Credit Unions of the Future Taskforce Report
H M Treasury November 1999
Chapter 1: Credit Union Development in Context
Chapter 2: The Credit Union Movement in Britain Today
Chapter 3: Vision of the Credit Union Movement of the Future
Chapter 4: How Banks and Building Societies Can Help Achieve the Vision
Introduction
The Credit Unions Taskforce was established by the Treasury in July 1998, with a remit to explore ways in which banks and building societies can work more closely with credit unions (CUs) to increase their effectiveness; look at ways to widen the range of services that are provided to CU customers; and encourage the continued expansion of the movement.
The Treasury asked us to draw up an initial report by about the turn of the year, and finish by the summer, so the results could feed through into its wider policy development work on access to financial services.
This is the final report on our work.
Chapter 1 - Credit Union Development in Context
1. Credit unions (CUs) are co-operative organisations which encourage their members to save regularly and enable them to borrow at lower interest rates than those normally charged by other financial institutions. Whilst the movement embraces people from a broad spectrum of society, where they are successful, CUs are part of the solution to the problem of social exclusion, of which financial exclusion is both a cause and a consequence.
2. CUs are registered and regulated by the Registry of Friendly Societies under the Industrial and Provident Societies Acts 1965 to 1968 and the Credit Unions Act 1979. Members save by subscribing for non-transferable shares deposited with the credit union; and may take out loans, at a maximum rate of interest of 1% per month.
3. The objects of credit unions, as defined by the 1979 Act, are:
- the promotion of thrift among the members by the accumulation of savings;
- the creation of sources of credit for the benefit of the members at a fair and reasonable rate of interest;
- the use and control of the members' savings for their mutual benefit; and
- the training and education of the members in the wise use of money and in the management of their financial affairs.
4. Membership is restricted to those who meet the qualification - the common bond - for a particular credit union. This may be one of four main types: residence in a locality; being a member of, or having an association with, an organisation; working for a common employer or in a locality; and following a particular occupation. The common bond is unique to CUs and is based on the simple idea that members will know each other and will be able to exert moral pressure to ensure that loans are repaid. Its effectiveness is demonstrated by bad debts being, on average, less than 1% of loans. Most credit unions are largely run by unpaid volunteers, providing services to people who may have no dealings with the commercial banking sector.
5. Each share in a credit union is fixed by statute at £1. The maximum saving permitted is £5,000 or 1½% of the total shareholding of a credit union, whichever is the greater. A credit union may accept deposits only as subscription for its shares. It may pay a dividend on shares, not exceeding 8%, after all expenses and taxes have been accounted for. The normal range of dividend payments among employment-based CUs is between 3 and 5%. Community CUs typically pay dividends in the range 1-3%, once established; many pay no dividend at all for the first three years, or indeed ever.
6. In most credit unions loans may be made to members up to a maximum of £5,000 in excess of their share capital. So a member with the maximum of 5,000 shares may borrow up to £10,000. Loans are repayable over two years if unsecured, and over five if secured. Most loans are under £1000. Interest charged on loans may not exceed 1% per month on the reducing balance (12.68% APR maximum). Credit unions may borrow short term from other credit unions and from authorised banks, and may hold their surplus on deposit subject to restrictions. (Broadly they are restricted to current and deposit accounts with building societies and banks). Credit unions may apply to the Registrar for a certificate under Section 11C of the 1979 Act which allows them to lend greater amounts to individual members over a longer period. The Registrar needs to be satisfied that there are appropriate policy manuals documenting the systems, and committees in place to manage the functions - in particular loans and internal audit/supervisory committees.
Credit unions and financial exclusion
7. Credit unions help combat financial exclusion because they:
- are particularly open to low income groups;
- instill in their members a sense of self-reliance, and an understanding of the virtues of thrift;
- provide low cost credit.
8. The wider aspects of access to financial services are being considered by one of the policy action teams in the Treasury, set up as a result of the Social Exclusion Unit's September 1998 report Bringing Britain together: a strategy for neighbourhood renewal. The central concern in that wider debate is that, in about 10 percent of households, there is no-one with a bank account. This affects about 2½ to 3½ million adults, virtually all outside the main employment field: OAPs, young people who have yet to get a job, adult unemployed, sick, disabled, or lone parent women not in work or working part-time. Their reasons for not using banks vary. Some (a minority) have been refused accounts or had them closed down. The majority have chosen not to apply for accounts, sometimes because they think they might be turned down, more often because they prefer managing their household finances in cash.
9. People without bank accounts are often disadvantaged when it comes to settling their bills, because they cannot obtain the discounts offered for use of direct debit; and they may incur a charge if they pay in cash at the Post Office, or have higher bills if they use prepayment meters. If they receive a cheque they may have to pay a charge to cash it; and if they have to issue a cheque, they have to "buy" it from a friend or relation who has an account. Without a bank account and the attendant track record, they will have some difficulty obtaining credit cards or bank personal loans; and they may turn to moneylenders who charge high APRs instead. They are also less likely to receive information about other financial services products, which bank customers get from branches or by mail - often the main delivery channel for messages from banks to the public.
10. It is clear, therefore, that financial exclusion is an important aspect of social exclusion. In turn, access to a bank account and access to credit are two aspects of financial exclusion. While banks can help to resolve the former by providing basic bank accounts, there are currently two groups which do not have access to credit. The first may be judged not credit-worthy by any financial institution, including credit unions. The second might be able to repay loans, but banks may find it difficult to confirm their credit-worthiness. It is this group to which credit unions can lend with greater confidence because the individuals are members of a common bond.
11. In short, CUs can make a substantial difference, because they can give access to affordable credit to people who for one reason or another do not want bank accounts, including those who want to avoid bank charges; and to those who cannot get credit from mainstream sources because of their low income or impaired credit history. But, to make significant inroads into this target group would require considerable membership growth.
12. Assuming, for purely illustrative purposes, that among the "unbanked" are 1 million people who would wish to borrow, but cannot get bank credit. To serve their needs, credit union membership may need to be around 2 million - compared with the current total of under ¼ million. This is because there would need to be members who deposit funds, to enable credit unions to lend; and, as a conservative assumption, there would need to be one depositor for each lender. Were there a desire to achieve this level of development, these numbers imply there would need to be around 500 new credit unions, with an average of 3,500 members each, or a smaller number of even larger credit unions.
13. While the precise number of people wishing access to credit (and eligible for it) is not known, the assumption of 1 million people demonstrates that the implied level of growth represents a formidable challenge, even over an extended time-scale. Moreover, the capacity of CUs to provide banking services other than provision of credit and savings facilities, such as cheque handling and bill payment, let alone introduction to other financial services, is still in its infancy.
14. We feel strongly that the credit union movement can make a positive contribution to increased access to financial services for low income groups, especially in deprived areas. For this to happen, a crucial first step is to recognise that CUs are not some kind of poor man's bank - a label which stigmatises them and which has impeded their effectiveness. Instead, CUs should be developed as broader-based community institutions with a wider appeal, to complement the established banking sector, so as to attract savings from those who have money, thereby mobilising the funds needed for loans to those in need of affordable credit but unable to get it. The challenge is to find ways to encourage the growth of such CUs.
15. This is not simply a question of finding ways of assisting community CUs, underdeveloped as they often are, to the exclusion of others. Employment-based CUs can (and, in our experience, frequently do) include some of the lowest paid people in the workforce; and they can in principle reach out into the community by changing their common bond to include those living in the area, although the takeup of this option so far has been limited. We would emphasise that the most successful CUs include a high proportion of people in work. Indeed, long-term sustainability will only be achievable by community credit unions if they have an appropriate mix of people in work, providing the savings needed to ensure adequate services to less well-off people.
The taskforce's approach
16. The starting point was to consider the current state of the CU movement prior to developing a vision of its future. Then we set out to define how banks and building societies might help achieve that vision. Accordingly, this report covers:
- the state of development of the credit union movement today (paragraphs 17 to 24);
- the changing legal framework (paragraphs 25 to 28);
- the elements of a growth strategy, to deliver our vision of a future CU movement (paragraphs 29 to 45);
- how banks and building societies can help in this process, through the medium of a central services organisation (paragraphs 46 to 69).
Chapter 2 - The Credit Union Movement in Britain Today
17. CUs are relatively recent arrivals on the financial services scene in this country. The movement began in Germany in the middle of the last century. There were also CUs started in Italy at about the same time or soon after. The first CU in Canada started in 1900; and its founder was also responsible for establishing the first CU in the USA, in 1909. By 1978 there were 44,373 active CUs round the world, but very few of them were British, although the idea had spread to the Caribbean, Africa, Asia and Ireland. It was in the 1970s that CUs in this country began to grow. By the time the Credit Union Act was passed in 1979, there were 59 CUs affiliated to the Credit Union League of Great Britain, later to become the Association of British Credit Unions Ltd (ABCUL).
18. Today there are nearly 800 CUs in the UK. They have been growing rapidly recently - about 50 new credit unions are established each year, with an annual increase in membership and assets of about 20%. The movement is strongest in the North of England, Scotland and Northern Ireland. Our report concentrates on the movement in Great Britain, as the CUs in Northern Ireland nearly all belong to the Irish League of Credit Unions, rather than the mainland associations, and have followed a different development path. In mid-1999, the overall picture was as follows:
| No. of credit unions | Members 000's |
Assets(1) £m |
|
| England & Wales | 524 | 130 | 69 |
| Scotland | 135 | 95 | 55 |
| Great Britain total | 659 | 225 | 124 |
| N. Ireland (2) | 174 | 267 | 321 |
| UK Total | 833 | 492 | 445 |
Sources: Registry of Friendly Societies(GB), Registry of Friendly Societies(NI)
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 |
| USA | 30 |
| Australia | 20 |
| Canada | 16 |
| UK | 1 |
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 level.
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 unions.
(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 development.
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 beginning 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 in place.
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 two-tier structure.
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 the vision
46. At present some banks and building societies assist CUs through:
- access to payments systems;
- free or low cost banking;
- favourable interest rates on credit union deposits;
- gifts of premises or equipment;
- staff training;
- bank staff secondments;
- advice and guidance; and
- research.
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 credit unions.
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 programme.
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 unbanked.
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.
Conclusions
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)
Secretariat
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.