Financial Services Authority CP11/29 Deposit protection: raising consumer awareness

Transcription

1 Financial Services Authority CP11/29 Deposit protection: raising consumer awareness Response from the Association of British Credit Unions Limited (ABCUL) Contact details Abbie Shelton Policy & Communications Manager Tel: Or Matt Bland Policy & Communications Officer Tel:

2 Executive Summary Credit unions, as the smallest and newest deposit-taking sector in Britain, actively promote their membership of the Financial Services Compensation Scheme because of the credibility and legitimacy that the Scheme provides. The 85,000 coverage is, aside from a few of the largest credit unions, enough to cover the maximum deposit that it is possible for most credit unions to accept (FSA maximum shareholding limits impose restrictions of 1.5% upon the maximum that a credit union can hold in deposits from a single member relative to total deposits) and so in most cases the FSCS provides a virtual 100% guarantee of deposits held. By the same token, many credit unions are very small enterprises. An analysis of 237 ABCUL credit union annual (CY) returns from the year 2009/10 illustrates the scale of the sector, with: 44% had less than 1,000 member customers 38% had assets of less than 500,000 70% generated less than 200,000 turnover 56% generated a pre-tax profit of less than 10,000 Credit unions legitimacy in financial services is underpinned by Financial Services Authority regulation and FSCS membership, however, being so small in many cases, most credit unions resources are stretched and therefore the sector would greatly appreciate consideration of this as the proposals in question progress. Of course, given the credit union sector s active promotion of the Financial Services Compensation Scheme, there is little about the objective of the proposals before us that we would object to. It is, of course, in the interests of financial services in general, and deposit-takers in particular, that awareness of the compensation arrangements is as high as it can be so that the calamitous events of the run on Northern Rock in 2007 can be avoided in future. We ask only, therefore, that the obligation to display posters, stickers and leaflets in a deposittakers place of business is applied flexibly (as with the accommodations already confirmed around credit unions which occasionally operate from informal premises such as collection points in community centres) and that the materials that credit unions will be required to display are provided in as cost-effective a way as possible. In particular, we would like to offer ABCUL s services in disseminating materials to our member credit unions if to do so could enable cost savings to the individual credit unions. Similarly, we would like the cost to credit unions for the materials to be charged at no more than upon a cost-recovery basis. Finally, we welcome the FSA s recognition that not all credit unions have websites and that, therefore, they do not need to provide online disclosures.

3 Introduction We welcome the opportunity to respond to this consultation. ABCUL is the main trade association for credit unions in England, Scotland and Wales, and our members serve around 80% of Britain s credit union membership. Credit unions are not-for-profit, financial co-operatives owned and controlled by their members providing safe savings and affordable loan facilities. Increasingly a small number of credit unions offer more sophisticated products such as current accounts, ISAs and mortgages. At the end of September 2011, credit unions in Great Britain were providing financial services to 837,339 adult members and held more than 703 million in deposits with more than 570 million out on loan to members. An additional 115,549 young people were saving with credit unions. 1 At 30 September 2010, the 325 credit unions belonging to ABCUL were managing around 512 million of members savings on behalf of over 611,037 adult members. The Credit Unions Act 1979 sets down in statute the objects of a credit union; these are four-fold: The promotion of thrift among members; The creation of sources of credit for the benefit of members at a fair and reasonable rate of interest; The use and control of their members savings for their mutual benefit; and The training and education of members in the wise use of money and in the management of their financial affairs. Credit unions in Britain are small, co-operative financial institutions often extending financial services to those unfairly excluded from the financial services the majority take for granted. They are owned and controlled by a restricted membership and are operated for the sole benefit of this membership. The Credit Union Act 1979 sets down these operating principles in law. In the past decade, British credit unions have trebled their membership and assets have expanded four-fold. As this growth has taken place, the role that credit unions can play both in providing equitable financial services to the whole of their communities and providing diversity in the financial services sector has been increasingly recognised by government and policy-makers. Credit unions have been central to Government efforts to promote financial inclusion taking a pivotal role, for example, in delivering the Department for Work & Pensions Financial Inclusion Growth Fund which provided capital for on-lending to those without access to a source of affordable credit. Ending in March 2011, the loans provided under the fund totalled 405,000 with a value of 175 million 2 and an independent evaluation of the scheme found that it saved loan 1 Figures from unaudited quarterly returns provided to the Financial Services Authority 2 See DWP Growth Fund statistics here:

4 recipients between 119 million and 135 million in interest payments compared with high cost alternatives. 3 The Coalition s Programme for Government committed to promoting mutuals as part of a diverse financial services system and the Department for Work & Pensions is currently conducting a feasibility study the outcome of which will determine whether and how the earmarked 73 million credit union modernisation and expansion fund will be invested in the credit union sector. Both of these initiatives demonstrate the strength of the Government s commitment to the promotion of credit union growth in Britain. One of the key proposals under consideration in this regard is the potential for credit union services to be made available through the Post Office network which has the potential both to greatly boost credit union growth and provide a significant new source of competition and diversity in financial services. Consultation questions Q1. Do you believe that it is important for consumer confidence and financial stability that UK consumers should be made aware of deposit protection? If so, do you agree with the aims set out above for additional measures? As we have set out above, credit unions actively promote their membership of the Financial Services Compensation Scheme as it underpins their credibility and equal standing with the other, more established deposit-takers. As such, we agree entirely that it is important for financial stability and consumer confidence that the levels of FSCS awareness amongst the general population should be as high as possible. However, many of our members are very small institutions with very limited resources and any initiative which aims to enhance awareness of deposit protection as a means of increasing financial stability cannot be considered to achieve its aims if the act of meeting the requirement in turn undermines the stability of the firm. Therefore, we welcome the recognition of credit unions specific needs built into the proposals and would urge that steps be taken perhaps through working with ABCUL to minimise the costs to firms in complying with these new requirements. All materials should be provided on a cost-recovery basis only. Q2. Do you have any comments on the proposed statement to be included in FSCS posters and stickers? We broadly agree with the wording as proposed. We would, however, indicate that there is a case for the FSA to introduce extra flexibility into the wording of the disclosure since it does not properly account for the situation that we outlined above whereby the great majority of credit unions are unable to accept deposits in excess of 85,000. We appreciate that for simplicity it would seem best to have a universal disclosure statement, however, there are instances where individuals wish to deposit more than the maximum individual 3 See DWP Growth Fund evaluation:

5 shareholding limits with a credit union and have to be advised that this cannot be done because of regulatory restrictions upon the credit union. Were these same individuals to then see stickers in the credit union s branch or disclosures on its website seeming to imply that it is possible to hold deposits in excess of 85,000, this could cause significant confusion and raises the potential for needless distress to be caused to the individuals whom this disclosure information is intended to help. We would suggest, as a potential alternative, that the disclosure instead read: Your deposits are protected up to, but not more than, 85,000 by the Financial Services Compensation Scheme. This de-emphasises the element about non-coverage of deposits in excess of the 85,000 limit whilst still being clear that anything above 85,000 is not protected. Q3. Is the information set out above the right information to include in the FSCS information leaflets for consumers to take aware? If not, what information should (or should not) be provided? We do not have any comment on the proposed information to be included in FSCS information leaflets which is comprehensive. Q4. How should EEA deposit takers stickers and posters be produced? Should EEA deposit takers produce their own stickers and posters, or should we require firms to follow a template? No view. Q5. Have we identified the most appropriate ways for firms to display the stickers and posters in branches? We agree with the proposed ways for firms to display the stickers and posters. Q6. Do you agree that deposit takers should also display the specified deposit protection information on their websites? We agree that where credit unions have websites that they are able to update themselves, it is reasonable to expect them to provide this information. Q7. Do you have any comments on the draft rules? We have no comments other than those made above in respect of statement wording. We would also suggest, in line with our response above regarding costs, that an explicit rule be introduced to the effect that the materials will be charged to firms on a cost-recovery basis only. Q8. Do you agree with the proposed three-month implementation period for firms?

6 A three month implementation period seems appropriate provided that the publicity materials are provided in good time by the FSCS. Q9. Do you have any comments on our analysis of the costs and benefits of the proposals? We have a few minor concerns regarding the cost benefit analysis. First, the assumption that all credit unions have only one branch is inaccurate. There are a substantial number of the larger credit unions who have several permanent branches. Furthermore, most smaller credit unions have various community collection points that operate through the week, therefore, each of these needs to be equipped with the appropriate materials. It is not accurate to assert that credit unions have only one branch and we would propose multiplying the cost upon credit unions by at least 3 on this basis. Secondly, the cost benefit analysis does not seem to take account of a). the size of many credit unions and their scarce resources and b). the more limited benefit that credit union disclosures have since they do not present a systemic risk to financial stability nor do they serve the numbers of people served by large banking groups. Therefore, the cost relative to a credit union s available resources is greater because of their diminutive stature and the benefit is smaller because of their limited systemic significance. If the above factors were fully accounted for in the cost benefit analysis we feel there would be a clear case for controlling the costs upon credit unions as we have outlined above to assist them in making the required disclosures without undue costs. ABCUL February 2012