New services could mean regulatory changes for larger credit unions

Abcul conference report: The apex says it will work to ensure that any changes the PRA brings forward remain proportionate

UK credit unions looked to a changing future – with the aftermath of Covid-19, regulatory change, climate change and interest rate challenges – at the annual conference of the Association of British Credit Unions (Abcul). Held virtually on 11-12 March, the two-day event featured a speech by economic secretary and city minister John Glen.

Mr Glen reiterated the government’s commitment to bring forward legislative changes to the Credit Unions Act, to allow the sector to offer a wider range of products and services. The decision was announced in the 2020 budget but Covid-19 disruptions put back the timetable for updating the act.

“Your valued members understand that you are essential to their financial well-being, an ethical home for their precious savings and a safety net for those who might otherwise have to rely on high-cost lender, ” said Mr Glen.

He said the government had taken other steps to boost the sector, such as establishing Fair4All Finance in 2019 to allocate dormant assets money to financial credit unions and other financial inclusion initiatives.

Fair4All Finance committed £5m to its Covid-19 Resilience Fund, which is supporting the affordable credit sector through the immediate crisis so it can continue to provide vital services. An additional £65m was allocated in May, together with an expanded Affordable Credit Scale-up Programme, which will directly support the growth of community finance organisations in the UK, including credit unions.

The minister said credit unions should focus on innovating for the future. To help them digitise, in 2018 the government launched the Affordable Credit Challenge, which supports partnerships between UK community lenders and fintechs, to develop innovative technology to increase access to affordable, responsible credit. The government allocated £2m for this project.

Serve and Protect Credit Union’s partnership with Credit Kudos, and Capital Credit Union’s partnership with fintechs Nivo and Soar, were awarded each £200,000 to take their ideas forward.

“Being a steady traditional sector doesn’t mean there isn’t room for fresh thinking,” said Mr Glen.

The government also launched a prize-linked savings scheme for credit unions in 2019, to help people improve their financial resilience while boosting awareness and membership of credit unions. This saw 15 credit unions across the country launch prize-linked saver accounts. The pilot will run until the end of March 2021 but the minister says several credit unions plan to continue to offer them in the years to come.

“So far the evidence suggest that Price Saver has had a positive impact on members’ savings,” he added.

A no-interest loans scheme pilot was also confirmed in the recent budget, which will allocate up to £3.8m for a pilot no-interest loans scheme to help vulnerable consumers who would benefit from affordable short-term credit to meet unexpected costs as an alternative to high-cost credit.

“If we do this well, we’ve established a new concept that can be scaled up in the years to come,” said Mr Glen. “I understand the importance of your goal of widening access to affordable credit. I believe this pilot is an important step towards that.”

The minister welcomed Abcul’s Vision 2025 strategy, which argues that credit unions need to evolve, become more digitally efficient, and offer a wider range of services.

Related: Abcul announces Vision 2025 strategy for credit unions in Britain

He called on the sector to unite behind the strategy and suggested some new products – such as insurance or or affordable hire purchase.

With regard to amending the Credit Unions Act, Mr Glen said he hoped top bring more certainty for credit unions – but changes would also require an appropriate regulatory regime.

He said the regulatory framework needed to work for larger as well as smaller credit unions that offer a more basic service.

“Keep talking to us keep working with us we do want the same thing, thriving credit unions that go from strength to strength,” he added.

Sarah Breeden, executive director for UK deposit takers supervision at the Prudentian Regulation Authority (PRA), reassured delegates that the PRA intends a proportional approach to regulatory changes.

She said the PRA would consider how to best tackle risks that may arise from offering new services, adding: “We want a credit union regime that continues to be strong and simple, too.”

She encouraged credit unions to promote diversity and inclusion, embedding these into their organisational culture, which, she said, would counter the risk of group think on boards.

Cybersecurity is also a risk. “You are cash-rich and liquid, which makes you a prime target,” said Ms Breeden, encouraging credit unions to share best practice and share economies of scale where possible.

Climate change is another danger area, leading to physical risks such as inland floods and rising sea levels; credit unions must also anticipate changes to government policy, technology and consumer preference.

The Bank of England has been challenging larger financial institutions to tackle climate change. While credit unions have not been asked to meet these expectations, the PRA would encourage them to look at them.

Ms Breeden told the credit unions to check their ability to cope with zero or negative bank rates were they to be introduced. PRA has already engaged with credit union apexes to assess the sector’s readiness and expects the challenges to be minimal, she said.

Abcul CEO Robert Kelly said the apex would continue to campaign for legislative reform while trying to represents all of its member credit unions.

“We are pushing as hard as we possible can to get the best deal for the entire sector,” he said.

Abcul CEO Robert Kelly speaking at the virtual event

He talked about the need to debunk the myth that credit unions serve only vulnerable customers. The sector has the opportunity to serve a wider demographic and embrace digital transformations, he said.

Abcul will continue to engage with the PRA to ensure regulation remains proportionate after the amendment of the Credit Unions Act.

Mr Kelly expects credit unions who embrace new opportunities – such as setting up credit union service organisations and offering new services to face different regulatory demands but these should not apply to credit unions that choose to stick to more basic services.

He added that credit unions do not need to become banks when they reach a certain size and that this only happens when the board and management want it. “It’s not default, it’s not automatic. It’s related to organisational culture,” he said.

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