Responsible Officer: Andrew Trehern, Corporate Director Place Shaping. Cllr Keith Ferry, Portfolio Holder Planning, Development and Enterprise No

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1 Ref PHD SUBJECT: Credit Union Responsible Officer: Andrew Trehern, Corporate Director Place Shaping Portfolio Holder: Key Decision: Cllr Keith Ferry, Portfolio Holder Planning, Development and Enterprise No Urgent/Non Urgent: Power to be exercised: No Portfolio Holder Responsibilities (Allocation of Responsibilities) - Paragraph 2(i) of Delegated Powers of Portfolio Holders, Appendix to the Executive Procedure Rules, Part 4D of the Constitution. Exempt: No Decision subject to Call-in: Enclosures: Yes None

2 Section 1 Summary and Recommendations This report sets out the rationale for changing Harrow Council s 50,000 line of credit to M for Money credit union to a subordinated debt. Recommendations: The Portfolio Holder is requested to: agree the loan of 40,000 by way of subordinated debt to M4 Money to replace the previously agreed line of credit.. Reason: (For recommendation) Converting the line of credit into subordinated debt will enable the Credit Union to increase its membership and the volume of loans it can lend. This will support the recommendation in Cabinet Report September , Agenda Item 17, to increase the range of regulated financial services available to residents, during a period of national economic recession. Section 2 Report In accordance with Cabinet Report of September 2009, the council has allocated a budget of 13k ( ) and 12k ( ) and the facility to lend 50,000 to M for Money., to be used as a line of credit, to enable the provision of loans soon after the commencement of credit union services. This line of credit has not been drawn down, by M4Money and the recommendation is that the 50,000 line of credit is substituted for a 40,000 subordinated loan. M 4 Money officially commenced trading in Harrow in April 2010, and has been actively supported by the council. The subordinated loan will only be used for the provision of loans to those living or working in Harrow. The money from the loan will be held separately in M4Money s accounts and will be identified by providing a discrete nominal code. When developing M4Money Credit Union in Harrow the intention was to roll out the Credit Union initially to council staff and then to the wider community. This was because loans to staff were viewed as being less risky, as the loan is repaid through payroll deductions. Once M 4 Money had developed a firm base it would then roll out its service to the wider community. M4 Money were set a target of securing 40 council members of the CU by the end of the 2010/11 year. This was exceeded in August 2010 and M 4 Money, now have 50 members and lent out in excess of 60,000. The pre and post Christmas periods are critical times for the Credit Union in recruiting new members and issuing loans. However, it has now effectively reached its limit in respect of the amount of money it can lend. The FSA will allow the Credit Union to lend more money if it increases its level of capital.

3 The FSA defines capital for a Credit Union as Reserves + Interim Profit + Subordinated Debt. Amending the 50k line of credit to a subordinated debt will provide M4Money with capital to enable it to increase its membership and loan base. This will enable the Credit Union to loan 40,000. The success and expansion of a Credit Union is key to financial inclusion and meeting the Council s priority to build stronger communities. If the line of credit is converted to a Subordinated debt, the terms of the Service Level Agreement will be changed through a Variation to the Agreement, which will be signed by both parties. The Variation would detail the sum, interest charges and loan period of the Subordinated loan and require M4Money to provide monthly Management Accounts. Options considered a. Retain the current SLA, which would slow down M4 Moneys growth in Harrow. b. Converting the line of credit into subordinated debt Financial Implications The current line of credit loan period ends 31 st March The maturity of subordinated debt must be more than 5 years after the loan was made. In other words not until after If the CU went into administration, the claim of the council would be below that of members of the Credit Union, and other nonsubordinated creditors. To the fullest extent possible the council would waive its rights to set off amounts they owe the credit union against subordinated amounts owed to them by the credit union; The repayments to the council on the loan sum would change, because the loan period would increase by two years. The subordinated debt would be less than the line of credit in the Service Level Agreement. This is because the size of the subordinated loan is restricted by the FSA to 20% of share balances the subordinated loan will be restricted to 40,000. The 40k loan can be accommodated within the Place Shaping Capital budget. Performance Issues The decision would support the Council s priority to mitigate the impact of the recession. It will not directly impact on any local or national performance indicators. The SLA will be amended to reflect increased number of Credit Union members. It will have no impact on assessments of the Council by external regulators (such as Ofsted, Care Quality Commission and external

4 auditors). The decision will enable M4Money to recruit more members, it will support work of partners such as CAB and Home Group to support financial inclusion. Environmental Impact This proposal has minimal environmental impact. Risk Implications Risk included on Directorate risk register? No Separate risk register in place? Yes If M4Money went into administration, the claim of the council would be below that of members of the Credit Union, and other nonsubordinated creditors. However, even if the debt was not subordinated the council would be paid after Credit Union members. The Risk to the council will be reduced from 50k to 40k if the Decision is approved. M4Money has provided Financial Statements which have been appraised by Finance Directorate. There is a degree of risk, the Management Accounts for 2008/9 show M4Money made a loss of This was because of the recession, and the auditors recommendation to write off 32k as bad debt. The 32,000 of bad debt is related to Hillingdon clients. M4Money was not trading in Harrow in 2008/9 and the write off does not relate to Harrow. The situation will be different this year, the ratio between loans and savings has improved in the 2010/11 financial year and as of August stood at 181,153 for the loan book and 180,583 for total savings. Risk has reduced because a) M4Money received Growth Fund money from central govt. This money does not need to be repaid to central government, and can be used to lend money to residents in the most deprived wards (at risk from financial exclusion). M 4 Money will not be exposed to risk if any recipients of loans from the Growth fund do not repay their debts. (because its not M4Money's money). b) M4Money have tighter measures on loans to prevent future bad debt Key actions are as follows: Every borrower no matter the size of the loan is credit checked. Every borrower must provide the last two months bank statements. Income and expenditure statements are scrutinised and matched to bank statements and the credit check on the basis that prevention is better than cure. Members in arrears are contacted after one missed payment. After three missed payments M4Money send a solicitors letter. County Court judgement follows, after a CCJ an attachment to earnings, benefits and a charge on property will follow.

5 Equalities implications This Decision does not include a change of policy or procedure, this is not a new project. Corporate Priorities Improve support for vulnerable people, Build Stronger Communities. The provision of affordable loans to residents that do not have access to mainstream banking provision and are prey to door step lenders and pay day loans charging 100% plus rates of interest. Section 3 - Statutory Officer Clearance Name: Steve Tingle Chief Financial Officer Date: 22 September 2010 Name: George Curran Monitoring Officer Date: 22 September 2010 Section 4 Performance Officer Clearance Name: Martin Randall Divisional Director Date: 24 September 2010 Partnership, Development and Performance Section 5 Environmental Impact Officer Clearance Name: Andrew Baker Divisional Director (Environmental Date: 24 September 2010 Services)

6 Section 6 - Contact Details and Background Papers Contact: Mark Billington, Head of Economic Development ext 6533 Background Papers: Service Level Agreement between Harrow Council and M 4 Money, Cabinet Report September , Briefing Note Credit Union 2 September 2010, Financial Statements 2007, Management Accounts Position Andrew Trehern Corporate Director Place Shaping Name (print). Date: For Portfolio Holder/Leader * I do agree to the decision proposed * I do not agree to the decision proposed * Please delete as appropriate Notification of personal interests (if any): (Note: if you have a prejudicial interest you should not take this decision) Additional comments made by and/or options considered by the Portfolio Holder Signature: Portfolio Holder Date:

7 Call-In Waived by the Chairman of Overview and Scrutiny Committee NOT APPLICABLE*