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Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011

Volume 731: debated on Thursday 20 October 2011

Motion to Approve

Moved By

That the draft Legislative Reform Order laid before the House on 19 July be approved.

Relevant document: 18th Report from the Regulatory Reform Committee

My Lords, industrial and provident societies—co-operatives as they are better known—and credit unions have made a long and invaluable contribution to our society. For centuries they have been a driving force for common endeavour and mutual support. From high street co-operatives to pubs and football clubs, from healthcare to agriculture and from education to local shops, co-operatives and credit unions are cornerstones of our communities.

The strength of the co-operative economy today, with more than £30 billion in turnover and more than 13 million members, is testimony to the trust and value that we place in them. Credit union membership continues to grow across Great Britain, enhancing the diversity of our financial services, with membership on track to exceed 1 million this year. Despite a difficult economic environment, credit unions continue to provide much needed finance and support to local people and communities. Co-operatives and credit unions are a key element of the coalition Government’s vision to empower local communities. Both will benefit from the changes introduced by the legislative reform order that we are debating today, which will reduce burdens and remove obstacles to enable them to grow and extend their services to new members.

The legislative reform order has been a long time in the making. Consultations with the mutual sector began in 2007, and co-operatives and credit unions took the lead in proposing measures designed to bring their regulatory and legislative frameworks into the 21st century. The proposals themselves fall into two parts: those applying to co-operatives and those applying to credit unions.

There are six proposals of benefit to co-operatives. The first abolishes the minimum age for membership and reduces it for those wishing to hold office. This will enable young people to engage more actively with their local co-op, and in some cases to become officers sitting on their local committees. The second removes the restriction on the maximum holding of non-withdrawable shares in a co-operative. This will enable co-operatives to raise capital more easily.

The other four proposals remove burdens and increase choice for co-operatives by: allowing them to choose their own year-end dates; removing the requirement to have interim accounts audited; permitting them to charge non-members for copies of their rules, while protecting the rights of existing members; and enabling easier dissolution. Taken collectively, these measures will have a positive impact in reducing burdens on co-operatives, removing unnecessary costs estimated to total £33 million, and delivering net benefits from improved access to capital of a further £7 million.

With respect to credit unions, the legislative reform order contains eight proposals. The first four enable credit unions to extend their membership base and serve a greater number of customers by: opening up the common bond requirements; removing the limit on non-qualifying members; and allowing bodies corporate to become members for the first time subject to a cap. These proposals will allow credit unions to serve a greater number of people by extending the membership base and enabling mergers to take place where this is considered appropriate. The fifth proposal allows credit unions to issue interest-bearing shares, which could encourage increased savings, helping to tackle chronically low rates of saving across the country, and which, in turn, could lead to greater lending.

The remaining proposals relax restrictions on share withdrawal, allow credit unions to charge an appropriate rate for providing ancillary services and remove the 8 per cent limit on dividends, unless the rules of the credit union provide otherwise. These proposals will substantively update credit union legislation and provide a welcome boost to the mutuals sector and its members. Such is the enthusiasm for these reforms that a recent survey by the Association of British Credit Unions identified that over 60 per cent of credit unions are intending to extend their geographic coverage once the LRO comes into effect.

As noble Lords are aware, the LRO was previously laid in Parliament in March 2010 and the Committees of both Houses recommended changes to the order prior to its approval. These recommended changes were: first, that the affirmative resolution procedure be used for any changes to the caps relating to corporate membership; secondly, for members to be required expressly to endorse a decision to abolish the 8 per cent limit on dividends; and thirdly, for the proposal enabling credit unions to charge a market rate for ancillary services to apply only to new members, and to be subject to a review after two years. I am pleased to confirm that each of these recommendations has been taken on board in the new draft order before the House today. The Delegated Powers and Regulatory Reform Committee has recommended that the order is,

“in a form satisfactory to be submitted to the House for affirmative resolution”.

In conclusion, credit unions and co-operatives have been waiting a long time for this LRO to be made and many stand ready to take benefit of the order as soon as it takes effect. This LRO reflects our commitment to promoting the mutual and co-operative sector in Great Britain, ensuring that we enhance diversity in our financial services and that we support a sector that provides finance, employment and support for millions of people, including those hardest to reach and most in need of help. This legislative reform order will support and enable growth of co-operatives and credit unions and I look forward to hearing your Lordships’ views on these proposals. I very much hope that you will lend your support to these important reforms. I beg to move.

My Lords, today is International Credit Union Day and the theme for the celebrations is “Credit Unions Build a Better World”. It celebrates the important economic and social contributions credit unions make to their communities worldwide. I am vice-chair of the All-Party Parliamentary Group on Credit Unions and it is wonderful that we are debating and approving this statutory instrument today of all days.

As the noble Lord said, credit unions are financial co-operatives owned and controlled by their members. Credit unions in the UK manage over £600 million on behalf of over 900,000 people. The order before us today makes some very welcome changes. It was originally laid in similar form by the last Labour Government, as the noble Lord said, and I was delighted when the present Government sought to carry forward these much needed reforms. The order makes a number of sensible changes, such as allowing credit unions to pay interest on savings rather than a dividend. It allows them to provide services to community groups, attract investments and extend the services that they offer. That is all very welcome. I congratulate the Government on what they have done.

However, this is only one of a number of steps that the Government should be taking. Although the credit union sector in the UK is growing, it is still relatively small. With the right support, the potential for major expansion is all too evident. That expansion and growth would be of benefit to communities up and down the country. We must also remember that it is a sad fact that some of the most financially excluded citizens have to pay the highest price for credit, which we should all regret and want to work to eliminate. We have seen organisations on the high street that are little more than legal loan sharks which charge people 2,000, 3,000 and 4,000 per cent interest to borrow money. Expansion of the credit union sector gives people who are financially excluded the opportunity to become financially included and to pay a fair price for the credit that they need.

The big society seems to have disappeared a bit from the vocabulary of the Government in recent months, but initiatives like this, which enable people to help themselves, are what I understand by the big society and are very welcome.

My Lords, let me join others in welcoming this order laid before us. Like others, I think that the only regret is that we had not seen it perhaps a little sooner, but I am delighted that it has come now. I am also delighted to be able to look at it in the context of the Government’s commitment to credit unions. A project is now under way between the Post Office and ABCUL—a sort of industry spokesperson for credit unions more broadly—to find ways for the Post Office to be the front-door platform for many people to access their accounts through the Post Office structure. That would have been inadequate were these other steps not being taken to expand the capacity of credit unions.

I am particularly delighted that we now have a new definition of the common bond, which will take a real constraint away from credit unions and their capacity to build membership and to serve the community. The United States has long had much greater flexibility. Whereas in the UK the figures from ABCUL suggest that the current amount of assets under credit union management is £790 million, in the United States—even allowing for the difference in population size—some $900 billion of total assets come within the credit union structure. We are looking at a completely different dimension, which I hope the UK will be able to move towards. As the noble Lord, Lord Kennedy, has said, many people who are financially excluded can see a route into financial inclusion through credit unions that they would not find in the high street banks.

I also am encouraged by the expansion of the groups which a credit union can serve to include corporate bodies, partnerships and unincorporated associations. We have many small businesses which once again cannot find a satisfactory financial relationship through existing high street banks. They need other sources and mechanisms. Again, if we look at the United States, it is interesting that the ability to serve small business has long been part of the credit union framework. In 2011 alone, the Obama Administration are using that credit union network to push $300 million in additional credit directly to small and very small business in a way in which we have no capacity to do here in the UK. For the kind of activity that we are seeing through credit easing—obviously, that is a much broader programme—in the United States that is able to happen far more easily and fluidly through mechanisms such as the credit union and the much wider world of community development banks. We can now begin to move towards having that potential here in the UK.

With the new classes of shares and the ability to deepen investment, we are coming now to the point where there is a recognition that more diversity and provision that focuses on people who are financially excluded, and on businesses that are micro and small, is all to the positive for the growth that we need in our economy.

I join others in welcoming this order laid before us by the Government today. I express apologies from my noble friend Lord Newby, who had expected to be standing here but, because of the time, unfortunately could not cancel another commitment. I welcome this move by the Government.

My Lords, the Minister greeted my arrival at the Front Bench with a slightly wintry smile earlier. Whether he thought I was late, though I assure him I was descending from the rarefied atmosphere of the Back Benches, which is why I was slightly delayed, or whether he anticipated that this debate had some hidden horrors, I am not sure. He will, however, by now have appreciated the fact, from the contributions both of my noble friend Lord Kennedy and of the noble Baroness, Lady Kramer, that this measure is most welcome and Her Majesty’s Opposition are delighted to see it being presented today.

As noble Lords have already spoken about the virtues and possibilities of the credit union and the Minister himself paid due tribute to their work, it would be otiose of me to expand on that matter and, as I am given to brevity, noble Lords will appreciate that I will take as read the reason why this order should commend itself to the House. However, I have some questions to ask, which I hope the Minister will be able to respond to. What does he expect the removal of the limit on non-withdrawal shares to be? Will this result in dominant members of a society emerging? What steps will the FSA be taking to ensure that societies do not become subject to such dominance whereby a small number of individuals might establish a very considerable influence with regard to these non-withdrawable share holdings?

On credit unions, could I ask about the removal of the common bond, which is the whole point of a credit union, because it provides the self-regulatory strength of mutual knowledge and understanding? What does this mean as far as the future of the credit union is concerned? Does it mean that credit unions will be just another form of financial organisation rather than the distinctive sort of organisation which is being commended in the speeches made so far today in this short debate?

Finally, what does the Minister expect to be the impact of bodies corporate joining credit unions? Will this not lead to small commercial enterprises exploiting the financial strength of the credit union to further the interests of their own businesses? In other words, would credit unions become tied to businesses instead of being independent? After all, one business which might supply 10 per cent of the assets of the credit union will undoubtedly be a powerful force within it.

We welcome this legislation, but I would be grateful if the Minister could give me some assurance on those limited anxieties.

My Lords, I am grateful to the small but focused and committed group of noble Lords who have spoken with clear knowledge and some degree of passion about this, as it is important. It is clear from all sides that there is strong support for the work that co-operatives and credit unions undertake across Great Britain.

In answer to the noble Lord, Lord Davies of Oldham, I was waiting to see—my noble friend Lady Kramer having nobly stepped in in the absence of my noble friend Lord Newby—who might be on the Front Bench in the absence of the noble Lord, Lord Eatwell. I noticed that the noble Lord crossed three Benches in one bound and here he is. It is always good to be opposed by the noble Lord, Lord Davies.

I had not realised that we were debating this order on International Credit Union Day, but I am delighted that we are making a small contribution to that. I should like to have said that we had scheduled the business deliberately, but I must confess that I was unaware.

As has been said, although the co-operative and credit union sector is not as large in Great Britain as it is in other countries, its membership is growing. That is clear testimony to the trust and esteem in which they are held across the country. The Government want to make sure that we underpin the valuable role that they play, particularly in promoting higher rates of saving across the economy, helping to develop a culture of financial responsibility, providing credit at a local level for individuals and empowering communities across the UK.

However, I recognise the points made by the noble Lord, Lord Kennedy of Southwark, and my noble friend Lady Kramer about the need for us to do more. Even though I was not asked about what else the Government are doing, we see this order in the context of a series of reforms that we are making, as I am sure the noble Lord, Lord Kennedy, is aware. We are exploring the commencement aspects of the co-operative Act and this order is a necessary precondition of that Act coming into effect. We are making the electronic communications order for mutuals, which will enable them to cut the costs of communicating and to hold votes electronically. Only earlier this week we debated in Committee the transferring of Northern Ireland credit unions under the FISMA legislation, which will not only act as a deregulatory measure but give better protection to an important category of depositor. Therefore, this order is part of an ongoing programme of work.

Let me address the important questions of the noble Lord, Lord Davies of Oldham. On the question of non-withdrawable share capital, the consultation and trade body studies indicate that approximately 0.5 per cent of industrial and provident society members will seek to invest more in their co-op. This is viewed as positive. The results do not raise a question of withdrawal but show a small positive interest among members in investing more.

Then there was the question of whether businesses will effectively take over credit unions. Will credit unions lose their independence? The sector itself wanted businesses to be able to be members and, in that way, help to expand the membership base. No concerns were expressed about this during the consultation period. Therefore, this is seen entirely as an opportunity by the sector itself, rather than as any threat to independence.

In relation, finally, to the common bond and its removal, there is a limit on the extension of the common bond which is currently very restrictive. Some restrictions will remain to ensure that the fundamental purpose of credit unions is not undermined, and that is built into the new construct. I agree with the noble Lord that we must not do anything to undermine the fundamental purpose here. We are not doing so, nor does the sector believe us to be.

When the coalition came into government, we made clear that we would be supportive of the mutuals sector. By means of this legislation, we are taking another step to bring what is essentially a 19th century construct into the 21st century in order to free the sector of unnecessary burdens and obstacles. It is clear from what I said in my opening remarks, and I think it has been confirmed by contributions this afternoon, that there is huge appetite for growth in this sector. At a time when we must redouble our efforts to support the economy, we have to do all that we can, and this plays a modest but important part in enabling growth. I believe that this order is a win-win situation not only for co-ops and credit unions, but also for the communities that they serve.

Motion agreed.

House adjourned at 4.22 pm