To celebrate 50 years of credit unions in England, the government asked the sector to set out its vision for the future. Over two months, respondents told the government how it can help the financial providers succeed. Here, we list a summary of those responses …
1. Starting up
Existing start-up capital requirements are too restrictive for new credit unions wishing to register. Of the 35 respondents that answered this question directly, 13 felt the initial capital requirements (3% capital:assets ratio for small credit unions, 8% capital:assets ratio for large credit unions) are unrealistic for new credit unions due to their nature as self-capitalising institutions.
One trade association suggested the current capital requirements represent a significant barrier to small credit unions that pose little or no threat to the wider financial framework. A few responses from trade associations suggested a graduated approach to regulation and restrictions at each level. One trade body suggested including a 3-4 year establishment period to enable credit unions to register and build up capital. Several responses argued that the government should provide more funding to cover the start-up costs.
Six respondents thought that the time it takes to register and gain approval is a significant barrier to the establishment of new credit unions. Three of these respondents suggested creating a dual staged process to give credit unions a legal personality prior to full authorisation, as with building societies.
2. Government support
There was broad agreement from all sectors that government should not promote credit unions as an alternative to payday loan companies, as it is not sustainable for the sector to solely serve the financially excluded. But there was widespread support for the government to encourage strategic partnerships between businesses and credit unions, particularly around payroll deduction.
Trade bodies and larger credit unions thought government should support credit union savings clubs in schools to educate children about the benefits of credit unions and saving from a young age. There were also suggestions that government should promote awareness of credit unions through publicity and marketing, with respondents, predominantly from smaller credit unions and the voluntary sector, suggesting that government fund a national advertising campaign.
3. Restrictive regulation
There was some support from trade associations for the Financial Conduct Authority to delegate some of the rule-making responsibility to the individual credit union board, where they have previously sought authorisation to do so from the membership.
This was also supported by some larger credit unions, with respondents emphasising that the current arrangements for changing a credit union’s rulebook are unnecessarily laborious and require simplification.
However, there were concerns from some trade bodies and voluntary sector institutions that member control should not be diluted. They argue that no changes should be made at the expense of the democratic element of the credit union movement, as this distinguishes credit unions from other financial institutions in the marketplace, and that government should actually support more work to re-engage members.
There was widespread support from the credit union sector for the FCA to pre-approve rule changes, prior to them being put to credit union members. Out of the 33 respondents who answered this question directly, 22 respondents supported this proposal, suggesting that it would be more beneficial for the regulators to initially sign off a proposal and then for a credit union to gain ratification afterwards with a member vote.
4. Promoting stability
Some trade associations and credit unions called for the government to support measures which allow the credit union sector to collectively manage their financial assets.
A few of the associations and smaller credit unions suggested removing the lending and depositing limits, with one trade body suggesting the restrictions on these limits could be overcome by formal partnerships between credit unions and Community Development Finance Institutions (CDFIs). There was also a high degree of support for the removal of lending and depositing limits from the larger credit unions and voluntary sector organisations, particularly for corporate members.
There was some support from smaller and larger credit unions for a relaxation of the rules around credit union investment of surplus funds. One response from the voluntary sector suggested updating the rules to allow members’ deposits to be invested ethically, either directly or collectively with other credit unions through a Credit Union Service Organisation. They felt that this would allow credit unions to generate sufficient income to ensure sustainability, growth and to subsidise riskier lending to the most vulnerable members.
Two trade bodies asked for the government to consider credit union access to central bank facilities as a direct participant and for government assistance with capital and social investment in credit unions.
5. Business links
There were differing views on whether credit unions should pursue business lending, with some of the larger credit unions suggesting the rewards from business lending are not worth the risks, and with some trade associations stating that there was little interest from credit unions in expanding into this area at the moment.
However, a few large credit unions suggested that this is a direction they wish to pursue in the future. Some smaller credit unions noted that they do lend to sole traders as individuals, but one response emphasised that the restrictions placed by the regulator on such activities are onerous.
Respondents called for the promotion of skill sharing from the private sector and for the government to encourage other financial institutions to share expertise and operational support. A response from an individual stated that credit unions should specifically reach out to the rest of the mutuals sector, in particular building societies, for support. Another response suggested that credit union champions should be appointed within public sector organisations.
6. Merging opportunities
The majority of trade associations suggested the government should not drive mergers but instead should support increased collaboration.
Some of the larger credit unions felt that mergers were necessary and that the government should take an active role in facilitating these mergers. One large credit union thought that the current situation of around 375 credit unions across the country, many of which have fewer than 1,000 members, is unsustainable and the future objective should be around 20-30 national, general service credit unions. This view was generally supported by respondents from the voluntary sector.
Conversely, some smaller credit unions were opposed to the idea of the government driving mergers, suggesting that the state should not get involved other than to offer grants to credit unions that are struggling
What is the government’s response?
Following the feedback, the government said it will commit to take steps on spending, legislation and regulation to deliver a more supportive environment for credit unions, with the aspiration that credit union membership will increase to two million by 2020.
It recognises the diversity in the credit union movement and welcomes credit unions of different sizes and approaches. Some credit unions wish to remain at their current size and do not wish to expand; the government welcomes the important work such institutions do for their members. However, the government is concerned that the legislative and regulatory framework may be unnecessarily holding back those that want to expand and innovate. Equally, the government will not offer revenue support to credit unions that are operating an unsustainable business model.
The government also acknowledges the number and variety of trade associations representing credit unions. However, it said it is not its place to convene the industry and act as a trade body for the sector. It is clear that if the credit union sector were able to speak with a more unified voice it would give the sector more influence. The government believes this could be achieved through a reduction in the number of trade associations.
In line with many of the responses to the consultation, the government agrees that credit unions cannot simply serve the financially excluded, but must attract a broader membership base to be successful and become self-sustaining in the longer term.
Many respondents called for monetary grants to aid credit unions. While recognising the difficulties some credit unions face, the government does not intend to provide revenue support to credit unions; this approach has been tried in the past and risks offering support for unsustainable business models, which will then struggle to survive once the support is ended.
The government said it recognises the credit union sector’s calls for various revisions of the current legislation. In general, these legislative changes require primary legislation and will therefore need to be considered under the next parliament.
It said it is committed to considering potential changes to the legislation on credit unions in the next parliament. The call for evidence responses produce some useful areas of focus for this, including: the objectives of a credit union; common bond restrictions (number, family); appropriate level for rule change decisions; Prudential Regulation Authority power to direct mergers; ability to make ancillary charges; ability to establish subsidiary bodies; and clarification on purchase and use of property.
In addition, it said it notes the concerns some respondents raised around the regulatory environment for credit unions. While it is vital that credit unions are appropriately regulated, it said, the government is committed to ensuring that regulation is pro-competition, which is why it gave both the PRA and FCA objectives in line with this remit.