COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT
OFFICIAL REPORT
(Hansard)
Inquiry into Credit Unions
16 October 2008
Members present for all or part of the proceedings:
Mr Mark Durkan (Chairperson)
Ms Jennifer McCann (Deputy Chairperson)
Mr Paul Butler
Mr Leslie Cree
Mr Simon Hamilton
Mr Alan McFarland
Mr Sean Neeson
Mr Robin Newton
Mr Jim Wells
Witnesses:
Mr Mark Lyonette – Financial Inclusion Taskforce
The Chairperson (Mr Durkan):
The session is being recorded by Hansard. I welcome Mark Lyonette to the meeting. Mark is a member of the Treasury’s Financial Inclusion Taskforce and will brief members in that capacity. Mark is also chief executive of the Association of British Credit Unions Ltd (ABCUL). Therefore some of what he says — in his presentation or, more likely, in response to members’ questions — may relate as much to his ABCUL position as to his role with the Financial Inclusion Taskforce. The relevant papers have been provided for members.
Mr Mark Lyonette (Financial Inclusion Taskforce):
I am happy to summarise the paper that Brian Pomeroy submitted to the Committee on behalf of the Financial Inclusion Taskforce; it is short and sweet. I am also happy simply to answer members’ questions if that is preferred. As the Chairperson said, I am Mark Lyonette, chief executive of the Association of British Credit Unions Ltd, which has good relations with its colleagues in Northern Ireland. I have been a member of the Financial Inclusion Taskforce for the past three years; the taskforce is an advisory body rather than an executive body of UK Government. Therefore I cannot speak on behalf of the Treasury at this meeting, but I can speak about the taskforce’s work over the past three years.
Credit unions initially featured in the taskforce’s agenda in only one way. The Government recognised that credit unions in England, Scotland and Wales were already playing a significant role in making short-term small-value loans to people who otherwise would only have had access to loans at several hundred per cent through the home credit market or illegal lending.
Initially, in that context — and so long as we could demonstrate that we were doing that type of work — the Government put £36 million for the first two and a half years into the sector. Credit unions did not receive all that money, because in Britain there are community development financial institutions (CDFIs), which may make loans. A much smaller amount went to that sector, in which there are approximately only 10 or 11 organisations.
As the taskforce progressed, some of its members told the Government that financial inclusion is not only about making small-value loans and giving people more credit. Credit unions realise that encouraging people to save can make a great difference. It took a while to persuade some civil servants of that fact, but they now recognise that helping people — particularly those on low incomes — to save is an important part of the initiative.
The Government have been working on the savings gateway, which is a tax incentive on savings. It will be developed in the next new few years, and the credit union movement hopes that it will be able to play a big part in it.
Ms J McCann:
I read your report and I have a few questions on it. It seems that many more financial services are available to credit unions in England, Scotland and Wales than in the North, and the Committee has been examining and discussing that situation. Our credit unions should be on a par with those in England, Scotland and Wales. Can you foresee any resistance to that happening? How can equality be achieved as quickly as possible?
In this time of economic downturn and credit crunch, credit unions appeal to low-income families because their borrowing facilities are easier to access than those of banks. I am keen to hear your advice on how that can be processed.
Eighty million pounds of public funding was provided over five years, although I appreciate that the credit unions did not receive all that money. However, credit unions here have not had access to similar funding. If that is the direction in which credit unions choose to go, how will it be processed?
Mr Lyonette:
The Committee is probably aware from Brian Pomeroy’s written submission on behalf of the taskforce that there are fewer credit unions in England, Scotland and Wales than there are in the North; they serve less than 2% of the population. Nevertheless, we were successful in lobbying for credit unions to be entitled to offer child trust funds and cash ISAs. Equally important, we persuaded the Department for Work and Pensions to allow benefits to be paid directly into credit union accounts. Recipients of almost every benefit can instruct that their benefit be paid into a credit union.
In the past few years, we have worked on small, short-term loans for people whose main income is benefits. Credit unions would not be able to offer such loans if they could not deduct money from people’s benefits. If we relied entirely on people repaying their loans by cash, there would be a different credit risk, compared with our being able to take £3 or £4 from their benefits. That is a key point.
Credit unions achieved all that by showing that we do something different. If we were merely another kind of mainstream lender or deposit-taker that happened to be a co-operative and the only thing that marked us out was that we were smaller than building societies or banks, the Government would not have been too interested.
I do not believe that we have support with legislation and regulation merely for being warm, cuddly co-operatives; we have achieved that by showing that credit unions play a vital role in lending in low-income communities and, as the Government now recognise, in saving. That has been central. I do not believe for one minute that we would have got the present round of legislative reforms had we not shown over the past three years that we could deliver the growth fund — that part of the Financial Inclusion Taskforce’s fund involving small loans.
Civil servants were sceptical; they thought that money would go out and probably not come back. There was some scepticism until credit unions proved that it was possible. Losses are slightly greater than they would be without that focus, but that is inevitable when lending to people on very low incomes who have so many calls on their cash.
My advice is to emphasise the things unique to credit unions. That said, one of our problems in Britain over the past 20 years has been that credit unions tried to build their business entirely on serving people who are financially excluded or on low incomes; that does not work from a business point of view. We look jealously at credit unions in Ireland as a whole, as they are much more broadly based and serve a much wider section of the community. That is our challenge, but we believe that we can do both: we can grow the breadth of people who use credit unions while showing what we can do for those on the lowest incomes.
Ms J McCann:
Did you encounter much resistance from banks?
Mr Lyonette:
No. Those of you who know credit unions around the world will know that sometimes banks view credit unions as competition. However, we are not regarded as competition in Britain, partly, I suspect, because we are a much smaller sector there. Ironically, 10 years ago, Fred Goodwin, when at the Royal Bank of Scotland, chaired a Government committee on how banks could help credit unions. Credit union colleagues in other parts of the world found that astonishing.
Ideas came out of that review that are still in play. We have not had opposition from the banks. However, in the past 12 months the Chancellor reached agreement with the six chief executives of what were then the main high-street banks that they would support the growth of new credit unions — because coverage in some parts of England, Scotland and Wales is patchy — yet very little has happened with that, partly because of the economic crisis and partly because of other factors.
Some banks are much more supportive than others about our growth; others less so. In some cases, that is because they regard credit unions as competition — perhaps not this month or next year but further down the line.
Mr Hamilton:
I want to ask Mark about the role of credit unions in Great Britain in expanding financial choice and well-being in ways that credit unions in Northern Ireland may not do at present.
You spoke about the paying in of benefits and other schemes such as cash ISAs and child trust funds, which credit unions here cannot provide. How successful have those schemes been? Is there any quantifiable impact on financial exclusion?
I am interested in credit unions’ ability to lend to groups and to assist with community enterprises and investments. How does that function in GB and how could our credit unions and communities benefit?
Mr Lyonette:
Not all credit unions in Britain offer the full range of services. Most credit unions, about 100 of our 345 credit unions — although that number changes every day — may take benefits directly from the account of a borrower. That is not really a service, but it enables us to offer credit to people on low incomes more confidently. That has been hugely useful. Without that, we would not have been able to deliver the growth fund; and without the success of the growth fund, which is now making about 100,000 loans a year, we would not have had the new legislation. No Government would introduce legislation just because we are small financial co-operatives doing the same as everybody else. It has made it much easier to push for legislation. It is not just the Government: it is a cross-party initiative with the three main parties in Westminster.
Credit unions that have offered cash ISAs have been very successful; it has increased the scale of bigger savers in many of them. The challenge for many British credit unions is growing the savings pot, not getting the loans out the door. They could get many more loans out the door responsibly and safely — their challenge is to get savings in, and that demands that you appear, feel and are safe.
Fewer credit unions have accepted the investment of child trust fund vouchers, but those that have found it very useful. It has sometimes encouraged new members rather than just having existing members investing their voucher with the credit union. Both cash ISAs and the child trust fund have had a slower take-up due to fear of the process of returns with Her Majesty’s Revenue and Customs (HMRC) and having to account for take-up every two weeks. We do not feel that that fear is justified. Credit unions that have had experience of those processes say that they are not that difficult.
We are excited about the groups and organisations side. Our pitch to the Government has been that the sector has grown reasonably well in the past five or 10 years. We now have just under 700,000 members and just over half a billion in assets, which is small beer compared to here. We need the new legislation. Ireland is the exception across the world, as in most countries credit unions have not grown to represent 20% or 30% of the population without having a much wider range of powers. That makes the story of healthy growth in Ireland even more astonishing.
Although we will be able to lend to organisations, the key benefit — going back to what I said about growing the savings pot — is about organisations being able to deposit and in, effect, do their banking with credit unions. All the changes that we have pushed for from the Treasury and the Financial Services Authority have been based on demand. We have been able to show them that those changes are a good idea, and to that end we can show them hundreds of organisations — local community organisations and small businesses — who approach our members every week. Not only is a service provided with the grant, but the money that is deposited in a credit union is lent out to be used in the community meanwhile. For example, local authorities giving grants to local organisations can see the benefits twofold.
It has been a no-brainer; there is support outside the sector, and we are very excited about organisational membership.
The Chairperson:
How do the community development finance institutions complement the work of credit unions? Are communities aware of the difference in the support provided by credit unions and that provided by CDFIs?
Mr Lyonette:
Community development finance institutions have their background in the United States.
The Chairperson:
Is that the community banking model?
Mr Lyonette:
No. CDFIs are not regulated as deposit takers, and that is one of the challenges for the sector. Initially, CDFIs came into Britain, and, I think, the North of Ireland, predominantly around business lending. In 2001, half a dozen of them went into personal lending. The CDFI model is very different from credit unions; money must be invested in them so that they can lend it out.
However, is the risk/reward ratio sufficient to attract enough funds — often from people with an ethical or social desire — for a CDFI to lend out? That is the challenge. There are about 11 CDFIs providing personal lending. After six years, they have a loan book of about £2 million in total; they have not taken off as everyone had hoped.
When CDFIs were developed in Britain, the credit union sector was probably guilty of most of the things that that model hoped to address. The reason put forward for introducing CDFIs was that credit unions were not doing all that they should have been. For example, CDFIs criticised credit unions’ maximum interest rate of 1% as being unable to serve as broad a section of the community due to the credit risk. They said that credit unions make people save before they borrow, which, traditionally, credit unions in Britain did until five years ago. The CDFIs said that many people cannot save money before they borrow or that they may need an emergency loan.
Credit unions were in the process of change anyway, but they had to respond to those criticisms. Some of the reasons for CDFIs being set up no longer obtain because credit unions are more flexible and have a different approach from that of 10 or 20 years ago. CDFIs have not been as successful as perhaps many people had hoped.
Mr Newton:
Perhaps I should have declared at the beginning that I am a member of a credit union.
The Chairperson:
Members have previously declared those things, so we do not have to keep repeating them.
Mr Cree:
That depends on how much money you have.
Mr Newton:
Not much. How can credit unions invest in a community-based business?
Mr Lyonette:
As in moneys that are at risk?
Mr Newton:
Yes.
Mr Lyonette:
We wholly discourage that. Nobody should be feeling smug at the present time due to the credit crunch and, more generally, the financial services crisis, but one of the things that we are pleased about is that credit unions in Britain have very limited investment powers. Our members will not suffer; all a credit union’s investments have to be in the mainstream, either in Government gilts or high-street bank deposit accounts.
Credit unions are worried about what might happen if the high-street bank that they have their corporate desposit with goes into default. Under the financial services compensation scheme there is limited cover for small businesses and for individuals; however, for many of our larger members there is no such cover.
Despite some concerns, credit unions are not allowed — and would not push for — greater investment powers than we have at present.
The situation in Britain is a bit like the story of the building societies in the past, when being safe and risk-averse was perceived as unfashionable and fuddy-duddy. Perhaps people will now consider those matters in a different light.
Mr Cree:
Your submission is interesting. I helped to set up a credit union, and one of my concerns is that although credit unions in GB developed similarly to those here in the early days, when I consider the range of services that are offered by many of your members, I cannot help but wonder about the sea change that credit unions here would be required to make in order to offer comparable services. For example, credit unions here cannot accept a third-party cheque.
In addition, I am concerned about whether credit unions’ products will be able compete against other financial services, such as cash ISAs. How successful have your products been and how competitive have their rates been compared to those of the banks? Such products could be useful in attracting big money back to credit unions and for longer terms. How do you envisage credit unions here reaching a stage at which they could offer a similar range of services to those that are available in GB?
Mr Lyonette:
As you were perhaps hinting, there are dangers associated with credit unions offering a range of new services, since, historically, they offered only basic savings and loans. We see the legislation going hand in hand with parallel regulation. Without a proportionate, fair and reasonable regulatory framework to allow the FSA some control over what credit unions can do, opening up legislation could be a cause for concern. Given that it is reasonably clear in which direction the Government are going with new legislative powers, the greatest challenges to the regulatory framework will arise in the next 12 months.
Some of those powers will significantly increase the risks for credit unions. For example, it is important — and around the world it has been vital to the growth of the credit union movement — that credit unions can offer, and promise, interest on deposits rather than only retrospective dividends. In order to attract savings, an organisation must be able to tell depositors that their money will achieve 3%, 5%, or whatever the rate of interest may be, because that is better than telling customers that they must wait until January or February to see what happens.
Of course, the financial risk is much higher when paying interest rather than dividends. Credit unions that wish to attract deposits from institutions must be able to pay accrued interest throughout the year and know exactly where they are; they must be able to budget to pay 5% on certain accounts and 2% on others etc. Transacting such business would put credit unions into a new world, and, therefore, when the FSA reviews its regulations over the next 12 months it will be keen to ensure that credit unions that want to diversify can do so.
In our sector, the largest credit union has approximately £55 million in assets — which is more than four or five smaller building societies— and conducts a very small amount of mortgage lending. At the other end of the scale, we have credit unions with perhaps 100 members. Consequently, credit unions’ capabilities are like chalk and cheese. One of the big challenges that we will face over the next 12 months is to design a framework that works for the whole sector.
We must increase services one step at a time while ensuring that there is a regulatory framework to run alongside.
Concerning your point about why credit union cash ISAs are successful when, as you know, hundreds of other products are available in the marketplace, our experience is that — and this is not unique to Britain; it is the nature of credit unions — if people trust their credit union and it provides the services that they want, it need not necessarily provide the very best rate in order to attract funds. So long as the rate being offered is there or there abouts, people will often opt for a credit union for the added value that it brings.
For credit unions in Britain, that has been a telling lesson. For most of our history many credit unions did not pay a dividend and were surprised when savings did not flow in. The dividend should not a question of “if we can afford it at the end of the year, we will pay you”; credit unions are buying people’s savings to use for lending. Therefore, it is only reasonable that people are given something in return, not least because their savings will be eroded by inflation. If credit unions do not meet inflation rates with dividends, then they are taking people’s money and not doing anything with it for them. That is not a great service, and perhaps people can get better results elsewhere. There has been a big wake-up call in the sector about the need to be competitive and not to expect growth without providing a good range and quality of services.
Mr Cree:
Some members are concerned that interest and dividends are outside the tax bracket and that the liability for income tax might screw things up for them or get them into a paper chase. Has that been a problem for credit unions in GB?
Mr Lyonette:
No. Many years ago there was some degree of ignorance about taxation matters, and when people started a credit union they did not know what they needed to do. Now, things are reasonably easy, through talking to the local tax office and working out what must be reported above what level of taxable income. It is not now a challenge for credit unions. Things are straightforward, once people know what they have to do.
The Chairperson:
It may concern some in the credit union movement here that the only way to offer a range of services is to come under FSA regulation, whether directly or delegated through the Department here. People might be afraid that that is complicated, unhelpful and cramps credit unions’ co-operative style. What is your experience of the FSA and the regulatory environment?
Mr Lyonette:
Credit unions in Britain probably had those same fears in 2000. I am often on the record as saying that the FSA is one of the best things that has happened to credit unions in Britain. At industry functions, I will probably be one of the few people who has something good to say about the FSA.
The Chairperson:
Perhaps you are on the record for saying it because it is exceptional.
Mr Lyonette:
We were all anxious and hugely nervous about what coming under FSA regulation would mean. Previously, there was no regulation. There was the Registry of Friendly Societies. However, it did what it said on the tin: it registered your society but it did not provide any supervision or prudential standards.
Therefore, credit unions were somewhat nervous. However, we pat the FSA on the back because it has done a fantastic job of taking the main handbook, which was about 16ft wide, and distilling it to the essential issues that would produce good controls and desired results for the credit union sector without being too onerous. The FSA was very good at doing that; and credit unions now have “CRED”, a specialist rules-based sourcebook.
By and large, it works well: people know what they have to do, and it is not too difficult. That does not mean that there are no difficulties, but, generally, the sourcebook was welcomed by the FSA and credit unions, and that welcoming established a good rapport with the FSA in working through the issues. We had to educate the FSA about all sorts of things that were not in the mainstream sector, such as the concept of attached shares. Those issues can be worked through from first principles, and we believe that we have a good framework.
I understand how important a body such as the FSA has been, because in recent years we have been working with, particularly, Newry Credit Union as part of the Irish League of Credit Unions on trying to offer them the current account framework that credit unions have in Britain.
The big stumbling block for that was in finding a way for Newry Credit Union to join VISA. It kept coming back down to the fact that VISA could not see where the regulation was; it could not see the FSA or its equivalent. Hopefully, that problem has been solved; we are still in the process of working things through; however, we think that we have found a way for credit unions to offer, not just cash cards and full current accounts but a VISA debit card.
With the exception of the Irish credit union movement, all credit unions around the world have some facility for day-to-day finance, whether it is a checking account, as in the United States, or transaction banking. These days, that means plastic; not credit cards necessarily, but the ability to put money in, make payments, and withdraw cash at machines and supermarkets. That is all taken for granted as part of a modern financial service, and credit unions should be able to offer those services. It is really unhelpful if there is a legal or regulatory framework that does not allow that to happen.
The Chairperson:
How does the relationship between credit unions and the FSA work? Do they relate directly or do they work through ABCUL? Are there intermediary interfaces?
Mr Lyonette:
Like all other firms that are regulated by the FSA, credit unions are authorised firms. The association plays a representative role in discussions with the FSA, but, the FSA has an individual relationship with every credit union in Britain. As one would expect, the trade body lobbies for things, feeds back experiences, and so on; however, the FSA’s relationship is with individuals, and that is a challenge. Nearly 700 credit unions, albeit with comparatively small assets, went into the FSA, which is a huge number of institutions in comparison with the number of banks and building societies in the UK.
There was a real challenge concerning the degree of face-to-face supervision and regulatory visits versus desktop supervision. A good balance has now been reached, and quite innovative things have been done to get round some of those challenges. By and large, that relationship has been a good experience. In fact, and this may sound strange, sometimes we have had to lobby the FSA to be a little bit harder on us, which is not something people say very often. Some credit unions in Britain have failed — usually very small ones that were not operating in a good way — and the FSA has not always picked up on things as quickly as it might have done.
We are also pushing to raise our capital adequacy level. For most credit unions, the basic capital adequacy is bare solvency. Although we understood that that was a good transitional approach when the credit unions went into the FSA, in 2002, it does not give our members’ members the first line of safety that would be expected. For example, if a credit union has a bad year, the first port of call is on its reserves. To have only bare solvency as the minimum standard seems to be capital inadequacy rather than capital adequacy. We are quite keen, and I think it will come as part of the regulatory review alongside legislation, for capital adequacy to rise a little.
Larger members of the credit union movement have to have an 8% capital adequacy on a risk adjusted basis. To be honest, they are all incredibly well capitalised, with a typical level of 14% or 15% capital. That good base means that they are resilient during difficult times, such as the current credit crunch, and have a better chance than any bank of weathering the storm. Sometimes we push for slightly higher standards, because we do not want our members to fail.
The Chairperson:
Are there any costs attached to regulation?
Mr Lyonette:
Yes, but I cannot recite them off the top of my head. In the early days, part of the discussions involved negotiating fees for different services that would make sense in a sector with such a wide range of institutions. Our members did not indicate that the cost of the FSA was too onerous; indeed, the cost of the FSA is not particularly difficult or onerous for credit unions. However, in light of Bradford and Bingley’s problems, credit unions’ thoughts on the cost of the FSCS — the compensation scheme — might be a different story.
The Chairperson:
I appreciate your help and the submission that we received from Brian Pomeroy, chairman of the Financial Inclusion Taskforce. As we thought, many of our questions were based more on your ABCUL experience than your taskforce experience.
The Treasury continues to examine changes to the field of membership. Traditionally, it has been the common bond approach. Will you elaborate on the issues surrounding that and explain the differences?
Mr Lyonette:
We continue to use the common bond, but it has a more flexible meaning now than it used to have. That flexibility has enabled most credit union movements in the world to bring in employers. Those of you who are involved in credit unions will know that the ability to deduct money directly from a person’s payroll for loan repayments or savings is a really powerful tool. That is a reason why employee credit unions grew more quickly than community credit unions. It is a lean, mean way in which to collect money, because money comes directly from payroll departments.
Unfortunately, almost all of the big employers in Britain are, excluded from availing of credit-union services, because the predominant model is the community common bond. Although, that could be cities the size of Manchester or towns the size of Swindon, employers do not want credit-union services just for those people who live in one city or town. For example, if they have employees who are based across the south-west, or indeed throughout England or Britain, they will want the services for everybody. At the moment, their only choices are to start a credit union or work with perhaps 20 or 30 credit unions across the country.
In this day and age, the human resource departments of most large employers do not want to set up new credit unions: they do not create businesses. We have a long list of national employers that would love credit unions to operate within their base. However, they do not want services to be available only to employees who live in certain towns; rather, they want them to be available to all their employees wherever they live.
The inclusion of employers is key to the growth of the sector. We have told the Government that if they want measures such as the savings gateway to progress, they must improve the convenience of saving from payroll, wages or benefits, because that is more powerful than cash collection. The same applies to the housing-association sector. Many social-housing landlords would like to have credit-union services for their employees and tenants. Landlords experience some of the same problems as large employers in that unless they just happen to sit within the common bond of the credit union they must work with 20 or 30 credit unions, which is quite difficult.
It is about flexibility: it is about bringing in more people and giving them easier access to credit unions. We have not got the sort of universal coverage in Great Britain that exists here.
The Chairperson:
That has been very helpful. Thank you very much.