Credit Unions (Modernisation)

Madeleine Moon Excerpts

Tuesday 10th July 2012 Commons Chamber

[Mrs Madeleine Moon (Bridgend) (Lab)]

I declare an interest as a member of Bridgend Lifesavers credit union. Bridgend Lifesavers is a community-based credit union founded in 2000. It has gone from strength to strength, with 3,000 people benefiting from its services and an expanding network of collection points, including a high street collection shop in Bridgend town centre. Last year the union had savings of more than £1 million and had made loans of more than £500,000. I would like to put on record my admiration for the hard work of everyone connected with Bridgend Lifesavers who have made it such a success. I would also like to put on record the fact that I am the vice-chair of the all-party parliamentary group on credit unions.

This debate has come at an important time for credit unions and the financial services sector. Not a day seems to go by without another story of mis-selling, rate fixing or large bonuses, and it is little wonder that trust in banks has dropped to an all-time low. A ComRes poll at the end of June found that only 10% of people trusted bankers to tell the truth. Increasingly, people are looking for financial services that have the sense of social responsibility and the credibility that credit unions represent. Credit unions already fulfil a vital role helping people who ordinarily struggle to get a bank account or affordable credit.

With the publication of the Department for Work and Pensions feasibility report on credit union expansion, credit unions are at a crossroads. I want to use the time that I have to examine that expansion and to seek assurances from the Minister that any changes that he makes will be carefully made and considered to avoid the goose that laid the golden egg meeting an untimely and scrambled end. The feasibility report concluded that no change is not an option, and it is clear from credit unions themselves that they feel that they are not reaching their full potential.

The report picked up on the gap in the financial services market. Financial exclusion needs to be addressed urgently. Some 1.4 million people in the UK do not have a transactional bank account, but credit unions can fill that gap where banks appear unwilling to do so. Around 7 million people in the UK use high-cost credit. A survey carried out by Unite concluded that the third week of every month is rapidly becoming Wonga week, with 82% of the 350,000 respondents saying that their wages cannot last the month and 12% saying that they turn to payday loan companies to see them through to the end of the month. The House has heard frequently of the exorbitant rates of interest those companies charge and the financial hardship that that can lead to. A survey carried out by Save the Children on the costs of child care found that a third of parents in severe poverty have had to go into debt in order to meet those costs.

[Jessica Morden (Newport East) (Lab)]

Does my hon. Friend agree that it is easy to understand how child care costs can push people into debt, because for many families those costs are equal to the cost of their mortgage or rent?

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[Mrs Moon]

My hon. Friend is completely right. We must take on board the fact that those are families who want to work and who get into debt in order to continue working, because they know that continuing to work will give their children a better start in life. They need support, and credit unions can give them a better level of support.

Greater competition for the high street banks and the more widely available source of affordable credit are both things that credit unions can offer. Therefore, what should be done to nurture credit unions and ensure that they can fill the gap while achieving long-term sustainability? The main recommendations of the feasibility report can best be summarised as the need to increase efficiency, to increase revenue and to increase skills. I understand that the Government plan to take forward the report’s recommendations and that the additional earmarked investment of £38 million will be conditional on the credit union industry meeting a number of agreed milestones for collaboration, modernisation and expansion. I hope that the Minister will elaborate on how that will work in practice.

I shall look at the changes in turn. Increasing efficiency, from the point of view of greater automation, reorganisation and collaboration, makes sense. Close working among credit unions and the ability to provide a greater variety of services to a larger customer base is clearly important, but I want to sound a note of caution. Part of the appeal of credit unions is their ethos of independence. In the section, “The Way Forward”, the report recommends that the Government select the best performing credit unions, which make commitments to fulfil certain requirements. The Department for Work and Pensions has suggested that, for that to work, credit unions would need to form consortiums of 15, with a joint minimum membership of 120,000.

[Jim Shannon (Strangford) (DUP)]

I thank the hon. Lady for bringing this matter to the House. In my constituency credit unions play a vital role in local communities and deliver to the people who really cannot afford banks. Does she agree that the Government changes should take into full consideration the importance of small credit unions and what they deliver to local communities?

[Mrs Moon]

I thank the hon. Gentleman for his intervention. That is exactly where I was going in my speech. The average size of a credit union is around 8,000 members, but many fall below that, including Bridgend Lifesavers. Its membership is growing, but it is still about 3,000, so it would be excluded from the modernisation plans. In fact, it would be impossible to meet the target of 120,000 members given that we do not have that total membership across Wales. Wales is a vibrant and active country for credit unions, and I have no problem being ambitious about what they can achieve, but I would like an assurance from the Minister that smaller credit unions that provide valuable services to their communities, such as Bridgend Lifesavers, will not get lost in a stampede aimed at economies of scale. Perhaps we could hear about the measures to be introduced to protect smaller, but still valuable, credit unions. I recognise the need to increase revenue through the expansion of membership and by increasing the products available and the interest rate that credit unions are able to charge.

Demand for credit unions is certainly not a problem, as the feasibility report’s research found. Of 4,500 consumers on a low income who were contacted, 60% expressed a desire for local trusted services, such as those provided by credit unions. The crunch came when they were asked about their awareness of local credit unions, with only 13% of those surveyed being aware of the services that unions provided. That might in part be explained by the previous links required for membership, so the legislative reform order that came into force in January will, I hope, tackle that issue, and I thank the Government for taking the measure forward.

The feasibility report emphasises the need to raise consumer awareness and to develop a strong credit union brand. A national marketing campaign is needed not only to reach those on lower incomes, but to broaden the appeal of credit unions generally. In the United States and in Canada, 40% of people are members of credit unions. The credit union is not just a low-income organisation; it is active across the income spectrum.

[Damian Hinds (East Hampshire) (Con)]

Will the hon. Lady give way?

[Mrs Moon]

I will most certainly give way to the chairman of the all-party group on social mobility.

[Damian Hinds]

The hon. Lady has mentioned a couple of countries and could have also mentioned Northern Ireland. We have just heard from a colleague from Northern Ireland, where credit unions are widespread, well understood and well known, and, notwithstanding her point, which we all accept, about the benefits of small credit unions, that demonstrates the benefits of scale. If lower-cost operations are to reach out to more people, including to low-income customers, scale will have significant benefits.

[Mrs Moon]

I thank the hon. Gentleman for his intervention. Of course scale has benefits, and I recognise that, but we must not kill off small credit unions that are going to grow—and perhaps the publicity campaign will help them to grow. We must not say, “Credit unions cannot expand; we are only going to service the large ones and stick with them,” otherwise unions in countries such as Wales, where they are growing, will find themselves isolated and unable to meet the growing needs of those who want the low-cost credit that they offer.

[Tessa Munt (Wells) (LD)]

The critical thing, which the hon. Lady mentioned a moment ago, is that credit unions should not take up just those who really need the help that they offer. It is important that people with funding are able to invest in credit unions, so that there is a much wider investment base for those who can afford to place their money there, and so that unions do not just soak up the difficult situations of people in difficult circumstances.

[Mrs Moon]

The hon. Lady is right. I gave the example of 3,000 members in Bridgend Lifesavers, with a balance of £1 million and loans of £500,000. Such membership and a balance of £1 million shows commitment and what can be achieved by even small credit unions, and that is why it is important that we continue to support them and allow them to expand.

I should like the Minister to provide more details of how his Department, perhaps working with colleagues in the Treasury and in the Department for Business, Innovation and Skills, intends to address the issue of awareness. Will he commit to working with credit unions to develop a national marketing campaign?

Another way to help credit unions is by linking them to the post office network, which would help them to raise awareness and to achieve a boost in revenue. Consumer Focus, in its report “Credit where credit’s due—The provision of credit union services through post offices”, highlighted the potential value of that link-up and how it could be achieved. People trust and value the Post Office brand, and there are 12,000 post office branches—more than bank and building society branches combined—which would offer a nationwide, visible platform for credit unions and greatly increase the availability and diversity of services.

Looking at what needs to be done, the report suggests that credit unions would need to develop shared back-office functions with Post Office Ltd and shared banking platforms. Credit unions might also be required to pay a fee to Post Office Ltd. That idea has widespread support, but it is a big step for all concerned, so will the Minister elaborate on what role his and other Departments will play in facilitating it, and on the stage that has already been reached in making it a reality?

The feasibility study suggested that long-term financial sustainability could be achieved if the interest rate ceiling of 2% that credit unions can charge on loans is lifted to 3% on reducing balances. The modelling included in the study suggests that the 3% loan rate would need to apply only to loans below £1,000. The 3% rate would make credit unions more sustainable, but at the same time they would not lose one of their biggest attractions—affordability. That is important, because this is often about the small purchases of essential items such as cookers and freezers that families need. That is borne out by what Brian Rees of Bridgend Lifesavers said to me:

“A regulation for 3% maximum interest would be very helpful. As you appreciate, lending very small amounts of money is very expensive and we presently don’t cover costs below £500. 3% is nowhere near ‘a door step rate’ but it would help us to sustainability.”

I understand that the Government are planning to consult on this measure, and I hope that the Minister will listen to those concerned about the pros and cons of adopting it. Should it be decided that it offers a short-term solution, I hope that legislation can be brought forward as soon as possible. Credit unions can achieve what we want them to achieve, and they themselves want to achieve, only if they are given the capacity to do so.

Finally, I turn to the demand for credit unions to develop a broader skills base and, by extension, better qualifications for their staff and directors. The Association of British Credit Unions, which is a great supporter of the all-party group on credit unions, has identified that as a challenge to the sector. Some progress has been made, but while the feasibility report suggests that for credit unions to demonstrate that they are worthy of Government support they need to have appointed a director to work with their board, it does not offer much detail on the time scale or how it expects that to be achieved. I would be grateful if the Minister could furnish us with further details.

Credit unions offer a ready-made solution to many of the problems that we are facing, but in supporting and enabling them to grow and expand services we must not lose sight of what they stand for and their value to the communities they serve. I, and the many Members who support their local credit union, look forward to hearing the Minister tell us about the support that can ensure that these valuable community-based sources of financial aid are encouraged to grow, develop and prosper.