Credit Unions

Lord McFall of Alcluith Excerpts

Thursday 13th December 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, it is a pleasure to participate in the debate today and in particular to congratulate my noble friend Lord Kennedy on initiating it and, as has been mentioned previously, his continuing work to emphasise this particular issue.

As a member of the Parliamentary Commission on Banking Standards, I and my colleague in the other place, John Thurso, visited Edinburgh last week to take evidence from credit unions, Citizens Advice and money advice services. The question in our minds was: how can we have a banking system that serves the whole of society, especially low-income and unbanked people who are not presently covered, and is there a duty on society and institutions to ensure that everyone participates fully in that society? We have moved from a banking system in which only a fraction of the population had bank accounts to a situation where people need a bank account even to receive state benefits. The banking system is now central to everything that goes on in society. Consequently, the treatment of ordinary citizens by banks—not simply the corporate context—is pivotal to adapting the present system to serve the modern needs of society.

It is a fact that those financially excluded are now also socially excluded. That is where credit unions come in. Mention has been made of the feasibility study done by the DWP in May 2012, a good piece of work which found that the total market for modern banking services for low-income people could be as high as 7 million, with 1.4 million in society presently unbanked. Credit unions are ideally placed to help meet this demand and serve that additional 1.4 million people.

Of course, as has been mentioned, consumers trust credit unions to provide their financial services. That is in contrast to what is happening at the moment with the major financial institutions. The motto of the City is: “My word is my bond”. A MORI poll conducted six months or a year ago in the City found that 80% of those who worked there did not recognise that that was the motto, so something has become disengaged. An anchor has slipped somewhere on that and we need that diversity. At the moment we have five or six major financial institutions—banks—in the United Kingdom worth 450% of the country’s GDP. Not only is that uncompetitive but it does not serve the financial stability interests of the country. That diversity is important.

One problem with credit unions, which was mentioned to us last week, is that they are seen as a poor man’s—or woman’s—bank. That is not so on one level, where they have an advantage and strength in offering services to people whom mainstream banks do not presently serve. But on another level, if credit unions are to grow and become fully established as a potent force, they need to attract the full spectrum of savers—from the low-income to the high-income people. The potential for growth in that area is extensive.

Presently, there are good competitive deals existing in the credit union movement. It was pointed out to us that if a credit union can hold interest at 12.7% APR—which is a target that they all try to achieve—for loans of up to £3,000, those rates are among the best in the market. Glasgow Credit Union, the biggest credit union in Britain, at the moment has a £3,000 loan over 36 months at 12.9%. That is better than any loan from any commercial banking organisation. So there are good things going on at community level at the moment. However, the number of credit unions that can offer current accounts and mortgages total only 24 out of the more than 400 in the UK. Thirty-six thousand people have current accounts. Again, only the four biggest credit unions do mortgages. That is a drop in the ocean and gives an illustration of the opportunity.

If the target of an additional 1 million members is to be reached in the next seven years, credit unions need to be attractive to people of all incomes. Talking of that, the new Moderator of the Church of Scotland, the Right Reverend Albert Bogle, was down in Westminster a couple of weeks ago. He invited me to dinner because I had been on the Church of Scotland’s economic commission looking at the future of the economic circumstances in Scotland. We suggested that following that economic commission, and following the Moderator’s interest, it would be good to think of developing something like a Church of Scotland-wide credit union for the whole of Scotland, because in the Church of Scotland you have high-income earners and low-income earners. It is an ideal establishment for that. I have encouraged the new Moderator to talk to the Scottish Government and the DWP so that we can get that going.

Mention was made earlier of the Irish experience. If we look at the experience in Ireland going back to the 1950s, it was the church there, particularly the Catholic Church, that encouraged members on higher incomes to save so that they could embrace members who needed to borrow, and do so at more affordable and ethical rates. The coverage of credit unions in Britain is 1%, while the coverage of credit unions on the whole island of Ireland, comprising the Republic of Ireland and Northern Ireland, is reaching 30%. So there is a good example for us to follow in that particular area.

The message for today is that credit unions are not the poor man’s or woman’s bank; they are everyone’s bank. I am proud to have been influential in my own area when I was a Member of Parliament in establishing a credit union in Dumbarton, particularly ensuring the common bond. My wife and I were founding members.

I also had the Dalmuir Credit Union in my constituency, which was started by one woman, the late Rose Dorman. It now serves more than 6,000 members and is one of the most flourishing credit unions, but it was down to her social entrepreneurship. There are many Rose Dormans up and down the land. So faithful was she to the credit union movement that when she was dying in St Margaret’s hospice, she called me in to visit her to tell me that the then Treasury consultation paper on credit unions was flawed and she wanted me to do something about it—and we did listen to her in part on that.

What has been suggested this morning came up in evidence last week in Edinburgh, that a major step forward to make credit unions more widely available would be that partnership with the Post Office network. We have been informed that that could indeed be possible if technology could be put in place and if funding was made available by the DWP from the credit union expansion project.

It is important here to emphasise points that have been made earlier. There is a complementary role between banks and credit unions, not just a competitive role—one that is in the interests of both entities: a strong mutual sector, a strong credit union sector and a strong commercial sector learning from the best of each other and thereby helping to serve the interests of consumers in society.

Already there has been some recognition from banks that credit unions have a part to play. For example, the Co-op Bank provides, on a commercial basis, back-office facilities for current accounts; the Clydesdale Bank provides back-office facilities for debit cards; Barclays, the Co-op and Santander post events and provide research for credit unions. The Co-op Bank in particular has seen a host of new business in the past 12 months, as my noble friend Lord Graham has mentioned. That is down to its ethical policy.

We cannot leave this debate without touching on those two words: culture and ethics—culture meaning behaviour and ethics meaning how we resolve the many conflicts of interest in financial services. As one former bank chief executive said to me when I was examining the financial crisis, “It is as if too often people had given up asking if something was the right thing to do and focused only on whether it was legal”.

If we are to build a market that is efficient and fair, non-market values have to underpin it. I refer to Adam Smith, professor of moral theology in 1759 at my alma mater Glasgow University, from which I was proud to receive an honorary doctorate a few years ago. In his writings, Adam Smith was convinced of the necessity of a well functioning market economy, but not of its sufficiency. In The Theory of Moral Sentiments, published in 1759, he argued that while prudence was,

“of all virtues that which is most helpful to the individual … humanity, justice, generosity, and public spirit, are the qualities most useful to others”.

He was also deeply concerned at the inequality and poverty that might remain in an otherwise successful market economy. Today we are witnessing those very issues of widening inequality and deepening poverty. Smith’s comments are as relevant today as they were when they were written more than 250 years ago.

Financial inclusion, diversity in the banking model, reinvigorating mutuality and the establishment of a new ethical framework and culture are urgent. The credit union movement is integral to these initiatives. It deserves our support not only on these market considerations but on those non-market sentiments and qualities of justice and public spirit, alluded to previously, which they execute on a modest yet ambitious daily basis up and down the land.

The right reverend Prelate the Bishop of Durham said the credit union has a distinctive purpose and nature. It is that distinctive purpose and nature that will be beneficial to the financial services industry and to the wider consumer—and one which we must take seriously today, move the debate on, turn things into reality, and make it a big player in financial services in the United Kingdom.