Credit Unions

Lord Archbishop of Canterbury Excerpts

Thursday 13th December 2012 Lords Chamber

[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.