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.