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."
Bargain Hunter: Affordable art - suddenly being a collector is just a walk in the park
Phoenix Life: Chance of a refund for overcharged policyholders has risen
Money Insider: Peer-to-peer lenders come into their own as marketplace lending evolves
Has your Premium Bond won the £1million jackpot?
There are 'dark corners' of the investment and pensions industry, says Pension Minister
- 1 End of the licence fee: BBC to back radical overhaul of how it is funded
- 2 Raif Badawi, the Saudi Arabian blogger sentenced to 1,000 lashes, may now face death penalty
- 3 PornHub turns masturbation into energy in bid to save the planet
- 4 Dakota Johnson's 'It's only Isis' Saturday Night Live sketch sparks controversy
- 5 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
New theory could prove how life began and disprove God
This is what it's like to be dead, according to a guy who died for a bit
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Ukip would cut billions from Scottish budget to fund English tax cuts
End of the licence fee: BBC to back radical overhaul of how it is funded
Russia's roadmap for annexing eastern Ukraine 'leaked from Vladimir Putin's office'
iJobs Money & Business
£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...
£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads