Credit Unions

Debate between Damian Hinds and Gregory Campbell

Wednesday 23rd November 2011 Westminster Hall

[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.