Credit Union (Maximum Interest Rate Cap)

Tuesday 18th December 2012 Written Statements

[The Economic Secretary to the Treasury (Sajid Javid)]

The Government have today published a consultation on raising the maximum interest rate cap for credit union loans. This consultation seeks views on the proposal to increase the maximum interest rate that credit unions can charge, from 2% per month to 3% per month.

The rationale for this proposal was explained in detail in a feasibility study commissioned by the Department for Work and Pensions (published in May 2012), which found that credit unions are currently unable to break even on small, short-term loans. This leads to a lack of stability in the sector, which is damaging for the long-term future of credit unions.

Allowing the maximum rate of interest to increase will enable credit unions to become more stable over the long term. This means that low-income consumers will have greater access to reliable, affordable credit, without having to resort to more expensive means, such as home credit or payday lenders, or worse, illegal lenders. Even with a 1% increase in the monthly rate of interest, credit union loans will still be substantially cheaper than the alternatives for consumers with no mainstream options. It is important to note that this increase in the interest rate would be permissive; it does not require credit unions to increase the interest rate they charge but simply permits them to do so if they judge that the benefits outweigh the costs. As such, the measure eases an existing regulatory burden on credit unions.

Many credit unions are strongly embedded in their local communities and are committed to assisting those on low incomes. Research shows that credit unions often appeal to low-income consumers as bodies which are local, accessible and convenient, and which are community based. Giving credit unions more flexibility in their lending will enable them to recruit new members, and further establish their role in helping the financially excluded.

The Department for Work and Pensions, HM Treasury, and the Department for Business Innovation and Skills will continue to work closely on all aspects of the credit union expansion project including this consultation, and any consequential legislation.

I am placing copies of this consultation document in the Libraries of both Houses.