State aid No N 244/ United Kingdom Credit Union Provision of Access to Basic Financial Services Scotland

Transcription

1 EUROPEAN COMMISSION Brussels, 06.IV.2005 C(2005)977 fin Subject: State aid No N 244/ United Kingdom Credit Union Provision of Access to Basic Financial Services Scotland Sir, I. Procedure 1) By letter dated , the UK authorities notified the Credit Union Development Support (CDUS) scheme to the Commission. 2) A meeting was held between the Commission s services and the UK authorities on and on , the Commission asked for additional information. Since then, various revisions to the proposed scheme were submitted by the UK authorities. The latest submission was made by letter of In this submission, the scheme was substantially revised and renamed as Credit Union Provision of Access to Basic Financial Services. II. Description of the scheme The Purpose of the scheme 3) According to the UK authorities, the overall objective of the scheme is to provide access to financial services via Credit Unions for individuals who are currently without basic products and services, and are as a result both financially and socially marginalised. 4) The UK Government has initiated various schemes aimed at social inclusion and inner city regeneration. A recent attempt at inclusion was the use of the Postal network in the UK whereby social benefits were used as a trigger to inculcating a culture of basic banking. The Credit Unions scheme goes further in trying to reach communities at a local level, as they are considered as the appropriate vehicle for such 'micro financing'. The Right Hon Jack STRAW MP Secretary of State for Foreign and Commonwealth Affairs Downing Street London SW1A 2AL United Kingdom Commission européenne/europese Commissie, B-1049 Brussel Belgium - Telephone: (0)

2 5) The scheme outlines the Scottish Executive s intention to develop measures to support the ability of credit unions to provide such services by means of: The development of a suite of basic affordable financial products and services which have been designed according to the specific requirements (simple, transparent and low cost) of the financially excluded and other vulnerable groups such as ethnic minorities, lone parents, the disabled, the elderly and those on low incomes or out of work; Aid to credit unions to ensure that they have adequate infrastructure to deliver the aforementioned suite. In particular, assistance is urgently needed for rural credit unions, credit unions in areas of deprivation, and to help develop new credit unions where no provision currently exists; Funding on the basis of a service of general economic interest (SGEI), under Article 86 (2) of the Treaty. 6) Under the proposed arrangement funding could be granted to both existing and new credit unions. Grant Administering Bodies 7) The following public bodies in Scotland will be providing funding as part of the overall scheme. Scottish Ministers (Scottish Executive and Communities Scotland) Scottish Local Authorities Scottish Enterprise Highlands and Islands Enterprise. Legal basis 8) The Social Work (Scotland) Act 1968 will be used for the Scheme. According to the U.K. Authorities, this is a wide-ranging piece of legislation, the purposes of which is stated to be promoting social welfare in Scotland. Although the Act does not describe the services credit unions provide, these services, and other terms and conditions which will govern the funding provided to the credit union, will be expressed in a contract awarded under the Act to each credit union which will receive the funding. Provision of Basic Financial Services (BFS): funding granted on the basis of a Service of General Economic Interest (SGEI) 9) The Scottish Executive considers that credit unions are the appropriate agents to deliver the range of products set out in this notification and proposes to compensate these credit unions for the additional costs incurred. 10) One or more of these products and services and hence the delivery of the SGEI will be granted to the most suitable credit unions. The exact product entrusted will be decided taking into account each individual credit union s stage of development and would complement the existing products offered by that credit union. 11) The Scottish Executive considers that such funding to compensate credit unions for those costs directly attributed to the development and delivery of BFS products is in compliance with Article 86(2) of the Treaty. 2

3 Proposed suite of products 12) Credit Union Savings Account: this savings product will be developed to allow those with little or no prior engagement with savings products to save small regular amounts of money in order to encourage a savings culture (e.g. a lone parent building up savings to budget for intermittent necessary expenses). The delivery of this product could be linked to the provision of financial education. 13) Flexible Credit: this low-cost, affordable credit is to be used for essentials such as children s clothing, the replacement of household goods and/or to refinance and break out of debt. Eligibility criteria will be developed to assess individual needs. Different models of lending could be adopted, including small emergency loans. Access to these loans would not be linked to the level of savings held with the credit union. In order to mitigate the risks for other members savings, this product may be backed by a loan guarantee fund. 14) Credit Union Budgeting Account: the budgeting account would work by using the credit union as a payment distributor for debts and bills (enabling account holders to capitalise on the discounts offered for paying bills by direct debit). Advice on money matters is anticipated as being an integral part of this service and would include negotiation on debts between debtor and creditor. The eventual payment of social security benefits by electronic transfer is also envisaged through this account. 15) Insurance Products: these would include home contents and buildings insurance, life insurance, medical/dental cover, veterinary insurance and funeral prepayment plans providing basic cover while offering low premiums and a convenient method of payment. Why Credit Unions? 16) Credit unions are registered as legal entities under the Credit Unions Act 1979, with reference to the Industrial and Provident Societies Act 1965, authorised to carry out their regulated activities by the Financial Services Authority 1 (FSA) under the Financial Services and Markets Act ) Credit unions have four statutory objects: the promotion of thrift among their members by the accumulation of savings; the creation of sources of credit for the benefit of their members at a fair rate of interest; the use of members savings for their mutual benefit; the training and education of members in the wise use of money and in the management of their financial affairs. 1 The Financial Services Authority is the financial services regulatory body in the UK. All credit unions have been registered with and authorised by the FSA since July

4 18) In addition, credit unions can adopt two social goals: to contribute towards the alleviation of poverty within the community; to contribute towards the economic regeneration of the community. 19) In the UK a credit union is a not-for-profit, financial co-operative owned and controlled by its members. Credit unions cannot be clearly categorised as either part of the public or the private sector. Every credit union is directed and controlled by a volunteer Board of Directors, elected by the membership. Members of a credit union save in a common fund. Volunteers and/or staff run the day to day business of the credit union. 20) As mutual societies, credit unions are not-for-profit organisations so any operating surplus or profit is used to improve the services to members or can be repaid to the members in the form of a dividend on their savings. Under the 1979 Act dividends cannot exceed 8%. 21) Membership of a credit union in the UK is restricted (by the 1979 Act) to people who share a common bond, based on: residence in a certain locality, or; working for a certain employer or working in a certain locality, or; membership of or having an association with a certain organisation, or following a particular occupation. 22) Each credit union, when it applies to the FSA for authorisation, defines its common bond within one (or occasionally two or three) of the categories above. Live or Work common bonds are becoming increasingly the norm in Scotland. The scheme intends to support credit unions that make specific links to the financial inclusion objectives of the Scottish Executive. 23) In Scotland, credit unions have historically been established by groups of local people in predominantly low-income areas. They are considered as community finance initiatives which provide a highly valuable, but costly, face-to-face financial service to communities. 24) The benefits of credit unions are that: They are not-for-profit and have a value-based commitment to reach all people in their communities; They have greater links and knowledge of their local communities which facilitates engagement; They often have a physical presence in the most disadvantaged communities; They have an educative role to enable people to use their products effectively; The emphasis on building savings contributes to poverty alleviation; They are trusted and familiar in their communities. 4

5 Form of Aid 25) The Scottish Executive will entrust certain services of SGEI status to credit unions assessed as appropriate agents after applying pre-determined selection criteria, which will be directed to the financially excluded. Funding would then be allocated to credit unions as compensation for the extra costs of providing these products to their clients. 26) The aid will compensate the loss (loss compensation) resulting from the provision of these products; capital grants can also cover new capital expenditure incurred for the provision of products of SGEI status. Eligible costs 27) The costs eligible for funding would be limited to those directly attributable to the provision of the SGEI products and services. Process of funding under SGEI 28) The Scottish Executive will approve which products of SGEI status will be entrusted to credit unions. The entrusting authority will be one of the designated grant administering bodies. Where the Scottish Executive may wish to extend entrusting body status to any organisation not within the scope of this notification it will seek approval from the Commission before granting entrusting body status. Guidance will be formally provided to others wishing to become an entrusting body or contribute to the same eligible costs. 29) The details of credit unions delivering products of SGEI status, the level of funding received and the details of the fund providers will be published on the Scottish Executive website. 30) A contract will exist between the credit union and the entrusting authority, setting clear tangible targets for the numbers for products to be delivered. Under this contract, credit unions will be required to keep separate accounts for their SGEI activities. 31) The Executive would use a combination of criteria to determine best value. This would include an assessment of financial performance (as indicated through recent business planning/health check work and PEARLS 2 ) to determine efficiency and cost effectiveness of the organisation and its activities. It would also include an assessment of current and potential impact on financial exclusion. 32) Credit unions delivering products and services of SGEI status will be reviewed every 3 years. Credit unions will be given their own tangible targets in relation to the numbers of products delivered over the 3 year period. Performance against these targets will be submitted to the entrusting body annually. Credit unions which are not providing a satisfactory service after 1 year will have their funding reduced and unsatisfactory performance after 3 years will result in the cessation of SGEI-related funding. 2 PEARLS is a financial performance monitoring system designed to offer management guidance for credit unions. WOCCU (World Council of Credit Unions) state that PEARLS can be used to compare and rank institutions. 5

6 33) Credit unions will also not be eligible for further funding if the SGEI activity becomes self financing. Systems will be put in place to ensure that support given to a credit union does not over-compensate the minimum necessary to deliver the product and service in question. Separation of Accounts 34) Systems would be put into place to ensure there will be no duplication of funding nor any overcompensation. Credit unions will be required to separately identify expenditure and income relevant to products and services of SGEI status. Credit Unions should also be able to demonstrate that only capital expenditure specifically incurred for SGEI activities would be eligible for capital grants. These accounts will be independently audited and made available to the Scottish Executive. The costs which will be reimbursed will be clearly accounted for by the credit union and identifiable as those specifically incurred in the carrying out of the service(s). These will be accounted for separately in the credit unions accounts. Overlap of coverage 35) In a very small number of cases there may be more than one credit union which meets the criteria for SGEI status with overlapping common bonds (serving a common geographical area). This is unlikely to be a regular occurrence as credit union registration with the FSA is dependant on an adequate membership within a common bond. Only on rare occasions has the FSA allowed an overlap to occur. If this scenario does occur the Scottish Executive would award SGEI status to the credit union that offered best value for money, or if both credit unions provided a good service and provided complementary services, different and distinct services would be entrusted to them. Budget for the Scheme 36) The Scottish Executive has a budget of 1.4m for 2005/06 to support credit union development. Scottish Local Authorities, Social Inclusion Partnerships, and other agencies have an interest in credit unions and their funds will form part of the Scheme. European Structural Funds will also form part of this Scheme. Expenditure will be determined each year by the level of demand and by the grant administering bodies. It is expected that the total level of funding available to Credit Unions in Scotland will be a maximum of 5m per annum. 37) The number of recipients will depend on the number of applications made and the extent of resources made available. There are 141 credit unions in Scotland, 84% of which are community based. Duration of the Scheme 38) The Scheme will be in operation for 5 years from the date of Commission approval with the exception of rural credit unions for which the duration would be eight years. The UK reserves the right to request an extension of the scheme or to notify a successor scheme if this is deemed necessary. Monitoring 39) For this funding there will be no cumulation of aid. The scheme will be closely monitored and also measured, setting realistic targets for individual credit unions (using the health checks provided by independent consultants.) Funding will be monitored to ensure that the financial ratios relevant to financial health and growth are being achieved. 6

7 40) A monitoring report for the scheme, indicating the total funding distributed and detailed audit information pertaining to the separation of accounts by credit unions will be provided to the Commission on a yearly basis. III. III.1 Assessment of the measures Existence of aid 41) The State aid rules of the Treaty apply to undertakings. According to case-law an undertaking is an entity which is carrying out an economic activity. In assessing whether an activity is to be considered economic, it should be recalled that, according to settled case-law: the concept of an undertaking covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed, and that any activity consisting in offering goods and services on a given market is an economic activity. 3 Indeed, for an activity offering goods or services to be considered as not economic one should be able to exclude the existence of a market for comparable goods or services. The fact whether the entity in question is profit-oriented or not is not relevant for its qualification as an undertaking. As already indicated, loans to low-income individuals are already provided by private actors in order to make profits. Thus, notwithstanding a potentially lower charge of interest rates, the provision of such products is considered to be an economic activity. 42) In order to ascertain whether measures constitute aid to an undertaking within the meaning of Article 87(1) of the EC Treaty, the Commission has to assess whether the measures: - are granted by the State or through State resources; - are capable of distorting competition; - favour certain undertakings or the production of certain goods; - affect trade between Member States. State Resources 43) The scheme would use the State s funds, which would in turn be allocated by the State s own administering bodies. The scheme thus involves state resources. Distortion of competition 44) The UK authorities maintain that there is no distortion of competition as the credit unions address a market failure. The Commission, however, notes that there exist commercial undertakings that provide loans and home credit to the low income segments of society. The Commission notes that the funding will support the operations of the credit unions; the latter would in turn provide funding to members who are actual or potential customers of commercial lending enterprises. 45) The financial support would result in subsidising operating costs; as this support will not be available to commercial loan providers there would be a distortion of competition. 3 Judgment of the Court of 18 June 1998 in case C-35/96, Commission of the European Communities v Italian Republic, ECR I-3851, paragraph 36. 7

8 Affectation of trade between member states 46) Financial services and investing in financial service providers are well established cross-border activities within the European Community. Thus, it cannot be excluded in principle that State measures addressed to operators of these sectors have the potential to affect trade in the Member State. 47) However, the Commission notes that even though some Credit Unions are large 4, the fact remains that the coverage of their operations would be of a local nature; any effect on trade will thus be limited. Advantage 48) The scheme is only open to credit unions and is not a general measure available to the rest of the economy. 49) In order to asses if the measure provides an economic advantage to the beneficiaries entrusted with public service obligation four conditions must be satisfied (see case C- 280/00, Altmark Trans GmbH paragraph 87, 88). 50) First, the recipient undertaking must actually have public service obligations to discharge and those obligations must be clearly defined. 51) Second, the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner 52) Third, the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of the public services obligation, taking into account the relevant receipts and a reasonable profit. 53) Fourth, where the undertaking is not chosen in a public procurement procedure, which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the level of compensation needed must be determined on the basis of an analysis of the costs, which a typical undertaking, well run and adequately provided within the same sector would incur, taking into account the receipts and a reasonable profit from discharging the obligations. 54) Only if those four conditions are satisfied may it be considered that an undertaking has not enjoyed a real financial advantage, which would have the effect of putting it in a more favourable competitive position than the undertakings competing with it. In the case at hand, credit unions are not chosen in a public procurement procedure. Furthermore the UK authorities have not provided information substantiating that they are being compensated according to the costs of a typical undertaking. 55) In the absence of indications that credit unions would have the cost structure of a typical undertaking it cannot be excluded, that the fourth condition is not fulfilled. Therefore it could in principle be possible that credit unions do enjoy a real financial 4 Among the eligible Credit Unions there are large Credit Unions such as: Scotwest Credit Union Limited with more than members and in excess of 17 million in loans; Glasgow Council Credit Union Limited with more than members and in excess of 24 million in loans. 8

9 advantage, which would have the effect of putting them in a more favourable competitive position than the undertakings competing with them. 56) In view of the above paragraphs the scheme constitutes State aid within the meaning of Article 87(1). III.2 Compatibility 57) Article 87 (2)(a) of the EC Treaty stipulates that aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned shall be compatible with the common market. The Commission notes that, although it may be argued that the aid has a social character, it is not granted to individual consumers but to entities. Article 87 (2)(a) is thus not applicable. 58) Article 87 (3)(c) sets out that aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest shall be compatible with the common market. As the scheme envisages the provision of basic financial services via entrustment to specific entities, this derogation is not considered appropriate. Service of General Economic Interest 59) According to Article 86 (2): Undertakings entrusted with the operation of services of general economic interest shall be subject to the rules contained in this Treaty, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community. 60) The Court has consistently held that Article 86 provides for derogation and must therefore be interpreted restrictively. 61) In keeping with the Court s interpretation of Article 86(2), in order to qualify for exemption, the scheme needs to meet certain conditions: the service to be provided by the credit unions must be a service of general economic interest and be clearly defined as such by the Member State; the undertaking(s) in question must be officially entrusted by the Member State with the provision of the service; the application of Article 87(1) would prevent the performance of the entrusted service; the 86(2) exemption must not affect the development of trade to an extent that would be contrary to the interests of the community. The nature of the service and its definition 62) It is Member States who are primarily responsible for defining what they regard as services of general economic interest. This definition can only be subject to an examination and determination by the Commission for manifest error. 63) The purpose of the measure is the delivery by Credit Unions of a suite of basic affordable financial products and services (BFS) which have been designed according 9

10 to the specific requirements (simple, transparent and low cost) of the financially excluded and other vulnerable groups such as ethnic minorities, lone parents, the disabled, the elderly, those on low incomes or out of work. The Scottish Executive considers that such funding to compensate credit unions for those costs directly attributed to the development and delivery of BFS products to be in compliance with Article 86(2) of the Treaty. 64) While acknowledging that Member States have a large power of appreciation concerning the identification of a service as SGEI, the Commission has to verify that the service carries a general interest that goes beyond the generic interest associated to each economic activity and the public intervention is justified by the nature and needs of the public service. In the present case the question arises to what extent an aid scheme targeted to some specific undertakings corresponds to the nature and needs of the public service. In principle, supporting the financially excluded could be done across the board, in a way that does not discriminate between competing service providers. The Credit unions clients are typically financially excluded people and other vulnerable social groups who are not the typical clientele targeted by other banking institutions, under conditions comparable to the ones envisaged for Credit Unions, for the services offered. However, as the potential for distortion of competition cannot be ruled out, the Commission has taken special note of the fact that this scheme would promote the interests of socially excluded members of the local community and, furthermore, also considers that, at any rate, these clients would turn to another institution once they need a more complete range of financial services. Proposed suite of products 65) Credit Union Savings Account: this savings product will be developed to allow those with little or no prior engagement with savings products, to save small regular amounts of money, in order to encourage a savings culture (e.g. a lone-parent building up savings to budget for intermittent necessary expenses) The delivery of this product could be linked to the provision of financial education. 66) Flexible Credit: this low-cost, affordable credit is to be used for essentials such as children s clothing, the replacement of household goods and/or to refinance and break out of debt. Eligibility criteria will be developed to assess individual needs. Different models of lending could be adopted, including small emergency rescue loans. Access to these loans would not be linked to the level of savings held with the credit union. In order to mitigate the risks for other members savings, this product may be backed by a loan guarantee fund. 67) Credit Union Budgeting Account: the budgeting account would work by using the credit union as a payment distributor for debts and bills (enabling account holders to capitalise on the discounts offered for paying bills by direct debit). Advice on money matters is anticipated as being an integral part of this service and would include negotiation on debts between debtor and creditor. The eventual payment of social security benefits by electronic transfer is also envisaged through this account. 68) Insurance Products: these would include home contents and buildings insurance, life insurance, medical/dental cover, veterinary insurance and funeral prepayment plans providing basic cover while offering low premiums and a convenient method of payment. 10

11 69) Given the nature and the definition of the types of products, the Commission considers that the UK Government has not made a manifest error by defining the proposed products to be of general economic interest; it further considers the service to be adequately and clearly defined. Entrustment 70) For the purpose of entrustment it is noted that Credit unions will be given an enforceable contract clearly outlining the purpose of the financial support and the credit union s obligations. 71) The Commission considers therefore that for the purpose of Article 86(2) there would be formal entrustment of the service. Necessity and proportionality of State financing 72) The UK Authorities consider that inadequate resources have meant that the effectiveness of credit unions to date has been unsatisfactory. e.g. 62% of all community credit unions are only open for six hours or less a week, and a third for three hours or less. Only 17% operate from their own premises, with most operating from community centres, churches, volunteers homes or local authority premises. 73) To realise the objectives envisaged for the Credit Unions it is deemed critical to provide adequate resources. As the Credit Unions are unable to access adequate funding themselves State financing has become necessary. 74) To ensure proportionality of the funding, financing beyond the net costs of the public service should be prevented. The public financial support can only be used to perform the public obligations imposed by the entrustment contract and to cover the net costs exclusively linked to the public service obligation, as these net costs could not be otherwise recovered. Consequently the benefit of the State funding may accrue directly and exclusively to people on low income. 75) Credit Unions will be required to keep transparent accounts to ensure that funds are utilised for the purpose of the delivery of BFS and that there is no overcompensation. The accounts will also be expected to demonstrate that the funds have benefited people on low incomes. Effect contrary to the interest of the community 76) Financial inclusion is fully in line with the basic objectives of the EC Treaty. The development of the social economy (as part of which credit unions are expressly mentioned) is also a priority for the structural funds in the period 2000 to The Commission Communication concerning the Structural Funds and their co-ordination with the Cohesion Fund 5, clearly states that there should be active support for the creation and development of organisations such as credit unions and that such organisations will generally require continuing assistance for some time. 5 See Commission communication concerning the Structural Funds and their coordination with the Cohesion Fund OJ C 267, , p.2, Social Economy: new employment creating services section. 11

12 77) Furthermore, due to the local nature of credit unions and their operation any effect on trade will be limited and it is considered that it will not be contrary to the interests of the Community. IV. Conclusions 78) With view to the above the Commission comes to the conclusion that the conditions in order for Article 86(2) EC Treaty to apply are therefore satisfied. 79) The Commission has accordingly decided not to raise any objections to the UK scheme Credit Union Provision of Access to Basic Financial Services on the ground that the measures are compatible with the EC Treaty. If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition Directorate H-2 Rue de la Loi/Wetstraat, 200 B-1049 Brussels Fax No: Yours faithfully, for the Commission Neelie Kroes Member of the Commission 12