Credit unions to come in from the cold
An overhaul of legislation should offer more people the chance to avoid high-cost payday loans
Sunday 08 January 2012
There is probably one within walking distance of your home. Your friends and relatives could have money deposited with one. But it's one of the financial services industries best kept secrets. What is it? The local credit union.
Credit unions have been around since the early 1980s and there are hundreds across the UK. Some are one man and his dog operations, others are comparable to small building societies with strong local roots. But with close to a million members across the UK the credit union movement is not to be sniffed at.
Unions are in effect financial co-operatives, akin to a building or friendly society, where members' deposits are lent to other members at reasonable interest rates.
From tomorrow, a radical overhaul of the legislation governing credit unions comes into force, which will allow them to compete for business on a more level playing field with the banks and building societies.
"The rules governing our industry have always been quite restrictive. For instance, unions only took people and business from there own strict catchment area, which restricted the number of potential customers and was a real disincentive for businesses with offices in different locations," says Mark Lyonett, the chief executive of the Association of British Credit Unions.
Credit unions were also barred from paying interest on savings. Instead, they would get to the end of a financial year and declare a dividend – or not – for members with money on deposit.
"From Monday, credit unions will be able to promise a rate of return to savers in advance," says Mr Lyonett. "This will mean people can be sure of what they will get rather than having to wait for a dividend to be decided. This should help attract more sophisticated savers and we hope that some rates will be competitive. For instance, the Glasgow credit union was able to pay a dividend of 3.25 per cent last year. That compares very favourably with the average rate of return on a bank or building society deposit account – reckoned to be 0.7 per cent by Moneyfacts."
What's more, it seems many credit unions are moving into personal banking with 30 offering current accounts. Some of the largest institutions are even venturing into home loans.
But, as with all parts of the financial services industry these have been a very difficult past few years for credit unions. Figures from the Financial Services Compensation Scheme – which guarantees deposits when financial institutions go bust – shows that since 2007, the start of the credit crunch, 38 unions have gone to the wall. Going back to 2001, the FSCS has dealt with more than 60 credit unions, compensating more than 33,000 members close to £6m:
"There are more than 900 credit unions across the UK, so the percentage the FSCS deals with is relatively small. Credit unions normally fail because of over lending, loan repayments not coming in leading to deficits and sometimes poor management," an FSCS spokesman says.
He added that the overhaul of the industry should help ease this situation: "The changes are likely to help credit unions that are struggling as the legislation will allow them to provide services to different groups of people within one community. Currently all members must have something in common, so credit unions may be able to merge in a way that they haven't in the past." The last recorded failure of a credit union, though was last September, but crucially deposits up to £85,000 are protected by the FSCS.
Philip Pearson, a partner at Hampshire-based advice firm P&P Invest, who last year saw his local union, the Havant Area Savers, collapse, thinks that credit unions shouldn't be allowed to attempt to grow out of what looks like acute industry-wide problems.
"These are aimed at the less sophisticated and often members don't do their financial homework when seeking loans. There is a lack of transparency in the industry. It seems antiquated and frankly amateurish. If I was to advise anyone who wants a simple, easy to understand account I would point them to Post Office savings or the Co-operative bank rather than a credit union," Mr Pearson adds.
In response, Mr Lyonett said that the failure rate looks high relative to the banking sector because "the Government stepped in to save the banks and building societies. Without this aid we would have seen substantial failures. The credit union industry enjoyed no such protection."
And, according to Sarah Pennells the founder of financial advice site Savvywoman.co.uk, the financial position of unions has improved. "Confidence was shaken, but the rules were tightened up around 18 months ago so unions have to have more capital to operate."
The ethical core of the credit union model appeals to many savers, according to Una Farrell from the debt charity the Consumer Credit Counselling Service. "The idea is to get people into the savings habit while offering access to reasonably priced loans. Credit unions can act as a real antidote to the banks and high-cost credit providers, such as payday loan firms." Housing charity Shelter said last week that up to a million people have taken a payday loan, which can charge an annual interest rate of up to 4,000 per cent, to cover rent or mortgage payments.
In comparison, credit unions do seem to offer much better value. "Unions can make short-term loans of say three months and interest is capped at 26.8 per cent. This is a lot cheaper than payday loans and we find that three months is enough time for people to sort out their finances," Mr Lyonett says.
Ms Pennells agrees: "Credit unions have a more important role to play than ever, especially as an increasing number of people think there's no other option than a payday loan."
But, public knowledge of credit unions is very limited. Maybe with tomorrow's changes the secret will out.
Jacqueline Currie, 30 and Grant Burns, 37
Dental nurse and firefighter
The couple from Glasgow wanted to get married, but also to secure a mortgage for their first home.
After approaching several high street mortgage lenders, they almost gave up. "It was a difficult decision to have to make – a wedding or a house, says Jacqueline. "We could only save enough for one without overstretching ourselves, but luckily we have good savings accounts with Glasgow Credit Union, which really helped us."
They secured a mortgage with the credit union and are now saving to get married. "We just moved into our first home together and are now focused on saving for our wedding," says Jacqueline. "It's nice to know we'll have a lovely home to return to after our honeymoon."
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