Credit Unions

Lord Collins of Highbury Excerpts

Thursday 13th December 2012 Lords Chamber

[Lord Collins of Highbury]

My Lords, first I declare an interest as a member and chair of Enterprise the Business Credit Union. I, too, thank my noble friend Lord Kennedy for initiating this debate, and I congratulate all speakers on making terrific contributions. I also hope that today’s debate will assist some noble Lords in better distinguishing my noble friend Lord Kennedy and myself—that would be a bonus.

Current estimates are that up to 7 million people use sources of high-cost credit, and 1.4 million people have no transactional bank account. Four million people incur regular bank charges and 850,000 incur financially crippling bank charges because they need help to manage their money better. As we heard in the debate, just 2% of people in the UK are members of a credit union, compared to 24% in Australia, 44% in the United States and up to 75% in Ireland. Credit unions are also growing fast in eastern Europe and parts of South America, Africa and the Far East.

DWP figures show that credit unions offer the most competitive interest rates in the UK market on personal loans of up to about £3,000. They can save borrowers an average of £400 a year. People with incomes in the lowest 10% bracket would be able to save between £5 and £20 per week if they had access to a trusted local credit union. Despite the low levels of participation compared with other countries, credit unions have been growing steadily here over the past 10 years. Membership, assets, savings and loans have all at least doubled recently, laying the foundation for British credit unions to emulate their international counterparts. As my noble friend Lord Graham said, there are about 400 credit unions across England, Scotland and Wales. Well over 1 million people use credit unions, including—very importantly—more than 123,000 junior savers. These young people have their first experience of the financial sector through credit unions.

Figures show that £776 million is being saved in British credit unions and £602 million is out on loan to members. As we heard, 25 credit unions across the UK now offer current accounts, with more than 34,000 people holding one. Some credit unions offer mortgages, cash ISAs and insurance products. Credit unions operating in Britain today are extremely varied in size, in membership and in the range of services they offer, but they all share a basic philosophy of mutual support and co-operation. The uniqueness of many credit unions is their connection to communities and, more importantly, their commitment to localism.

The changes to the Credit Unions Act 1979 that came into force in January 2012 through the LRO will enable credit unions to provide far more than simply a banking solution for the financially excluded. Often, local communities want to save locally in order to be able to provide lending opportunities to support local businesses and help regenerate and reinvigorate their communities. This was highlighted by the right reverend Prelate the Bishop of Durham. This modernisation of credit unions has enabled and will enable a much more fundamental change in which they will shift from targeting the financially excluded to becoming fully inclusive. They are teaming up with associations and charities to find innovative ways of meeting the needs of new groups of members. We also heard in today’s debate about the social housing sector. The new unions will be available to all, accessed locally, fair, safe and simple. They will bring banking back into the heart of every community.

The investment in credit unions announced in June by the noble Lord, Lord Freud, following the decision to take forward the recommendations of the independent credit union feasibility study, is extremely welcome; it is terrific news. The objectives of the Credit Union Expansion Project are very ambitious. The project aims to increase credit union membership by at least 500,000 people on lower incomes by March 2015, and to increase this number to 1 million by 2017; to increase access to affordable credit so that members will save an additional £1 billion in interest payments compared to the charges they would otherwise have had to pay to high-cost commercial lenders; and to ensure that credit unions will deliver this expansion in a way that makes them financially sustainable. We have heard how difficult that is.

The £35.6 million of funding available through consortia of credit unions will enable support to go to credit unions of all sizes, enabling them to expand through capacity building and collaboration. The study found that even the biggest credit unions struggle to meet the operating costs of making small loans to people on lower incomes. The project will clearly help—and is helping—to secure the industry’s long-term financial sustainability. Credit unions will be able to buy in the new IT systems and infrastructure needed to increase the number of people they help to save and borrow.

As we heard from my noble friend Lord Kennedy, following the debate and amendments in this House, I welcome the Government’s acceptance of the need to cap the horrendous interest rates charged for so-called payday loans in an attempt to deal with the worst excesses of that market. As many have recognised in today’s debate, payday loans are only part of the story. Within the licensed market we have door-to-door home credit, pawnbrokers, rent-to-buy stores and agency mail order sellers.

We need to empower consumers, providing more information on the alternatives to high-cost lenders. We need to instil a culture of saving earlier on in life—something that schools need to embrace more readily. Trade unions, too, could do more to provide information, and I welcome the recent campaigns by some. Alongside employers, trade unions could also do more to support credit unions through payroll deduction schemes. Again, I welcome the comment of the noble Baroness, Lady McDonagh, that the Government as an employer could work with trade unions in the public sector to promote credit unions. Earlier this year, my own union, Unite, pledged to challenge Britain’s payday lenders by establishing a nationwide credit union network. This followed the launch of a Unite-backed credit union in Salford as the model for such a network. Steve Turner, the national official concerned, said:

“We are trying to get to the point where you can get emergency loans through credit unions, to stop that third week being Wonga week”.

Obviously, the interest rate cap for credit unions makes it difficult to offer sustainable arrangements that would enable them to compete in this way. Therefore, the Government’s proposal to increase the interest rate cap for credit unions from 2% to 3% is welcome. However, I am sure many credit unions will feel that this is difficult for them, as it runs counter to their ethos of low interest rates. I am sure that some may even argue for the removal of the cap altogether. I suspect that neither course is right.

What I hope we shall end up with, in light of the expansion of credit unions, is a change that maintains and safeguards members’ comfort and allows credit unions to get on in a competitive environment, ensuring that they are on equal terms with those other payday, home credit lenders and rent-to-buy stores. Credit unions will find it difficult to reach the targets without the support of the Government. Could the Minister tell us what role a nationwide marketing campaign might play in reaching the target and, if he thinks that this is appropriate, when it might be possible for this to commence? Could the Minister also tell us—and I repeat the question asked by my noble friend Lady McDonagh—what the department will do to expand and support payroll deduction schemes throughout and across government departments? There are many government employees who would seriously benefit from membership of a credit union.