a normal wage among the people who he had been training us to work with. He berates me regularly for not taking a low wage—and for not taking a low wage when I was in Parliament. He lives by his beliefs. He described to me in his Christmas note the number of people in Easterhouse now using the food bank as the only way they can feed their children. He talked about the café they had opened at the local church, where they give free tea and coffee and subsidised meals. Bob, of course, is the person who persuaded Iain Duncan Smith to take poverty seriously when he visited that estate.
I do not think any of us can be proud of what is happening today on estates like that. The Government have a responsibility in this. I could have gone on about all the other ideas that everybody has had but I do not want to take up the House’s time. I hope that the Government will take up these good ideas but will also implement them quickly so that more people have access to decent credit and savings in a way that the credit union movement enables them to do.
Lord McFall of Alcluith
My Lords, it is a pleasure to participate in the debate today and in particular to congratulate my noble friend Lord Kennedy on initiating it and, as has been mentioned previously, his continuing work to emphasise this particular issue.
As a member of the Parliamentary Commission on Banking Standards, I and my colleague in the other place, John Thurso, visited Edinburgh last week to take evidence from credit unions, Citizens Advice and money advice services. The question in our minds was: how can we have a banking system that serves the whole of society, especially low-income and unbanked people who are not presently covered, and is there a duty on society and institutions to ensure that everyone participates fully in that society? We have moved from a banking system in which only a fraction of the population had bank accounts to a situation where people need a bank account even to receive state benefits. The banking system is now central to everything that goes on in society. Consequently, the treatment of ordinary citizens by banks—not simply the corporate context—is pivotal to adapting the present system to serve the modern needs of society.
It is a fact that those financially excluded are now also socially excluded. That is where credit unions come in. Mention has been made of the feasibility study done by the DWP in May 2012, a good piece of work which found that the total market for modern banking services for low-income people could be as high as 7 million, with 1.4 million in society presently unbanked. Credit unions are ideally placed to help meet this demand and serve that additional 1.4 million people.
Of course, as has been mentioned, consumers trust credit unions to provide their financial services. That is in contrast to what is happening at the moment with the major financial institutions. The motto of the City is: “My word is my bond”. A MORI poll conducted six months or a year ago in the City found that 80% of those who worked there did not recognise that that was the motto, so something has become disengaged. An anchor has slipped somewhere on that and we need that diversity. At the moment we have five or six major financial institutions—banks—in the United Kingdom worth 450% of the country’s GDP. Not only is that uncompetitive but it does not serve the financial stability interests of the country. That diversity is important.
One problem with credit unions, which was mentioned to us last week, is that they are seen as a poor man’s—or woman’s—bank. That is not so on one level, where they have an advantage and strength in offering services to people whom mainstream banks do not presently serve. But on another level, if credit unions are to grow and become fully established as a potent force, they need to attract the full spectrum of savers—from the low-income to the high-income people. The potential for growth in that area is extensive.
Presently, there are good competitive deals existing in the credit union movement. It was pointed out to us that if a credit union can hold interest at 12.7% APR—which is a target that they all try to achieve—for loans of up to £3,000, those rates are among the best in the market. Glasgow Credit Union, the biggest credit union in Britain, at the moment has a £3,000 loan over 36 months at 12.9%. That is better than any loan from any commercial banking organisation. So there are good things going on at community level at the moment. However, the number of credit unions that can offer current accounts and mortgages total only 24 out of the more than 400 in the UK. Thirty-six thousand people have current accounts. Again, only the four biggest credit unions do mortgages. That is a drop in the ocean and gives an illustration of the opportunity.
If the target of an additional 1 million members is to be reached in the next seven years, credit unions need to be attractive to people of all incomes. Talking of that, the new Moderator of the Church of Scotland, the Right Reverend Albert Bogle, was down in Westminster a couple of weeks ago. He invited me to dinner because I had been on the Church of Scotland’s economic commission looking at the future of the economic circumstances in Scotland. We suggested that following that economic commission, and following the Moderator’s interest, it would be good to think of developing something like a Church of Scotland-wide credit union for the whole of Scotland, because in the Church of Scotland you have high-income earners and low-income earners. It is an ideal establishment for that. I have encouraged the new Moderator to talk to the Scottish Government and the DWP so that we can get that going.
Mention was made earlier of the Irish experience. If we look at the experience in Ireland going back to the 1950s, it was the church there, particularly the Catholic Church, that encouraged members on higher incomes to save so that they could embrace members who needed to borrow, and do so at more affordable and ethical rates. The coverage of credit unions in Britain is 1%, while the coverage of credit unions on the whole island of Ireland, comprising the Republic of Ireland and Northern Ireland, is reaching 30%. So there is a good example for us to follow in that particular area.
The message for today is that credit unions are not the poor man’s or woman’s bank; they are everyone’s bank. I am proud to have been influential in my own area when I was a Member of Parliament in establishing a credit union in Dumbarton, particularly ensuring the common bond. My wife and I were founding members.
I also had the Dalmuir Credit Union in my constituency, which was started by one woman, the late Rose Dorman. It now serves more than 6,000 members and is one of the most flourishing credit unions, but it was down to her social entrepreneurship. There are many Rose Dormans up and down the land. So faithful was she to the credit union movement that when she was dying in St Margaret’s hospice, she called me in to visit her to tell me that the then Treasury consultation paper on credit unions was flawed and she wanted me to do something about it—and we did listen to her in part on that.
What has been suggested this morning came up in evidence last week in Edinburgh, that a major step forward to make credit unions more widely available would be that partnership with the Post Office network. We have been informed that that could indeed be possible if technology could be put in place and if funding was made available by the DWP from the credit union expansion project.
It is important here to emphasise points that have been made earlier. There is a complementary role between banks and credit unions, not just a competitive role—one that is in the interests of both entities: a strong mutual sector, a strong credit union sector and a strong commercial sector learning from the best of each other and thereby helping to serve the interests of consumers in society.
Already there has been some recognition from banks that credit unions have a part to play. For example, the Co-op Bank provides, on a commercial basis, back-office facilities for current accounts; the Clydesdale Bank provides back-office facilities for debit cards; Barclays, the Co-op and Santander post events and provide research for credit unions. The Co-op Bank in particular has seen a host of new business in the past 12 months, as my noble friend Lord Graham has mentioned. That is down to its ethical policy.
We cannot leave this debate without touching on those two words: culture and ethics—culture meaning behaviour and ethics meaning how we resolve the many conflicts of interest in financial services. As one former bank chief executive said to me when I was examining the financial crisis, “It is as if too often people had given up asking if something was the right thing to do and focused only on whether it was legal”.
If we are to build a market that is efficient and fair, non-market values have to underpin it. I refer to Adam Smith, professor of moral theology in 1759 at my alma mater Glasgow University, from which I was proud to receive an honorary doctorate a few years ago. In his writings, Adam Smith was convinced of the necessity of a well functioning market economy, but not of its sufficiency. In The Theory of Moral Sentiments, published in 1759, he argued that while prudence was,
“of all virtues that which is most helpful to the individual … humanity, justice, generosity, and public spirit, are the qualities most useful to others”.
He was also deeply concerned at the inequality and poverty that might remain in an otherwise successful market economy. Today we are witnessing those very issues of widening inequality and deepening poverty. Smith’s comments are as relevant today as they were when they were written more than 250 years ago.
Financial inclusion, diversity in the banking model, reinvigorating mutuality and the establishment of a new ethical framework and culture are urgent. The credit union movement is integral to these initiatives. It deserves our support not only on these market considerations but on those non-market sentiments and qualities of justice and public spirit, alluded to previously, which they execute on a modest yet ambitious daily basis up and down the land.
The right reverend Prelate the Bishop of Durham said the credit union has a distinctive purpose and nature. It is that distinctive purpose and nature that will be beneficial to the financial services industry and to the wider consumer—and one which we must take seriously today, move the debate on, turn things into reality, and make it a big player in financial services in the United Kingdom.
Lord Elystan-Morgan
My Lords, I am grateful to be allowed to speak very shortly in the gap. It was only late yesterday that I realised that I would be able to be in London today.
I applaud and admire the noble Lord, Lord Kennedy, for his sterling efforts, not only today but over the years, in relation to this particular aspect. I accept that it is only credit unions, or some development along very similar lines, that can solve the problem that is a burden for so many of our fellow countrymen. Millions of people in desperate economic conditions suffer the tyrannies of what is euphemistically called the sub-prime credit market. They are not there because they want to be but because the harsh conditions of their life have left them no options.
However, they are not without a shield; that is my point. The Consumer Credit Act 1974 was replaced by the Consumer Credit Act 2006, which extended its provisions and made them much more prevalent. The Act allows a judge in a civil court, whenever it is believed that a borrower has been unfairly dealt with, to intervene substantially and radically in relation to the contract. The judge can do so if he is of the view that the terms of the contract were less than fair, or that the way in which the creditor has acted was less than fair in all circumstances. On the face of it, that could bring about a virtual nemesis of the tyranny exercised by so many creditors in this regard. Even the best of them profit from a situation where there is a huge imbalance of status between creditor and debtor.
Unfortunately, very little use seems to have been made of that legislation. My brief appeal today is that this shield that can protect so many of our fellow countrymen in the years in which we will develop what I trust will be a very wholesome credit union situation, comparable with that in North America, the Republic of Ireland and Australasia, is used to ensure that those people are not left without protection. Society can do a great deal to allow these people to know that they have basic, fundamental rights under the Act of 2006. I would like to see the Judicial Studies Board of every circuit in England and Wales propagate the need for judges to give the fullest possible commitment on this matter, so that justice can be done to a limited degree in the short term for those people who so need it in this context.
Lord Collins of Highbury
My Lords, first I declare an interest as a member and chair of Enterprise the Business Credit Union. I, too, thank my noble friend Lord Kennedy for initiating this debate, and I congratulate all speakers on making terrific contributions. I also hope that today’s debate will assist some noble Lords in better distinguishing my noble friend Lord Kennedy and myself—that would be a bonus.
Current estimates are that up to 7 million people use sources of high-cost credit, and 1.4 million people have no transactional bank account. Four million people incur regular bank charges and 850,000 incur financially crippling bank charges because they need help to manage their money better. As we heard in the debate, just 2% of people in the UK are members of a credit union, compared to 24% in Australia, 44% in the United States and up to 75% in Ireland. Credit unions are also growing fast in eastern Europe and parts of South America, Africa and the Far East.
DWP figures show that credit unions offer the most competitive interest rates in the UK market on personal loans of up to about £3,000. They can save borrowers an average of £400 a year. People with incomes in the lowest 10% bracket would be able to save between £5 and £20 per week if they had access to a trusted local credit union. Despite the low levels of participation compared with other countries, credit unions have been growing steadily here over the past 10 years. Membership, assets, savings and loans have all at least doubled recently, laying the foundation for British credit unions to emulate their international counterparts. As my noble friend Lord Graham said, there are about 400 credit unions across England, Scotland and Wales. Well over 1 million people use credit unions, including—very importantly—more than 123,000 junior savers. These young people have their first experience of the financial sector through credit unions.
Figures show that £776 million is being saved in British credit unions and £602 million is out on loan to members. As we heard, 25 credit unions across the UK now offer current accounts, with more than 34,000 people holding one. Some credit unions offer mortgages, cash ISAs and insurance products. Credit unions operating in Britain today are extremely varied in size, in membership and in the range of services they offer, but they all share a basic philosophy of mutual support and co-operation. The uniqueness of many credit unions is their connection to communities and, more importantly, their commitment to localism.
The changes to the Credit Unions Act 1979 that came into force in January 2012 through the LRO will enable credit unions to provide far more than simply a banking solution for the financially excluded. Often, local communities want to save locally in order to be able to provide lending opportunities to support local businesses and help regenerate and reinvigorate their communities. This was highlighted by the right reverend Prelate the Bishop of Durham. This modernisation of credit unions has enabled and will enable a much more fundamental change in which they will shift from targeting the financially excluded to becoming fully inclusive. They are teaming up with associations and charities to find innovative ways of meeting the needs of new groups of members. We also heard in today’s debate about the social housing sector. The new unions will be available to all, accessed locally, fair, safe and simple. They will bring banking back into the heart of every community.
The investment in credit unions announced in June by the noble Lord, Lord Freud, following the decision to take forward the recommendations of the independent credit union feasibility study, is extremely welcome; it is terrific news. The objectives of the Credit Union Expansion Project are very ambitious. The project aims to increase credit union membership by at least 500,000 people on lower incomes by March 2015, and to increase this number to 1 million by 2017; to increase access to affordable credit so that members will save an additional £1 billion in interest payments compared to the charges they would otherwise have had to pay to high-cost commercial lenders; and to ensure that credit unions will deliver this expansion in a way that makes them financially sustainable. We have heard how difficult that is.
The £35.6 million of funding available through consortia of credit unions will enable support to go to credit unions of all sizes, enabling them to expand through capacity building and collaboration. The study found that even the biggest credit unions struggle to meet the operating costs of making small loans to people on lower incomes. The project will clearly help—and is helping—to secure the industry’s long-term financial sustainability. Credit unions will be able to buy in the new IT systems and infrastructure needed to increase the number of people they help to save and borrow.
As we heard from my noble friend Lord Kennedy, following the debate and amendments in this House, I welcome the Government’s acceptance of the need to cap the horrendous interest rates charged for so-called payday loans in an attempt to deal with the worst excesses of that market. As many have recognised in today’s debate, payday loans are only part of the story. Within the licensed market we have door-to-door home credit, pawnbrokers, rent-to-buy stores and agency mail order sellers.
We need to empower consumers, providing more information on the alternatives to high-cost lenders. We need to instil a culture of saving earlier on in life—something that schools need to embrace more readily. Trade unions, too, could do more to provide information, and I welcome the recent campaigns by some. Alongside employers, trade unions could also do more to support credit unions through payroll deduction schemes. Again, I welcome the comment of the noble Baroness, Lady McDonagh, that the Government as an employer could work with trade unions in the public sector to promote credit unions. Earlier this year, my own union, Unite, pledged to challenge Britain’s payday lenders by establishing a nationwide credit union network. This followed the launch of a Unite-backed credit union in Salford as the model for such a network. Steve Turner, the national official concerned, said:
“We are trying to get to the point where you can get emergency loans through credit unions, to stop that third week being Wonga week”.
Obviously, the interest rate cap for credit unions makes it difficult to offer sustainable arrangements that would enable them to compete in this way. Therefore, the Government’s proposal to increase the interest rate cap for credit unions from 2% to 3% is welcome. However, I am sure many credit unions will feel that this is difficult for them, as it runs counter to their ethos of low interest rates. I am sure that some may even argue for the removal of the cap altogether. I suspect that neither course is right.
What I hope we shall end up with, in light of the expansion of credit unions, is a change that maintains and safeguards members’ comfort and allows credit unions to get on in a competitive environment, ensuring that they are on equal terms with those other payday, home credit lenders and rent-to-buy stores. Credit unions will find it difficult to reach the targets without the support of the Government. Could the Minister tell us what role a nationwide marketing campaign might play in reaching the target and, if he thinks that this is appropriate, when it might be possible for this to commence? Could the Minister also tell us—and I repeat the question asked by my noble friend Lady McDonagh—what the department will do to expand and support payroll deduction schemes throughout and across government departments? There are many government employees who would seriously benefit from membership of a credit union.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I must start by thanking the noble Lord, Lord Kennedy of Southwark, for securing what has been a really important debate and for his excellent work in supporting the sector, given his position as the vice-chair of the All-Party Parliamentary Group on Credit Unions. We have had a lot of very thoughtful contributions today, which I know he will have been pleased to hear. Before I touch on some of those, I must also particularly thank the noble Lord, Lord Griffiths, not only for his contribution today but also for his work on the steering committee responsible for the production of our feasibility study, alongside Deanna Oppenheimer, the chair of that team, and Paul Ruddle.
Credit unions play an important part in their local communities by helping low-income consumers, and they can support our aims to tackle problem debt and increase financial inclusion. Today has been an opportunity to reflect on the advances that credit unions have made and what needs to be done in order to provide a wider, more innovative range of financial services to many more consumers. There are 400 credit unions in Great Britain, with £776 million saved in them and more than £602 million currently out on loan. We have 25 credit unions offering current accounts, and some offering mortgages and insurance products. As a number of noble Lords have pointed out, membership of the movement has grown to just over 1 million—and that includes 123,000-odd junior savers. But as the noble Lord, Lord Kennedy, pointed out, that is still only 2% of the adult GB population, compared with credit union coverage of 75% in Ireland and 44% in the USA, so there is room for expansion, to say the least.
We have an estimated 7 million people impacted by what is called the poverty premium, which means that they pay much more for credit and goods than other people. Very often their options are limited to home credit, rent-to-buy shops, payday lenders and illegal loan sharks, which leads all too easily to over-indebtedness. A typical home-collected credit loan charges 272% APR, on a £400 loan over 52 weeks. This works out as a total repayment of £728, whereas a similar loan from a credit union would cost £457, a saving of about £270.
For many years, credit unions have been working in partnership with national and local government, commercial organisations and the voluntary sector to improve the financial health of individuals and families. Many MPs and Lords, as we have heard today, have taken—and continue to take—an active role in supporting their local credit unions.
One of the most interesting common themes running through many of today’s speeches from the noble Lord, Lord Kennedy, my noble friends Lord Griffiths, Lord Stoneham of Droxford and Lord Cormack, and the right reverend Prelate the Bishop of Durham, was the role of banks in supporting the credit union movement. I ought to make the point that banks are in fact supportive. Many see a role for themselves and, indeed, Deanna Oppenheimer supported our feasibility study out of her role on the retail side of Barclays. We should not just ignore their support, but it is clearly an interesting suggestion from noble Lords about whether one should look to the banks for further and deeper levels of support, both in terms of funding but also, and possibly even more importantly for an industry that needs to grow and mature, in the form of the expertise that can be found in the banking sector.
The DWP provided funds of £113 million to more than 150 credit unions between 2006 and 2012. This money was used to support low-income consumers to access necessary and affordable loans, offering a real alternative to the higher cost lenders. On top of that investment, we implemented the legislative reform order in January 2012, which allowed credit unions to reach out to new groups, provide services to community groups, businesses and social enterprises, and offer interest on savings. That helps the credit unions to grow, but clearly much more needs to be done. That is why, following the publication of the feasibility study findings in May, we looked at how credit unions could provide financial services for up to 1 million more consumers on lower incomes—in other words, doubling their footprint—in a way that would allow the movement to modernise, expand and, most importantly, become sustainable and financially viable. My noble friend Lord Griffiths made the important point that we need this industry to become viable. Those proposals reflected a mood for change that is evident throughout the sector and is shared by many interested stakeholders. The study told us that a new approach is required and that reducing costs, modernising, expanding and reorganising must all be part of the equation for the sector to become viable.
In June we announced that we would proceed with the project and make up to £38 million available over the next three years to credit unions that embrace change and modernisation. More than 60% of consumers contacted by the feasibility study wanted the type of local, trusted service that credit unions provide. We have asked for bids against the funding and are currently in the evaluation phase of the project. I will make a further announcement on this in February next year. I hope that that is soon enough. Some noble Lords have criticised the Government for moving too slowly on this. I hope that that date is soon enough to show that we are pushing ahead with this. However, I emphasise that the project will go ahead only if it is subject to tight project management discipline to maximise the chance of success and minimise the risk of financial failure.
Alongside those proposals, the study also proposed that the Government consider an increase to the credit union APR cap, which is currently set at 2% per calendar month, as that would allow credit unions to make small loans to more low-income people at a competitive rate. The study contained compelling evidence which indicated that the average unit price to deliver a loan was £108 and that making a £400 loan over 12 months would earn only £57 in interest—barely half the amount that it cost. While on the surface it does not seem fair to increase interest rates on loans, particularly for people on low incomes, we must move to a position where credit unions can cover their costs on these smaller loans, or get near to doing so, as these smaller loans are costly in terms of administration and staff time. The 3% charge on a £400 credit union loan would increase from £57 to £82. That is a much lower rate than that payable through the other options facing people who want this kind of loan. The increase will result in people paying about 50p per week extra for that typical average loan in return for access to a service that the feasibility study tells us they need and want. However, I remind noble Lords that this is a permissive change. Credit unions will continue to be free to charge lower rates. Clearly, they will want to do that on larger loans where you do not need to cover the administrative costs or you spread them more effectively.
The Economic Secretary to the Treasury, Sajid Javid, has announced that HMT plans to start the rate cap consultation next week, leading to any regulatory change by HMT and BIS being introduced in summer next year. This would allow credit unions to prepare and implement the change from April 2014. The consultation is seeking views on increasing the cap to 3%. Removing the cap entirely would have significant consequences for the movement. The cap is important because it exempts credit unions from consumer credit regulation on the basis that they are not-for-profit, ethical, lending institutions that can be trusted to treat borrowers fairly. Removing this exemption would place a costly burden on credit unions and consumers alike. If the proposal to increase the APR cap to 3% is accepted, the Government will look to ensure that the Consumer Credit Act exemption also remains in place. We are encouraging people to submit their views to the consultation.
I earlier suggested that credit unions must provide a wider, more innovative range of financial services. We hear daily about the growth in payday lenders. Clearly, for some people payday lenders provide a solution which works and is convenient, but they must not be seen as a solution to financial difficulty or a form of credit that is suitable for long-term borrowing. The APR is a very blunt instrument because of the administrative cost involved. If, for example, I was generous enough to lend the noble Lord, Lord Kennedy, £50 and wanted it back next Thursday and suggested that he pay £5 for that service and give me back £55, which seems utterly reasonable to me, the APR rate on that would be 14,300%. Actually, because it is a leap year this year, it would be 14,500%. I give that figure to illustrate that you have to be very careful when using an APR which is designed for longer-term loans, where it tries to cover the administrative costs. It becomes ludicrous when you are covering very short-term loans for small amounts of money.
Despite that comparison, the Government have recently tabled an amendment to the Financial Services Bill because clearly we need to take action to protect vulnerable consumers from the worst practices of lenders. That amendment gives the Financial Conduct Authority a specific power to cap the total cost of credit if it considers that it is consistent with its objectives to do so. These powers will come into effect once the FCA takes over regulation of consumer credit in April 2014.
To pick up the point made by the noble Lord, Lord Elystan-Morgan, the current regulator, the Office of Fair Trading, uses the provisions of the Consumer Credit Act and other legislation to regulate the activities of lenders, including payday lenders. When that responsibility moves to the FCA, it will have additional powers and a range of tools to tackle consumer detriment.
Our plans for universal credit will help low-income households to develop greater responsibility for managing their household budgets and support their transition into work. There is a role for credit unions here and, indeed, a number of them are already working with their local housing associations to develop an account that helps with budgeting and ensures that rent is paid, to pick up the point made by my noble friend Lord Stoneham.
We know that most people on low incomes manage their money well, but around 1.3 million working-age adults still do not use a mainstream bank account. The combination of monthly payments, access to a mainstream bank account and the right level of support will make it easier for households to take advantage of, for instance, cheaper tariffs for essential costs such as utility bills. Increased financial responsibility will also allow households to improve their access to affordable credit.
On the point raised by the noble Lord, Lord Kennedy, on jam-jar accounts, we recognise that accounts with in-built budgeting facilities could support some claimants to manage their money and we are currently working with a range of financial providers, including credit unions, to explore the feasibility of offering these accounts to UC claimants. We expect to announce our detailed approach in that area in the new year. We also recognise that people will need some additional help and support from services provided at a local level and we are working with local authorities, housing associations, credit unions, Money Advice Trust, Citizens Advice and other groups as we work out our strategy.
On the point raised by the noble Baroness, Lady Armstrong, universal credit support will still be available to claimants through budgeting advances, which will help meet unexpected expenses such as household equipment or furniture purchases.
While the support of government is important, it is essential that credit unions attract the appropriate mix of savers and borrowers and working and non-working customers from a range of income levels to become sustainable. It is in that context that I welcome the All Party Parliamentary Group initiative with London Mutual Credit Union to recruit more members from Parliament into credit unions. I support that initiative and look forward to the project launch, which I understand will be in February next year. This picks up the point made by the noble Baroness, Lady McDonagh, about joining such institutions.
The point made by the noble Lord, Lord Collins, about a nationwide marketing campaign is a good one. I do not have a response today, but I will go and mull on that point because next year could be appropriate timing to look at something like that.
I know that in my own department officials are working to promote the benefits of becoming a member of a credit union and encouraging staff to join or to volunteer to help. In the end, the credit union movement and credit unions themselves must step up and show they have the ambition to change and to serve many more people. It will require real leadership from the sector and a real will to modernise. I am sure that, together, we can develop a sector that is sustainable, innovative, and continues to be central to the communities it serves.
Lord Kennedy of Southwark
My Lords, I thank all noble Lords and the right reverend Prelate for their contributions. It is encouraging that there is so much support across the House. I very much endorse the remarks of many noble Lords about putting the personal back into banking and getting the retail banking sector to step up to the mark. Not having access to bank accounts leaves people at the hands of high-cost payday lenders. This is a huge problem that has to be addressed. Getting the balance right between regulation and enterprise is so important to create the conditions for the sector to prosper. Many noble Lords spoke about the importance of ensuring that the credit unions have the management and professional governance structures in place. I fully support what was said.
We have to be ambitious for the movement and for the sector. I hope the Government will reflect on the debate and see the credit union movement as a key component in the financial marketplace. While some banks have provided support, I was delighted that many noble Lords supported my call for them to do more.
In conclusion, I thank all noble Lords for their contributions. I can assure all noble Lords that the development of credit unions is a matter I will return to again and again in this House. The noble Lord, Lord Cormack, said the banks could and should do more. It is our job to make sure the banks respond to that challenge as, “Yes, we will do more.”.