Credit Unions

Lord Griffiths of Fforestfach Excerpts

Thursday 13th December 2012 Lords Chamber

[Lord Griffiths of Fforestfach]

My Lords, I am delighted to take part in this debate and I thank the noble Lord, Lord Kennedy, for initiating it. First, I must declare my interest. Last year I was appointed by my noble friend the Minister to the project steering committee of the DWP credit union expansion project, which reported earlier this year. More recently, I have also supported, but in a very small way, the initiative of the right reverend Prelate the Bishop of Durham to explore the potential for developing a credit union within his diocese and, more generally, in the north-east of England.

This involvement grew out of my interest in the subject as a result of being asked back in 2003 by the then shadow Chancellor of the Exchequer, Oliver Letwin, to set up and chair a commission on the subject of debt among low-income families, why people get into debt spirals and what might be done to help them. The commission was independent of any political party and reported in March 2005. In that report we made it very clear that we welcomed the growth in alternative sources of credit, especially in relation to commercial banks and doorstep lending, and we made a number of recommendations. On the basis of that, and subsequent involvement, I would like to make three broad points that really support what the noble Lord, Lord Kennedy, has already said.

The first is that although credit unions are small in number and in the volume of lending, they are nevertheless an important part of the financial services industry for a number of reasons. First, they provide low-income families with access to credit at interest rates lower than those of home credit and payday loans, let alone those of loan sharks. Credit unions have also never been accused of bringing undue pressure on the doorstep in encouraging potential borrowers; nor have they been accused of a lack of transparency.

Secondly, credit unions are an important way of reintroducing the personal element back into banking. The personal element exists today, but only for high net worth individuals. Many customers complain of the lack of the personal element, a problem that has been added to by technology. Credit unions have a key role in reintroducing this personal element into banking.

Thirdly, credit unions are an attractive form of ownership that gives borrowers confidence that they are not being exploited. Those who use these services and have taken part in credit unions speak particularly of the importance of the local and regional dimensions.

Finally, credit unions, as the noble Lord, Lord Kennedy, said, have at their heart a culture of saving that is desperately needed in this country. If you look at what has happened in the past five, six or seven years in the financial crisis, all elements of our society have gone into debt and have been overspending. The banking sector issued far too much debt through leverage and was a major cause of the financial crisis. As was made clear in the Autumn Statement last week, the percentage of government debt to income is expected to increase over the next three years. Consumer debt still stands at a horrendously high level and is, frankly, not sustainable. Therefore, at the level of individual families, in schools and among young people, credit unions have an important part to play in helping people to manage their finances.

Credit unions have changed over the past decade very much for the better. Membership has doubled and loans to low-income families over the past five years have tripled. Credit unions have recognised the need for change. Surveys have suggested that the people who are using them are very happy with them. The working party of which I was part commissioned a study from Experian. It found that the potential market for credit unions is 7 million people.

However, there is one fundamental problem about credit unions at present. They are not financially viable and, to exist in their present form, they need a continuing subsidy. Some credit unions, the most successful, are financially viable, but they are a small minority. Credit unions have been helped in the past six years, first by the initiative of the previous Government, the Financial Inclusion Growth Fund and, more recently, by reforms that this Government have made. However, in spite of this, in recent years the DWP has ceased to fund 55 credit unions, 25 of which have been forced to close or merge. Credit unions are important but they are not financially viable.

My second broad point is to welcome the initiative of this Government, particularly the interest shown by the noble Lord, Lord Freud, as the Minister responsible, which carries on from the previous Government. The working party faced three scenarios. The first was to do nothing; the second was to figure out how one could help those credit unions which wanted to change and which were viable or could easily become viable; and the third was to look at the issue of a cap on the interest rate. On the first scenario, if we do nothing, then the credit union movement is going to go into decline. Membership will go down and large parts of the country will have no credit unions. On the second scenario, we can support a programme of modernisation and expansion, which is what the Government are doing. Through that programme, you can really see membership of the credit unions doubling with a corresponding increase in the loans they make and the deposits they take and in the value of what they are doing. On the third scenario, the question arises of whether we should have an increase in the maximum rate of interest. At present it is capped at 2% per month. Through research we found that, if you could increase that to 3%, you could make the whole sector financially viable by 2015 or 2016. The argument against that is that you are then raising the annual rate of interest from something like 26% to 44%, which is true. If you were able to increase the rate of interest for limited periods for short-term loans—not for long-term loans—that would make a real contribution to credit unions.

I welcome what the Government are doing and the initiative they are taking. At present, they are very supportive of the credit union movement. However, I have been thinking about this issue for about 10 years and I have to say that I am frustrated. Here is the credit union movement which is what society wants—what people want when they hear more about it—and yet it is always small and struggling. Should we as a society not have a larger vision of what credit unions can do? We know that they play an important role at present. I am a great believer in the free market but we know that it alone is never going to solve the problem of credit unions. The Government continue to invest, which is a good thing, but the quid pro quo is that the credit unions must change.

Following the financial crisis, we have a unique opportunity in this country to restructure our banking system. Back in the 19th century, we had a very competitive banking system with a large mutual sector. In the First World War Lloyd George insisted that the banks financed the war effort by buying gilts, which they did. However, the banks said that, in return, they did not want to compete against each other. As a result, for 60 years, all areas of the City of London had cartels. Only since the 1970s has there been some increase in competition. Banks provide a service that is a public utility. Therefore, there is a strong case for the Government thinking about lifting the rate.

The noble Lord, Lord Kennedy, mentioned the big society and the banks being part of that. What can we as a society do to increase the role of the trade unions, churches and sports organisations and of the middle class in this area? We know that campaigns relating to things such as cycling, adoption, family courts and tax avoidance can be successful. Is there not something we can do to get the banks more involved? Last week we were told that two of the leading British banks were paying a $2.5 billion fine in the US. If banks can pay fines like that, surely, when the contribution of the Government is only £38 million, they can make more of a contribution to getting credit unions robustly established as part of our society. I make the following proposal, noting that two members of the banking commission are taking part in this debate. Could we not make it a condition of retail banks having a licence that they engage in some way in helping to create stronger mutual organisations, especially credit unions? I suggest that that is where the issue should rest.