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Credit Unions

Volume 713: debated on Tuesday 20 October 2009

Question for Short Debate

Tabled By

To ask Her Majesty’s Government what plans they have to encourage the further development of credit unions in the United Kingdom.

At the outset, I express my gratitude to all noble Lords for showing their interest by putting their names down to speak in this debate.

The past 12 months have seen absolute chaos in some of our financial institutions, with banks being saved by part nationalisation, the Monetary Policy Committee sticking over some months with a 0.5 per cent bank rate, liquidity being propped up by quantitative easing, lending to would-be house buyers and small businesses becoming less accessible—I could go on. However, credit union membership, which has nearly trebled since 1997, grew by more than 10 per cent in the nine months to June 2009 for those belonging to the Association of British Credit Unions Limited. By June this year, ABCUL credit unions numbered 325, with 558,000 members, £450 million in savings and £370 million on loans to members. If you include all credit unions, the figures are somewhat higher.

I have never needed access to a credit union. I have always been in employment that allowed me to save, so I have had cash resources for crises and sudden emergencies. I have always been able to have a bank account. However, many members of our society—not only the poor—have not enjoyed the access to funds or credit that most of us in this House would take for granted. The only lifeline access to credit has been through the tally man or the loan shark, whose clutches are more difficult to escape than we can possibly imagine. Credit unions are based on the co-operative ethos of people helping people. They provide savings, loans and a range of services to members who, on the democratic principle of one member, one vote, elect volunteer directors.

Clearly, credit unions have not been immune from the global economic crisis. There is increased demand for loans, including from many middle-income and higher-income consumers. At the same time, when people are looking for security in their savings, about a quarter of all credit unions reported significant growth in deposits and a further two out of five reported smaller levels of growth. During the recession, however, credit unions have also reported a couple of important downsides, with members struggling to repay, while credit unions are unable to make the money that they have on deposit work for them and for their members.

What, then, do credit unions need in order to thrive? A number of things can happen and, while I shall not be at all exhaustive here, public sector support for credit unions could be significant through some relatively small things—for example, by providing free payroll deduction facilities for public sector employees to pay into credit unions and by promoting the services of credit unions to employees. The Welsh Assembly Government recently announced such an action, which could be replicated widely in the public sector. Credit unions could be assisted to occupy accessible and visible high street premises. Staff volunteering could be encouraged to enhance the skills base and governance standards of credit unions, which are especially important as they go through a process of growth. Organisations that give grant funding could be encouraged to deposit some funds in a credit union to increase the lending pot available. A number of such things could be done.

Many other things need to happen, including the continuation of appropriate funding for credit unions, particularly the growth funds. New things could happen as well; credit unions offer cash ISAs, but when legislation changes they will be able to offer interest on some of those ISAs, which will enable them to compete on a more level playing field with other providers. There are all sorts of future opportunities on which I should like to hear the Minister toward the end of the debate; no doubt, other noble Lords will have further ideas. For example, credit unions are keen to offer their members savings gateway accounts when those become available next year.

There is also the possibility of using the Post Office network. I know that ABCUL has already been in discussion with the Post Office for some months, to explore how credit union services could be accessed through that network. At a time when the Government are clearly struggling to find positive things for the Post Office to do when some of its core services are declining, that is one possibility.

However, the most important thing that credit unions need in order to thrive is the legislative change that they have been hoping for, expecting and anticipating. I am particularly grateful to the noble Baroness, Lady Noakes, and to the two Select Committees for their detailed work in looking at the Co-operative and Community Benefit Societies and Credit Unions Bill. From their work, it became quite clear that there was a deficiency in the wording of the Private Member’s Bill that had passed through the other place and been brought here.

I hope for an assurance from the Minister—and I look to him for this—that he will ask his Treasury officials to work with me to incorporate in a new Bill at the beginning of the new Session of Parliament, after the Queen’s Speech, those amendments that are necessary to satisfy the two Select Committee reports and the noble Baroness, Lady Noakes. If I can have the Minister’s assurance that Treasury assistance will be forthcoming, I hope to be able to reintroduce the Private Member’s Bill shortly after the Queen’s Speech. I hope that that would meet the wishes of all sides of this House, and of the other place, and get the Bill through properly without the technical problems that it produced in its present form.

The need for credit unions is an imperative in the provision of pluralism in our financial services and I look forward to hearing from my noble friend the Minister how, both qualitatively and otherwise, he proposes not only to sustain the current credit union developments but to help to expand them.

Billions of pounds have been spent from the public purse on preventing market forces from devastating our financial institutions. Credit unions do not need such a vast injection of cash, but they do need an atmosphere of tender, loving care from the Government—as do the hundreds of thousands of our citizens for whom they, through mutual self-help, provide a lifeline. This extremely important subject may not affect vast numbers of people; nevertheless, when it affects over half a million of our citizens, the potential for good is clearly evident in the credit union Bill. I hope that we will have a clear and encouraging response from my noble friend the Minister.

My Lords, I am most grateful to the noble Lord, Lord Tomlinson, for the opportunity to speak on such an important and timely issue. I am the chairman of an insurance brokering and financial services organisation and in my business life I have supported mutual insurance offices and building societies for the arrangement of insurance policies and mortgages. A number of these organisations have demutualised to become limited liability companies, but I am very much in favour of mutual organisations. I support and promote the credit unions, because they incorporate the ideals of mutuality and transparency.

The current economic situation has highlighted the number of people in this country who have been and are being failed by traditional, commercial financial institutions. Recently, we have seen the consequences of lending institutions that are too relaxed about the scale and focus of personal debt. Those suffering the most are those who were most vulnerable in the first place. That some people have felt the need to resort to unscrupulous and illegal loan sharks is highly regrettable and a sad indicator that, as a society, we have not been able to take care of our most vulnerable. There have been horrible incidents where people have been treated very badly by the loan sharks.

The credit union network currently makes up only a very small share of the financial services market, but that can and should change. That change in culture is necessary, if we are to avoid the debt trap that so many families have fallen into. Credit unions foster a culture of thrift and responsible lending within a community. They can provide those who may not normally have access to loans from the more traditional banking sector with a responsible and ethical way of borrowing. Unlike many traditional banks, credit unions will usually offer debt management and counselling for those in financial difficulty in a non-judgmental and unintimidating way. There are well noted examples of credit unions being a positive force for change in disadvantaged communities.

There is still a huge divide in this country between those who are able to access the types of financial services that many of us take for granted and those who have to resort to the financial black market. Government have a role to play in closing this gap and in ensuring that financial exclusion is tackled. Credit unions can and should be part of the answer.

The benefits and rewards gained from being a part of a mutual organisation such as a credit union are far greater than just financial. Because credit unions are owned and managed by their own members, usually voluntarily, there exists a huge incentive to make the union successful. This, coupled with the obligation that members share a common bond, means that the community element is incredibly strong among these unions. We have heard much recently about communities in Britain, about their breakdown and about the need to return to the days when people felt a common bond and were willing to help their neighbours. Credit unions can help in communities where a common bond may have been lost by bringing together people who live in the same area, share an occupation, belong to the same organisation or attend a place of worship.

Credit unions, and other good mutuals, offer good services to their customers and are able to show strong accountability to their members. They are able to combine a public service ethos with a strong customer focus, something normally better attributed to the private sector. They should be part of the overall mix of financial services available to people, increasing choice in the market and promoting more than just profit. It is also important that credit unions remain true to their savings ethos and protect themselves from becoming just another financial institution. Credit unions have the potential to reach many more communities and customers than they do at present, but this will require extra effort on the part of the Government. I look forward to seeing the growth of these community-based unions.

My Lords, I am most grateful to my noble friend for reminding us that there is an alternative to the high street banks. There are financial institutions that pay reasonable rates of interest but do not take huge risks or deal in dodgy paper; they pride themselves on their low overheads and reasonable pay and, as the noble Lord, Lord Sheikh, reminded us, they are ethically run. It is these qualities that make me think that perhaps the age of the credit union is upon us. As my noble friend explained, credit unions are owned and controlled by their members for the common good. This was the subject of Professor Sandel’s Reith lectures this year. And for what was Elinor Ostrom awarded the Nobel economics prize last week? It was, in the words of the Nobel Committee:

“For work on the right of users to self organise”.

In other words, as my noble friend put it, people helping people—a phrase straight out of credit union literature.

This debate is about credit unions in Britain, but they operate in most countries and offer us a lot to learn. They are extremely varied in size, membership and the services that they offer. In Ireland, half the population belongs to a credit union; in other countries, hardly anyone does so.

I think that it is in the developing countries where we see the most benefit, because credit unions are a form of low-tech banking. One of the messages consistently received from aid organisations is how valuable low-tech solutions are in third-world countries. This came across loud and clear last Wednesday in Committee Room 9. The All-Party Engineering Group met about 50 young engineering graduates from the best universities who had been working with two organisations, Engineers Without Borders and Engineers Against Poverty. They told us how they had been to third-world countries, or were going to developing countries, to do fairly simple things such as designing a sewerage system, making the electricity supply more efficient, organising public transport, designing and helping to build a road or a bridge or distributing fresh water. All this was done to help to lift people out of poverty and move them from subsistence to sustainability. Frankly, I found their idealism uplifting. A senior engineer from Arup told us how £100 invested in a family helps to raise their income by as much as 60 per cent, and how £1,500 invested in a home helps to eliminate disease, provide better living standards and enable the children to go to school. What is required, she said, is some kind of social entrepreneur to organise and manage this finance, modest as it is.

We have heard about Engineers Without Borders and we know about the humanitarian work done by Doctors Without Borders, such as that done by Médecins Sans Frontières, so my question to the Minister is this: what about bankers without borders—that is, young bankers to provide the low-tech solution that is so effective in medicine and engineering? Cannot the Treasury and my noble friend help to find some young bankers driven by a wish to help to lift people out of poverty by means of self-help and to organise credit unions, micro-finance and local enterprise? They could introduce proper accounting principles and internal controls and procedures, plan financial operations and introduce proper governance. All these things are the bread and butter of banking. It seems to me that a corps of idealistic young bankers from Britain, working in the emerging economies through credit unions, would not only be an important part of fighting poverty but would help to raise the positive profile of credit unions here in Britain and perhaps renew our faith in bankers.

My Lords, I, too, welcome this short debate initiated by the noble Lord, Lord Tomlinson, on furthering the development of credit unions in the United Kingdom of Great Britain and Northern Ireland. There is a geographical area of that union where the development of the credit union movement is out of kilter and is indeed being impaired compared with the movement in the remainder of the kingdom.

This evening I specifically ask the Minister what plans the Government propose to especially encourage the credit union movement in Northern Ireland, and in so doing to give the movement there parity with the credit unions which operate throughout the rest of Great Britain. There are several inconsistencies in how credit unions are regulated in Great Britain and in Northern Ireland. I shall mention four. The most critical anomaly is that we in Northern Ireland are not covered by the Financial Services Compensation Scheme. Credit union members in Northern Ireland do not enjoy the same protection as credit union members in Britain or, indeed, in the Republic of Ireland. Just look at the current plight of the Presbyterian Mutual Society savers—and they were savers.

Secondly, credit unions in Britain can apply for funding under the Growth Fund. Substantial assistance can be obtained for credit unions to introduce new savings and loan schemes, whereas in Northern Ireland that is denied to them. Further, the Department for Work and Pensions in Britain sponsors credit unions to administer the Social Fund hardship loans. Credit unions in Northern Ireland are not permitted to do so. In Britain, the unions are being encouraged to set up a gateway savings incentive scheme. No such savings product has been implemented in Northern Ireland.

In two areas, Northern Ireland credit unions do not have parity with other financial institutions. They are not permitted to provide a mini cash ISA service to their members. Instead of members being rewarded for saving with their credit union, they are penalised because they are taxed on any income earned. If Northern Ireland credit unions were to provide mini cash ISAs, their members would be permitted to put into savings £3,000 per annum, tax free, just as in Britain, where credit unions are allowed to offer these facilities, as are all other financial institutions. Similarly, credit union members in Northern Ireland are not permitted to avail themselves of the child trust fund service. I am aware of a credit union with in excess of 3,200 juvenile members with deposits totalling more than £1.6million, yet it cannot offer any child trust fund product.

The main obstacle that credit unions in Northern Ireland face is that the primary legislation, the Credit Unions (Northern Ireland) Order 1985, has not kept abreast of changes in the financial services market. In fact, the Northern Ireland order expressly prohibits credit unions from performing the functions of banking. Credit unions in Britain, regulated under the Financial Services Authority, have been able to provide these services from their inception. In addition, by virtue of being regulated by the FSA, they are covered by the Financial Services Compensation Scheme.

I am conscious that my remarks have had a negative edge. I shall finish on a positive note. I am aware that a review is currently under way in Northern Ireland and, I hope with political support in Stormont and Westminster, credit union members in Northern Ireland should start to enjoy a more level playing field.

My Lords, I should say at once how indebted we are to my noble friend Lord Tomlinson for seizing the opportunity to allow us to become members of the credit union supporters’ group. He has said everything that needs to be said about them statistically and on their aims and references. We are grateful to him. Every contribution has enhanced not just this House, but the value of credit unions in the economy of this country.

I declare a general interest, which is not related to my interest in the Co-operative Group declared in the Register of Lords’ Interests. Sixty years ago, I was an employee of the Newcastle Upon Tyne Co-operative Society. I would stand in the general office with other colleagues on what was known as a red letter day—dividend day. When I and my colleagues paid out the dividend, we knew that this was a good community activity because the way that the Co-op worked in those days, and perhaps does now, was that its share capital was accrued dividend which had been earned and not drawn. On dividend day, the money was drawn and some 50,000 of the 60,000 members of the society who withdrew a portion of their dividend spent it on shoes, boots, shirts, suits and things of that kind. The money was raised in the community, for the community and spent by the community.

It has often been said that the Co-op movement never made a millionaire and never made a pauper. The first has been overtaken by events—some millionaires have been made—but I have yet to hear of paupers.

One of the bugbears for credit unions in getting off the ground was, sadly, that they were not being wholly policed and serviced by competent officials. In other words, there was the question of security. In those days, there were three elements to investment for the working class: liquidity, profitability and security. All are important, but the most important element was security. People wanted to make sure that their money was safe, but because they left their money in their share passbook, there was cheap capital available for the society to use.

This is all part and parcel of the current situation. My noble friend Lord Tomlinson has allowed us to say why we believe that the theory and practice of credit unions have a part to play today. Like him and others around the House, we have watched the situation, nationally and financially, go from bad to worse. I make no comment on that, except to say that the credit union movement stands tall and upright in its service to its members.

In conclusion, I received a document called Credit Union News. It states:

“Time for credit unions to reach out. Credit unions are poised to benefit from major changes in legislation and according to Mark Hoban MP, Shadow Financial Secretary to the Treasury, they now have a tremendous opportunity to seize the moment and become the real alternative to the High Street banks”.

The article also states:

“He goes on to say that a key objective should be the provision of ‘universal coverage’. ‘I want to see the development of credit unions across the UK and I want to see them able to provide services and products to the whole population so that everyone has access to a credit union’”.

Those of us who know the credit union movement know of the bond which binds together communities, trade unions, the police and local government. As an aspiration, the more that people have access to an organisation such as a credit union, the more they will sleep easily in their beds.

I look forward very much to what the Minister has to say, because the credit union movement has problems, aspirations and desires. They have served their apprenticeship in the field of financial management and responsibility. They deserve attention, which I know they are getting, from this Government—now and in the future. I congratulate my noble friend Lord Tomlinson, and everyone else who has spoken, on being very much to the point.

My Lords, I add my thanks and congratulations to my noble friend Lord Tomlinson for enabling us to debate the important subject of credit unions this evening, and for his commitment and hard work in the cause of credit unions.

What I shall say this evening is informed by my awareness of the work, successes and problems of credit unions in Newport and Norwich. Newport is the city that I represented in the House of Commons and Norwich is the city in which I now live. Newport has needed its credit union. In my former constituency of Newport East, there were communities traumatised principally by the vicissitudes of the steel industry. There were people in those communities who were not only poor but lacking in confidence, lacking in the most basic understanding of how to manage money and certainly lacking in access to banks. We have come to understand that, while the banks were happy to engage in sub-prime mortgage lending, they were not happy to provide the generality of banking facilities to many poor communities. When people in those deprived communities had access to banking facilities, too often the charges on overdrafts that they suffered compounded rather than eased their problems. People in my former constituency were prey to loan sharks charging APRs of several hundred per cent and enjoying the assistance of Alsatian dogs in collecting the money they claimed as owing to them. Even in very recent weeks, in the Larkman area of Norwich leaflets have been distributed offering pre-Christmas loans at an APR—if you study the small print and have the ability to comprehend it—of 128 per cent. In the recession, of course, more people have become vulnerable to such temptations and pressures. Credit unions have certainly been needed.

In the past 10 years, Newport Credit Union has expanded from operating in four wards of the city to the whole of the city and now has 1,500 members. In Norwich there are four credit unions: three community-based and one employee-based—the employees of Norwich City Council and other local authorities in the area. Over the past 20 years, the credit unions in Norwich have achieved a membership of about 1,500. At the moment, Ketts Credit Union is developing collection points in schools, helping young people to learn to save.

What are the lessons that should be learnt from the experience of credit unions over the past decade? One obvious lesson is that establishing and building a credit union is a difficult and slow process. It is difficult, in part, because it takes time to find local people with the confidence and skills to take on these responsibilities.

How, then, should credit unions be helped? I warmly endorse the agenda for assistance to credit unions set out by my noble friend Lord Tomlinson and would add only a very few reflections. One is that we should respect localism and local variety in credit unions. I do not think that we want standard models, and we should be very wary of how big government, and big central government in particular, approaches and deals with credit unions. One has to respect the local ownership and local control to which my noble friend Lord Haskel particularly drew attention. The needs that credit unions meet are local, as is their contribution. Word of mouth is probably the best way to expand membership. Their volunteers are local, motivated by community loyalties. Let us take this opportunity to praise and thank those who commit so much time and energy and community and civic spirit to helping credit unions to do the invaluable work that they do.

I think that support for credit unions should also be local. Small amounts of public funding might constitute a very good investment in helping credit unions to achieve critical mass and cross the hurdles of development that they need to cross—for example, support for part-time finance officers or, as the Welsh Assembly Government have recently provided, help in Newport for part-time officers to extend financial inclusion. It must be a good investment to help to avert personal disaster and to build community strength. If grants are available to provide some stiffening of professional help, that will of course be very welcome. I suspect that it is better that the grants come through local authorities, and if central government or the Welsh Assembly Government wish to support local authorities, so much the better.

However, help might also be provided by way of deposits. I am advised that there are areas in the United States of America where credit unions are relatively well capitalised and this is because it is a custom for local institutions to make deposits with them—deposits that are no doubt small in the terms of those institutions but significant for the credit unions. So might it not be attractive and helpful if it became conventional practice for local authorities, local banks and other local businesses to deposit money with their local credit unions? They would be at least as safe as they were in depositing money with Icelandic banks—indeed, much safer—and it would be an aspect of corporate social responsibility.

I shall be very interested to hear the Minister’s view of the value of credit unions and of what can sensibly and sensitively be done to promote and assist them.

My Lords, I too congratulate the noble Lord, Lord Tomlinson, on initiating this debate, which has been extremely well informed and interesting. I was particularly interested in the description of the noble Lord, Lord Graham, of handing out the dividend in 1949, a time when my mother was working in the divvy department of the Leeds Co-op. I grew up with stories of the divvy and I have seen its value to the person as well as in a policy sense.

It is also a pleasure to be talking about an aspect of the financial world that is miles away from the bonuses that we tend to get bogged down with. We are talking about a significant proportion of the population. The noble Lord, Lord Tomlinson, referred to 500,000 or 600,000 people who are members of credit unions. Provident Financial, one of the door-to-door lenders which is not a loan shark but which certainly charges very high rates of interest compared with credit unions, has 1.8 million customers. We are talking about a big pool.

I believe there is general agreement on the value of credit unions. When Mark Hoban says that he would like credit unions to become the real alternative to high-street banks, I hope that he will continue to promote that as part of the financial services agenda if he is ever in a position to influence it. Over recent months, we have seen a number of ways in which credit unions have taken on new responsibilities, which most people would be pleased to see. A number of noble Lords may have seen that the Audit Commission in a report in August looked at the way in which local authorities are increasingly working with credit unions, not least dealing with redundancies in parts of the country and using resources under local authority control in innovative ways to help credit unions to grow. In some parts of the country, libraries are now being used as collection points for credit unions, which seems a sensible use of a community resource. If, once it has sorted itself out, the Post Office were to play a role in developing credit unions, that would be extremely good.

Although we all agree on the value of credit unions, if one looks at how one establishes and sustains a credit union, one sees that it is extremely difficult. My wife was involved in establishing a credit union in Lambeth and for months on end she returned home late at night, weary from a meeting where she, together with a group of enthusiastic volunteers, grappled to put together the Lambeth credit union. I was very relieved to see from the web that that institution still exists, but it has only 500 members. The effort that went into creating it was disproportionate to the number of people who use it, particularly as within Lambeth many thousands of people could more sensibly be in a credit union rather than dealing with their finances through their current method.

I would like to pursue three very different ideas to help make the life of credit unions easier. The first relates to staff volunteering, as a number of noble Lords have mentioned. I do not know about bankers without borders but getting bankers to be attached to nascent credit unions, as solicitors carry out pro bono work with law centres or other bodies, is an extremely good idea. I suspect that many middle-ranking bankers would quite like it. I hope that can be pursued.

Secondly, I hope that we get the Co-operative and Community Benefit Societies and Credit Unions Bill through quickly in the new Session. It would help if the Government were to adopt it and put it in the Queen's Speech. I believe that it would go through like a dose of salts. I hope that goes through because it is another building block.

The third thing which has been drawn to my attention by my colleague Peter Black, a Member of the Welsh Assembly, is that currently credit unions are paying £8,500,000 to the Financial Services Compensation Scheme, which seems disproportionate given the risk attached to credit unions. That is a cost that they could well manage without. I hope that the Government will look at that.

To sum up, I think we are agreed that credit unions deserve our support and acts of encouragement.

My Lords, I congratulate the noble Lord, Lord Tomlinson, on securing this short debate this evening, and I thank him for the work that he did on the Private Member’s Bill. I look forward to his bringing that back in the new Session.

The noble Lord, Lord Tomlinson, and other noble Lords have given a good overview of the strengths and opportunities for credit unions. It is the policy of my party to support consumer choice in financial services, and that requires diversity. Credit unions are clearly an important part of that diversity, as my noble friend Lord Sheikh so clearly explained. I am grateful to the noble Lord, Lord Graham, for reading out my honourable friend Mark Hoban’s positive views on credit unions. I will be happy to tell him that he is endorsed by the noble Lord, Lord Graham.

It is tempting to just agree that credit unions are a good thing, in particular because they provide lower- cost credit for those who might otherwise fall into the hands of loan sharks, as the noble Lord, Lord Howarth, explained. I would like to spend my few minutes this evening concentrating on the other side of the equation, which is saving. Credit unions obviously do have savers, but their reach is not particularly great within society. I argue that we need a much broader focus on the desirability of saving in our society rather than on access to finance.

We have seen an explosion in personal debt in the past decade or so, with personal debt now standing at £1.5 trillion. In the past two years that has been stabilising, and we have even seen one or two falls in the monthly statistics. The fact remains that the average household debt is nearly £60,000 and unsecured debt is around £9,000. An astonishingly high proportion of the adult population, at over one-third overall—double that rate for groups such as single parents—have no savings whatever. That is why at the smallest financial crisis those people are driven to borrowing, often at very high rates with undesirable terms.

In addition, we have seen growth in a culture of borrowing for consumption. While that might be okay for those with secure incomes and good prospects, it is not necessarily sensible for those living on limited incomes. Many have borrowed not just in an emergency but to finance a lifestyle that they cannot really afford. The time has now come to reverse the trend and start to promote saving as a beneficial way of life. The savings ratio went below its long-term average shortly after 1997 and even went negative last year. It has ticked up this year, but it is still below the level of the 1980s and 1990s and below the long-term trend.

I acknowledge that the Government are experimenting with the saving gateway scheme to try to kick-start the saving habit of those who live on benefits, and credit unions want to be a part of that. I do not think that is enough. I would like to read just one bit of a study carried out by the Personal Finance Research Centre at the University of Bristol. It says that rainy-day savers—that is, long-term savers,

“are ‘born’ at a very early age and retain that aspiration for life. This argues for encouraging saving at a very young age”.

Do the Government have any policies likely to create rainy-day savers among the young? We do not regard child trust funds as being in that category. I have never heard it claimed that they are there to create a saving habit among children. They may do something for parents.

A significant number of adults do not have access to a transactional bank account. That is an important part of access to wider financial services, including savings. It can also reduce the cost of living, for example by accessing cheaper energy charges. The latest report from the Financial Inclusion Taskforce shows that while there have been significant improvements in the number of unbanked adults, there remain up to 2.7 million unbanked adults, depending on the definitions that you use. Credit unions have only about 24,000 accounts at the moment, so they are clearly not the answer to that problem.

In the Prime Minster's speech to the Labour Party, he referred to the Post Office playing a much bigger role. I hope that the Minister will elaborate on this. In particular, will this role foster financial inclusion and savings, or is it just going to be yet another route for more borrowing in society? The focus of policy going forward should be angled much more towards encouraging saving than borrowing. Then we might have a chance of rebuilding a responsible approach to finance in our country.

My Lords, first, I thank my noble friend Lord Tomlinson for bringing about such a timely and important debate. Thanks, too, to all noble Lords who have spoken in this debate and for the important insights that they offered.

The Government support credit unions and the benefits that they bring to consumers and to local communities. Credit unions help to instil and encourage a savings culture among their members. In some communities, and for many who are excluded from mainstream financial services, credit unions continue to offer the only credible alternative to loan sharks and unscrupulous doorstep moneylenders. Credit unions in Great Britain also play a significant role in supporting financial initiatives such as the child trust fund, the growth fund and ISAs, and many will also offer saving gateway accounts from next year—an important initiative to support the financially excluded.

There are around 700 credit unions across the United Kingdom with a combined membership of 1 million adult members. As my noble friend Lord Tomlinson indicated, this is a growing sector, appealing to many throughout the UK. It has yet to reach its potential. We recognise that we need to modernise and update the legislative and regulatory framework if the sector is to continue to grow.

Next month, we will be laying in Parliament our legislative reform order for the sector, which is eagerly awaited by the sector. It addresses many concerns that have been brought to the attention of the Treasury through consultation and a working group made up of representatives from the sector. The order will update the legislative framework for credit unions and industrial and provident societies in Great Britain. It will enable those societies to serve their members better, and to assist in the delivery of the Government’s financial inclusion programme.

The order forms part of a review of legislation that commenced in 2007 with the aim of providing the mutual sector with a cost-effective legislative framework to facilitate effective competition in the modern economy and to continue to fulfil its valuable social role. It will amend the Credit Unions Act 1979 to amend the requirements for membership of a credit union, reform restrictions on non-qualifying members of credit unions, allow credit unions to admit bodies corporate to membership, allow credit unions to offer interest on deposits, abolish the limit on annual dividends, amend the attachment of shares provisions and allow credit unions to charge the market rate for providing ancillary services to their members.

I am sorry that the Co-operative and Community Benefit Societies and Credit Unions Bill now faces an uncertain future, but there are grounds for hope that it can be resuscitated. That Bill, which complements the order, focuses on the linked objectives of modernising legislation and increasing member confidence in co-operative and community benefit societies by improving their corporate governance standards—laudable objectives that have received strong support from the community of stakeholders. The Bill seeks to give the Treasury a power to make further changes to credit union law by importing building society law where appropriate. The sector wants this change to help it to move on to the next phase of its development.

The Bill also contains measures designed to protect the key aspects of credit unions to ensure that their fundamental nature—their defining philosophy and structure—is not undermined, while permitting credit unions and their governance to develop and improve. The Bill will be of direct benefit to some of the poorest and most vulnerable in society—people who should be able to count on their Government for support. As my noble friend Lord Tomlinson so eloquently said, it is people helping people and Parliament helping people to help people.

The Government intend to make an order under the Electronic Communications Act 2000 to facilitate the use of electronic communications between credit unions and their members and the Financial Services Authority. A similar order was made in 2003 to facilitate the use of such communications by building societies.

The current lack of legislation enabling the use of electronic communications for other mutuals means that communication between credit unions, industrial and provident societies and friendly societies, their members and other stakeholders is usually paper-based. That is both inefficient and costly. The ability to use electronic communications to discharge some of their statutory obligations would enable credit unions and other mutuals to reduce their costs, increase their competitiveness and better serve their members.

The Government fully support the Bill proposed by Mr Malcolm Wicks and so ably supported by my noble friend Lord Tomlinson. I am sorry that its further passage is now uncertain, but I am grateful to the Delegated Powers Committee and the Constitution Committee for their careful consideration of the draft Bill. My officials and I will work closely with my noble friend Lord Tomlinson and others to decide how best to take forward legislation in this area, as is sought by the industry and supported by government.

The Government, in their support for this sector, have set up a growth fund, with a total worth now of almost £100 million for credit unions and community development finance institutions to lend to their members—the sort of initiative that I am sure that my noble friend Lord Howarth of Newport had in mind. More than 170,000 credit union members have so far benefited from loans since the start of the growth fund in July 2006.

In the Pre-Budget Report, we announced a review into Northern Ireland legislation for credit unions and industrial and provident societies. The Treasury published the review in the summer. The Treasury and the Department of Enterprise, Trade and Investment in Northern Ireland are now preparing a joint consultation. That will give stakeholders an opportunity to comment on the proposals for reform. The consultation is expected to be published before the end of the year.

There were many important contributions to the debate. The noble Lord, Lord Sheikh of Cornhill, spoke with great sensitivity and persuasiveness about the role that credit unions can play in meeting the needs of the most vulnerable in society and those who are unbanked. I share with the noble Lord a great respect for the concept of mutuality, and have previously spoken about my regret that mutuals are no longer as prominent in the financial sector landscape as they were. I concur with the noble Lord that credit unions are playing and can continue to play an important role in fostering the spirit of thrift and supportive communities.

My noble friend Lord Haskel spoke of social entrepreneurship as lying at the heart of working for the common good. I will be talking more about the issues of banks and their responsibilities to society in a speech that I shall be making tomorrow evening to the Worshipful Company of Bankers. On the specifics of the issue raised by my noble friend, in a speech that I gave last week to the British Venture Capital Association, I spoke about the need for the financial services industry to show some contrition for the damage that it has brought on the economy, by supporting community programmes. It would be abhorrent—I said this previously in response to a question asked by the noble Lord, Lord Newby—for banking institutions to cut back their community programmes at a time such as this. Much more can be done in sharing skills. I will certainly write to the British Bankers’ Association conveying the sentiments expressed by my noble friend Lord Haskel. I will of course share with my noble friend and others who have spoken in this debate both the letter that I send and the reply that I receive.

My noble friend Lord Graham of Edmonton spoke about the theory and practice of the sector. In a challenging environment, as he said, we can clearly see that the credit union movement stands tall and upright, proud and able to meet the challenges of continuing to grow into the future.

My noble friend Lord Howarth of Newport spoke about his experiences in Newport and Norwich and quoted examples of growing and thriving credit unions developing product suites and cultures suited to the poorest and most disadvantaged. My noble friend spoke of the need to respect localism built around a common bond and for government to create a framework that enables, but does not enmesh, the essential local character of a successful credit union.

My noble friend spoke about the opportunities for local financial institutions to second people to credit unions to provide some skill and professional support and for others to provide funding to support credit unions. The Bill supported by my noble friend Lord Tomlinson includes the admission of corporate bodies, unincorporated associations and partnerships, which would achieve some of the goals that my noble friend Lord Howarth of Newport had in mind.

The noble Lord, Lord Newby, quoted Mr Mark Hoban earlier than I could, which is one of the many privileges of being in opposition. There are few of being in government, I can assure him. I fully support the sentiments expressed by Mr Hoban and supported by the noble Baroness, Lady Noakes, that we would wish to do everything to encourage credit unions to become the alternative to banks. To do that, we clearly need to ensure that credit unions have contemporary structures and the ability to offer a contemporary suite of products and services to their members.

The noble Lord also spoke about the difficulties of setting up credit unions. The LRO to which I referred earlier is aimed at simplifying and removing burdens in connection with the establishment of credit unions. The consultation that supported it sought to identify barriers to the development of credit unions and to facilitate the elimination or, at least, diminution of those barriers.

The noble Lord, Lord Newby, also spoke about the need for bankers to provide support, and I thought the example he gave of legal practices providing pro bono support for legal advice centres is a good parallel that the banking industry should be encouraged to follow. With the noble Lord’s agreement, I will quote it in the letter that I intend to write to Miss Angela Knight at the British Bankers’ Association. I am delighted to hear that he wishes to see the Bill, or a successor Bill, pass through Parliament.

The noble Lord raised the Financial Services Compensation Scheme and its cost to the credit union movement. The cost is relatively small. It is less than £1,000 for the majority of credit unions and not much more than that for the largest. The credit union movement wanted to be conjoined with other deposit-taking institutions. It was invited to indicate a wish to be treated separately, but it concluded that it was in the interests of credit unions to be conjoined with other deposit-taking institutions. Credit unions have clearly benefited in terms of depositor confidence and assurance from the security that the compensation scheme provides.

I welcome the opportunity to agree with the noble Baroness, Lady Noakes, and share the sentiment that she expressed that we need to move back towards a more balanced society that is less dependent on debt and places more emphasis on the virtues of thrift, saving and self-provision for the future. We have used too much debt across every possible avenue of society and economy in the developed world in recent years. This is not a phenomenon that is solely applicable to the UK.

Finally, I congratulate my noble friend once again on securing this debate. It has spoken powerfully of the House coming together in a common bond of support for credit unions.