Credit Unions of the Future
No. of credit unions
|England & Wales||
|Great Britain total||
sources: Registry of Friendly Societies(GB), Registry of
19. Recent research(3) reveals that
membership numbers in Great Britain are split almost exactly 50-50
between work-based CUs (working for the same employer, or in the same
locality, or in the same employment organisation) and community CUs
(living in a locality, or belonging to the same community organisation).
Community CUs with a purely geographical common bond are a relative
novelty, compared with employment or associational, especially church-based
ones. Over the years, the number of community CUs has grown steadily,
but the larger average size of the work-based CUs has come to predominate.
Work-based CUs are less than one in six of the total, but they account
for over 70% of the assets.
20. Compared with a number of other countries, the CU movement here is less developed. population %
in a CU
Republic of Ireland 45
As in Britain, recent membership growth in these countries almost
certainly owes much to employment based, as distinct from traditional
community based, CUs. Nevertheless, we feel there is much to be learned
from these overseas movements, in terms of how they have organised
themselves to promote CU growth. This theme is considered further
in chapter 4.
Small scale development of community credit unions
21. Research reveals that, with few - albeit notable - exceptions,
community credit unions are not reaching significant portions of their
target population. The majority have less than 200 members and the
average number of loans on the books of these smaller CUs is 36. Services
are restricted, with 62 percent of all community credit unions only
open for six hours a week or less, and a third for three hours or
less. Only 17 percent operate from their own premises, with most working
from community centres, churches, volunteers' homes or local authority
premises. The overwhelming majority think that volunteer burn-out
is restricting their growth. It takes community credit unions on average
9-12 years to get to 200 members and most are not getting past that
22. One reason for the small scale of community credit unions is that in the 1980s the Registry had a policy of small geographic areas for common bonds. This policy has now been relaxed, but its effects can still act to restrict CU development. This is because once a CU has been registered with a certain area for its common bond, no other CU can be established with a common bond including that area(4). So there might be a new CU established, or an existing one in an adjoining area with growth ambitions, but these will not be able to recruit members from within the area already covered by the existing CU. Unless the existing CU is willing to merge itself with the new CU, the potential growth of new CUs and those in adjoining areas seeking to expand is blocked.
23. The consequence of lack of development among community credit
unions is that very few are fully self-sufficient and economically
viable. Only 4 out of the 257 CUs in the ABCUL research study have
reached the level where income is enough for employment of a full-time
staff member or a number of part-timers. Only a further 11 have enough
income to employ a part-timer. Having staff takes the pressure off
the volunteers and enables membership growth and service development.
Most community credit unions have not reached that stage and remain
totally dependent on volunteers and assistance from local authorities.
24. Whilst most community CUs are, in our view, far too small to be effective, it is possible to see, from larger CUs of all common bond types, what are the ingredients of success. The CUs that have grown to a substantial size have:
- an active force of volunteers, able to renew itself with new recruits when needed;
- premises appropriate to their growth prospects;
- a common bond that enables further sustainable growth;
- paid staff, able to guarantee sensible opening hours;
- developed business management skills, including IT capability;
- a demand for loans right from the outset.
We return to this theme when we consider the vision of the CU movement of the future, in chapter 3.
Changing the legal framework
25. A Deregulation Order came into force on 1 September 1996 which:
- added a new common bond of living or working in a particular locality;
- allowed a simple statutory declaration to amend common bonds;
- increased the amounts that can be saved or loaned, from £5,000 to £10,000 depending on the size of the credit union; and
- gave the Registrar the discretion to permit a credit union to
grant individual loans up to a maximum of 1½ times its aggregate
shareholdings, if it has adequate management and systems.
26. Last November, the Government proposed a package
of measures designed to lift some of the restrictions in the Credit
Union Act 1979, in order to encourage growth in the CU movement, whilst
retaining CUs' focus on providing financial services to the poorer
members of society.
(a) Allow credit unions to borrow money from external sources, in
addition to their existing powers to borrow from banks and other credit
(b) Permit credit unions to offer interest bearing accounts, which
is not currently allowed.
(c) Allow credit unions to provide additional basic services and
charge fees eg bill payments.
(d) Abolish the limit on the maximum amount that can be held in
youth accounts, currently £750, and lower the minimum age for
joining a credit union, (without conferring voting rights).
(e) Make the common bond requirements more flexible by allowing
the associational common bond to be combined with the other four types,
viz following a particular occupation, residing in a locality, being
employed in a particular locality, and working for a particular employer.
(f) Remove the current 5,000 maximum membership limit.
(g) Allow credit unions more flexibility to dispose of re-possessed collateral, by allowing them three months or such other period as may be approved, for individual credit unions or case-by-case, by the Registrar.
(h) Extend the repayment periods for loans, to be seven years for
secured lending (or twelve for credit unions holding Section 11C certificates)
and three years for unsecured lending (or five years for credit unions
holding Section 11C certificates).
27. Whilst it is clear that these measures could enable
CU growth, their effectiveness, assuming they are implemented in due
course, will depend on the readiness and capacity of individual CUs
to exploit the opportunities. This cannot be taken for granted. Indeed,
we believe that there is a danger of too little response, particularly
from community credit unions, unless there is also a programme of
positive encouragement. There also need to be investment incentives,
as exploitation of the additional opportunities involves a significantly
higher level of operational sophistication than that possessed by
many of today's community CUs.
28. The need for such a programme led us to try to define a vision
of the credit union movement of the future. For there to be a programme
of encouraging CUs to grow, there needs to be clarity about the direction
of that growth; and there need to be decisions about the means of
encouragement. The next chapter deals with those aspects.
Chapter 3 - Vision of the Credit Union Movement of the Future
The elements of a growth strategy
29. We consider that CUs of the future should retain the key features
which give them strength at present. These include mutual ownership,
democratic organisation, co-operative principles and volunteer directors.
The movement needs to take a new direction, if CUs are to make a significant
impact on the provision of reasonably priced financial services for
those who currently lack access to them.
30. A substantial number of CUs in Britain are failing
to grow significantly. Too many of them remain very small and do not
generate sufficient income to achieve financial self-sufficiency.
Volunteers are overstretched. They are only reaching a tiny proportion
of the potential membership within their common bond. These features
need to be reversed.
31. The key elements in a growth strategy include:
- larger individual CUs;
- professional management;
- capacity to offer a wider range of services;
- enhanced regulation;
- a viable share protection scheme;
- customer/member care;
- a better matching of CUs to areas of need.
32. Size is important, because it is the key to future growth. Bigger
CUs can offer better service quality, through better staffing and
a more businesslike approach. Also, the bigger the CU, the more savings
it can attract, leading in turn to bigger loans, higher income, bigger
reserves, higher dividends and more members. A virtuous circle. The
success of most work-based CUs and the small minority of highly successful
community CUs is due to their ability to maintain this pattern of
33. In contrast, when CUs are too small, there may be constraints
on their ability to grow. Worse, if they have a large common bond,
and their existence inhibits other CUs from operating within that
common bond, this can effectively deprive otherwise eligible people
from access to a CU. Additionally, some CUs may be constrained by
the small size of their common bond and the lack of obvious opportunity
to change it. In any event, small CUs are unlikely to be able to afford
paid staff; and their consequent complete dependence on volunteers
is likely to limit their capacity to develop and grow.
34. With greater size comes the affordability of paid staff and better
office facilities, and hence higher professional managerial standards.
A developed front office, means greater attractiveness and accessibility
to members; and the capacity to offer a more efficient and effective
service. Employment based CUs and the most developed community CUs
already have proper premises, office equipment and paid staff.
35. In some cases local authorities and banks or building societies
have assisted community CUs with premises and office equipment; and
there is no reason this should not continue. But we would stress that
the strategy of moving to front-office premises is a step-change for
the organisation. Unless the office costs can be supported in a sustainable
way over the long term, the office can become a millstone. We would
prefer to emphasise the linkage between CU growth and CU self-sufficiency.
In an ideal world all CUs would aspire to be big and prosperous enough
to be able to afford their own premises and facilities.
36. Larger CUs also mean a greater chance of partnerships with banks
and other financial services providers being commercially attractive
to them, so they can offer a wider range of services. Some CUs already
provide access to bank payment systems for their members' needs, such
as settlement of utilities accounts. And there may be prospects for
CUs to arrange for collection of insurance premiums, through special
deals with insurance providers, which some CUs are now begining to
do. Other more sophisticated products can also be envisaged.
37. Ideally, CUs would not be allowed to start operating without
a membership and prospective savings base large enough to provide
a foundation for growth and sustainability. At present the law allows
a CU to start with 21 people, with or without money. We are told that
there is no prospect of legislative change in this area, but we consider
that some other mechanism would be desirable, to stop the formation
of too many small CUs with insubstantial growth prospects. For example,
the FSA might issue guidance to CU organisers; or a central body maintained
by the CU movement itself (which we consider in the next chapter)
might address the issue through technical advice. The production of
an effective business plan, with membership and financial targets
consistent with sustainability, should come to be recognised as an
essential component of CU start-up
Credit Union regulation
38. We consider that a more effective approach to CU regulation is
both inevitable and desirable. There is considerable scepticism as
to the effectiveness of the current system, not least because non-compliance
seems in many instances to go unchallenged. For example, many small
community CUs appear to be technically insolvent; but they are not
being closed down, as the law permits. If CU growth is to be soundly
based, there needs to be both effective regulation and effective enforcement.
For banks and building societies, the conditions for obtaining and
maintaining a licence, backed up by active supervision by the regulatory
authorities, have had the effect of protecting depositors and ensuring
quality services. There is every reason to suppose that appropriate
regulation for CUs would achieve similar results.
39. Depositor confidence is pivotal to the success of the CU movement.
In the past it has been necessary on occasion to organise rescues
of individual CUs that have become insolvent. These have relied on
goodwill and co-operation; but this cannot provide the same degree
of depositor confidence as a formally constituted share protection
scheme. We readily recognise that one precondition for a share protection
scheme would have to be far greater regulation than that currently
40. The future of CU regulation is a complex subject, relevant to the work of the taskforce because financial institutions will only support organisations which are properly regulated. Stronger regulation is the natural counterpart of a stronger CU movement; but sudden moves might jeopardise the survival of many small community CUs whose current weakness has been noted. Many of them are concerned about both the standards that might be required and the prospect of higher registration fees and other compliance costs.
41. As an accompanying measure for an effective regulatory system,
the taskforce were attracted by the prospect of special arrangements
for those CUs which could not come up to the required standards. The
current legislative framework creates a two-tier structure, through
the dispensation, under Section 11C of the 1979 Act, for CUs that
the Registrar considers to be adequately managed to lend greater amounts
for longer periods. This is a useful precedent for a possible future
42. Under a system of generally stricter regulation, those CUs that
could not achieve the standards might be allowed to continue as some
form of local savings club. There might be migratory provisions, enabling
these local clubs to become CUs on meeting the standard conditions.
Additionally, there could be a transitional period, during which existing
CUs should have time to decide whether they wished to meet the required
regulatory standards, or, perhaps temporarily, to become savings clubs.
The two sorts of institution would have to be clearly differentiated
by title, to avoid any possibility of confusing depositors.
43. There would be, however, difficulty in extending share protection
to the lower tier, in this sort of system. Logically, participation
in a share protection scheme should only be allowed to CUs that are
judged to be well managed, in order to minimise the potential exposure
of the survivor CUs. So the members' savings in local savings clubs
would not be protected. Indeed, one of the steps a savings club would
have to accomplish, to graduate to CU status, would be acceptance
by the share protection scheme.
44. Regulation by the FSA would entail CUs having to pay higher fees
than at present, to cover the costs of regulation. But, for many small
community CUs, this would seem unaffordable. The taskforce's preferred
solution is for the cost of regulating CUs to be subsidised by the
other institutions regulated by the FSA. If all the costs were met
in this way, it is understood that the effect would be an increase
of about one-half of 1 percent in the fees paid by those other institutions.
However, the other institutions might only find this acceptable if
it were subject to performance criteria on success in extending access
to financial services. Another option, if the idea of a two-tier regulatory
structure were to be adopted, might be a two-tier fee structure. A
third would be for the fees payable by CUs to be broadly proportionate
to their assets.
45. The choice of approach to be adopted is dependent on a wide range of factors. In considering the position, we would urge the FSA and the Treasury to keep in mind the desirability of conserving and developing the community credit unions we do have in this country, at least the solvent ones, as an objective in its own right. Effective regulation needs to be sensitive to the principle of proportionality. And it needs to leave room for weaker CUs to grow, rather than threaten them with extermination.
Chapter 4 - How Banks and Building Societies Can Help Achieve
46. At present some banks and building societies assist CUs through:
47. On the whole, this assistance, although no doubt welcome by CUs,
is far from comprehensive or consistent. Not all CUs get the best
possible deal from their bank or building society; and there are areas
of assistance from which CUs might benefit that are outside the normal
range of services a bank or building society would provide, for example
advice on CU development plans or regulatory requirements.
48. Many banks and building societies want to increase the amount
of help they give CUs. They wish to be seen to be exercising social
responsibility; but, at the same time, they see the economic potential
for working with CUs. They can see the scope for partnership, for
example CUs could be a market for the cash management services offered
by banks and possible channels for distribution of other products.
49. In considering what can be done to improve on this situation,
we were struck by the fact that, in countries where the CU movement
has grown substantially and successfully, it has invariably done so
supported by some form of central services organisation (CSO). We
decided to explore that option, with two questions in mind: How might
a CSO help CU development in this country? and How can the banks and
building societies best make a contribution?
Role of a central services organisation
50. Judging by the experience of CU movements overseas, a CSO could
deliver a wide range of functions that would assist the development
of CUs here. These include:
- back office processing, to relieve volunteers of book-keeping and other essentially administrative tasks;
- assistance with business planning and financial management;
- assistance with member financial education and marketing;
- provision of a treasury management facility;
- assistance with product development;
- recycling surpluses from CUs with an excess of savings to those with an excess of borrowers;
- back office processing for bill payments and other transactions services;
- encouragement and support at each development stage.
51. Many of these tasks represent areas where banks and building
societies have expertise and resources that could assist a CSO. Indeed
some of them might be wholly outsourced by a CSO to individual banks
or building societies, or even other organisations. However, at this
stage the range of possible CSO functions is but a wish list. What
happens in practice will depend on how willing the CU movement might
be to see these operations controlled at national level.
52. Any CSO would need to have a close working relationship with
CU trade groups, so as to define roles and responsibilities clearly
and avoid duplication. It will also need to find a way of delivering
seed corn or development funding. At present considerable support
of this nature is provided by local authorities. But there is a strong
case for enabling such funding to be channelled through a CSO, to
ensure best practice in the way it is spent and the technical advice
and assistance that accompanies it.
CSO ownership and control
53. In considering CSO ownership and control, we looked again at
the experience of CU movements overseas. In countries that have strong
CU central support organisations, they are owned and controlled by
the CU movements themselves; they deliver representative and technical
support functions; and they achieve significant economies of scale.
54. In the USA, the Credit Union National Association (CUNA) has
a service group subsidiary, providing financial services and products
to the individual credit unions. In addition, it has a separate central
finance facility - the US Central Credit Union - whose functions include
investment of credit union funds, provision of liquidity, access to
payment systems and net settlement for the movement. Other affiliates
include a mutual insurance company, a charitable foundation, and companies
for data processing, ATM networks, card processing, shared branch
networks and mutual fund management.
55. Other English-speaking countries are characterised by a single,
integrated credit union support system, combining trade association
representation, information and training; collective management of
credit union liquidity and other business services. In all cases these
facilities are owned and controlled by the credit union movement and
enjoy the participation of the overwhelming majority of individual
56. In Canada, each province has a central credit union, providing
investment of funds, liquidity and access to payment systems. They
also serve as provincial trade bodies for CUs and link in with a central
credit union (CUCC) which performs the same functions at national
level. Quebec, however, has a separate structure, which, among other
functions, acts as an industry self-regulator.
57. In Australia, a service corporation for the whole country (CUSCAL)
has branches in each state. It combines trade association functions
and services such as liquidity management, corporate banking and treasury,
insurance, mortgage securitisation, IT, financial management and planning.
58. The Irish League of Credit Unions is the trade association
and sponsoring body for CUs north and south of the border. It also
provides business services such as insurance, sponsors a collective
investment fund and operates a share protection scheme and monitoring
A CSO model for Britain
59. We considered whether a British CSO should be linked in some
way with the public authorities, who would allow it a role in the
regulatory process. This is the case in Quebec and Poland, for example.
But we decided this would be inappropriate for this country. The regulatory
system in financial services is moving away from the model of industry
self-regulation under a central body, in the direction of a single
authority - the FSA - directly responsible for regulation of all sectors.
So, we recommend that the CSO should be independent, as are its equivalents
in the USA, Ireland and Australia.
60. There are a number of options for the structure of the CSO: it
might be a single body for the UK, or have a federal structure, with
sections in Scotland, Wales and each of the English regions. A unitary
structure would be better able to achieve economies of scale in the
services it delivers, so achieving a more effective result than smaller
bodies for any given input of resources. Additionally, a unitary body
is likely to find it easier than a sub-divided one to maintain uniform
service standards; and it might be in a better position to establish
a mechanism for cross-subsidisation of more fragile community CUs
by stronger ones. For these reasons, we recommend that, in the first
place, the CSO should be a single body. If, in the course of time,
its operations and the CU movement as a whole grow sufficiently, there
may be a case for geographical divisions; then a reorganisation might
be in order. But that option does not have to be addressed in detail
now. The important thing in the first instance is to establish a national
entity, following appropriate feasibility work and piloting.
61. The relationship between a CSO and existing local bodies - the
credit union development agencies - needs to be addressed carefully,
to ensure harmony. The primary role of these agencies is the grass-roots
organising and development of CUs at local or regional level. On the
other hand, the role of the CSO will be to provide back office support
and expertise on a national level, in support of CU development. These
roles are completely compatible but it would be difficult for local
CU development agencies to be absorbed into the CSO structure. They
are local government funded organisations. Some are directly responsible
to the elected authorities in each city, county or district. Others
are separate legal entities with their own board of directors. Either
way, they should not be simultaneously under the control of another
body, such as the CSO.
62. The CSO will need to be essentially customer focussed, to serve
the CU movement. This means ensuring that it has links with appropriate
stakeholders. The onus will be on the CSO to position itself as an
open and attractive partner for the movement. It will have an important
promotional task, to ensure that the existing CU development agencies
recognise the value of the inputs it can make. It will also need to
encourage local authorities to divert at least some of the financial
resources they are currently devoting to credit union development
locally, through the CSO, to the extent their powers permit. This
aspect is considered further below.
63. Any central development body needs to be under the ownership
and control of the credit union movement. There is no question of
banks and building societies (or local authorities for that matter)
either owning or taking charge of the CSO. The most suitable structure
for the CSO could be a company limited by guarantee, to be run on
a non-profit basis. The majority of the board should come from the
credit union movement, although funders should be represented.
64. Whilst ABCUL represents the large majority of CUs in Britain,
there are significant sections of the movement with affinities elsewhere.
We consider it highly desirable for the CSO to be of value to all
sections of the movement. To this end, the CSO will need to engage
actively and market its services to all eligible CUs. It should also
have as a central objective the promotion of access to CUs for the
65. The CSO need not in itself be a large organisation. It could,
for example, operate by contracting with banks, building societies
or other organisations, who could supply appropriate expertise and
other assistance. So its initial capital needs might be relatively
modest. We envisage that banks and building societies might make contributions,
as might local authorities. The involvement of the latter will be
extremely important for the success of the CSO, not least because
their credit union development agencies will need to be able to draw
on it for technical assistance and advice.
66. Finance on a fairly substantial scale would be required, were the CSO to provide some of the capital for CU development. We envisage an arrangement whereby some of the money for this purpose would come from the public sector. For example, funds from the EU and local authorities' regeneration budgets could be used to purchase from the CSO the necessary services. Naturally, each local authority would wish to ensure that its contribution is spent in its territory. Similarly if the new regional development authorities get involved.
67. We envisage that the material contribution of banks and building societies to the work of a CSO might be through several channels:
- initial capital, to enable the establishment of the organisation itself;
- material gifts, such as premises or office equipment;
- secondment of staff with appropriate expertise;
- contracts for provision of services that the CSO decides to outsource.
68. Attracting contributions from banks, building societies or other private sector sources would be assisted if CSO financing were channelled through a charitable organisation (for example a trust or company limited by guarantee) to be established by the CU movement specifically for this purpose.
69. CUs can and should make a significant contribution to the promotion
of wider access to financial services for less well-off sections of
society. But to do this, the movement as a whole needs to grow - and
CUs serving deprived communities must be central to that growth. The
establishment of a CSO could be of considerable assistance in this
task, providing it gets the support of all parts of the CU movement,
and providing it can dovetail with existing CU organisations and development
agencies' needs and plans. Through the medium of the CSO, banks and
building societies can play a full part, so helping build up CUs as
complementary institutions in the financial services sector.
Annex: Taskforce Membership
Fred Goodwin (Chair) Deputy Group Chief Executive, Royal Bank of Scotland
Andrew Blessley - Director of Marketing and Distribution, NatWest Bank
Pat Conaty - Housing Investment Consultant, Aston Reinvestment Trust
Ray Donnelly - Lecturer, Heriot-Watt University School of Management
Mark Donovan - Local Government Association adviser (co-opted October 1998)
Rose Dorman - Chair, Dalmuir Credit Union
Gillian Ford - Head of Corporate Affairs, Clydesdale Bank
Gerald Gregory - Director of Marketing and Mutuality, Britannia Building Society
Roger Hollick - Chief Executive, Derbyshire Building Society
Gary Marsh - Head of Business Development and Planning, Halifax plc
Geoff Rutland - Head of Financial Institutions, Midland Bank
Christopher Smith - Group Public Affairs Manager, Coop Bank
Ralph Swoboda - Chair of the Management Committee, Association of
British Credit Unions (ABCUL)
David Alexander - Head of Banking Services Branch, HM Treasury
Jeremy Jones - Head of Banking and Mutuals Supervision Branch, HM Treasury
Graham Burbage - Mutuals Branch, HM Treasury
Marion Desborough - Banking Services Branch, HM Treasury
John Laydon - Head of Public Affairs, Royal Bank of Scotland
The original taskforce membership also included
Rosalind Gilmore CB - former Chief Registrar of Friendly Societies,
who resigned in October 1998; and Paul Duffin, General Manager Banking
and Savings, Halifax plc, who resigned in December 1998 and was replaced
by Gary Marsh
1. Loans to members comprise about 80 percent of CU assets, most of the remainder being cash and investments.
2. 1997-98 figures
3. Credit Unions in Britain: Donelly R and Haggett A (Plunkett Foundation 1997) and
Towards sustainable credit union development - a research project (ABCUL 1999)
4. The Registry has pointed out that it has been prepared to permit overlapping common bonds since 1993. But where there were serious doubts about the viability of a new credit union because of overlap, the Registry would discuss this with the applicants.