The UK credit union movement gathered in Manchester this month at a pivotal moment, with policymakers, looking for financially sustainable routes out of the cost of living crisis, planning new regulations and encouraging the sector to offer new products.
This comes alongside existing pressures on the movement, with Mike Mercer – a stalwart of the credit union sector in the US state of Georgia – warning in his opening plenary address that credit unions are “falling behind”, dwindling in number through a process of consolidation and struggling to keep up with advancing technology.
Mercer, who now runs COOPR8 Consulting, said he was concerned that “some of the bigger credit unions are drifting away from their co-operative identity” towards a for-profit model, especially when senior staff are drafted in from outside the movement. He also fears credit unions are too siloed away from the rest of the co-op movement, arguing that their capacity for community impact is much greater when they work on the ground with co-ops.
But he also warned of the risk of drifting too far towards a non-profit ethos and “giving too much away”: credit unions need to take care of the business as well as the members, he said – a tension that was addressed at various points of the conference as speakers assessed the role of credit unions in a struggling economy.
In the second plenary address, Martha Stokes from the Financial Conduct Authority (FCA) said credit unions have three priorities – to avoid harm, improve standards and diversify services. “We want members to have accessible and affordable products that meet their needs,” she said, introducing the new Consumer Duty being put in place by the FCA to improve customer protection, which “will fundamentally change financial services industry”.
The meet these demands, credit unions will need strong governance, with clear roles and responsibilities set for senior managers and effective risk management needed.
She also stressed the need for good record keeping, investment in emergency resilience in terms of IT systems, cybersecurity and oversight of third party providers.
“For some credit unions it represents a significant shift,” she warned. With the cost of living crisis leaving a quarter of UK citizens with low levels of financial resilience, the FCA expects credit unions to give “appropriate levels of care” to members – as well as investing in tech to offer new services.
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Government changes, flagged up at previous Abcul conferences. will allow credit unions to offer new products such as car finance and insurance. “Along with benefits, new products can bring risk,” warned Stokes, who said credit unions will need to apply to the FCA for permission to deliver new services, show how these activities meet the Consumer Duty and how the credit union can monitor these new products.
“There’s a need for more sustainable community-based finance,” she said, “and credit unions need to adapt to meet those needs.”
There was concern from the floor over the pace of the changes and over proportionality of the regulation. Stokes agreed that proportionality is important said the FCA would work with Abcul on the changes, adding that the FCA is “trying to tread a line“ between delivering too much admin and being clear on the duties of credit unions.
A side session, led by Niamh Evans of Abcul, further addressed the Consumer Duty, which will apply to all staff and volunteers at a credit union at all points of interaction with a member.
Although the sector is exempt from consumer credit regulation on loans, “to continue with that we need a good standard of conduct,” said Evans, “so it’s advisable that you follow the duty with your loans.”
Credit unions are expected to avoid harm – for instance by running affordability checks – and to “act with honest and integrity”, she said. And they must focus as much on member outcome as on the organisation’s financial wellbeing. “If you change a product or service you must consider impact of that on members,” she said.
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That means monitoring products such as child benefit loans and payroll deductions to ensure they still deliver value to members as cost of living pressures increase. Formal processes are needed for that monitoring, said Evans, drawing on all relevant data such as complaints and member feedback, with data gaps identified and addressed.
“The FCA is not saying exactly how you should monitor,” she added; but it has set out its required outcomes.
With products and services, financial providers should check who is using the product and how it meets their needs; assess price and value; ensure that all communications throughout the lifetime of a product are clear and adequate; and that consumers are supported.
The flipside of the regulatory coin came from Dele Adeleye of the Prudential Regulation Authority. Invoking the familiar narrative of Brexit, Covid-19, supply chain disruptions and the energy bill crisis, he stressed the need to ensure good risk management after a series of shocks to the economy.
But, he added, “taking money from members and parking it in bank account does not help a credit union grow. Go forth and lend, sustainably.”
Adeleye said the vast majority of credit unions are adequately well capitalised but warned against complacency. “We’re going to see impairments this year,“ he said. “Think about about risk management, think about safe and sound lending, think about how you will keep that good capital position.”
Noting that the smaller a balance sheet, the more expensive a credit union is to run, he urged the audience to make sure they have “the right scale to run business sustainably”. Credit unions also need to plan for the cost of living crisis. “If members withdraw their savings, it’s a pressure on liquidity. How do you support members as household incomes fall?”
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Part of this resilience planning is to have a good exit strategy in place, he added. “If you breach capital requirements it’s unfortunate, if you stay in breach for a long time it’s unacceptable. We can help organisations turn things around – we are proportionate and pragmatic – but eventually that organisation will have to ask, what is in the best interest of our members?”
He added: “I’d rather a credit have good contingency for exit strategy than go insolvent and lose all that value that’s been built up.”
With disrupters continuing to enter the market, and regulation keeping pace with increased risk and complexity in the market, credit unions have the advantage of trust, he said. “It’s not just a financial relationship, it’s like an identity. But don’t take that trust for granted – trust is earned and it can also be lost. Competition can move members away to faster, more efficient financial services.”
The PRA wants to see a credit union sector that’s “co-operating and looking forward stretegically on these market challenges,” added Adeleye. “I hear fantastic ideas; they can only happen if you all move together.”
Asked by Matt Bland from the Co-op Credit Union if there was any conflict between the priorities set out by the PRA and the FCA’s Consumer Duty, Adeleye said that under the mutual values of the credit union sector, “there should be no conflict if you do what you set out to do”.
One option for how all this might play out on the ground was explored by US credit union advisor Scott Butterfield, who looked at the work of America’s community development credit unions (CDCUs) which are “mission-focused”, working in working class and underserved communities.
CDCUs act as a bridge, he said helping people go from money struggles to asset building by “creating a footpath to assets.” Used auto loans are one example of this: by providing people with affordable access to a vehicle they help them find and hold on to work.
The model is also sustainable, he added, with good profit and growth rates. “Reinventing a credit as a CDCU is invograting,” he said. “It delivers purpose and growth.”
Other advantages is that it helps to corner a lending market that big banks are not interested in, and can attract grant funding from government.
“UK credit unions inspire me,” he said, “but you guys have a challenge, I don’t think you’re growing quickly enough … grant funding will help you grow.”
He warned that there are operational expenses – “it costs more to do a loan for a first time car buyer” and that the lending has higher risks. “If you start lending for cars you’re going to end up repossessing some cars.”
And to access grants, community impact reports are essential – looking at where the lending goes, at staff volunteer time, at members’ improved credit scores and “taking people out of sub prime”.
Responding to the presentation, Robert Kelly, from Abcul, said he thought car finance will not become central to credit union business as it is in the US.
And he feels that more discussion is needed on where to find government funds for the model. “We need some movement from Fair4all to recognise the CDCUs are a good idea,” he said. “Data and analytics on members and social impact is crucial for getting growth funds.”
Abcul will have a white paper ready by June for a pilot group to test, added Kelly, and by midsummer it will be ready to approach the Treasury, Fair4All and other stakeholders for fundng for a pilot project.
Credit unions can also demonstrate their social impact by improving their performance when it comes to gender equality and diverse representation – the focus of two sessions of the conference.
The first was the launch of the British Sisterhood of the Global Women’s Leadership Network. The Network was set up by the World Council of Credit Unions (Woccu) to drive gender equality across the global movement after women employees requested a a forum for safe discussion about their work, and issues impacting them in daily life.
The network initially held meetings at Woccu’s annual global conferences but there was demand for more frequent, local discussion, leading the the formation of regional sisterhoods; there are now more than 160 around the world.
“You see women doing amazing things in your credit unions every day of the year,” said Lena Giakoumopoulos, director of the GWLN in the US. “It”s not just about International Women’s Day – we should be talking about women every day of the year.”
It will take 50 years for the UK to close its gender gap in business leadership, she added – which is essential in terms of economic opportunity, educational attainment, health and survival, and political empowerment.
“We’re doing this work for future generations, we have a responsibility.”
The conference closed with an update from Abcul’s Inclusivity Group, which saw delegates agree that there is still work to be done in terms of ensuring a diverse UK credit union movement.
Joy Maitland, vice chair of Planesaver, said: “If you want a diverse board, commit to it, review it, live it. it’s about culture on the board and in the organisation. Inclusion comes first, diversity is a benefit of that inclusion.”
A poll of delegates in the room found that only 39% thought Abcul was inclusive. Inclusivity Group member Ruksana Kauser from Calderdale Credit Union said: “I’m disheartened by people saying Abcul’s not inclusive, I’m only sat here because it is. We are trying, but it’s going to take time.”
Delegates noted that more inclusive boards would help credit unions better understand the needs of their communities, while more young board members would help with succession planning.
But there are barriers to people applying to join boards in terms of confidence, skills and experience, and credit unions will have to be more proactive in terms of approaching potential candidates.
“We want more people to come forward to have competitive elections,” said Matt Bland. “The more people put themselves forward the better – for everything, not just diversity.”
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