Financial Exclusion and Credit Unions: recent developments

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1 Financial Exclusion and Credit Unions: recent developments 13 July 2015 Alan Weaver LGiU associate Summary As individual and family debt has increased there has been growing interest in credit unions. Both Labour and the Coalition governments have sought to promote credit unions, increase pressure on unsuitable lenders, and take wider steps to tackle poverty and debt. Credit unions have grown steadily in size and reach but market penetration remains low in comparison with international standards; Fair Finance, London Mutual Credit Union, and Moneyline provide examples of successes and challenges experienced by leading credit unions. Local authorities have played a significant role in promoting credit unions and financial inclusion. This policy in practice briefing includes examples of some successful approaches and will be of interest to local authority members, officers and voluntary sector organisations concerned with tackling financial exclusion and promoting credit unions. Origins Credit unions (CUs) are a form of local cooperative bank which offer a range of financial services. Each credit union must define a common bond, i.e. a shared characteristic of its members. They are non-profit institutions and receive tax breaks on the core activity of lending. Although CUs exist worldwide, the size and scope of the sector varies considerably from country to country. Only two per cent of the UKs economically active population are members of a credit union, for instance, whereas next door in Ireland membership is much higher at 72 per cent. In the UK CUs only emerged in the 1960s when immigrants from Ireland and Jamaica started up their own institutions. In many countries, smaller banks developed by collaborating with one another and pooling together certain activities. This tactic proved so successful that almost all continental European and North American local banks, be they cooperatives, public banks, or CUs, now exist as part of very large networks. They can share the costs of the multi-million pound IT investment needed to access the payments system - the network that banks use to transfer money to each other.

2 Canadian, US, Australian and Korean CUs are able to offer a large suite of financial products to customers, including cheques, credit cards, debit cards, and money transfer services. Such products and services are not really financially viable in countries without local banking networks, such as the UK. Consequently, many British CUs are significantly dependent on grant funding or support from local authorities. 80% of community based credit unions receive some form of grant and most customers have to visit their credit union in person to be able to withdraw money, because the credit union can t provide access to ATM s. In the UK, formal financial institutions have been less willing to lend to people on lower incomes than those in other countries. Commercial banks have preferred to focus on shortterm returns, ignoring less profitable customers and geographical locations, increasing sales by selling (or occasionally mis-selling) financial products. This has been reinforced by the demise of relationship banking and the rise of centralised credit decisions. Financial Exclusion Financial Exclusion (the inability, difficulty, or reluctance of particular groups to access mainstream financial services) appeared on the national agenda in the 90s and 00s as evidence began to emerge about the high living costs for those without access to bank accounts, and clear links to poverty and debt. The amount of debt and number of debtors have increased significantly over the last 10 to twelve years and this can be tracked through a series of reports produced by the Centre for Social Justice (CSJ). See What Price Credit? (March 2005), Breakdown Britain: Indebtedness (December 2006), Breakthrough Britain: Serious Personal Debt (July 2007), Maxed Out: Serious personal debt in Britain (November 2013), In Restoring the Balance: Tackling the Debt (July 2014) to track the scale of this. The latter report highlighted that nine million people in the UK were struggling with serious financial debt in 2013 or A further eight million were at risk of finding themselves in the same position, living only one pay-cheque or benefit payment from financial disaster. More recently, deficit driven cuts in welfare spending have reduced the support available for those on the lowest incomes. And problems caused within the welfare benefits system administrative errors, processing delays, changes in eligibility and sanctions - can result in sudden drops in household income or no income at all, sometimes for weeks at a time. When families are struggling to make ends meet it is difficult for them to save. But savings are crucial in building financial resilience. Savings help people meet unexpected demands, smooth peaks and troughs in income and spending and limit the need for borrowing. Effective tools for savings, payments and accessing credit and insurance can help people climb out of poverty or get through a crisis or emergency without falling into debt. Yet only 41 per cent of the UK population report having any savings.

3 Recent developments in the credit union sector The Credit Act 1979 regulated CUs in the UK for the first time. Since the passing of this Act, CUs have grown steadily in size and reach. Numbers of CUs grew from 81 in 1982 to 389 in In the same period, membership increased from 14,000 to over 893,000 and assets increased from 222 million to 1000 million. Association of British Credit Unions Limited (ABCUL) has reported that, after a period of consolidation, at 31 December 2014, there were 362 CUs, with a membership of 1.2 million, and total assets of 1.26 billion. Nevertheless, the penetration of the UK financial market remains low by international standards. The US has roughly 7000 CUs serving over 100 million members (almost a third of the population) and there are now $1.2tn ( 773 billion) of assets under management. Australia has 4.5 million members, a quarter of the population. Because of their late development, their inability to develop economies of scale or access the transmission system, CUs in the UK have been caught between a rock and a hard place. They have been unable to stop large numbers of the poor from turning to unsuitable lenders. They have not been able to build an infrastructure that will attract a wider range of savers. A new survey published on 13 July (reported in the Guardian), by Scape Group a publicsector procurement specialist, and the Association of British Credit Unions (Abcul), says that three times as many consumers have turned to payday loans or doorstep lenders rather than credit unions, despite considering the high-cost borrowing rates to be worse value for money. One in 20 people said they had taken short-term loans from payday firms, while the same proportion had borrowed from doorstep lenders to make ends meet. In contrast, just three per cent had used credit unions. The survey for the study does show, however, that positive publicity for credit unions in recent years seems to have convinced consumers that they make financial sense. Of those questioned, 41 per cent said credit unions were good value for money, compared with only one per cent who said the same of doorstep lenders and two per cent who saw payday loans as being good value. While take-up was low, 62 per cent said they would use credit unions if accessing them was easier. Abcul is working on how to make credit unions more accessible through online and mobile channels and via payroll deduction schemes the sort of innovation it said had led to the growth of credit unions in the US. As government, parliament and public opinion formers become increasingly concerned about the growth in individual and family debt, and the social consequences and resource implications of its knock on effects (family breakdown, addiction, unemployment, and mental health issues), there is a growing consensus about the need to develop a conducive competitive and regulatory environment for CUs. Role of Governments and Statutory Bodies There have been efforts from both Labour and Coalition governments to tackle the issues. Promoting CUs - In the early 2000s, leading CUs worked with the Labour Government s Financial Inclusion Task Force to develop Community Banking Partnerships (CBPs). 14 Community Banking Partnerships Pathfinders were set up in two waves in 2004 and Some of the successful pilots included: South West Pound Devon; Robert Owen CBP Powys and Fair Finance East London. A major breakthrough was the successful piloting of Money Advice and Budgeting Services.

4 Labour provided a 74 million Growth Fund for CUs and community development finance institution (CDFIs) to lend to deprive and excluded communities. It established the Money Advice Service. In October 2008, Financial Services Compensation Scheme (FSCS) was extended to savings within CUs. Further amendments to the Credit Union Act 1979 were made by the Legislative Reform Order This loosened the definition of common bond. It allowed credit unions to: borrow money from external sources; provide services to other bodies; offer interest on savings; lower age restrictions on membership, etc. Upon taking office, the Coalition Government abolished the Financial Inclusion Task Force but introduced other initiatives. The most important ones included a 38 million deal with ABCUL (the trade group representing British CUs) to help modernise and grow the CU movement. The objectives of this Credit Union Expansion Project (CUEP) included: enabling CUs joining CUEP to reduce costs and become financially sustainable; increasing access to financial services (including affordable credit, bank and savings accounts) to one million more people on low incomes saving low income consumers 1 billion in loan interest payments. Later, in 2014, the government raised the interest rate cap on British credit unions from 2 per cent to 3 per cent per month. In June 2014, the coalition government issued a call for evidence seeking views on what more could be done to help CUs to thrive and grow in a sustainable manner. The response was published in December 2014 and highlighted that the government agreed that CUs cannot simply serve the financially excluded but must attract a broader membership base to be successful and become self-sustaining in the longer term. It committed to fund a pilot savings programme to be run by the Archbishop of Canterbury s task group on Affordable Credit and Savings, paring CUs with primary schools to encourage good savings habits amongst children. It also undertook to consider potential changes to the legislation on CUs in the next parliament if it was re-elected. Regulatory Pressure Government support for CUs has been accompanied by pressure on unsuitable lenders like payday loan companies from the following regulatory bodies: the Competition and Market Authority (CMA) imposition of publicity on price comparison sites; Office of Fair Trading (OFT) a price cap on interest rates; and the Financial Ombudsman robust complaint investigations. As a consequence, some smaller lenders have left the market and the main lenders are struggling. Wonga revealed it was axing hundreds of jobs, to cope with the evolving business and market in a clear sign that the rate cap was hurting. It has recently announced a pretax loss of 37 million, a hefty change from 2012 when the firm made 62 million in profit. The regulatory clampdown on the payday loans sector led by a cap on the overall cost of loans does appear to be benefitting vulnerable borrowers. Citizens Advice has said that the number of complaints it had received over payday loans had nearly halved since last year. The rights organisation said it helped with 5,554 payday loan problems across England

5 and Wales from January to March 2015, marking a fall of 45 per cent on the same period in 2014, when 10,155 problems were reported. Poverty and Debt - Governments have taken steps to tackle poverty and debt. The Money Advice Service (MAS) was launched in April In August 2014, it produced figures and evidence demonstrating that its debt advice had worked for nine out of ten people struggling with serious financial problems. In September 2014, MAS embarked on an extensive consultation exercise in support of the development of its strategy for improving financial capability in the UK. In March 2015, it published a report providing an overview of consultation responses and highlighted general agreement on the need for a strategy and strong support for a collaborative approach. The final strategy will put in place a tangible action plan, with commitments from 250 organisations across government, financial services, public and third sectors to take specific steps to advance the cause of greater financial capability in the UK. Welfare Benefit Reforms - The Department of Work and Pensions (DWP) has undertaken to put support in place to cope with these changes. This includes alternative payment arrangements for those who need it, budgeting loans, and Universal Support Delivered Locally (USDL) - a support system led by local authorities and Job centres, working with local partners to help people improve their digital skills and finance capability. The government has also made some effort to encourage financial service institutions to develop products that help people manage Universal Credit payments more easily. Devolved Administrations It is important to be aware that devolved administrations have also been active in promoting financial inclusion. The National Assembly of Wales developed its own financial inclusion strategy. The Scottish Government passed the Bankruptcy and Debt Advice (Scotland) Act in 2014 which seeks to bring about a financial health service for Scotland. The Northern Ireland Executive is developing its own financial capability strategy. The New Conservative Administration All political parties made positive comments about credit unions during the current election campaigns In The Queen s Speech the government made one general comment about measures to increase living standards. Given that the Conservatives were one half of the previous coalition partnership, and have already committed themselves to previous initiatives and responses to consultation, it might be safe to assume they will continue to support credit unions and financial inclusion. There will be no shortage of advice and expectations from a range of influential bodies. Wider Expectations Financial Inclusion Commission (FIC) - One of the most influential and substantial groups is the FIC. FIC is an independent body of experts and parliamentarians who came together after the demise of the Financial Inclusion Task Group to put financial inclusion on the public agenda in the 2015 General Election. It has gathered evidence from across the country highlighting the serious problem of financial exclusion. Their report acknowledges and highlights the role played by CUs. It presents a vision in which every adult and child can enjoy decent financial health, i.e. every adult: is connected to the banking system; has access to affordable credit; is encouraged and enabled to save; has access to the right insurance cover; has access to objective and understandable advice. Every adult and child receives the financial education he or she needs. The FIC proposes a whole range of detailed recommendations for bringing this about.

6 Church of England The Church of England has also played a practical and public role. In 2013, the Archbishop of Canterbury Justin Welby launched a Church of England plan to support CUs and to combat the rise of UK pay-day lenders charging extremely high interest rates. Archbishop s Task Group on CUs and the Financial Sector is piloting a savings club programme (funded by the Government) in church primary schools in partnership with credit unions. Leading Credit Unions Despite positive developments, CUs are struggling to make progress but there have been some major success stories and some challenges. Fair Finance Established in 2005 by social entrepreneur and CEO Faisel Rahman, Fair Finance offers financial products and services to tackle financial exclusion including affordable loans, a free debt advice service, and microfinance for small businesses and entrepreneurs struggling to access finance. Early on, it pioneered the funding of a Money Advice and Budgeting Service, supplied by a consortium of six housing associations that pay to refer their tenants. The project assisted over 900 tenants, set up debt repayment plans with a high degree of success and saved over 800 people from eviction. The housing associations drew on the expertise of Fair Finance to train their housing management staff in money advice basic skills and this has led to success in resolving debt cases and in setting up preventative financial inclusion services. In 2013, it won a Big Society Award for this initiative. Over the last five years, Fair Finance has pioneered fundraising for investment into businesses and services that have a social benefit as well as financial return, helping to bring nearly 10 million of social and commercial finance to support entrepreneurs as an alternative funding source to grants or donations. Unlike other CUs Fair Finance has had the backing of major banks including Santander, BNPP, and Societe Generale as well as individual and institutional social investors. Recently, it signed further financing from Unicredit and the European Investment Fund to bring more finance to hard pressed entrepreneurs. Fair Finance submitted evidence to the FIC saying that they consider the key to becoming investible has been a robust business plan, efficient processes, and actively turning down subsidies. Santander said that the decision to lend to Fair Finance on a commercial basis was a relationship-led model where the bank invested time to develop a deep understanding of Fair Finance s business model, needs, and risks. The financing deals Fair Finance have worked on will allow it to help nearly 1,000 entrepreneurs and small businesses in London and help move 50,000 away from high cost credit providers over the next few years. London Mutual Credit Union London Mutual Credit Union is a not-for-profit member-owned financial co-operative operating in the City of Westminster and the London boroughs of Southwark, Lambeth and Camden. The primary lines of business include retail banking, deposit-taking and lending. By April 2015, the CU had over 23,000 members. Southwark Council Employees Credit Union was originally established by local authority staff in It was formed to address the economic hardship among low paid workers and the local Caribbean community. In 1997, it opened membership to employees of King s College Hospital and in 1999, to anyone living or working in the borough.

7 In 2006, the CU was the first in the UK to offer current accounts, alongside benefit direct accounts, flexible savings accounts, instant and accessible loans, home contents insurance, money advice and debt counselling services. In 2012, the now London Mutual Credit Union became the first British CU to offer payday loans. The initial 12 month trial for short-term payday loans was completed in The Financial Inclusion Centre evaluation report indicated it to be a success, although it also revealed that it loses money on each new loan made. If the borrower becomes a long-term member and saver the costs of this first loan can be covered; but it does raise questions about viability. London Mutual Credit Union made its payday loan facility available to anyone living or working in the London boroughs of Southwark, Lambeth, City of Westminster and Camden. Moneyline Since 2002, Moneyline, a Blackburn based social business has provided affordable loans as an alternative to expensive door-step lenders. It has grown into an operation with over 20 branches in the North West, South Wales, Lincolnshire and Staffordshire. For its work with Riverside, who worked hand in hand with Moneyline from 2008, providing affordable lending for St Helens and Wirral tenants, the social enterprise was named as Responsible Lender of the Year Short Term Loans 2011 by Credit Today and was on the final short list of four in the Guardian s Social Enterprise Awards. Recently, however, Moneyline submitted evidence to FIC indicating that they were forced to stop lending in December 2014 due to a lack of working capital. This meant turning away 750 to 1000 applicants just before Christmas. Local Authorities Local authorities have provided a range of initiatives to support CUs and to promote financial inclusion. Brighton and Norwich have taken steps to develop a Financial Inclusion Strategy. Bournemouth has developed a Community Finance Initiative. Oldham has taken steps to tackle debt in the borough and to provide fair finance through a shop. Glasgow City Council Two innovative local authorities with long standing experience are listed below. Glasgow: Developing Credit Unions - As part of a wider portfolio of anti-poverty initiatives, GCC has undertaken a programme of support since 2001, which has encouraged the development of CUs throughout the city. The Council recognised that by promoting savings and providing affordable credit, CUs had the potential to play a major strategic role in the fight against financial exclusion and poverty experienced by many of Glasgow s citizens on low income and state benefits. Central to this has been the encouragement that has been given to establishing and supporting a Strategic Development Group, open to all Glasgow CUs. Established in 2003, this group has provided a forum for Glasgow CUs to network, discuss common issues, exchange good practice and develop a programme of collective action, which benefits all CUs. A range of practical support measures has been put in place. Support has included a marketing initiative, including tv and radio advertising campaigns. A CU website has also

8 been developed to promote the benefits of CU membership and promote a range of services available. A comprehensive programme of training and development for CU staff and volunteers has been supported, covering areas such as CU specific courses and specialist topics such as business/succession planning and money advice. GCC has also supported CUs in moving into shop front premises, including utilising councilowned properties. The council has also agreed 100 per cent business rates relief for CUs. This has facilitated the movement into more highly visible premises, raising the CUs profile within local communities and helping to grow membership levels. The support provided by GCC has been catalytic in nature and has provided a significant kick-start to CU development across the city. A key principle of the approach has been to gradually work towards a position whereby CUs can be self-sustaining social enterprises, which ultimately will not require relying on public subsidy. Whilst that goal has not yet been attained, significant progress towards its achievement has been made. The support provided to encourage credit union development has resulted in a major membership growth over the past decade. From a base of only three per cent of Glaswegians being members of credit unions, membership has grown significantly since 2001 and currently stands at around 25 per cent. Glasgow is now in the position where it has a larger CU membership than any other city in the United Kingdom. This includes over 160,000 members across 34 CUs, with a financial asset portfolio in excess of 220 million. Payday Loans - Payday lenders are under attack in Glasgow as nowhere else. The city's council has blocked computers on its networks from accessing payday loan websites; and has now been successful in encouraging some of the city's biggest employers and institutions to do the same. The city's trading standards officers tour shopping parades to check on offers for loans agreements and APRs that breach the Consumer Credit Act. Other steps include the council committing not to lease any of its commercial property to payday lenders and working with the 13 billion Strathclyde Pension Fund to ensure no direct investments are made in the trade. Leeds - financial literacy and financial inclusion strategy In the early 2000s, Leeds City Council and Leeds City Credit Union identified problems of high-interest loans. Research found low usage of bank accounts by residents and high usage of doorstep lenders, particularly among single parents. A fifth of those who borrowed used the money to pay off other debts or for day-to-day living. Leeds City Council developed programmes on financial capability. These included work with young children, as well as programmes for primary schools and older children. Financial capability training was also given to council staff on lower grades and those who worked part time and casual hours. The partners in the project had explicit health improvement goals. There is a wealth of qualitative evidence that when people's income improves, and their debt worries reduce, they also have more money to spend on healthier food and are less stressed. This leads to fewer visits to the doctor and reduces costs for the NHS. The work required substantial investment but provides strong evidence of good potential returns. Research by the University of Salford has shown that: financial inclusion activities created 26 million of additional disposable income for people every 1 spent by beneficiaries generated an extra 25p in the regional economy

9 every 1 invested in financial inclusion generated 8.40 for the regional economy. People spent the extra money mainly on food, bills, their children and saving. Furthermore a substantial number also reported improved health, making fewer visits to the doctor and needing fewer prescriptions. Comment Local authorities have a clear interest in promoting credit unions and financial inclusion, given the knock on effects of increasing debt on demand for local authority services. This has become even more important as public sector financial cutbacks impact disproportionately on local authorities. Councils could also promote credit unions to their staff. The chief executive of Abcul, Mark Lyonette, has said he wanted employers to make credit union membership an easier option for staff. The most successful credit unions in the world have strong links with employers who allow staff to save and repay loans through payroll deduction. In fact in some places, credit union membership is seen as a fairly standard employee benefit,. Related briefings Welfare Reform Update: August 2014 Hunger and food poverty: all-party parliamentary group inquiry: January 2015 Welfare Reform: pre-general election special April 2015 Conservative manifesto commitments the local government perspective May 2015 Queen s Speech 2015 Resources ABCUL (Association of British Credit Unions Ltd) All Party Group on Credit Unions in Westminster Cross Party Group in the Scottish Parliament For more information about this, or any other LGiU member briefing, please contact Janet Sillett, Briefings Manager, on janet.sillett@lgiu.org.uk

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