COMMITTEE FOR ENTERPRISE, TRADE & INVESTMENT

OFFICIAL REPORT

(Hansard)

Credit Union Review

29 November 2007

Members present for all or part of the proceedings:
Mr Mark Durkan (Chairperson)
Mr Leslie Cree
Mr Simon Hamilton
Ms Jennifer McCann
Dr Alasdair McDonnell
Mr Alan McFarland
Mr Robin Newton

Witnesses:
Mr Paul Bingham ) Department of Enterprise, Trade and Investment
Mr Mike Bohill )
Mr Sandy Williamson )

Mrs Carol Edwards ) Consumer Council for Northern Ireland
Ms Julie Megrath )

The Chairperson (Mr Durkan):
We are joined for the first briefing on the role and potential of credit unions by officials from the business regulation division of the Department of Enterprise, Trade and Investment (DETI). I welcome Mike Bohill, who is the head of the division, Sandy Williamson and Paul Bingham. Thank you for your attendance.

I apologise that the Committee is running late, but we had to wade through responses to the draft Programme for Government, draft investment strategy and draft Budget. I thank Mike for attending a previous evidence session at which we took evidence from credit union organisations. I also thank you for providing the Committee with a briefing paper in advance.

Mr Mike Bohill (Department of Enterprise, Trade and Investment):
I am accompanied by Sandy Williamson, who, as well as being a departmental official, is the registrar of credit unions, and Paul Bingham, who is the assistant registrar of credit unions.

The Department’s briefing paper seeks to set out as succinctly as possible the current regulatory framework in Northern Ireland; the role played by the registrar and his relatively small team of officials; the GB regulatory framework and, in particular, the role of the Financial Services Authority (FSA); and the operation of the financial services compensation scheme (FSCS). Those issues were addressed when the Committee met the delegation from the Irish League of Credit Unions (ILCU) and the Ulster Federation of Credit Unions (UFCU).

The paper gives an update on current devolved issues for which the Department has responsibility, as well as issues that are reserved matters.

We briefly set out some changes that there have been to the regulatory framework with the agreement of the credit union movement generally in Northern Ireland over the past few years. Furthermore, we outlined a number of initiatives that we are currently working on with the movement to extend the range of services that are available to members of credit unions.

That is the gist of what we have sought to do in our paper, which was to cover a wide-ranging area of responsibility. We will happily try to clarify any points and answer any questions that the Committee has.

The Chairperson:
This is not a criticism of the briefing paper, but part of the problem is that every point of clarification is almost a point of complication, as a result of the legal and administrative variables. Should one part of legislation be changed, that could have a knock-on effect. The Committee is approaching the review with a view to conducting a focused inquiry, which will enable us to produce a report that outlines recommendations. Therefore, I ask you to be straight in your health warnings to us.

Mr Bohill:
Absolutely. We have tried to provide a factual paper that contains as much fact as we currently know. You are correct about the complications, Chairman. The old adage that every complex issue has a simple answer is wrong. Complex issues normally have complex answers. We have sought to give the Committee a flavour of what those issues are. We have not included in the paper information on issues about which we are uncertain. On other issues we have said that, “Our understanding is”, as options that require consideration may not have been considered in sufficient detail.

The Chairperson:
The FSA point is that it has to be all or nothing either way. If the FSA were to assume responsibility for some credit unions’ additional non-credit union activities, all the activities of those credit unions would be regulated by the FSA.

Could a more graduated method of introducing additional services be applied in order to avoid complications? Could two separate orbits be created without wreaking confusion, or must an all-or-nothing approach be adopted?

Mr Bohill:
All the evidence suggests that that a graduated approach would be cumbersome and would create uncertainty. The credit union movement does not want to lose credibility or for people to lose confidence in it. We are always wary of that happening.

A few years ago, we did a great deal of work on the role and regulation of credit unions. We came up with one option, which was to create a separate business entity that would be outside the sphere of the Northern Ireland credit union movement. It would be a free-standing entity that would serve credit unions and their members. It would be a financial services business that the Financial Services Authority would regulate separately. Our understanding is that the Ulster Federation of Credit Unions is actively considering that option.

The Chairperson:
Therefore, a separate company called, for example, “Credit Union Services Ltd” would be set up. A number of credit unions would then decide whether to sell some of their services. Would it be similar to credit unions’ deal with the Co-operative Bank to offer their members a debit card that allows them to withdraw their cash at an ATM?

Mr Bohill:
The detail would need to be examined, but a third party could become involved.

The Chairperson:
Could some credit unions decide to sell those services?

Mr Bohill:
That would constitute more of a stand-alone business that the credit unions would set up themselves. There are a variety of options available.

The Chairperson:
How could credit unions operate on two different levels without uncertainty being created? You would be asking credit unions to perform on two different levels, yet you say that the Government cannot perform on two different levels.

Mr Bohill:
That is a fair point. There are 185 credit unions in Northern Ireland. They come in all shapes and sizes, as the presentation from the ILCU and the UFCU clearly demonstrated, and have a wide range of competences. The establishment of a single organisation, regulated by the FSA, would be much easier to achieve than any of the other alternatives. That is the conclusion that we have arrived at; that, rather than have the FSA and DETI regulate between them any combination of 185 credit unions, we have the FSA regulate a single organisation.

Mr Sandy Williamson (Department of Enterprise, Trade and Investment):
We did not say that it was the ideal option but simply thought that it was the most feasible option that we could come up with at the time. Any other option would involve a complication of different permutations. If we were to suggest that there should be joint regulation, would that mean that the FSA would regulate all of a credit union’s engagement in its work or only the additional services that it was providing? Where there is dual regulation, a whole mixture of elements becomes involved. It would be a financial services-providing company, owned by a sponsored body, and the credit union movement could choose to [Inaudible.]

The Chairperson:
If you are suggesting that credit unions should form a separate legal entity, would not mean that there would be dual regulation? The one entity that would provide the additional services would be regulated by the FSA, yet the movement itself would not be.

Mr Bohill:
It would be no different to a locally owned company such as the Progressive Building Society being regulated by the FSA as part of wider financial services regulation in Northern Ireland.

All financial services, except credit unions, are currently regulated by the FSA in Northern Ireland. Credit unions are the only exceptions to that.

Mr Cree:
I have an obvious question about credit union members’ savings protection. What protections do they have at present?

Mr Williamson:
The ILCU has a scheme that covers all its affiliated members. Converted into sterling, they receive cover up to the first £8,500 or £9,000, and a payback of 100%.

Mr Cree:
Is that just insurance cover?

Mr Williamson:
No; it is savings protection. Credit unions have a legal requirement to be insured against fraud and accident.

The Chairperson:
A share protection scheme (SPS)?

Mr Williamson:
The scheme is in place purely to ensure that members’ savings are protected should a credit union get into difficulties. Cover up to about £9,000 is provided. The UFCU has no limit, but it will protect savings of up to 80p in the pound. Those are the two main schemes that we have at present. Savers are covered to a certain degree.

Mr Cree:
However, they do not have full protection?

Mr Williamson:
It is a bit like the financial services compensation scheme, which will cover up to £35,000, but, after that, savers are on their own. The ILCU limit is £9,000 and the UFCU’s is 80p in the pound.

The Chairperson:
We are dealing with regulation in different spheres and different areas. Can you tell us the experience of the credit unions in GB that provide a wider range of services? For example, they offer a child trust fund, and so on. Are you aware of any challenges or difficulties that have affected credit unions in GB’s ability to perform when it comes to those additional services?

Mr Bohill:
Our understanding is that of the 550 or so credit unions in GB, around 11 fall into the category of being empowered to provide those wider financial services, whether those be insurance, mortgages, or whatever. Only a very small minority of credit unions in GB provides those services.

The Chairperson:
Are they under the same common bond restrictions?

Mr Bohill:
Yes.

The Chairperson:
Therefore, when they receive a list of all the credit unions that offer a child trust fund, can parents in other parts of the country, on seeing that it offers that service, join, for example, Leeds City Credit Union?

Mr Paul Bingham (Department of Enterprise, Trade and Investment:
Credit unions’ relatively low take-up on offering a child trust fund is quite surprising. I think that only six offer it. As you say, those six do not cover all of Great Britain, so the chances of parents availing themselves of a credit union that provides a child trust fund depends on where they live.

We do not have any statistics on the actual take-up levels of each product that individual credit unions offer. I do not know why that is, nor whether the membership is enthusiastic their credit union being a provider.

Mr Bohill:
Only six credit unions in GB offer access to child trust funds.

The Chairperson:
People in one part of the country cannot go through a credit union in another part of the country that offers additional services, however?

Mr Williamson:
The common bond rules still apply. The common bond of that credit union must be satisfied.

The Chairperson:
People therefore cannot use their own credit union, which does not provide similar functions, unless they have access to the fund that Leads City Credit Union, or elsewhere, provides.

Mr Bingham:
Not unless it is an approved provider. Being regulated by the FSA does not automatically entitle a credit union to become a child trust fund provider; that is a separate exercise.

Mr Bohill:
That provision is not as widespread as might generally be perceived.

The Chairperson:
If credit unions here consider forming a second entity, could that second option be a carrier for offering a child trust fund or would that be separate again?

Mr Bingham:
A credit union could apply directly to HM Revenue and Customs to be a provider.

Mr McFarland:
Can I be reminded of where we have got to? The credit unions briefed the Committee on what they want to do. How much dialogue has the Department had with them? The Committee is considering the issue, but presumably the Department has been working on the role and regulation of credit unions for some time now. How much progress has been made between the Department and the credit unions?

Mr Bohill:
The fact that we have four initiatives under way with credit unions to meet the delivery of additional services is indicative of good, ongoing dialogue with the ILCU and the UFCU, the two local representative bodies.

Mr McFarland:
What do you see as being the current blockages to progress being made in the way in which the credit unions want it to?

Mr Bohill:
As far as we are concerned, there is no blockage at all to maximising the potential scope of the current regulatory framework — in other words, the delegated powers that we have.

Mr McFarland:
What must happen in order for the credit unions’ vision to be brought to fruition?

Mr Bohill:
It is difficult to tie down exactly what their vision is. There are 185 credit unions in Northern Ireland. Even within the ILCU and the UFCU there are different aspirations. The vision of the smaller credit unions is to be successful, small credit unions. The vision of some of the bigger credit unions might be different.

Mr McFarland:
They want to be banks.

Mr Bohill:
To be fair, the ILCU did not say that their credit unions wanted to be banks. Its credit unions do not want to compete directly with the banking institutions. That would be wide of their ethos.

The Chairperson:
However, they offer banking services.

Mr McFarland:
Is the outworking of providing access to ATMs, PayPoints, and so on, not a challenge to the banks?

Mr Bohill:
We are working with the credit unions to enable them to enhance their services. Paragraph 12 in our briefing paper outlines four initiatives that are currently under way. Those include offering a debit card for use at ATMs, the creation of budget accounts, and for benefits to be paid directly into credit union accounts.

Mr McFarland:
I am trying to determine whether extensive legislation at Westminster will be required. If that is the case, there will be a requirement to fit into the parliamentary timetable. Alternatively, this issue may be able to be progressed once the Minister takes a decision to make it happen. At what stage are we?

Mr Bohill:
We have tried to outline that in our briefing paper.

Mr McFarland:
Sorry, perhaps I have just missed it.

Mr Bohill:
If the political will existed, Westminster agreed and the Executive agreed, and there was widespread agreement in the credit union movement to amend the current regulatory regime, extensive legislative change would be necessary. That is also outlined in our briefing paper.

Mr Bingham:
The citation in schedule 3 to the Northern Ireland Act 1998 that credit unions are a devolved matter would have to be removed. The Financial Services and Markets Act 2000 would also need to be amended to enable the Treasury to make an Order to transfer functions. Previously, it included provisions to transfer the functions of GB credit unions but not Northern Ireland credit unions. That would need to be changed. Moreover, consequential changes to The Credit Unions ( Northern Ireland) Order 1985 would need to be made. A decision would then have to be taken on what functions might transfer to the FSA or the Treasury, or, indeed, what might be reserved to DETI.

Mr McFarland:
It is obviously quite complicated.

Mr Bohill:
As you rightly say, time would have to be found at Westminster to amend the two principal Acts.

Mr Williamson:
[Inaudible.] Treasury, and then go through complicated procedure of changing the legislation. That cannot be done quickly. If a decision is made to go down that route, it will take some time to complete.

Mr McFarland:
One difficulty is that different factions are after different things. It will be difficult to obtain time to debate legislation at Westminster should only one organisation want to go the full way, and it may not be sensible to do that. Presumably, we must first get credit unions to clarify who wants what, and to what degree. The Committee then needs to examine whether that clarification amounts to a good idea and how far any legislative change should go. The Committee would then have to approach the Department, the Minister and Westminster to work out how far people can go, and in what timescale. Is that roughly how we proceed?

Mr Bohill:
Yes. The thrust of what you say is correct. The legislative changes that would be required are set out in paragraphs 7.6, 7.7 and 7.8 of our briefing paper. I return to what I said earlier about confidence. Like all banking institutions, credit unions rely on the confidence of the public in them. One only need think of Northern Rock. Therefore, we would be cautious. This is about managing risk. All our changes will be based on a risk assessment — in the same way in which any recent changes and initiatives were all based around risk assessment.

Extensive consultation will be needed with the credit union movement and the Treasury — leaving aside the political dimension — in order to change the existing system. We must be cautious and take it one step at a time.

Mr McFarland:
The banks and other financial organisations have been quiet. They have not been rushing to the Committee with submissions. However, if the proposed changes appear on the radar, we might witness a robust defence of territory. Is that a fair assessment of what might happen?

Mr Williamson:
It is a strong possibility.

The Chairperson:
I know some bankers who would argue strongly that credit unions should be allowed to move in that direction. That said, it might affect credit unions’ relationship with banking services.

Ms J McCann:
I apologise for missing the start of your presentation. I am aware that credit unions offer a service to people who are perhaps more disadvantaged than others in society. Credit unions are different in that its members need not have assets, only regular savings. That is central to their ethos.

Were credit unions to become like banks, could people from more disadvantaged areas still borrow on the strength of their savings? Would they need to prove that they had assets or owned property? I want to ensure that credit unions will still be available to those people, as that is the ethos of credit unions.

Mr Williamson:
That is one of the issues that the credit union movement will have to address itself. At present, everything that we have done has been to support credit unions’ core business, which is lending to the financially excluded. Where the legislation has permitted, we have tried to help credit unions to provide enhanced services.

There is a danger that the movement could lose its roots, and begin to behave like a bank and appear to be a bank. That is for the credit union movement to decide; we will not stand in its way. Our role is to facilitate the movement, and to help it to grow and develop under existing legislation.

Mr Bingham:
The credit union movement will take the lead in any changes that it wants to make. However, I believe that it will stick to its traditional model, which requires people to save before they can borrow. That model is slightly different to that of credit unions in GB, in which people tend to be able to borrow money shortly after they have joined. The credit unions here are much more prudent.

The Chairperson:
Any change that we are talking about would be an enabling change. It will not oblige all the credit unions to opt for the suite of services that has been outlined.

If there are no further points, we will move on. I thank the witnesses for attending today. Paul, Sandy and Mike, I am sure we will talk to you again as we try to wade through some of the issues.

We will now receive a briefing from Carol Edwards, who is head of consumer education at the Consumer Council. Carol is accompanied by Julie Megrath. I thank the witnesses for their attendance. I apologise that you had to sit through some of the proofing discussions that we had earlier on the draft Budget, draft investment strategy and draft Programme for Government. I also thank you for the briefing paper that you provided in advance. You will have heard the points the departmental officials made, and some of the questions that Committee members asked them, so that may inform your presentation.

Mrs Carol Edwards (Consumer Council for Northern Ireland):
Thank you. I head up the education team at the Consumer Council. My colleague Julie Megrath is its Northern Ireland financial capability co-ordinator. We are delighted to give evidence to the Committee today in order to help to improve the services that credit unions offer their members.

There is a need to balance retaining the existing good services that credit unions offer to their members and enabling them to enhance those services in order to meet the challenges of the more complex financial sector in which consumers operate.

For years, the Consumer Council has worked closely with credit unions — both the ILCU and the UFCU — to encourage responsible saving, borrowing and lending. That is part of our financial-capability work, which centres on helping people to manage their money wisely.

I will not go through our briefing paper in detail but will simply pick out some of the key points that we want the Committee to consider. We are happy to take any questions.

In particular, the Consumer Council has worked with the credit unions on developing a response to the Farepak collapse that happened one year ago. That collapse affected people across the UK. Some 1,200 people in Northern Ireland were hit badly, with almost £500,000 being lost.

The ILCU has now developed an easy shares account as its response to meet the needs of people who saved with companies such as Farepak and other hamper clubs. We understand that the UFCU is to launch a similar account in January 2008 as its response to the Farepak collapse.

As well as working on those specific issues, the Consumer Council has also worked closely with the credit union movement to lobby for the introduction of financial capability in the curriculum. That work was successful. The Consumer Council has promoted the work of individual areas’ credit unions in schools. For example, through working with local credit unions, both Sydenham Infants’ School and St Matthew’s Primary School in east Belfast now have successful credit unions set up in their schools. That was a great opportunity to embed good savings habits in the very young. Children as young as four or five years of age come to school with credit union savings every week, and that is a great asset to the community.

The Consumer Council runs a Northern Ireland financial capability partnership with the FSA, and both the ILCU and the UFCU are members of that partnership.

We have made several recommendations to the Committee today. We are here to represent the consumer’s point of view, and we appreciate that regulation of credit unions is a complicated area of legislation. However, I want to make some recommendations. For example, enabling credit unions to offer child trust funds would help to embed good savings habits in areas where people still have not set up trust funds for their children. Developing good savings habits is a factor in long-term financial capability. From research that the Consumer Council and FSA have carried out, we know that people in Northern Ireland lag behind in financial capability, particularly in planning ahead.

Allowing credit unions to offer more services and products, such as direct-debit facilities and direct payment of benefits into accounts, would help people to avail themselves of discounts and suchlike by paying by direct debt, which they cannot do at present. Allowing groups to join the credit union would help to develop communities. A mother and toddler group or a small drama group cannot currently open an account with a credit union, and we think that allowing them to open an account would help community enterprise.

We also want the common-bond restitutions to be re-examined. We have evidence — although not statistical evidence — of people coming to us, and to the advice sector, to say that there are times when they really do not want to be in the neighbourhood credit union common bond, and that they would prefer to be in a different credit union because of issues of confidentiality, and so on. It is also vital to ensure that all credit union members’ savings be fully protected.

Our submission sets out some issues that we will be raising with credit unions so that they can play their part in stepping up to the mark should their services and products be enhanced. They will need to improve training for staff and volunteers on confidentiality matters. They must ensure that all members of credit unions get clear information on interest rates for loans, savings, insurance and death cover, and that they will not have to attend an annual general meeting to hear that information. It should be made clear and available to members as a matter of course. We also want credit unions to be able to signpost members to expert debt and money advice if they spot that members need help in repaying loans.

Finally, there is scope for credit unions to engage with migrant workers’ representative groups to find out what services they can offer that growing sector of the community. From initial contacts with their representative groups, it seems that many migrant workers are involved in the building industry; therefore, they cannot get access to banks when they need them. Moreover, they may be required to wait longer before being allowed to open an account with a bank. Credit unions could examine those issues in order to try to enhance their services.

Ms J McCann:
I wish to reiterate that credit unions do an excellent job. I support most of what is contained in your submission. You mentioned direct-debit provision. Banks charge for that service, so would credit unions do so? If a direct debit is taken from a bank account and a customer does not have the money to cover it, the bank charges quite a lot of money for processing the direct debit. Have credit unions indicated whether they would charge for those services?

Mrs Edwards:
They have not given us that indication, but members of the Committee or the registrar could take that up with credit unions. We would certainly not want people to get hammered by charges if it were avoidable.

The Chairperson:
From contact with others, have you formed an assessment of the difference between services that credit unions provide in England and those provided here, or, similarly, between services provided down South and here? You say that credit unions here could easily switch to providing all those services that have been outlined. Would you caution the worth or workability of any services?

Mrs Edwards:
The range and spread of credit unions in Northern Ireland is such that they vary from a small local village credit union that opens one night a week to those that effectively operate banking hours. Therefore, the range of services would differ. However, it is clear that some people in Northern Ireland prefer credit unions as their financial service provider. It may involve some long-term work, but people who wish to use that facility in their local community should not, if possible, be put at any disadvantage to people elsewhere.

Some 26% of the population in Northern Ireland are members of credit unions. However, in the rest of the UK, that figure stands at only around 1%, which is very low.

The Chairperson:
Credit unions seem to be conscious of the fact that the financial services sector has changed over the past few years, and that people are developing new habits and practices. Things that people said that they would never do, they are now doing. For example, some people said that they would never use plastic, but now they use it. Therefore, credit unions want to ensure that they are not left behind. They want to offer services that provide consumer choice and cater for lifestyle requirements. Do you have any issues about how credit unions could viably be given that choice, without their being put into a competitive framework that they could not live up to?

Mrs Edwards:
Credit unions should be able to keep the best of their current services but have flexibility and change in the regulations in order to enhance those services. Not every credit union should be obliged to offer all the different products, but, at the same time, they should move to give the best service possible to their customers.

The Chairperson:
This question is not specifically about credit unions, but has the Consumer Council carried out any work on the child trust fund? For example, has it examined why there is such an aversion to it in Northern Ireland?

Mrs Edwards:
We have not carried out any statistical analysis, but we have asked some people about the child trust funds to try to find out why they have not taken them up. It is our understanding that when the parents of any child born after September 2002 register for child benefit, they automatically receive a letter of invitation from HM Revenue and Customs and a voucher for £250. Parents must complete a form to say where they would like the money to be invested in. There are several different options, but investing in a credit union is currently not among them.

We have heard people say —

The Chairperson:
The way in which the options are provided is not helpful. Parents receive a bundle of papers and a list of company names. Moreover, the terminology is not very accessible.

Mrs Edwards:
There are quite a few investment options for the £250. Some people take a long time to think about what the best option will be. However, even people who are familiar with that sort of documentation, forms or financial products can take several weeks to make up their minds. Some people may not like filling in that sort of form or may have difficulty interpreting it. There may also be readability or literacy issues at play.

Ms Julie Megrath (Consumer Council for Northern Ireland):
We are working with the FSA and the Parents Advice Centre in Northern Ireland to develop a resource for new parents, and we hope to roll that out in the next few years. The child trust fund will be part of that. We need to educate parents about changes in finance and tell them about the child trust fund.

The Chairperson:
I accept the premise that, if credit unions were able to offer an investment facility for the child trust fund, more people would avail themselves of it in areas where there is lower take-up. The credit unions would be able to promote the child trust fund, and they could reach people who are not reached or persuaded by the normal messages. Do members wish to ask any other questions?

Mr Cree:
I have one quick question. Your submission says:

“Six per cent of households in NI have no savings or bank account”.

Do you have figures to suggest that any of those people are in a credit union?

Mrs Edwards:
I cannot give you a figure for that. Numbers of people who belong to credit unions also have bank accounts. There certainly are people who traditionally have been members of credit unions for decades and who still do not have bank accounts, but I cannot provide a figure.

Mr Cree:
It would be nice to have that information.

The Chairperson:
With regard to how far different spheres of activity might be regulated through DETI or the FSA, is the consumer council agnostic on whether it must all be done through one or the other?

Mrs Edwards:
Yes. That is our position.

The Chairperson:
Is it similarly agnostic on the issue of credit unions registering a second legal entity or creating a distinct personality in order to provide some of the FSA-related services?

Mrs Edwards:
At this point, we are unable to take a position on that.

The Chairperson:
OK. Watch this space. Thank you.