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Credit Unions (Modernisation)

Volume 548: debated on Tuesday 10 July 2012

Motion made, and Question proposed, That this House do now adjourn.—(Mr Francois.)

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.

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?

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.

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?

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.

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.

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.

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.

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.

The fact that this is a well-attended debate notwithstanding the fact that Parliament’s focus has been on other matters today reflects the importance of the issue, and I congratulate the hon. Member for Bridgend (Mrs Moon) on raising it. I pay tribute to the work of the all-party group on credit unions. I see that its chair and vice-chair are here, and, I sense, some of its other members. We as a Department very much support and welcome the work of that group. My noble Friend Lord Freud is closely engaged with it, and he will continue to be so.

The hon. Lady paid tribute to Bridgend Lifesavers, her local credit union. I am happy to add my tribute to the work that it and many other small, medium-sized and large credit unions do in providing affordable credit at a time when there are, as she said, many sources of unaffordable and exploitative credit. I think that we are united across the House in wanting the credit union movement to prosper. That is why the Government have identified a further £38 million for the credit union expansion programme to which she referred and to which I will return in more detail. She asked that the goose that laid the golden egg should not reach a scrambled end, so we will take a gander at the evidence.

The hon. Lady made the important point that the difference between the United Kingdom and other countries is that we have massive potential for expansion of credit unions. As she said, 2% of the adult population of this country are in credit unions, while that figure is 40% in America and 70% in Ireland. I am pleased to say that credit union membership has just broken through the 1 million barrier. That is a significant milestone, and we praise everyone who has been involved in reaching it. The question is how we move on to the next million.

There is a balance to be struck between cherishing the historical traditions and roots of the community credit union, and recognising that the small community credit union will not survive indefinitely without ongoing state subsidy, unless we do something about revenues, costs and awareness, which the hon. Lady also raised. The working group that we set up, which was expertly chaired, identified a number of things that had to happen.

We are asking groups of credit unions to work together as part of this process not so that they lose their individual identity, which is crucial, but so that they benefit from scale in the things that they all have to do, such as their back-office functions, publicity, branding, the automation of decision-making or working on their websites. Notwithstanding the individual characteristics of each credit union, much that credit unions do is common to all of them.

Through the expansion project, we are not trying to help an individual credit union in a local place to expand; we want the entire movement to expand. That is why we want to support significant projects that will be of benefit across the sector. There is no reason why Bridgend Lifesavers or any other credit union should not be part of that, but they have to see themselves as part of a bigger project. We are trying to generate a step change in the scale, efficiency and activity of credit unions.

The hon. Lady is right that there is no shortage of demand, but a big shortage of awareness. She asked about publicity campaigns. I can confirm that we anticipate supporting national marketing campaigns for credit unions. We see a value in branding and marketing via the collaborative process that I have talked about.

The hon. Lady asked about the link with post offices. One of the challenges is that if we want post offices across the country to provide access to credit unions, it will only be viable if there is a common brand. While there will still be Bridgend Lifesavers, there might be a common credit union brand so that there can be standardised stationery in post offices and standardised training for people behind the counters. The Bridgend post office will not deal only with the local credit union. That is how we see the link with post offices working, but we are not at that stage yet. Part of the point of the expansion project is to create the scale and branding that would enable the post office link-up to be more effective than it currently is.

We see great potential for expansion in the credit union movement. To give just one example, when universal credit comes in and payments not just of regular benefit, but of housing benefit, are made direct to claimants, budgeting skills will be critical so that people can manage their money and ensure that it gets through to the landlords. Credit unions in a local area will be well placed to assist people with things such as jam jar accounts to ensure that although the individual sees the money and becomes familiar with it, just as they would with a wage, it gets through to the landlord. I am aware of credit unions that are generating a business from that by saying to social landlords that they will run such accounts when the money is paid direct to the claimant to ensure that the landlords get their money, obviously with the consent of the account holder. Social landlords are willing to pay for that service because it is valuable in guaranteeing their rent. That we are moving the entire working-age housing benefit system over to the universal credit platform offers huge potential for the expansion of credit unions, which I am sure the movement will harness.

The hon. Lady asked specific questions about the feasibility study. The proposition was that, as I have said, £38 million would be required between 2012 and 2015. We are looking for tight project management and discipline to maximise the chances of success. In a sense, it is a payment-by-results model. In the past, when the Department has funded growth funds, they have helped and the money that has gone in has been lent, but there has not been a step change in the infrastructure. That is what we are trying to achieve. We want to keep the values and ethos of the credit unions, but are also keen to see professionalism and efficiency, because the point of all of this is to achieve value for money for the lower-income saver.

The hon. Lady raised the issue of interest rates, which we have considered. It is a sensitive issue. We have the rather strange situation at the moment in which credit unions are the only financial institutions that are regulated for interest rates. That seems anomalous in a sense, considering the interest rates that the same client group routinely pays—we have heard about Wonga week. We therefore believe that there could be a modest change, perhaps from 2% to 3%. It would be a permissive change—if credit unions did not want to make it or did not feel they needed to, they would not have to—but we believe it would be a move in the right direction.

That change is a sensitive and difficult issue and will take a bit of time to make, not least because two separate Departments hold the reins of the legislation. If credit unions are ready for the challenge of modernisation and expansion, we will support them. The Treasury will start the process of the rate cap consultation this autumn, which will lead to the Treasury and the Department for Business, Innovation and Skills making any regulatory change next summer. The credit unions will then need time to prepare for and implement the change, so provisionally we are looking at the following April. That is quite a long time away, and if the process can be speeded up we will certainly be willing to consider it, but we need proper consultation because it is a sensitive issue. However, the hon. Lady said that her credit union supported raising the cap, and we are sympathetic to that and want to make progress as rapidly as we can.

For projects to qualify, we will want them to include automated decision making, which is much more efficient, integrated and centralised services and the provision of new financial products. I mentioned jam jar accounts, but there are many more. We will want partnerships to be developed to expand projects such as payroll deductions. As my hon. Friend the Member for Wells (Tessa Munt) said, credit unions are not just about low-income households, and it will help if we can get a spectrum of people using credit unions and make them more mainstream, I imagine with a bit of cross-subsidy. We also want projects to improve marketing, and in due course there will be the potential for working with post offices. Cumulatively, those approaches will lead to a major uplift in membership and create the delivery capacity required to deal with demand.

As the hon. Member for Bridgend said, the credit union expansion project report was recently published. We have already engaged with the credit union sector this month to inform it of the project’s requirements. Early next month we will advertise the procurement process for the exercise, and we anticipate that it will move fast, with proposals being received perhaps the following month. We want to get on with it. Ideally, we want to have contracts in place by January. Although the interest rate change is perhaps happening a bit slower than she would wish, it is a priority of the Government to get the money through, get the contracts in place and get things moving. We want that to happen by the turn of the year or not long thereafter.

The hon. Lady mentioned some research that she had seen on the scale of the demand for credit unions. The credit union expansion project commissioned its own research, and we were struck by the fact that of the 4,500 people surveyed, three in five said they would use credit union services if such were available. As she and the chair of the all-party credit unions group, my hon. Friend the Member for East Hampshire (Damian Hinds), will know, credit union use is still patchy. There are still places where nobody is aware of a local credit union, and one of the challenges of the project is to improve geographical coverage so that even if someone does not have a local credit union they can access one through, for example, a local post office. We want people to be aware of the credit union brand through national advertising, because credit unions will not get their next 1 million users in good order without breaking out geographically.

On the good that credit unions can do, the evidence that we have shows that 1.4 million people do not currently have a transactional bank account. I was impressed when I met a representative of my local credit union in Bristol. I must admit that before I spoke to her, I was not aware of the range of services that it offered. She described how online access and other things that we take for granted in our regular banking are now becoming far more normal in credit union accounts. We have to get away from the image of credit unions as the poor man’s banks and recognise that low-cost lending by an organisation and people who are familiar is attractive to people, particularly given the current reputation of some of the banks. We need to build on that trust and confidence and expand awareness, and that is what the current project is about.

It is very striking—this is also from our research—that up to 7 million people are using sources of high-cost credit. Even with a higher interest rate of 3% a month rather than 2%, people would save hundreds of pounds by borrowing from credit unions compared with borrowing from Home Credit, and far more compared with borrowing from other institutions.

It was crucial for our research to involve credit unions as well potential consumers. We were encouraged that four in five of those we consulted

“recognised the need for fundamental change in their organisation and that they wanted to offer a wider range of modern financial services to…consumers.”

This is a decision point for the movement. In the past, we have subsidised some credit unions and felt that they did not modernise and move forward when they had that public subsidy. When the public subsidy was withdrawn, a number of them closed or had to merge to avoid closure. We do not want that to happen. Therefore, we are both standing alongside the credit union movement and inviting it to take up the challenge.

The Government believe credit unions have a bright future. I am sure hon. Members on both sides of the House will work together to ensure that it happens.

Question put and agreed to.

House adjourned.