Future of Financial Inclusion and Money Advice Conference

20 July 2011

Opportunities and challenges for the credit

union movement

Matt BlandPolicy & Communications Officer

ABCUL

Agenda

• Credit unions today• Challenges• Opportunities• The credit union sector of the future• Questions & answers

Credit unions today

What is a credit union?

• Financial co-operative, owned and controlled by members

• One-member, one-vote• Core business – savings and loans• Increasingly more sophisticated product offering

– ISAs– Child Trust Fund– Credit Union Current Account– Some mortgages

Scale & scope

• Size – September 2010– 436 credit unions– 0.9m members and junior savers– Total assets - £750m– Shares (deposits) - £635m– Lending - £500m

• Growth – 1998 – 2008, membership tripled and assets quadrupled– Year to September 2010 – 10% annualised growth

• Spread– Around 90% population eligible to join– 2% Britain, 5% Scotland and 20% Glasgow

Role in Financial Inclusion

• Many credit unions established to tackle localised financial exclusion• Identified by Labour Government in 1999 for role in financial inclusion• Main provider of Growth Fund extending affordable credit• Safe savings – Farepak collapse• Work in partnership with key agencies

– Social Housing – 70% of excluded SH tenants– Local councils – 10 fold return on investment in Leeds– Prisons – access catalyst for rehabilitation, LJMU– Advice Services – Connect Project– Schools – financial education, learning by doing– Employers – payroll deduction

Challenges

Regulation

• FSA’s credit union sourcebook reviewed to coincide with new legislation– New tougher standards welcome – strengthen sector

– Challenge of transition

• FSA to be scrapped – two new regulators brought in• General increase in the burden of regulation

– EU initiatives – constant battle

– Financial Services Compensation Scheme costs

– Changes to accounting framework – IFRS

– Potential move of consumer credit regulation to FSA successor

Effect of Austerity

• Credit unions, like everyone, facing tough trading conditions

• Funding more scarce– New modernisation fund – likely to be the last made

available from Government– Council budgets under pressure, but social fund devolution

• Economy generally depressed – potential for:– Higher arrears– Difficulties in lending

Financial inclusion vs.self-sustainability

• Credit union interest restricted to 2% per month on reducing balance or 26.8% APR

• DWP Growth Fund Evaluation finds lending costs outstrip revenues at this interest rate for small loans – but strong performance reducing costs

• Other research identifies same issue – JRF non-profit doorstep lending, for instance

• Imperative to streamline lending processes to improve margins – effective and efficient

• Important to have wide range of members – cross-subsidy

Opportunities

Legislative Reform

• New Legislation awaited since review in 2006• Current legislation described as amongst the most

restrictive in the world• Key reforms to Credit Unions Act include

– New flexibility in ‘common bond’ – mix-and-match– Ability to accept organisations, businesses and community

groups as members– Ability to pay interest as well as dividend on savings

• Will herald a new phase of credit union development

DWP Modernisation Fund

• £73 million earmarked for credit union modernisation• Subject to successful feasibility studies, could see

development of central, common banking platform• Economies of scale – streamlined, efficient

processes and modernised services• Potential delivery of services through the Post Office

network• Recently launched research from Liverpool John

Moores University and Policis recommends greater collaboration between credit unions

Merger and rationalisation?

• Changes to legislation and regulation at turn of century saw spike in mergers

• Caused by combination of looser legislation and tougher regulation – similar situation now

• North Wales Credit Union recently created from merger of 5 credit unions – taste of things to come?

Other opportunities

• Social fund devolved to local authorities?

• Big Society agenda?

• Government’s promotion of financial mutuals?

The credit union sector of the future?

Critical time facing credit unions

• Time of great challenges and opportunities

• Pressure from all sides to modernise and develop– Self-sustainability– Efficiency– Scale – Service

• But great opportunities to achieve these goals– Legislation– Modernisation fund– Development of central services and link-up with Post Office– Merger and collaboration

Credit union sector in the future?

• Fewer, larger credit unions• Several million members• A shared, central banking platform • Sophisticated, consistent product offering:

– Telephone banking– Internet banking– Current accounts as standard

• Greatly reduced cost base• Link-up with Post Office in place• Key alternative to the banking sector

Any questions?

Contact details

Matt Bland – Policy & Communications Officer

matt.bland@abcul.org / 0161 819 6933