Credit Unions

Damian Hinds Excerpts

Wednesday 23rd November 2011 Westminster Hall

[Damian Hinds (East Hampshire) (Con)]

It is a pleasure to see you in the Chair for this important debate, Mr Streeter. I know that we are competing against an Opposition day debate in the main Chamber and the appearance of Mr Patrick Vieira, so it is particularly good to see many hon. Members present. The subject matters to Members from all parties in the House. It is good to see at least four parties represented here already, with possibly a fifth quite soon.

I should declare an interest at the outset in that, like many hon. Members present, I am a member of a local credit union—in my case, United Savings and Loans, in Hampshire. I also chair the all-party group on credit unions, whose secretariat is provided by the Association of British Credit Unions Ltd.

The debate is timely, and that timeliness is to do with the making earlier this month of a legislative reform order that will come into effect in January. It is a key milestone enabler for the credit union sector that will boost the ability of credit unions to improve financial inclusion right across the piece. There are other timely aspects, such as the Government’s recent announcement on the modernisation fund and the exciting possibility of linking up credit unions with the post office network. More broadly, the debate is timely also because of the focus that we have these days on debt at all levels—national, corporate and individual—and because of the desire to re-encourage a culture of savings at a time when 4 million households in the country have no savings at all.

Several related debates are taking place within Parliament, such as on capping the cost of credit, debt management companies and credit brokerage. While those are not debates for today, I would not be surprised if hon. Members brought up aspects of them.

Credit unions have a huge growth opportunity in this country. The sector has already seen substantial and rapid growth over the past decade—between 200% and 300%, depending on which measure we choose. The growth fund, which was introduced under the previous Government, was a big part of that growth. There had already been substantial momentum for growth, but the growth fund also enabled credit unions to reach out to a new category of clients and members. Credit unions in Britain now have more than 800,000 adult members and more than 100,000 junior savers.

However, on an international level, membership penetration of the population by credit unions in this country remains small—a low, single-digit percentage, compared with almost a third in the United States and Australia, and almost half in Ireland. Before I am corrected, I should say that when I talk about credit unions in Britain being small, I am referring to Britain, not the United Kingdom, because in Northern Ireland, as in the Republic of Ireland, credit union penetration is massively higher than it is in England, Scotland and Wales. Globally, there are some 53,000 credit unions, with 188 million members across 100 countries. This model is not some newfangled idea or experiment; it has a great international, long-term record.

We are here to talk specifically about credit unions and financial inclusion. It is important to note that when we talk about financial inclusion or exclusion, the subject is not quite as binary as those terms suggest. It is not that someone is either included or excluded, but that there is a scale in between. No one has no access to any financial service whatever. The scale runs from one end—people trading derivatives on personal accounts—to the other, which is people borrowing money from the sort of lender whose idea of a late-payment penalty is a cigarette burn to the forearm. The question is not whether someone is absolutely included or excluded, but what sort of financial services they can access and at what cost.

A great deal of progress has been made on the entry level of financial inclusion, which is having a transactional bank account. In 2002-03, 10% of households did not have a bank account, and the latest figures suggest 4%. That, however, is still one household in 25, or 1.5 million adults in 1 million homes. Disproportionately, such households are single households, households with single parents and pensioner households, and they tend to be at the bottom of the income scale.

Not having a bank account matters on a practical level. Figures suggest that people could save between £125 and £215 just on utilities in the first year, because they could use direct debit. Interestingly and importantly, such savings can be wiped out by bank charges, particularly behavioural charges for people who are more used to dealing on a cash-only basis.

Broader than the question whether someone has a bank account is how much they pay. Risk will always be priced into credit. Different people will always pay different prices. However, it remains the case that some people pay massively more than others. In credit and other sectors, there is still a significant problem in that the poorest pay the most.

The Centre for Responsible Credit recently produced a good analysis and report, showing how much more the poorest pay for their credit than we—people with access to mainstream credit—do. It found that for every £100 borrowed for infrequent purchases, such as white goods, the cost of credit for people with access only to high-cost credit was on average 2.5 times as much as for people who accessed mainstream financial services. For annually recurring items, such as Christmas presents and back-to-school purchases, that figure rose to 10 times: the cost was £7.80 per £100 borrowed on a Barclaycard, and £71.90 if someone borrowed from home credit providers.

We are not talking about small numbers of people, even though sub-prime and high-cost credit is not an issue that many opinion formers and journalists are particularly aware of because they do not see some of the issues. The leader in the home credit market has 11,000 agents calling weekly on one home in 20 in the UK to collect repayments. Payday loan companies have between 1 million and 2 million customers per annum, and the segment is growing quickly. The leader in the rent-to-own market has 245 stores nationwide, with an ambition to more than double that. With rent-to-own in particular, the question is not only the advertised annual percentage interest rate, which is high enough, but the hidden costs that go with that, especially on the mark-up of goods and the additional cost of service cover.

Across personal credit, particularly to the most disadvantaged, although we could argue that this extends far beyond them, much of the emphasis is not on what they can afford to repay, but on what they want. Combining that with extensions and roll-overs, too many of the poorest and most disadvantaged people in society find themselves in a seemingly never-ending trap of debt, from which it is difficult to break out.

How do credit unions address financial inclusion? On transactional bank accounts, credit unions offer current accounts, and I have such a card with me. There are 33,000 active accounts through 25 different credit unions. Credit unions also offer affordable credit. Interest on loans from credit unions is capped at 26.8% APR, which is a small fraction of what someone might pay to high-cost and sub-prime lenders. Importantly, credit unions must have a balance between savings and loans, so they encourage savings. They are personal, community focused and responsible, and perhaps most importantly, they have an ethos about helping people. They are run by and for their members and are truly co-operative, without a profit motive.

One of the most important development and growth areas for the credit union sector recently has been forging partnerships to reach out to people at risk of financial exclusion. That can be groups of people who would identifiably be at risk of exclusion and a broader group who would, at certain times, be at risk of exclusion. To help such groups, many credit unions work actively with local community organisations, ethnic associations and so on. Some excellent work is being done in prisons to help offenders to prepare for release, rehabilitation and work. Leeds City credit union, for example, is undertaking a number of such projects. Care leavers are an important segment. There is a new financial savings product for children in care, and I hope that credit unions will take the opportunity to work actively in that area.

There is also a broader group of people who, at different times in their life, will face the trigger points at which the risk of financial exclusion becomes that much greater. For example, those trigger points can come when a person is setting up their first home or moving into a flat for the first time. The temptation of going down the high street and seeing the furniture and the flat screen telly in the window of the BrightHouse store is a real danger point, because if someone gets into the trap then, it may take them years and years, or perhaps longer, to get out of it.

There are also those who, perhaps through a change in circumstance—a change in job or the breakdown of a relationship—suddenly find themselves in rent arrears, and the problem can build up and snowball. Organisations such as the London Mutual credit union do a lot of great work with housing associations on exactly that area. By coincidence, right now, in the room next to this Chamber, the all-party parliamentary group on credit unions is holding a fair that showcases some of those partnerships, including London Mutual’s work with the Family Mosaic housing association.

Other types of partnership that credit unions engage in do something slightly different. Rather than just targeting people at risk of exclusion, they seek to grow to build up their self-sustainability and reach out to more people. An important way in which that can be done is with housing associations. Such a partnership is a great way to reach people—it is absolutely in the interests of the housing association that new tenants do not fall into rent arrears. They need tenants to become better at managing their finances and, ideally, to build up savings. Credit unions including my own, United Savings and Loans, do very good work in that area.

Payroll deduction schemes are another interesting and exciting development. They drive savings accounts, either through employer-based credit unions—credit unions can be community, employer or association based—or in partnerships. For example, we could see a community-based credit union partnering with local companies.

[Richard Graham (Gloucester) (Con)]

I congratulate my hon. Friend hugely on securing today’s debate and on his leadership of the all-party parliamentary group on credit unions. He mentioned the importance of the legislative reform order that is due to come in, and also alluded to the important role that housing associations can play in the spread of credit union membership, which we both agree is incredibly important. Does he not agree that there is a real opportunity for the National Housing Federation and the Local Government Association to go out there and encourage all their members to join their local credit union so that almost immediately the number of people across the country with access to loans and a place to deposit their money would increase sharply overnight?

[Damian Hinds]

My hon. Friend makes an important point. There is a great opportunity to expand the work between credit unions and housing associations. I hope that the number of those partnerships will increase greatly.

Some credit unions have been involved in payroll deduction savings accounts for many years. I had the privilege of visiting the Voyager Alliance credit union in Manchester. Based at the Stagecoach bus depot in Moss Side, the credit union runs a slick operation. When bus drivers and transport workers join the organisation, they frequently open a savings account from day one. Very small amounts go into the account from their wages. It is a bit like pay-as-you-earn in that they almost do not notice the deduction—well, they do notice it, but hon. Members know what I mean. Before they know it, a small nest egg has been built up, which is important for their financial stability.

The Police credit union does great work with a number of different forces. The Glasgow credit union, which is one of the most successful in the country, has 71 partnerships with different organisations to facilitate building up exactly this kind of savings account. The book on the power of nudge is required reading for all political anoraks these days, and we have talked about that mostly in the context of auto-enrolment pensions, but there is great potential for savings products as well.

Those are some of the things that credit unions themselves are doing, but as my hon. Friend the Member for Gloucester (Richard Graham) mentioned, deregulation of the sector and Government support are about to unleash a set of new and exciting opportunities.

[Mr Andrew Smith (Oxford East) (Lab)]

I too congratulate the hon. Gentleman on this debate and on his wider work in this area. My intervention gives me the opportunity to praise Blackbird Leys credit union and Oxford credit union in my own area. Does he not agree that there is scope to do more through the Post Office to reach out more widely to communities across the country?

[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.

[Mr Gregory Campbell (East Londonderry) (DUP)]

I declare an interest as a fully paid-up member of the Society Credit Union in Londonderry. I congratulate the hon. Member for East Hampshire (Damian Hinds) on securing this debate. In his very illuminating introduction, he mentioned a couple of times the differing aspects of credit unions. That applies particularly to Northern Ireland, where credit unions are flourishing and have done so for many decades. He has already alluded to flexibility, but does he agree that any changes we contemplate need to be sufficiently flexible to allow for growth in communities where credit unions have been stunted and have not really taken root, while allowing credit unions in areas where they show significant growth to expand even beyond the reach that they have managed over many decades?

[Damian Hinds]

I certainly take, accept and agree with the hon. Gentleman’s general point. There are very specific issues about the regulatory regime in Northern Ireland, but I am not an expert so I will not attempt to talk about things that I do not know enough about. However, I have a feeling that we may hear more about the Northern Ireland situation later in the debate.

More generally with affordable credit, if people are not overpaying for their loans it means that wages go further, and of course that has a beneficial marginal effect on employment and growth. Benefits go further too, and when taxpayers are paying out sums in benefit they want to know that it is going to support families and children, rather than being swallowed up in sky-high interest rates. Credit unions can also help to deliver a renewed savings culture.

I thank the Government for their support of the sector, their recognition of the role that credit unions can play in increasing and improving financial inclusion, and for their general interest in mutuals, especially in the wake of the banking crisis. I also thank them for seeing the legislative reform order through, for their boldness and ambition with the modernisation fund of up to £73 million, and their willingness to look at radical options, such as the Post Office link-up.

Inevitably, however, I also have some asks. First, I ask the Government to please provide a proportionate regulatory framework for credit unions in the post-FSA world. Credit unions should not be penalised for a crisis in which they played no part, and for which they share none of the blame. Secondly, it would be good to get further details of the modernisation fund, and to get the key projects under way as soon as possible. Thirdly, we ask the Government to understand the pressures, challenges and costs associated with reaching the hard-to-reach and, finally, to continue to work as partners with all levels of government to address financial inclusion, rip-off loans and the erosion of the savings culture, to help responsive and responsible financial services, and to further the cause of social justice that brought us all into politics.