Credit Unions

Andrew Turner Excerpts

Wednesday 23rd November 2011 Westminster Hall

[Damian Hinds]

I agree with the right hon. Gentleman. That is the single most exciting potential opportunity for the sector, and I will come to it shortly.

The key piece of deregulation, and what makes this debate particularly timely, is the passing of what in the credit union movement is known as the LRO. Politicos, however, prefer the longer title of Legislative Reform (Industrial and Providence Societies and Credit Unions) Order 2011, which is an awfully long phrase to get one’s head around. It is very important to the sector and has been an awful long time in the making. When speaking to credit union groups, we always get a groan when we say, “Soon, the LRO will be with us.” I am pleased to say that the order has now been passed and will be with us in the new year.

There are three critical elements to the LRO. First, there is the liberalisation of the common bond requirements. Traditionally, there has to be something in common between the members of a credit union. Although that has some advantages, it is also restrictive of growth. In future, credit unions will be able to open up membership to residents of a local housing association, which may have tenants outside the common bond area, or to employers who may have different branches and operations elsewhere. It will also help to facilitate the growth of the strongest credit unions, thus helping to serve more people.

The second key element is the capacity to pay interest on savings rather than the traditional dividend. The divvy, as it is known, has many advantages. However, it is rather difficult to explain, especially if someone is trying to persuade people to put their savings into a particular product. They may say, “Well, it depends how much money is left at the end of the year and then we will divide it all up and you will get whatever you get.” When a credit union is trying to compete in the market against individual savings accounts, it needs to be able to demonstrate a competitive rate. In future, it will be possible for credit unions to do that.

The third important change is in the type of members. It will be possible for credit unions to engage with not only individuals but organisations for a portion of their business. I do not think that we will see many large plcs suddenly starting to bank with their credit union, but it will work for local community groups, not-for-profit groups, small traders and so on that keep relatively small, but not totally insubstantial, positive balances in their account.

On a wider basis, we could say that credit unions have the potential to be the banker to the big society. Importantly, these changes are enabling; they are not compulsory. Three-quarters of credit unions intend to extend their membership base as a result of the changes.

What are the critical success factors for credit unions to be able to promote financial inclusion? We have to look at that on two levels: individual credit union and system-wide. For an individual credit union, scale is needed. It then needs a proportionate cost base so that it can run a surplus. It needs a good mix of savers and borrowers and income groups. To be successful, credit unions cannot just be for the most disadvantaged; they need a good mix. MPs and our local media can play an important part by encouraging more people to put a proportion of their savings—it does not have to be all—into credit unions in the knowledge that they are totally safe and that they will be doing some good in the local community.

On the system-wide level, scale is again at the top of the list of success factors. Alongside that are awareness, visibility and accessibility. Credit unions suffer on that count at the moment. Not as many people are aware of credit unions as they are of the sort of organisations that can afford to advertise constantly on daytime television. Credit unions need attractive, competitive products and substantial, robust back-office processes and interfaces.

[Mr Andrew Turner (Isle of Wight) (Con)]

My hon. Friend is drawing our attention to a number of issues; one of which I am aware is that the Isle of Wight credit union died earlier this year and was helped to amalgamate with the Hampshire credit union. We were greatly helped by the Financial Services Authority, and of course the local people were helped too, but it is important that people should feel some local connection. We do not need huge credit unions that go all over the country.

[Damian Hinds]

My hon. Friend makes a fine point. There will be variety. One of the things that sets credit unions apart is having something about them other than just being a financial institution, and that aspect will absolutely continue. However, these deregulatory changes will also enable stronger credit unions to grow and reach out to more people.

The other thing that can facilitate great change, improvement and growth in the sector is the modernisation fund of up to £73 million, which the Government are making available to help credit unions that can expand to reach self-sustainability in four to five years. I know that Ministers are considering a feasibility study on this issue, and whether and how best to use that money. There are some ways that Government capital can make a big difference. First, it can help the sector to develop a common banking platform and business processing. The sector has already demonstrated its potential for doing that with the credit union card account and the credit union prepaid card.

Secondly, as has been alluded to already, there is the possibility of linking credit unions with the Post Office, marrying a huge, trusted, visible and, for most people, accessible network with financial services from credit unions, which currently suffer from not having that presence. Thirdly, there is the development of the brilliantly named Jam Jar budget account, which is all about helping people to mimic the way that our mums and dads’ generation organised their finances. They had a jar for the rent, a jar for this outgoing, a jar for that outgoing and then they knew what they had left. It is a lot harder to know that these days. I mentioned some of the bank charges that people can incur, particularly in the first year they have a transactional bank account and move away from operating on a cash-only basis. Of course, that is of particular interest at the moment, not least because of the Government’s ambitious welfare reform programme.

There is another idea that I want to throw into the debate. It is not something that the sector is calling for, but I want to see new and innovative ways for people right across the country who may not have an immediate association with a credit union to put part of their investment portfolio through something like a social ISA, to hook them up with opportunities with credit unions and perhaps also with community development finance institutions or other social enterprises, social impact projects and so on.

We want growth in the sector and we want more financial inclusion, but we have to note and accept that particular costs are associated with inclusive growth. I am not a banker—thankfully—but to oversimplify things hugely I suggest that there are three key cost drivers to extending credit: the first is the riskiness of the customer base; the second is the term, or length, of the loan; and the third is the cost of collecting repayments. On those criteria, operating in the sub-prime segment of the market and reaching out to riskier types of customer, particularly with small loans and shorter-term loans, carries an additional cost.

Credit unions are known as an affordable option; that is what makes them so attractive. Their 26.8% APR limit is absolutely key, but the thing that we perhaps do not speak about often enough is that the limit has limits and it restricts what credit unions can do. With the growth fund, credit unions were able to reach out to a more excluded segment of the market. For the people that process helped, the savings have been quite substantial; there have been total savings in interest of more than £100 million and there has been a big drop-off in that group in the use of high-cost credit. However, for the credit unions themselves it is a costlier segment of the market, which is part of the reason why we have seen an erosion of the growth fund over time. Of course, with the growth of payday loans in particular it is especially difficult—actually, it is mathematically impossible—for credit unions to compete with organisations that are able to charge an APR in the thousands per cent, when credit unions themselves are capped at an APR of something less than 30%.

Some of the increased costs may be mitigated by technology. Of course, part of the point of the social fund is that if there is direct benefit deduction it greatly reduces the cost of collection and the cost of default. Jam Jar budget accounts are another development that would help in that respect, as would different channel developments. Those developments may mitigate the increased costs, but they are not the whole answer.

The sector is not calling for a lifting of the 26.8% APR limit, but I am sure that some right hon. and hon. Members have heard from individual credit unions, as I have, that they would like a liberalisation of the limit. There are big perception issues around that question but we must keep the debate active, because even if the limit on credit unions was somewhat higher than it is today there would still be a huge gap between the APR of credit unions and the 272% that someone might pay a home credit provider, or the thousands of per cent to a payday lender.

In recent months, a wider debate about APR caps and restrictions overall has had quite a lot of currency in this place, although as I said earlier, that is not a debate for today. Suffice to say, however, that everything I know about economics tells me that a blunt general cap on APR would be a terrible idea for multiple reasons, with all sorts of unintended consequences. I know that the Government are actively engaging in debate and analysis of the issue, so perhaps it is possible to have a different sort of regime—a different structure to the restrictions—which would get rid of the worst excesses of the market without denying people access to credit altogether. Personally, I have been kicking around the idea of a double-restriction scheme, whereby there is a limit on the initial set-up fee and then a separate limit, or set of limits, on the interest rate charge, which would enable payday loans, home credit and all sorts of things to continue while getting rid of the worst excesses of the market. In that different way of thinking, it might also be possible to create a different sort of regime for credit unions, although I stress again that it is not something that the sector is calling for.

To conclude, credit unions can deliver in Britain on a much bigger scale than they do today; we have only to look to Northern Ireland for a model of what things could look like. Credit unions can also deliver greatly enhanced financial inclusion. Let us not forget the human angle: more stable lives, less pressure on relationships and families and, essentially, happier people. Credit unions can also target and reach at-risk groups, such as those leaving care or ex-offenders.

--- Later in debate ---

[The Minister of State, Department for Work and Pensions (Chris Grayling)]

It is a pleasure to serve under your chairmanship, Mr Streeter. It has been an extremely informed and useful debate. I congratulate my hon. Friend the Member for East Hampshire (Damian Hinds) on securing it, on the extensive work that he has clearly done chairing the all-party group, and on his involvement in the credit union fair today. It is with fortuitous timing that we debate this issue at the same time as the fair, which showcased the valuable work of credit unions. There is a greater focus on both events as a result, but I particularly pay tribute to my hon. Friend and his colleagues for their involvement in the fair—a sign of hon. Members not just talking, but acting—and showcasing work by a sector that we all agree plays a very valuable role in our society, particularly in tackling debt, which can be a massive burden on lower income families.

One of the consequences of the credit crunch is that it is now more difficult for families on low income to obtain credit. The consequence can be to trap people in poverty, which makes it more difficult for many people to improve their work situation, as it constrains job search activity and makes financial planning much harder to manage. Of course, it also denies people access to certain types of job; for example, those that include handling cash are not necessarily available to people with poor credit records. It means that people have more demands on their finances, more to lose if something goes wrong, and are therefore perhaps more cautious about changing their financial situation; for example, by leaving the relative security of the benefits system and moving into work, even though we all know that once they are established in work, they are much better off in the long run.

We are dealing with the problem of debt that entrenches people in poverty. We know that those on low incomes are at the greatest risk of ending up in debt and, as a result, are often the least equipped to cope with it. One of the principal causes of debt for those on low incomes is that the majority have few or no savings. When an unexpected financial pressure occurs—an essential household appliance stops working; for example, the fridge breaks down—they have to resort to borrowing to make ends meet. However, they are treated as high-risk borrowers by the financial services sector and have to pay a high price for their credit. We have heard very articulate arguments this afternoon about the problems that can create, and about various lenders in the marketplace. My hon. Friend the Member for Chatham and Aylesford (Tracey Crouch) made valuable points about the risks to families on very low incomes and the huge price that they can pay for access to some of the things that those who are able to access mainstream financial services find easy.

Credit unions offer a valuable alternative service. By working within communities and helping those most in need of support, they help people to manage their financial affairs. Hon. Members play a valuable role. It has been interesting to hear how many of them give active support as members of their local credit union. As the right hon. Member for East Ham (Stephen Timms) said, successive Governments have supported credit unions and directly helped the sector to grow. We are keen to continue that support in a sustainable way; we believe that it is important. That is why we have agreed to continue providing support from the growth fund while we carry out a feasibility study into how we should help the sector to develop in the future. We have allocated £11.8 million to continue to support credit unions and other community financial institutions in this fiscal year. We want credit unions to continue to be part of the financial services landscape.

We also have a duty to ensure that credit unions operate efficiently and offer a good range of services to a wide range of people. Many credit unions are run at a loss. Many do not offer the same range of products and services. Many cannot provide services that are available in another part of the country. We have heard much about the legislative reform order this afternoon. As I am relatively new to the issue, I had not followed the extensive process to the degree described by my hon. Friend the Member for East Hampshire, but the order is there. It is happening. It will help to improve coverage.

The amendment to the Credit Union Act 1979 effectively opens up membership of credit unions to new groups, such as housing association tenants and employees of a national company, even if some of those people live outside the geographical area served by the credit union. It was either the right hon. Member for Oxford East (Mr Smith) or the hon. Member for Islwyn (Chris Evans) who pointed out that it is important for credit unions to spread their umbrella over a wider area than they do at the moment. My hon. Friend the Member for East Hampshire made a point about credit unions becoming the bankers of the big society. He is correct to say that there is potential to drive deep into the heart of the communities that they serve.

[Mr Andrew Turner]

I want to point out, and I am sure that the Minister would agree, that the people who run credit unions have made a great contribution. When the Isle of Wight credit union ceased to exist, the new amalgamated credit union of Hampshire and the Isle of Wight did a great deal of work, which was carried out by individuals voluntarily in the constituencies.

[Chris Grayling]

I pay tribute to all those involved. This is the essence of the credit union movement, and indeed the essence of the co-operative movement as a whole. If I have one regret politically, looking back over history, it is that the co-operative movement found itself on the left of politics rather than the right. The co-operative spirit has much in common with the spirit that we on the Government side of the House represent. Many of the changes that we are putting in place are designed to try and encourage people to work together. Within the credit union movement, we find that writ large.

As a result of the changes in the review, credit unions will be able to pay a guaranteed rate of interest on members’ savings. We hope that will help them to attract more savings, and so make more affordable credit available in the community. We also want them to do more. We want them to look to the future, reach out to offer new products to many more potential members, and work to provide the services that landlords and their other partners want. We need them to become more efficient, better known and more attractive—effectively, to move to the next level of potential for the credit union movement.

Credit unions need to reduce their costs, increase their capacity, and operate more efficiently by sharing back-office activity. The right hon. Member for East Ham asked a question about that. The creation of a central financial wholesale organisation for credit unions is being examined by the feasibility study, which is looking at a wide range of different options. It is being led by a project steering committee, supported by the Department for Work and Pensions. I am pleased that the issue of Jam Jar accounts was raised. Financial products such as Jam Jar accounts are very much part of the study.