Can credit unions really solve Britain’s costly credit shortage?

A company that began life in 1985 as a way for police officers on duty to pool their Christmas savings may not seem like an ideal recipient for a £200,000 prize aimed at developing a new generation of fintech lenders.

However, that is exactly what happened to the Credit Police Union last March.

The member-owned co-op, which has grown to 34,000 members since its founding in 2002, has been handing money out of a Treasury-backed fund so it can help workers in the police, armed forces and other public services lower their borrowing costs while improving their financial habits.

Officially dating back to the 1960s and with roots dating back to the 18th century, credit unions have long been praised for their membership model.  Notable supporters of the co-op include Michael Sheen and Camilla, Duchess of Cornwall

Officially dating back to the 1960s and with roots dating back to the 18th century, credit unions have long been praised for their membership model. Notable supporters of the co-op include Michael Sheen and Camilla, Duchess of Cornwall

And it wasn’t the only one. Despite their age, credit unions have been around since 1960 and can trace their roots back to the 18th century. Two of the three winners, four of the six finalists, were from the £200,000 credit union prize pool.

Hundreds of thousands of pounds has been designed to enable companies like PCU to “create innovative technology solutions to increase access to responsible and affordable credit”, according to Nesta, the company behind the Affordable Credit Challenge.

For Paul Norgrove, CEO of PCU, which operates under a broader umbrella than the Credit and Protection Services Union, 2016, it’s very much about making more people aware of their existence, and reducing how long it might take potential borrowers to get a loan.

We’ve seen a lot of people go into the military with scanty credit files, and a lot of them have gone to a doorstep or payday lender and didn’t even know we existed. He said many predatory lenders were better at raising awareness through Google.

Wonga made us all sit down and go ‘why did they go there and not to us’. We’ve spent the last couple of years trying to improve our approach, to improve our digital offering and reduce that friction so that we can be there when our members need us.

Ads for payday lenders like Wonga have been more prominent than those for local credit unions, which potentially offer diehard borrowers a cheaper alternative.

Ads for payday lenders like Wonga have been more prominent than those for local credit unions, which potentially offer diehard borrowers a cheaper alternative.

It is also about trying to attract new blood to the co-operatives that could be dominated by the older savers.

Marilyn Shiels, chief executive of Capital Credit Union, which serves 24,000 members in the east of Scotland and was one of the other winners of the £200,000 grant, said: ‘For members who want to go digital, this funding has been vital to transforming us.

We will have an aging membership (average member age is 47) otherwise. We are trying to attract youth and digitization.

And attracting younger members isn’t the only struggle credit unions face.

How did credit unions grow?
2015 2019
members 1.85 m 2.07 m
Offered loans £1.25bn £1.63bn
Total assets £2.8bn £3.5bn
Enter £186.3m 210.9 million pounds sterling
Income earned from loan interest 143.9 million pounds sterling £176.2m
Source: Bank of England

Although the membership of around 400 co-operatives in Great Britain and Northern Ireland grew from 1.85m in 2015 to 2.07m in 2019 and the number of loans at a similar level, chief executives and regulators alike have raised fears of a decline in the sector. .

Credit unions have always been popular because of their community spirit; All members must have saved with a guild and be united by a ‘common bond’, which may be geographical, such as capital, or professional, such as service and protection.

Notable supporters of these co-ops include Camilla, Duchess of Cornwall, actor Michael Sheen and the Archbishop of Canterbury, Justin Welby.

And such ethical home-grown lenders could fill the void left by the demise of the likes of Wonga and help more disadvantaged borrowers get access to the credit that many would like to buy, even if it has not yet materialized.

What does the Credit Union Act of 1979 say?

According to the legislation that formalized credit unions, the objectives of these cooperatives, which must have at least 21 members, are:

1. Promoting savings among members of society through the accumulation of their savings

2. Establishing sources of credit for the benefit of members at a fair and reasonable interest rate

3. Use and control members’ savings for mutual benefit

4. Training members and teaching them to use wise money and manage their affairs

The That’s Money organizers took a very restrictive interpretation of the law and what credit unions were allowed to do, said Marilyn Shiels, chief executive of the Capital Credit Union.

Just last year, the head of the Financial Conduct Authority, Charles Randle, gave a speech titled: “Is this a credit union contract?”

He said: “The need for more sustainable community financing is great.

The transformation that the credit union industry needs to undergo if it is to satisfy much of this need is huge. But the benefits of doing so can also be huge.

And this time it could really be different.

Not least because a 68-page review of Britain’s unsecured credit market, compiled by the Financial Conduct Authority (FCA) and published this month, has thrown its weight behind the most fundamental reforms to the system since it was formalized at the end of the 1970s.

The review stated that, “Despite positive efforts to encourage more alternatives to high-cost credit, the market has not been widely offered, and further reform is needed.”

This includes liberalizing the approach to regulating credit unions and encouraging more major lenders to participate at lower costs in this part of the market.

She added, “Credit unions provide an important alternative to high-cost credit and enable financial inclusion more broadly. To fully realize their potential, there is justification for removing some of the current restrictions on their activities.

Activists and CEOs alike welcomed her call for the Bank of England, Financial Conduct Authority, Treasury and Northern Ireland government to consider legislation published before the advent of the internet, let alone smartphone banking.

“I 100 percent welcome the recommendations of the review, the Credit Union Act of 1979 is older than I am,” said Paul Norgrove.

Robert Kelly, chief executive of the trade body representing 169 credit unions in England, Scotland and Wales, said the “big priority” was reviewing legislation and regulations that govern the sector.

Credit unions currently only have one source of income, and this is not a great strategy for building a big business, we need to be competitive and diversify.

Marilyn Shiels, Capital Credit Union

“The reality is that the regulatory environment has constrained credit unions in terms of transformation and innovation.

The Financial Conduct Authority (FCA) said credit unions can offer basic savings and loans. We have discussed the ability to offer auto financing, credit card, and insurance facilities, as well as further cooperation.

Marilyn Shiels, who sat on the review’s advisory panel, added: “We have the most restrictive legislative framework of any country, and it’s important that that be changed. We need to be able to offer more to our members beyond savings and loans.”

“Credit unions currently only have one source of income, and that’s not a great strategy for building a big business, we need to be competitive and diversify.”

Credit unions generated £210m in income in 2019, according to figures from the Bank of England – the vast majority, 83 per cent, came from loan interest. In its latest statistics published last July, it indicated, “There has been an increasing reliance on interest paid on loans.”

And while credit unions versus payday lenders aren’t a zero-sum game—the unions offer savings and payroll-deducted savings accounts, a variety of low-cost loans and even mortgages in some cases—the review also called for regulators to consider a 42.6 percent cap. Annual Interest Rate (APR) and whether “credit unions are allowed to fully service the subprime portion of the market”.

Marilyn Shiels of Capital Credit Union welcomed the recommendation, but some are more skeptical about whether this will have a real impact.

Robert Kelly’s predecessor as chief executive of the Association of British Credit Unions told MPs in 2016 that up to 80 per cent of applicants to credit unions could be rejected, with Kelly himself saying that was the money, and the focus on “responsible credit” meant getting involved. Customers “don’t throw money out the door”.

Peter Totton, head of policy at the StepChange Debt Charity, said the review ‘raised questions about broader social policy.

“Wider access to adequate credit can help people who can afford to borrow on commercial terms, but there is also another important group of people who need cheaper and better ways of being able to cover their essential costs,” he said.

The charity called for an interest-free loan scheme to help “those who are in a weaker position financially”.

But those in the sector who spoke to This is Money felt the review’s recommendations, along with Treasury-backed grants from Nesta, were a step in the right direction in allowing credit unions and community finance to help more borrowers in all categories.

“We can play a more prominent role, of course we can, and we should,” Kelly said. We should certainly have a more prominent place in building financial resilience into the gaps where irresponsible lending has occurred.

“I won’t say we’ll fill it all in, but I think we can do more.”

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