HM Treasury Call for Evidence British credit unions at 50 Contact details

Transcription

1 HM Treasury Call for Evidence British credit unions at 50 Response from the Association of British Credit Unions Limited (ABCUL) Contact details Mark Lyonette Chief Executive Tel: Matt Bland Policy Manager Tel:

2 Executive summary ABCUL s response to this Call for Evidence is based on the findings of a survey of ABCUL members which took place during the course of the consultation period and attracted 52 responses (22% of ABCUL members) representing a good cross-section of the credit union movement. Furthermore it builds upon the insights of ABCUL s work over many years and in partnership with a range of stakeholders and the international credit union sector in developing a Blueprint for Development based on four successive stages: enabling legislation and proportionate regulation; sound governance and strong management; sustainable business models, products and services and; appropriate investment. Our key policy recommendations in response to this Call for Evidence are: Enabling legislation and proportionate regulation Clarify the credit union objects and powers Introduce resolution procedures for failing credit unions Address the indirect impact of banking regulation on credit unions access to banking Acknowledge credit unions in personal insolvency Sound governance and strong management Encourage financial services corporate volunteering and expertise sharing Provide investment in training and development resources Sustainable business models, products and services Continue to encourage and support collaboration between credit unions Encourage payroll deductions and links to employers Provide better access to payment services, and commercial and agency banking Provide better access to credit data Appropriate investment Support collaboration and shared business models Encourage capital investment to boost balance sheets Explore the potential for social investment in credit unions Our detailed response to the consultation questions also highlights the following areas: 1. We recommend the clarification of the Credit Unions Act to allow credit unions to utilise and dispose of property and other assets in support of its core business. 2. In general we feel the process for setting up a new credit union strikes the right balance. 3. We recommend that creation of a new 2-stage approval process is considered to allow credit unions to have some legal status prior to full authorisation to enable it to put in place necessary resourcing and other contracts.

3 4. In general we do not feel that the common bond as currently constructed presents a significant barrier to credit union growth and development. Since it holds great importance for retaining credit unions regulatory position we recommend it is not liberalised any further. 5. We recommend some clarificatory guidance as to what exceptional circumstances may be deemed appropriate for the breach of the 2 million potential membership limit. 6. We recommend that legislation be amended to allow family members not resident at the same address as the qualifying member to be allowed to join a credit union on the basis of familial ties alone. 7. We recommend that government looks to address the newly-identified clash between several faith and ethnicity-based common bonds and the Equalities Act We recommend that FCA provides clearer guidance on, and more robust objective assessment of, common bonds to ensure that the requirements surrounding legitimate common bonds are applied consistently. 9. In relation to business lending, we feel that expertise and appropriate products and services are the main barriers for the sector to overcome. We recommend government invests in credit union training and development to assist them in exploring the opportunities in this market. 10. We recommend that the consideration be given to allowing boards to change specific rules where they have sought and gained strictly limited powers to adjust a rule at a previous general meeting of the members. 11. Government s own messaging should seek to promote a message on credit unions serving a range of members, not exclusively the over-indebted or excluded. 12. Government should also encourage investors in credit unions to do so via capital investment rather than revenue support in order to drive the right behaviours. 13. Support from wider society should seek to align with existing initiatives and avoid duplication or inconsistency. 14. We recommend that government support the resolution of failing credit unions in three ways: a. The introduction of a power for PRA to enforce merger where a credit union is failing b. The creation of a government-sponsored stabilisation fund to turn around failing credit unions c. Provision for FSCS to have bail-in resolution powers under Part 2 of the Banking Act 2009 for credit union resolution 15. We recommend that the board and management of resolved failing credit unions be removed under stabilisation or FSCS intervention and that stringent monitoring and a robust business plan be minimum requirements.

4 16. We do not believe government needs to take action to assist voluntary merger which is an option that is not unduly difficult to pursue at present. 17. Collaborative solutions to questions of scale should be the primary focus rather than government-encouraged merger. 18. Longer term government support for credit unions should consider: a. mechanisms for the facilitation of the securitisation of credit union mortgage and other assets b. credit union access to central bank facilities as a direct participant c. assist with capital and social investment in credit unions, with the potential for the need for new capital instruments over the long term. Priorities for government While the long-term development of the credit union sector depends upon action in all of the above areas, we feel that the most pressing areas for credit union development at this stage and which government should prioritise are: the clarification of credit union objects and powers to future-proof the legislation; training and development investment to ensure credit unions have the appropriate leadership and skills to move to the next level; the introduction of resolutions procedures to facilitate the orderly rationalisation of the sector in a period of transformation and growth; the acknowledgement of credit union s position in personal insolvency to ensure they are not unduly penalised for seeking to engage with hard-to-reach consumers. encouraging a culture of collaboration and mutual support among stakeholders in the arena of credit union development; and extending credit union services via payroll deduction to government and public sector employees and encouraging the private sector to do the same. Other key areas for medium-term intervention would involve addressing the lack of available credit data for lenders, addressing the indirect impact of banking regulation such as Basel III and Anti-Money Laundering on credit unions access to banking services; and exploring how credit unions can be assisted to access payment systems. Finally we would recommend that initiatives for longer term consideration are: facilitating social investment into the sector creation of new legislative vehicles for pooled credit union investments should be longer-term considerations.

5 Introduction The British credit union sector has enjoyed a great deal of support from government over a number of years. This has included a number of legislative initiatives, including credit union regulation moving to the FSA and FSCS protection in 2002, the raising of the credit union interest rate cap in 2006 and 2013, and the introduction of the Legislative Reform (Industrial & Provident Societies and Credit Unions) Order in Furthermore, the government has provided direct investment in the sector under the Financial Inclusion Growth Fund under the previous government and, under the current government, through the ongoing Credit Union Expansion Project. This has been pursued in recognition of the role credit unions can play in providing inclusive financial services which build financial resilience as well as, increasingly, providing diversity and competition in financial services more generally. Running parallel to this, since the advent of the Liverpool John Moores University research Towards sustainable development published in 1999, the sector has also been pursuing a strategy of modernisation and professionalisation in order to build sustainable and viable commercial businesses which are built on socially-responsible, ethical and inclusive values. This has led to credit unions operating in high street premises, with paid staff and providing an increasingly sophisticated and holistic financial service with a growing number of credit unions offering transactional and payment services as well as some offering mortgages. Growth in the sector in this period has been rapid. The most recent figures available from the Prudential Regulation Authority show that the sector now serves more than 1.1 million people and manages assets on their behalf of 1.1 billion. And in the decade between 2002 and 2012, credit union membership more than doubled by 125% while assets almost tripled by 199%. So although the sector remains small in relative terms, its growth has been uninterrupted and has gained momentum with a new development strategy and government support. Since the time of the LJMU report, ABCUL has been pursuing a Blueprint for Development which seeks to put in place the conditions which will enable credit unions to flourish. These conditions can be broken down, to four successive areas: Enabling legislation and proportionate regulation; sound governance and strong management; sustainable business model, products and services; appropriate investment. In this time we have made significant advances in improving conditions in each of the four areas. Legislative reforms already mentioned and the introduction of FSA regulation have greatly improved the framework within which credit unions operate. The ABCUL Credit Union Code of Governance and improved training resources have helped credit unions to improve standards of governance and management. Collective and collaborative initiatives to develop the Credit Union Current Account and the Credit Union Prepaid Card have supported efforts to broaden credit union membership and boost sustainability, bolstered by the Credit Union Expansion Project. And recent

6 investment has moved away from development workers and revenue subsidy towards tying awards to results in terms of growth and sustainability. There are, however, areas which remain to be addressed or require further action and the Call for Evidence offers a fantastic opportunity to highlight these and to work with government and wider society to achieve them: Enabling legislation and proportionate regulation Clarifying the credit union objects and powers while much has been done to modernise credit union legislation, there remain ambiguities in how far credit unions are able to act to provide a range of services in order to meet their members needs. An all purpose object in line with that recommended by the World Council of Credit Unions (WOCCU) allowing credit unions to provide any financial service required by members and a general purpose power also recommended by WOCCU to exercise those incidental powers as may be necessary or requisite to enable it to carry out effectively the purposes for which it is organised would address these limitations and allow credit unions to more-freely innovate. Resolution procedures for failing credit unions while government has recently taken steps to address shortcomings in the provisions for credit union insolvency, we remain of the view that further legislative action would assist. First, allowing the PRA the power to instruct the merger of a credit union in order to protect depositors would enable more orderly resolution where the underlying business is viable. Second, applying Part 2 of the Banking Act 2009 would allow the authorities to use FSCS resources to fund the transfer of credit union accounts to a continuing credit union, saving the fund money and retaining credit union services for members. We would also like to explore the possibility of government supporting the creation of a credit union stabilisation fund analogous to those active in other successful credit union sectors. Address the indirect impact of banking regulation of credit unions access to banking it has recently become increasingly difficult for credit unions to find a counterparty willing to accept credit union deposits (despite being limited to bank deposits and government gilts for investments and relying on banks for payment services). Also, where banks are willing to accept deposits, yields have fallen dramatically. We believe part of the driver for this are regulatory requirements upon banks such as Basel III / CRD IV / CRR and Anti-Money Laundering requirements which are being applied inflexibly. Any steps to address these issues would be welcome. Acknowledgement of credit unions in personal insolvency credit unions are disproportionately exposed to bad debt and personal insolvency due to the role that they play, and are encouraged to play, in serving those with limited access to affordable credit or suffering over-indebtedness. Furthermore, loss of credit union services through non-payment of loans can mean that individuals no longer have access to financial services. We would therefore like to see credit unions unique position acknowledged in personal insolvency.

7 Sound governance and strong management Corporate volunteering and expertise sharing the banking sector, in particular Lloyds Banking Group, Barclays and Citi, have undertaken to provide an increasing amount of corporate volunteering and expertise sharing with the credit union sector. This support is extremely helpful in helping credit unions to improve their, governance, commercial and compliance capabilities. We would like government to help us encourage more organisations to provide this support in order to continue to improve standards. Investment in training and development resources we have discussed a proposal to HM Treasury as part of the Call for Evidence process which seeks investment in an online training and development resource to assist credit unions in improving compliance and commercial skills. The skills and competency of credit union staff and boards is critical to their successful pursuit of growth and sustainability and as the sector grows is coming under increasing scrutiny from the regulators. We feel that there is a strong case for the development of a suite of resources which can be delivered largely online in order to enable remote access and can provide all credit unions with the opportunity to improve standards. Sustainable business models, products and services Continued support for collaboration we are extremely grateful for the support that the government has provided to the sector via the Credit Union Expansion Project. This seeks to support credit unions towards sustainability by helping them to collaborate and develop a shared business model. This is a transformational project which aims to improve the sustainability of the sector through enabling credit unions to offer a more consistent service, which meets the needs of a broad range of members and is cost-efficient and convenient. While the project is making huge strides towards an enhanced credit union offering in Britain, there are also a number of areas which may benefit in the longer term from further action, such as the potential legislation for a credit union for credit unions structure to enable more effective treasury management and direct access to payments systems and central bank liquidity. Payroll deductions and links to employers in those countries where credit unions are better developed they often have strong links with employers. Through embedding the service in an employment setting, the credit union can attract members from a range of backgrounds more readily and the service can be framed as an employee-benefit. Central to the success of these links is the presence of payroll deduction arrangements. By allowing individuals to pay into their savings and repay loans direct from pay, members are assisted to manage their money by making the process simple and painless. This aligns with the insights of Behavioural Economics which suggests that inertia and short-term thinking can discourage people from saving. It also provides benefits for credit unions in reducing bad debt and providing an efficient means of receiving regular payments. Government should commit to encouraging all public sector employers to link to a credit union via payroll deduction and encourage the private sector to do the same. Better access to payment services, and commercial and agency banking credit unions are heavily reliant upon the banking sector for access to payment services, commercial and

8 agency banking. Often as small providers, credit unions find difficulty in accessing these services in a cost-effective and efficient way. While we recognise that these are commercial arrangements which require technical capacity and high volumes to be offered cost-effectively, we are also aware that government has identified potential barriers to entry for smaller payment providers and has legislated for the creation of the Payment Systems Regulator partly to enable better access for smaller providers. Similarly, while many banks are providing support to credit unions, there remains a disconnect in places between investment and expertise support and the commercial terms which banks offer for services. We would like to explore how these arrangements might be improved. Better access to credit data the paucity of credit data available to lenders has been recently identified both by the Bank of England in a recent discussion paper and the FCA in relation to its response to payday lending. While the Bank looks at the issue from the perspective of credit availability for small businesses, and the FCA from the point of view of payday lending visibility, we think that there is a wider issue which affects all creditors since real-time, comprehensive credit data is not available for a range of credit and non-credit debts which credit union members are often exposed to. The lack of available data seriously hampers credit unions ability to lend effectively and responsibly and may be unduly limiting their capacity to lend. As such we would like to encourage the creation of a comprehensive real-time credit register. Appropriate investment We are not currently seeking further investment from government directly in credit union operations. However, the following areas are longer term considerations about the preferred nature of investment in credit unions. Crucially, we are strongly of the view that credit unions business models are distorted by revenue subsidy and that capital investment in balance sheets and systems infrastructure is the best means of ensuring the right outcomes in terms of sustainable growth. Collaboration and shared business models on the basis of the experience of credit union sectors around the world, we feel that investment in collaborative and shared solutions to credit union business models is one of the most fruitful areas for future investment. This kind of capital investment will have much better results for credit union growth and sustainability than will revenue support which has been far too common to date. While we acknowledge that the main development in this area to date is ABCUL s subsidiary Cornerstone Mutual Services and the Credit Union Expansion Project, the benefits of collaboration are clear whether through this or another vehicle. Capital investment to boost balance sheets like other mutuals, credit unions are limited in their scope for raising external capital due to their co-operative ownership structure. However, there are opportunities for capital grants to boost credit union reserves in order to increase the rate of growth and this is being explored through the Lloyds Banking Group Credit Union Development Fund, delivered via the Credit Union Foundation. By injecting secondary capital via grants or secondary instruments such as subordinated debt and deferred shares, credit unions can expand their balance sheets more rapidly than if they are required to rely wholly on retained earnings. Efforts to boost this kind of investment in credit unions should be continued.

9 Explore the potential for social investment in credit unions we are currently in discussions with Big Society Capital in relation to assisting the nascent social investment market to invest in credit union growth and expansion. As above, capital investments in balance sheets for growth are a key way of unlocking a credit unions potential. However, currently there exist no appropriate investment instruments for social investors to invest patient capital. We are exploring how the mechanisms of subordinated debt and deferred shares might be used for this purpose and would appreciate support in this. Consultation Questions We appreciate the opportunity to respond to this Call for Evidence. The Association of British Credit Unions Limited (ABCUL) is the main trade association for credit unions in England, Scotland and Wales. Out of the 338 credit unions which choose to be a member of a trade association, 70% choose to be a member of ABCUL. Credit unions are not-for-profit, financial co-operatives owned and controlled by their members. They provide safe savings and affordable loans. Some credit unions offer more sophisticated products such as current accounts, ISAs and mortgages. At 31 December 2013, credit unions in Great Britain were providing financial services to 1,122,461 people, including 126,217 junior savers. The sector held more than 1.1 billion in assets with more than 676 million out on loan to members and 949 million in deposits. 1 Credit unions work to provide inclusive financial services has been valued by successive Governments. Credit unions participation in the Growth Fund from saw over 400,000 affordable loans made with funding from the Financial Inclusion Fund. The DWP has contracted ABCUL to lead a consortium of credit unions under the Credit Union Expansion Project, which will invest up to 38 million in the sector and aims to make significant steps towards sustainability. ABCUL member survey ABCUL s response to the Call for Evidence draws upon the insights of a survey of ABCUL member credit unions which took place during July and August credit unions responded from a broadly representative sample of the sector both very small and very large; employment and geographically based. The vast majority of responding credit unions have been in operation for at least 5 years and many more than 20 years reflecting the maturing nature of the sector. There was a split between those credit unions with less than 1 million in assets and those with more. We are confident that the response we submit here is therefore reflective of the broad consensus among credit unions as to the measures Government and others can take to support the sector. 1 Figures from unaudited quarterly returns provided to the Prudential Regulation Authority

10 Question 1 Do you agree that the basic structure and objects of a credit union remain appropriate? What changes, if any, are required? ABCUL believes that the structure and objects of a credit union remain broadly appropriate and we would not seek to recast them fundamentally. However, we are firmly of the view that some clarification of powers would have a beneficial impact in addressing confusion and uncertainty around how far credit unions are able to act to innovate and to provide products and services which meet their members needs over and above the core savings and loans proposition which the existing objects frame. This was a proposal which we raised in the review of credit union legislation in 2007 and which was accepted as a need for reform. The only reasoning behind not pursuing this at that time was that the legislative vehicle used to take reforms forward was a secondary instrument and the objects require a primary legislation vehicle. In recent years there have been a number of legal questions raised by the regulators in relation to credit unions power to act arising from the lack of clarity in the current provisions, particularly in respect of innovative products and services. As the sector grows and develops in line with the Government s ambition and the Credit Union Expansion Project, a broader range of more sophisticated products and services beyond the savings and loans model are likely to become the norm. Therefore we feel that a general purpose power to act in the interests of members and to provide any financial service to that end would be a useful clarification of the credit union framework which would future proof the structure. In our survey of ABCUL members, 69% of respondents supported the inclusion of a general purpose object of a credit union to provide any financial service required by members as cited in the World Council of Credit Unions (WOCCU) Model Law. 2 A further 74% of respondents supported a general purpose power for a credit union to be able to exercise those incidental powers as may be necessary or requisite to enable it to carry out effectively the purposes for which it is organized which is also recommended by the WOCCU Model Law. Another area which has been raised by a number of our member credit unions queries the extent of credit unions power to hold land. Under Section 12 of the Credit Unions Act 1979 Power to hold land for limited purposes, credit unions power to hold land is limited to doing so for the purpose of conducting its own business thereon. However, cases have arisen where credit unions land holdings and buildings thereon have presented opportunities for credit unions to generate incidental income perhaps through renting residential or commercial space which present the opportunity to support the credit unions core business and ensure best-use of asset holdings. The WOCCU Model Law recommends that credit unions be given the power to acquire, lease, hold, assign, pledge, mortgage, discount or dispose of property or assets. The rationale behind this provision and those appearing alongside it is to give a credit union the typical powers to act to support its business which are permitted for a typical business. We think there is a case for clarifying this particular question in the context of clarifying credit unions general powers to undertake activities which support its core business. 2

11 Summary of question response We recommend the introduction of a general-purpose object allowing credit unions to provide any financial service that benefits its members We recommend the clarification of the Credit Unions Act to allow credit unions to utilise and dispose of property and other assets in support of its core business. Question 2 Is the procedure for setting up new credit unions appropriate? What changes, if any, are required? We are broadly content with the arrangements for setting up a new credit union. Respondents to our survey were split three ways between making the system easier (30%), leaving it as it is (30%) and not having a strong view (37.5%). While some do feel that the process could be streamlined, we are also very conscious that the process is generally applied proportionately to credit unions relative to other firms and we are supportive of the need for regulators to satisfy themselves that a new credit union is robust and well-managed. One area which might be considered for review (with a possible need for reforms to Section 1 of the Credit Unions Act 1979), however, is whether in a credit union context it might be deemed appropriate to introduce a 2-stage approval process as is the case for some more complex firms. Some high-profile recent new-start credit unions have come across a practical obstacle whereby the fact that a credit union has no regulatory or legal status prior to gaining full approval causes it all sorts of difficulties in securing premises and other services which the credit union needs to evidence it has in place in order to gain approval. This creates a form of catch 22 situation. If it were possible, as we understand is the case with other firms, to give a credit union application a minded to approve initial status prior to the granting of full approval, this would allow it to put in place conditions and services which it requires to gain full approval. Summary of question response In general we feel the process for setting up a new credit union strikes the right balance. We recommend that creation of a new 2-stage approval process is considered to allow credit unions to have some legal status prior to full authorisation to enable it to put in place necessary resourcing and other contracts. Question 3 Are the concept of the common bond and the wider rules around membership still relevant and valued by the credit union movement? What changes if any need to be made and what would be the benefits and risks? The common bond is a defining characteristic of a credit union and is critical to underpinning many of the special treatments and proportionate provisions which are provided to support credit unions sustainable activity under legislation and regulation. This has a crucial bearing at the European Union level where credit unions enjoy many derogations and exemptions which provide Member States with significant latitude to make specific and bespoke arrangements for credit unions. This

12 is in recognition that they are a purely domestic concern and generally provide an inclusive service to those otherwise underserved. As such, we are cautious in relation to liberalising the common bond concept beyond those measures which were introduced by the Legislative Reform (Industrial & Provident Societies and Credit Unions) Order Were the common bond provisions to be liberalised to a degree which could be suggested opens credit union membership to the general public, our character distinct from banks and, particularly, building societies would become much less apparent and our legislative and regulatory settlement therefore would be less secure. Given this clear and substantive risk, we would urge caution before any move might be made to reform the common bond concept any further. Of particular note here is the question of the two million potential membership limitation on common bonds relating to a locality under Section 1B of the Credit Unions Act. While there are certain circumstances particularly those relating to a merger to prevent the potential failure of a neighbouring credit union whereby a higher limit might be deemed appropriate, the provision under sub-section 2(b) which provides for exceptions in cases of extraordinary circumstance of this kind which we do not feel have been appropriately explored to date and should be before any further adjustment is made to the limit. It may be helpful if steps could be taken to clarify the circumstances under which this measure may be invoked. It is worth also noting that in ABCUL s survey of its members, 67% of respondents were of the view that the common bond presented no barrier to their credit unions growth, while 20% felt it did to a small extent and only 2.5% felt it did to a large extent. It is also worth further noting that the largest credit union in Britain has only in the order of 35,000 members to date suggesting that no credit union currently existing is anywhere near to pushing against the two million limitation in terms of saturating its potential membership. Our overall position, therefore, is that the common bond concept is not presenting a significant barrier to credit union growth while simultaneously providing significant benefits to credit unions legislative and regulatory settlement which would be otherwise placed in jeopardy. Notwithstanding our overall position, there is one specific area which we would like to request be considered for reform. Under Section 1A (3) of the Credit Unions Act, credit unions may, where their rules provide, admit into membership family members of those who are members of the credit union directly where those family members live in the same household. This has become a problem for some employment-based credit unions which are unable to admit family members who do not occupy the same household. While in many cases, the extended family of a locality-based credit union will live in the same area and therefore qualify for credit union membership in their own right, for employment-based credit unions, the restriction to only those living in the same household prevents credit union members doing the same putting them at a disadvantage. This presents itself as a difficulty where children are leaving home perhaps for university, or to serve in the armed forces or in the case of grandparents who would like to admit their grandchildren into membership. The inability to do so runs counter to the ethos of credit unions which seeks to build a community of membership and to use that membership to inculcate a healthy and informed approach to the management of personal finances.

13 We think, therefore, that there is a strong case for the removal of the requirement for family members to belong to the same household as the direct member of a credit union to whom they relate in order to create a level playing field between credit unions and to support the credit union ethos. There is already a clear definition of family members within the Act which would ensure that this change would not untowardly dilute the concept of the common bond. Recently we have also come across another difficulty relating to the common bond with is affecting a number of credit unions who base their common bond around specific faith or ethnic communities. It has been highlighted that a credit union which serves active members of a particular faith group but which also admits their family members who do not share the same faith is indirectly discriminating in contravention of the Equalities Act While we are dubious of the legal basis of this challenge, we are also keen to resolve the issue in order to prevent costly and time-consuming delays to registrations or, worse, the unwinding of existing common bonds. Any action the government can take to address this would be welcome. Finally, we would like to suggest that the current arrangements for registering new common bonds with the FCA can, at times, be less than satisfactory. Guidance provided by FCA to credit unions looking to register new common bonds is not as clear as it might be. The practice of accepting statutory declarations in all instances as sufficient proof of compliance with the legislation has resulted in numerous occasions where common bonds have been registered which are inconsistent with previous decisions and which conflict with the legislation. This then presents a difficult set of circumstances for both regulators and credit unions where erroneously-registered common bonds are unwound at a later stage or have the potential to be so. A clearer set of guidance and expectations from FCA and a more robust assessment process which applies some objective tests as well as accepting statutory declarations where appropriate would serve to address many of these issues. Summary of response In general we do not feel that the common bond as currently constructed presents a significant barrier to credit union growth and development. Since it holds great importance for retaining credit unions regulatory position we recommend it is not liberalised any further. We recommend some clarificatory guidance as to what exceptional circumstances may be deemed appropriate for the breach of the 2 million potential membership limit. We recommend that legislation be amended to allow family members not resident at the same address as the qualifying member to be allowed to join a credit union on the basis of familial ties alone. We recommend that government looks to address the newly-identified clash between several faith and ethnicity-based common bonds and the Equalities Act We recommend that FCA provides clearer guidance on, and more robust objective assessment of, common bonds to ensure that the requirements surrounding legitimate common bonds are applied consistently.

14 Question 4 Are the various limits imposed by legislation at the right levels to allow credit unions flexibility to serve and attract all kinds of members? What changes, if any, should be made? We do not see any major problems in the specific legislative framework for credit unions which are limiting the sector s growth. As the Call for Evidence document points out, there is a growing cohort of credit unions which innovate and offer a sophisticated and attractive range of products and the Credit Union Expansion Project aims to boost these efforts further through collaboration and the development of a shared business model. All of this is possible within the current legislative framework. Specifically in relation to the restrictions around business and organisational membership, we have not seen evidence yet that these limits are presenting an undue restriction upon the credit union sector s ability to serve the small business community. As we set out below, we believe that the relative lack of engagement in this area of business since the passage of reforms in 2011 is due rather to limitations in terms of relevant expertise in serving businesses and organisations and a concurrent lack of appropriate products and services. Summary of question response We do not think that the legislative framework currently presents significant barriers to credit union growth. In relation to business lending, we feel that expertise and appropriate products and services are the main barriers for the sector to overcome. Question 5 What other help can government give to assist credit unions to attract and retain a wide range of customers and have confidence to serve all customers effectively? What changes can be made to improve this? We feel that there are a number of areas in which the Government could take action legislative or otherwise to support credit unions in serving a range of customers effectively: - Continued support for collaboration and sustainable business models it is vital that credit unions continue to be supported to develop collaborative, sustainable business models which enable them to attract a range of customers, increase their income and decrease their costs. While barriers in regulation and legislation do present some difficulties in some areas, we believe strongly that the core credit union proposition is the key barrier to the sector s growth and sustainability. Government should continue to look to support such activity as we move forward and the Credit Union Expansion Project runs its course. - Payroll deduction and links with employers where credit unions are best-developed both in Britain and in the rest of the world they are always embedded in employment settings whereby it becomes, over time, the norm to join the credit union and to benefit from good value financial products provided without the need to pay external shareholders. In these locations, credit unions provide a vital service for underserved groups as well as crucial price and service

15 competition for the mainstream financial services sector. Government should do everything it can to support the provision of payroll deduction to credit unions in both the public and private sector, as this is a critical element in the success of credit unions with links to employers. Payroll deduction aids the credit union through security and efficiency of inward payments but also assists the member in managing their money, building on the insights of Behavioural Economics. - Training and Development while credit union trade associations and some other bodies do currently provide training for credit unions, delivery standards and availability can be patchy and the cost of face to face delivery is often seen as prohibitive. At the larger end of the sector there is no formal CPD-recognised or accredited training programme typical of those available to small building societies or other small firms. Raising the standards in training availability and delivery for both operational staff and governing boards is vital to ensure skilled and effective individuals are able to deliver compliant and effective services as the credit union sector grows. An upgrading of the design, the content and the delivery methods available will help ensure the sector can grow safely to sustainability. We have discussed proposals in this regard with government in more detail separately. 30% of credit unions responding to ABCUL s survey felt that rising compliance costs were a key risk to the credit union and improved training and development resources would help to address this. - Access to payment systems currently credit unions have difficulties in accessing payment systems in order to provide transactional banking and payment services which would enable them to provide the full service model which is ubiquitous in better-developed credit union systems. We are fully aware that there are technical and commercial barriers to achieving better access credit unions need systems capacity to access payments directly and need to be in a position to deliver strong volume in order to manage costs effectively however there remain questions, currently being investigated by the nascent Payment Systems Regulator, as to how access might be improved within the constraints of these barriers. - Better access to credit data as the recent Bank of England discussion paper 3 explores, the availability of credit data in the UK is not comprehensive and could be limiting the availability of credit by preventing lenders from making well-informed lending decisions. While the Bank s discussion focuses on a credit register to improve small business access to credit, there is also a need to address shortcomings in relation to personal and unsecured credit. Currently credit unions are unsighted in relation to a range of alternative lending payday lending, rent-to-own and home credit in particular due to poor reporting and a lack of real-time information. Similarly many non-credit debts such as unpaid tax, utilities bills or rent are also poorly reported. This causes credit unions great difficulty in making effective lending decisions which is accentuated by the fact that often credit unions seek to serve markets where alternative credit and non-credit debts are particularly prevalent. 75% of respondents to ABCUL s survey supported moves to make credit data more readily available while 36% cited rising bad debt as a key risk to the business and 61% cited difficulty getting funds out on loan. - Recognition of credit unions in personal insolvency 44% of respondents to ABCUL s 3

16 survey cited rising number of members seeking personal insolvency as a key risk facing the sector. Credit unions are uniquely exposed to bad debt arising from personal insolvency because of the role they play, and are encouraged to play, in providing affordable credit for those unfairly excluded. This can lead to credit unions being used as a lender of last resort and, in turn, being exposed to disproportionate levels of bad debt. This is compounded by the low profitability of the loans credit unions make in this market. Credit unions could be assisted to mitigate the impact of this by a form of recognition of credit union loans within personal insolvency which protects this debt from full write off. This kind of acknowledgement has precedents: the Common Financial Statement was recently amended to include a contribution to savings which we support. Similarly Citizens Advice has adjusted its guidance for advisers to take into account the implications of losing access to credit union services following insolvency when often this can be the individual s only access to affordable services. - Address falling yields for credit union deposits and access to banking credit unions are restricted in the places they can invest to bank deposits and government gilts. In the existing low-interest rate environment and with various extraordinary monetary support for banks and the wider economy, credit union yields on bank deposit investments are currently very depressed. This is being exacerbated by early adoption of Basel III / CRD IV / CRR requirements around liquidity which originally classified credit unions alongside other financial institutions as having a 100% run off rate in times of financial stress. While the Basel committee, European Banking Authority and European Commission are looking at how this can be addressed, we feel this is contributing to low yields. Furthermore, Anti-Money Laundering requirements are seeing many banks refuse to open accounts for credit unions or further increase the costs / reduce the yields of those accounts on the basis that they need to satisfy themselves of credit unions AML standards under Financial Action Task Force rules. This is despite the fact that these rules allow financial institutions to apply simplified due diligence where their financial institution customers are regulated for AML in their own right, as credit unions are. Credit unions are heavily reliant on these services to run their business, and upon yields to supplement depressed lending income. At the same time, the PRA is requiring credit unions to manage deposit concentration risk, so credit unions are being squeezed on a number of fronts. Government action to address this situation would be very welcome. Summary of question response We recommend that the government takes action in the following areas to boost credit union growth: o Continue to support collaboration and shared business models o Support payroll deduction and links to public and private sector employers o Invest in training and development resources for credit unions o Improve access to payment systems for credit unions o Provide better access to credit data o Recognise credit unions position in personal insolvency o Address regulatory drivers of falling yields and limited access to banking for credit unions

17 Question 6 What reasons have prevented some credit unions from offering loans to small businesses, including sole traders, in their communities? What could be done to encourage more activity in this area and allow credit unions a greater role in supporting local small and micro enterprises? In ABCUL s survey of members, 30% of respondents said they currently provide loans for sole traders, 18% said they provide loans to small businesses and 67% said they provide loans to neither. Some of those that provide loans to sole traders will also provide finance to small businesses. We believe the key barrier in this market for credit unions is a lack of experience and expertise. We think that a training and development programme such as the one proposed to HM Treasury which is based online, available to all credit unions and focussed on the commercial skills credit union professionals and directors need to build successful businesses, as well as compliance and regulatory issues, has the potential to directly address this gap in knowledge (along with various others). Summary of question response We believe the key barrier to credit unions providing business finance and other services is lack of expertise and knowledge. We recommend government invests in credit union training and development to assist them in exploring the opportunities in this market. Question 7 Is there anything that government can do to improve, simplify or clarify the legislation to make rules changes and the Boards power to act easier to navigate and meet the needs of their members? This issue goes to the heart of credit unions distinctive, democratic nature as co-operatives and is not uncontroversial. In ABCUL s survey of members, only 10% of respondents supported the proposal to allow the board of a credit union to change rules without recourse to a general meeting of the membership. Against this, 30% felt that this was entirely inappropriate. However, 57.5% were in support of the board having such a power where it has been conferred upon them in a specific way at a previous members meeting. Given the gravity of the question at hand, it drew spirited responses from both sides of the argument with some respondents feeling strongly that requiring member approval is overkill in many cases where, for instance, a particular employer in the area is specified in the common bond. However, others feel equally strongly that a board should be accountable to the membership on matters of rule changes and that the member meeting mechanism is the best way of guaranteeing this. On balance, and given the responses to the survey, we think that it should be possible to provide for boards to seek the power to change a specific rule such as the common bond where they have sought and gained approval for changing the rule in a previous general meeting of the membership. This should be strictly limited to specific rules and specific options of changes.

18 It should be noted that 72% of respondents said that the cost of the requirement to hold a general meeting has never prevented their credit union from making a change to their rules. This is not to say that the requirement to do so is not delaying changes or causing strictly unnecessary costs and bureaucracy but we must not expect this change to deliver transformational results. Summary of question response We recommend that the consideration be given to allowing boards to change specific rules where they have sought and gained strictly limited powers to adjust a rule at a previous general meeting of the members. Question 8 What else can the government do to encourage wider knowledge and understanding of credit unions? We feel key support initiatives listed above could address these issues. Firstly, the promotion of payroll deduction and links with employers is a fantastic way of raising awareness and understanding of credit unions. Secondly, the proposed training and development resources would include an element of marketing support which would provide requisite skills for credit unions to market themselves better. Thirdly, continuing to support and encourage collaborative solutions to credit union business model shortcomings as with the Credit Union Expansion Project will enable the sector to develop a consistent offering more amenable to collective marketing. We feel that these are the key areas of focus for raising awareness of credit unions and encouraging continued membership growth. Credit unions need to be able to sustainably support their own marketing and awareness raising activity in the long term and so the focus must be on putting in place the requisite conditions to enable them to do that. In addition to this, the Government s own messaging should, as far as possible, desist in positioning credit unions as exclusively an alternative to payday lenders or as a solution to helping people manage changes brought about by welfare reform. Only if credit unions are able to attract a range of members with a variety of needs and circumstances will the sector be able to develop sustainably. Summary of question response The best way to support credit union marketing is to support credit unions sustainable development through, e.g. promoting links to employers and payroll deduction; investing in training and development; and continuing to support collaborative solutions to credit union business models. Government s own messaging should seek to promote a message on credit unions serving a range of members, not exclusively the over-indebted or excluded.

19 Question 9 What can the government do to bring about further efficiencies and stability to the credit union movement? Internationally, as the Call for Evidence notes, credit unions tend to operate with centralised treasury and liquidity management functions which provide for the pooling of risk between credit unions, the sharing of resources for lending, balancing of portfolios and direct access to clearing and payment systems without the need for a sponsoring bank. The Credit Union Expansion Project is a first step towards some of this collaborative working in terms of a shared business model for participating credit unions. In our survey of ABCUL members, 50% supported moves to take this process further with the creation of a centralised credit union for credit unions structure as in Canada, the USA or Australia. Against this 17% preferred not to pursue this and more than 30% were unsure. We think the response to the question is a reflection of the lack of understanding around how this might work in the British sector. The Credit Union Expansion Project is exploring treasury management functions as one element of the possible collaborative working between credit unions but this is likely to begin only with advisory services before any consideration of pooling and collective investment takes place. Longer term, were the sector to pursue a credit union for credit unions structure, this would likely require a new legislative vehicle to be created. However, we do feel that there are things that can be done through brokerage and facilitation or via alternative vehicles before such a structure need be created. We would also once again refer to the points made above in relation to question 5 where, in particular, measures to support payroll deduction and links to employers, access to payment systems, better access to credit data, measures to address falling yields and bank access and a training and development programme would all assist with the efficiency and stability of credit unions in addition to collaborative financial management. Summary of question response We believe that there are measures which the credit union sector can take to collectively manage their financial assets and that the creation of a credit union for credit unions structure should be a longer-term consideration as collaborative initiatives are embedded. Other measures to support credit unions have been outlined above in response to question 5. Question 10 Should the government do more to ensure that credit unions have the flexibility to run their business but protect members by ensuring sound financial management? As the Call for Evidence highlights, the Credit Union Expansion Project through collaborative solutions and the creation of shared business standards and systems is driving a range of improvements in terms of strengthened financial management, credit control, debt recovery and sound decision-making. Similarly, outside of the Project, credit unions are facing increasing

20 demands from regulators to take a more robust approach to the management of their business and this is delivering some positive results in terms of improved standards. Once more, we would suggest that action in several key areas would assist credit unions in improving further: - Investment in training and development would help credit union boards and management to take a more-informed and strategic approach to developing their business while improving standards of compliance. - Better access to credit data would enable credit unions to make more reliable and effective lending decisions and therefore control bad debt costs more effectively. - Measures to recognise credit union debts in personal insolvency would protect credit unions from being disproportionately affected by insolvency among their membership as a result of pursuing their inclusive social mission. - Supporting and promoting the advantages of payroll deduction and links with employers would boost credit unions membership profile in support of sustainability and mitigating the risk inherent in providing services to low-income and excluded consumers. - Better access to payment systems will enable credit unions to offer a more comprehensive service which meets the needs of a broader range of people therefore supporting the sustainability of credit unions. - Steps to address low bank deposit yields and poor bank access would enable credit unions to boost income and improve their financial stability through mitigating concentration risk. Summary of response We reiterate items from question 5 as to how government can support credit union growth and development. Question 11 What can the government do to help credit unions grow while continuing to uphold strong governance and lend responsibly? In addition to the areas above, Government should encourage the private sector and civil society to provide support in terms of expertise and volunteers in order to help credit unions improve standards of governance and responsible lending. Similarly, those funding and investing in credit unions should be encouraged to do so on the basis of capital investment rather than revenue support in order to drive appropriate behaviours within credit unions and to support sustainability.