Treasury minister announces new legislation on UK credit unions

Proposed reforms will allow the sector to offer new products, include car loans and hire purchase

The Association of British Credit Unions (Abcul) ended its two-day conference in Manchester yesterday, with John Glen, economic secretary to the treasury, taking the podium to announce a number of regulatory changes.

These include governance reforms and a lending shake-up that will allow credit unions to offer automobile loans for the first time.

Mr Glen also discussed the pilot of a no-interest loan scheme, backed with £3.8m of government money, “which has been designed for those consumers in vulnerable circumstances who would benefit most from affordable credit to meet unexpected costs“.

The pilot is being run through South Manchester Credit Union, which Mr Glen had just visited. “I met with recipients for whom these loans are providing real-life impact – covering the costs of new white goods to keep families running, funerals for loved ones, and debt consolidation.”

He said the pilot should reach full-scale rollout in a number of sites across the country at the start of next year.

The idea is a tough sell for credit unions, which rely on loan interest for their income. “I recognise how it is perceived as compromising the core products and services that you offer,” Mr Glen admitted – but, he argued, the initiative could “provide a gateway product”, bringing future custom to the sector.

“The challenge now will be to take that concept pilot to a bigger pilot so that we can actually look at creating additional resources. We have £1.2m from JP Morgan and I see this as something that needs to be built on by other high street lenders so that we can actually have the capacity to provide that gateway entry product into the use of credit. 

“Credit unions will be instrumental in providing this ongoing support.”

Mr Glen also promised amendments to the Credit Unions Act to allow the sector in Great Britain to offer a wider range of products and services, as part of the upcoming Financial Services and Markets Bill. 

This will allow credit unions to offer hire purchase, conditional sale agreements, and insurance distribution services to their members, he said.

“We know that you will have members, especially key workers or those who work a shift pattern, for whom having access to a reliable car can be essential. And these changes will mean that you can offer products such as car finance to your members, should they wish to choose them, for the first time.”

The bill will also make minor amendments to governance, including a legal requirement for credit unions to submit annual accounts to the FCA, “and express permission for credit unions to temporarily lend to and borrow from other credit unions, even when there is no membership link”.

Facing questions from delegates, he was pressed on the issue of mergers and acquisitions, a current trend in the credit union sector which presents rescue options for failing entities, and an important mechanism for growth. More mergers are expected in the coming financial crisis but if a credit union is constricted by a narrow common bond, this can be a barrier to mergers.

Mr Glen said he was aware this is “an outstanding matter” but more evidence is needed care had to be taken before changes were made to these rules, adding that in many common bonds there is unused spare capacity for growth. The situation can be remedied “straightforwardly through statutory instrument but I will need further advice on that,” he added.

In other conference sessions credit union representatives from the US urged their UK counterparts to take advantage of the opportunity presented by vehicle finance.

Scott Butterfield, from US service organisation Your Credit Union Partner, said: “Auto lending will give you the revenue to make more investments, if it’s right for your credit union.”

Noting comments from delegates that there is a “cultural aversion” to entering this market, Mr Butterfield said due diligence will be vital.  “Some of you will make mistakes; culturally, managing the risks will be new, you might not understand why someone wants to buy that car, and you will need to not be judgmental.

“The UK is fantastic at savings schemes, lending not so much. When auto lending hits … it’s going to be big so be prepared for it.”

He said US credit unions will be happy to give advice on the automobile market. “There’s a lot of scope for strategic partnerships. If you’re not ready for it, is there a partner who can help you be ready for it? In the US I wish there was a big market like that where you can just jump in.”

  • Next month’s Co-op News, out on Tuesday, will include full coverage of the Abcul conference