Credit Unions

Lord Kennedy of Southwark Excerpts

Thursday 13th December 2012 Lords Chamber

Moved By

[Lord Kennedy of Southwark]

That this House takes note of the development of credit unions in the United Kingdom.

[Lord Kennedy of Southwark]

My Lords, I am delighted to open this debate on the development of credit unions in the United Kingdom. I have been a supporter of the credit union movement for well over 25 years. Since coming to the House two and a half years ago, I have tried to raise the profile of credit unions and to campaign for positive reform that will enable the movement to grow and to better serve its members. I firmly believe that a vibrant credit union sector is vital as part of the landscape of different financial organisations offering a range of financial products to citizens. I am a member of the Rainbow Savers credit union and have been for many years. I am also one of the vice-chairs of the All-Party Parliamentary Group on Credit Unions. Credit unions are financial co-operatives. I am delighted that in addition to being a Labour Party member, I sit in this House as a member of the Co-operative Party and as one of the 18 Labour and Co-operative Peers.

It is estimated that more than 90% of the UK population are eligible to join a credit union, either because of where they live or the industry in which they work. I am delighted that there is cross-party support in this House and in the other place for the development of credit unions—as there is in the devolved institutions, town halls and council chambers across the United Kingdom. More than 1 million people in Great Britain use credit unions. In June this year, credit unions held savings for their members amounting to £776 million and had £602 million out on loan to members.

In recent years, growth has been impressive. The previous Labour Government and the present coalition Government have both been supportive of the movement. The average membership of a credit union has increased from 200 members in the 1990s to more than 2,000 members today. Many of the bigger credit unions, such as Manchester, Glasgow and London Mutual, often get 200 to 300 applications for membership per month.

However, on an international scale credit union membership and penetration into communities here is on a small scale. Much more needs to be done. Compared with the UK’s 1 million members, the Republic of Ireland, which has a much smaller population, has more than 3 million members of credit unions. Two-thirds of the population of the Republic are members of credit unions. They have well over 10 times the amount of members’ money on deposit that we have in the UK. In the United States of America, 93 million citizens—just over 30% of the population—are members of credit unions, which have $845 billion on deposit. I hope that will give noble Lords some idea of where we fit in on the scale, and of what can be done if we work together.

One positive thing that credit unions do is encourage their members to save. Getting into the habit of saving and putting money aside for a rainy day, for Christmas or for something for the home is a good thing to do. It is a good discipline and a good habit to get into, and it will serve people well throughout their life. Credit unions also provide affordable sources of credit to members at a maximum interest rate of 2% per month, or 26.8% per annum. A £300 loan repaid over 26 weeks will cost a member less than £20 in interest. A similar loan from a home credit provider would cost well in excess of £170 in interest—and that is the nub of the problem.

If you are on a low or fixed income you often get the worst possible deal for finance, and all noble Lords should be angry about that. Why is it acceptable that those with the least should have to pay the most for finance? It is an outrage. With all the changes taking place in benefits and welfare, and with the introduction of universal credit, we should all agree that a sustainable fair-price mechanism to enable people to get the finance they need is desperately needed. An expanding credit union movement fits the bill nicely.

As I have said, if the big society initiative means anything, surely it means people coming together to help themselves and their communities. I contend that credit unions are the big society in action. I was delighted last week when we agreed an amendment to the Financial Services Bill that will cap the interest rates and other charges levied by payday lenders such as Wonga. I hope that the days of 4,000% interest rates from payday lenders will soon come to an end.

London Mutual Credit Union entered the payday lending market because it saw that local people had a need for that. People in desperate situations were coming in through its front door. They were drowning in a sea of debt and paying exorbitant interest rates, to unsympathetic companies whose only solution was to offer them another payday loan and rack up interest, charges and fines. People were offered another big loan that then could not be paid, so London Mutual stepped in. Its interest rate is 26.8% per annum, so if you borrow £400 for one month, you pay £8 interest, not the £120 you would pay with some high street payday lenders.

I accept that no credit union will be able to grow and be financially stable on payday lending alone. The London Mutual added this facility to a suite of products it offers to its members because it saw that there was a desperate need for it as people were being ripped off. Credit unions need to grow and prosper. That cannot be done just through government schemes and grants. They have to grow by attracting new members and savings and building their business on solid foundations. Credit unions must also be attractive to a wide cross-section of the population. They cannot be just institutions where poor people go for finance because no one else will give them any finance. Therefore, credit unions have to have a suite of products. Many of the large ones offer ISAs to their members at very competitive interest rates. Five of the biggest credit unions in the UK now offer mortgages to their members. Credit unions should offer traditional savings and lending, where possible and, where there is a need, look to provide short-term finance in addition to other financial products such as ISAs and much longer-term loans and mortgages where their financial strength allows. The movement should work towards providing financial services that are needed and wanted but do so on a firm footing with a strong financial base and using best business practice to achieve that. The challenge is for the Government, banks, business in general and local authorities all to play their role in supporting the industry to enable credit unions to grow their financial strength and robustness and deliver for their members reasonably priced financial products and services.

What should we be doing? The Government and Parliament need to ensure that the legislative framework in which the credit union sector operates is modern, up to date, flexible and enables it to develop and meet the challenges and take up the opportunities offered by the modern world. A start was made with the passing of the legislative reform order early this year but much more needs to be done. The DWP expansion project is a good government initiative and up to £35.6 million is available to credit union consortia. The aim of the project is to increase membership of credit unions by half a million by March 2015 and a million by March 2017, and increase access to affordable credit so that members save an additional £1 billion in interest payments compared with what they would have paid to high-cost commercial lenders between the start of the project and when it ends in 2019.

The Government should also ensure that the link-up with the Post Office happens. It would be good for the Post Office, develop the back office functions and give every credit union in the country a counter service at every post office, which is a trusted brand and presence on virtually every high street. This link has the potential really to boost confidence in the sector and create expansion.

We have on many occasions in this House spoken about banks and how these financial institutions have let us down. Not all but many banks do indeed have to earn the trust of their customers and the nation at large. Their practices have not been acceptable and people have rightly been cross at their actions. Many banks do some work in the field of credit unions by sponsoring events, reports and activities and some bank staff do a few hours’ work with a local credit union. While this is commendable and welcome, the banks have to do much more. If there are people in the community to whom banks do not want to provide financial products for whatever reason, they have a responsibility to enable the credit union sector to provide those services to people.

I would like to see all the banks—Barclays, HSBC, NatWest, Lloyds TSB and the Co-operative Bank—agree to second staff to work in credit unions. This would not be people just helping out for five hours but the banks identifying bright young people—those who they believe could be running their banks in the years to come and who will have major roles to play—and seconding them to work for credit unions for a year or two as part of their training and development programme. They could help build capacity, improve the management, practices and procedures, and build the robustness of the credit unions to provide financial products to those in the local community to whom the banks do not wish to provide financial services. This is socially responsible and I believe that the banks have a duty to put much more back into the community.

Local authorities have an important role to play in promoting credit unions to their residents. There are excellent examples of partnership working that are a real benefit to the local population and the local economy. Salford University did some research on behalf of Leeds City Council. It found that for every pound invested in credit unions there was a £10 benefit in retained income for the local economy as money was not lost in interest payments. Islington Council automatically signs up every new council tenant with the local credit union. It opens an account for them and puts £2 in it. Southwark, the borough in which I grew up, also works very closely with the London Mutual and actively promotes its services. Glasgow City Council deserves particular praise for the work it does—with its active support and engagement it has the largest credit union membership of any city in the UK. Some 22% of the population of the city of Glasgow are members of credit unions. The work in Glasgow was targeted to overcome organisational barriers to growth and to help the credit unions to become self-sufficient and standing on their own two feet. This is where we have to seek to go. I would like to see the Local Government Association and CoSLA actively encouraging their members to be fully engaged with, and supportive of, credit unions, playing a leading role in ensuring that credit unions in their areas have active agreements and active plans for growth and capacity building.

The social housing sector has also seen the potential for credit unions helping people with the transition to universal credits with jam-jar and ring-fenced accounts for regular outgoings, paying the rent to the landlord before releasing the remainder to the tenant. This has to be an area for further expansion with housing providers working in partnership so it is better for the tenants, the housing provider and the credit union and the work it is seeking to do.

There is also a role for employers to work with credit unions and there are some excellent examples, but quite a lot of them appear to be in the public sector. The private sector should look to engage more as there are real benefits for companies, their staff and local communities with minimal cost on their part.

As I bring my remarks to a close, I am delighted that my noble friend Lord Collins and the noble Lord, Lord Freud, will respond for the Opposition and the Government respectively. I thank all noble Lords and the right reverend Prelate who are going to speak today and look forward to their contributions.

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[Lord Kennedy of Southwark]

My Lords, I thank all noble Lords and the right reverend Prelate for their contributions. It is encouraging that there is so much support across the House. I very much endorse the remarks of many noble Lords about putting the personal back into banking and getting the retail banking sector to step up to the mark. Not having access to bank accounts leaves people at the hands of high-cost payday lenders. This is a huge problem that has to be addressed. Getting the balance right between regulation and enterprise is so important to create the conditions for the sector to prosper. Many noble Lords spoke about the importance of ensuring that the credit unions have the management and professional governance structures in place. I fully support what was said.

We have to be ambitious for the movement and for the sector. I hope the Government will reflect on the debate and see the credit union movement as a key component in the financial marketplace. While some banks have provided support, I was delighted that many noble Lords supported my call for them to do more.

In conclusion, I thank all noble Lords for their contributions. I can assure all noble Lords that the development of credit unions is a matter I will return to again and again in this House. The noble Lord, Lord Cormack, said the banks could and should do more. It is our job to make sure the banks respond to that challenge as, “Yes, we will do more.”.

Motion agreed.