Financial Services and Markets Bill – in a Public Bill Committee at 3:10 pm on 19th October 2022.
Q We will now hear oral evidence from Robin Fieth, chief executive of the Building Societies Association and director of Co-operatives UK, and Robert Kelly, CEO of the Association of British Credit Unions Ltd. For this panel we have until 3.55 pm. Would the witnesses please introduce yourselves for the record?
My name is Robin Fieth and I am chief executive of the Building Societies Association. We represent the UK’s 43 mutual building societies and seven of the large credit unions.
Good afternoon, everyone. My name is Robert Kelly and I am CEO of the Association of British Credit Unions Ltd. We represent 157 credit unions across Great Britain—roughly 62% of the market.
Q Thank you, Robin and Robert. This is a general question. The Bill’s objective is to bring the rulebook up to date nearly quarter of a century after the last piece of ab initio financial services legislation, the Financial Services and Markets Act 2000. There is obviously a lot in this Bill; I invite you to comment in general on how you think it achieves the objective of creating a competitive, well-regulated and vibrant sector. The Government are very supportive of a diverse range of financial services providers, which includes both of you, representing building societies, credit unions and co-operatives, and I am personally very supportive of that.
I would like to ask questions in both directions, if I may. First, does this legislation go far enough to meet your objectives? When I was in front of the Treasury Committee a week ago, I was challenged on the fact that it might give a greater ability to sell a broader range of products. That question came specifically in the context of co-operatives and credit unions. Do you have the necessary expertise and the regulatory rulebook to do that without prejudicing consumers? Sorry, there is a lot there, but hopefully that gives you something to open up with, and we will then hand the questioning to colleagues.
Shall I go first? We will try not to talk over each other. Thank you very much for the question, Minister, and thank you for inviting us this afternoon. From the very start we have been a strong supporter of the financial services framework review, and particularly of adherence to the original FSMA principles of setting a framework in legislation and delegating the vast majority of the detailed work to regulators.
On the first part of your question, the Bill largely achieves that objective. We can always ask for more. The areas in the framework side where we may be looking for further advancement are around, for example, the terms of reference or the operation of the Financial Ombudsman Service, as the third part of the regulatory framework. Within that, we have been very strong supporters of the PRA’s “strong and simple” initiative, which is a manifest example of how we move away from the single banking rulebook—the EU body of legislation —in a way that fosters real diversity in financial services and allows us to have a far more proportionate approach to the smaller, simpler, UK-based domestic organisations, like building societies and smaller banks.
On the third part of your question on enabling services, I would observe that the UK’s traditional approach to credit union legislation has been very much on a permissive basis: credit unions are permitted by legislation and regulation to do specific things and specifically not to do anything else. Perhaps the question that the Committee might like to consider more is the extent to which we can empower credit unions better to achieve their service to society and the communities that they are there to service, recognising that there is a regulator to make sure they do not stray too far. Those are my introductory comments.
Thank you for the opportunity to contribute today. I echo Robin’s comments in the round, in terms of the general objectives of the Bill. I welcome the opportunity to see, in a post-Brexit world for the United Kingdom, that there is a movement towards regulation and a legislative framework that is proportionate and delivers excellent consumer outcomes. That is certainly something we would echo every day of the week, so it is to be welcomed.
In terms of whether the legislation goes far enough, to echo Robin’s comments again, we have engaged on additional items with HM Treasury officials and regulators in recent times. We respect the fact that we are on a journey and that we have to ensure that a proportionality clause is applied. To go back to the Minister’s comment about whether we have all the expertise and whether the Bill goes far enough, I think those two things go hand in hand. We need to make sure that we continue to showcase the ability of the credit union sector to be a genuine competitor within financial services, that our mutuality and co-operative values shine through, and that we deliver excellent consumer member outcomes.
There are a couple of particular items that we referenced in recent conversations. We have to remember that the legislative reform agenda for the Credit Unions Act 1979 has been going on for a long time. We respect the fact that this is the most significant change since the Act itself in 1979. We are on an innovation journey and we firmly respect the fact that we need to continue to engage with all stakeholders, so we are delighted to see the possibility of additional new products and services being available to the credit unions that want to take advantage of the opportunity to provide them. Hopefully, credit unions can garner a wider share of financial wallets across households throughout the country and make sure that we serve more than the 2 million people we currently serve—that that number continues to increase.
There are a couple of examples that we have talked about. We believe there is a need for a future conversation around the common bond field of membership reform—something we have flagged to HMT already—and also around the possibility of innovation for credit union service organisations. That model is so prominent in and brings many, many advantages to the North American credit union system.
Lastly, in terms of the question about expertise, on the basis that we have had a long-standing conversation around legislative reform, we have been proactive in the background to make sure that we talk to our member credit unions, in conjunction with the BSA and other trade bodies and interested parties, to make sure we have the relevant conversation behind the scenes. We are preparing the ground for credit unions to understand that with the opportunity for new products and services come additional requirements around good consumer outcomes, compliance requirements and in-house training and development. That is something we have been doing in tandem with the legislative reform agenda.
I am firmly confident that we will be able to hit the ground running quickly as and when the legislation goes through both Houses, and that we have the ability then to expand our product and service range and make sure we can serve many more people with ethical finance across the UK.
Q Compared with the US or the rest of Europe, in the UK we lack mutually and co-operatively-owned regional banks. You have touched on this already, Robin, but I want to hear a bit more about why you think that is. What is the role of regulators when it comes to that lack of access?
The first thing is to look at the tradition—the tradition of the UK has been that our regional mutual financial institutions have either been insurers or building societies, traditionally, or, in the last 30 or 40 years, credit unions—compared with the United States or large parts of Europe, where there is a very long tradition of mutually-owned community banks, co-operative banks, lifelines and so forth. Our tradition is very different. Apart from the Co-operative bank, we have never had a large, mutual, fully general-purpose bank. Nationwide is a full retail bank, but it does not do business lending, for example. We have never had that tradition.
As some of you will know, there are a number of small community banks in the mobilisation phase or coming to mobilisation phase. On the second part of your question, the Bank of England’s new banks team has been very good at helping challenger banks to get through the process and start up, and we have seen so many start up. I am not sure that they have the same experience and expertise in respect of what the mutual model looks like and why it is different. If you talk to any challenger bank, they will say it was much more difficult to get through mobilisation than it should be. If you talk to the community banks, they say it is very difficult to get through mobilisation. There are at least three that we are working with on the side, if you like, that are going through that process.
The real challenge, where perhaps there is a role for Government, is in creating the forms of capital that mutual start-ups can follow, because they cannot be venture-capital backed, so you need some form of mutual capital. We have suggested to both the main parties, for example, that whichever version of the British Business Bank you want, it could have a mandate for part of its capital being mutual capital.
Robin has covered the vast majority of the salient points, and we would agree with his comments. In terms of taking it maybe a step further or down in respect of the community banking model, as Robin mentioned there is a development agenda in a few areas of the country. There is certainly space for innovation and competition in SME lending and around transactional activity and transactional accounts and making sure there is something different from a competition perspective —maybe where the bigger banks are not necessarily in those spaces or where there is perhaps an opportunity for some more partnership and co-operation. We have talked to some of the community banking models about what space they and the credit union sector could co-exist in. We acknowledge that credit unions are already able to do corporate lending and SME lending, and some have done so. I think around 20 or 21 credit unions across the country have taken advantage of that. The ongoing PRA consultation on the future supervision and regulation of the credit union sector has some reference to that, in terms of additional checks and balances.
We recognise that there is opportunity for the credit union sector to do more. A big part of the legislative reform package that will ultimately impact credit unions can be described as an enabling factor that allows product and service innovation and development. Alongside the community banking and mutual banking model, the development that we have seen, and all the background that Robin has already mentioned, it should be made clear that we in the credit union sector believe that we can also fill some of that space. If the overall objective is around competitiveness and enabling competition, we should be ready to act, and to respond to the needs of communities and small businesses across the country.
Q Mr Fieth, let me first come to you and the comment that you made previously about the UK not really having a tradition of mutually owned lending banks. Was not the first trustee savings bank set up in Dumfriesshire in 1810? There has been a very long and proud tradition of locally and community-owned banks, which survived for a long time. They were basically wiped out in a series of corporate takeovers in the 1970s and ’80s. Is that not the case?
Whether the term is “corporate takeover” or “demutualisation”, which was very much encouraged by the Government of the day, is a moot point, but you are absolutely right: there is or was a very proud trustee savings bank tradition, and of course it started in the lowlands—well, the borders—of Scotland. Sadly, the last trustee savings bank went into run-off within the last five or six years. That was the Airdrie Savings Bank. It is a tradition that we no longer have. Again, those institutions were not a full service of the kind that the shadow Economic Secretary was talking about. They were not a full service model. They were very much a savings and loans model, largely for retail purposes. That is the tradition we had, yes, but it is now sadly part of our economic history.
Q Thank you. Mr Kelly, a lot of the evidence that we heard earlier today—I do not know how much of it you were able to watch—came from the big institutions, which clearly have a large part of UK exports—a significant part of the UK economy. Could you briefly explain the importance of credit unions, particularly with regard to the promotion of financial inclusion?
Yes, of course; thank you for the question. Credit unions play a unique role in the economic infrastructure of this country. I mentioned that we serve 2 million people, but we have huge aspirations to make sure that that goes much further. After this session, I am joining a call on the cost of living crisis and the impact that the credit union sector is having in different parts of the country. A really good example is Bradford District Credit Union, which is working in tandem with the local authority on a range of products and initiatives that have built financial resilience and financial inclusion in that part of the country. There are many more examples across the UK.
The financial inclusion agenda chimes perfectly with our objectives, our ethics and the co-operation and mutual model that credit unions are built on. The important point to state is that we believe that that work can be accelerated and amplified in a significant way. We can do much more. The phrase that we would use is that we manage to put in place a balanced demographic of membership. The credit union should be seen as a safe and innovative place for any member of society, any consumer, to go to. It goes back to the comment that Robin made on full service. We believe the legislative reform package that is on the table for the credit union sector will allow us to do that. It will allow us to be more competitive, to look at risk-based pricing and to make sure that we are seen as more mainstream—and to serve a wider part of the population. Doing that creates an environment where additional financial inclusion initiatives and objectives are made possible, because we are building sustainability and the strength of balance sheets for credit unions across the country; those things go in tandem.
We have worked closely with a range of Governments over many years to deliver great value, and also financial inclusion objectives, but we need to make sure that there is a balance of products and services, and a balanced demographic that allows us to do much more of that. We have said that in the past, credit unions have unfortunately been seen as the poor person’s bank. We have worked incredibly hard to move away from that area—with, I think, great success. The legislative reform package that is on the table for the credit union sector will allow us to do much more, and it should be seen as very positive.
Q Thank you. You referred to the need to be competitive. When earlier witnesses used that phrase, they often clarified it with reference to overseas businesses or overseas financial services sectors. When you talk about being competitive, who are you competing with? Is there anything in the Bill that helps you to become competitive, or is there anything that could be added that would help?
I will give two examples. Credit unions will have, for the first time, the ability to offer car finance under personal contract purchase or hire purchase—conditional sale activity. We can also be immersed back into the general insurance mediation process. That means that we can diversify our product range. It should mean that we can diversify our income lines, which should result in greater sustainability for the sector. Those are two examples where we were very firmly part of the legislative programme that has been developed for the credit union sector.
On competition, we recognise that we are a small player overall in the financial services landscape, but we can do more, and have huge aspirations. We have that wider product and service range. Investment in technology will allow us to be seen as being more mainstream. A bigger part of the financial wallet for many households across the country could be maintained by the credit union sector. The Bill certainly has its elements there.
We talked about credit union service organisations. It is important that we continue to have that conversation with all relevant stakeholders, look at where in the sector there is innovation in the overall infrastructure, and consider how we can learn from the successes of the model used in North American and other parts of the world. The Bill goes a long way to allowing us to diversify, and to become more competitive and more mainstream. That is to be welcomed. There are certainly follow-on elements that we will undoubtedly talk to officials and regulators about in the weeks and months ahead.
Q According to the Financial Conduct Authority website, in just over the last year, eight credit unions have gone into administration; only one did in the preceding three years. Is there something about the current financial services sector, or about the credit union model, that means there is a systemic problem? Or is it simply that, if we move from having a small number of big players to a large number of small players, inevitably we will lose some of the small players?
We recognise the difficulties in terms of reputational risk, and the challenges that failure brings. We are working tirelessly with our member base. We are a very broad church. Our members have asset sizes from a couple of hundred thousand to well over £220 million, and everything in between. We recognise that failure is difficult and painful. We are working extremely hard behind the scenes collaboratively with the BSA and other interested parties. Credit unions that fail often have a couple of items in common. There tends to be a lack of good governance, and sometimes there is key person risk. Covid has exacerbated some of that, just in terms of volunteer burnout and sustainability challenges, demand for lending and bad debts. We have been impacted by insolvency and mis-selling in many cases as well. We have identified that it can be difficult to maintain a smaller asset range using a volunteer base—not always, but sometimes. We are working tirelessly behind the scenes to make sure that credit unions look at their business plans and numbers on a regular basis, and take the tough decisions.
Let me bring that to life, very quickly. The original development of the fiscal principles was in 2002. In that year, we had 698 credit unions in GB; we are now down to fewer than 250. Most of that reduction in numbers came through consolidation and mergers or acquisitions. Some of it has been failure. We certainly believe that the number will continue to come down. It would be appropriate to find solutions that allow credit unions to come together as part of mergers or acquisitions and maintain services in their local communities.
Q Would both our witnesses support giving the FCA and the PRA an explicit remit to report on how they have considered specific business models—including credit unions, building societies and mutual and co-operative regional banks—to ensure that they are given parity of esteem with other providers? If so, how would that support your sector?
That is a great question; thank you very much. We are already part of the way there with the PRA. It has had a secondary competition objective since the 2014 Act, and it was subsequently enhanced at the BSA’s behest. Every time it consults, it has an obligation and a requirement to determine whether there are specific aspects that disproportionately affect the mutual sector, and that has been welcome. We have seen a real change in the PRA’s approach to the financial mutuals since the financial crisis, and it has been largely positive.
There is a very important question as far as the FCA is concerned. We saw it last year with the proposed demutualisation of LV. It was apparent that the FCA was entirely agnostic on the business model, in terms of their competition objective and the good competition that achieves better customer outcomes on the conduct side. There is certainly a case for the FCA to consider that far more closely. I am always very careful when we talk about conduct outcomes with the FCA because, as a consumer, you should not have a different outcome, but you might experience a different journey. There are some nuances in there. As to how it best achieves that without adding ever more reports and burdens, that is in its annual reports, which are obviously open to examination and scrutiny. In the regulator’s annual reports, it should report back on that; that would be the most straightforward way to achieve that.
Thank you again for the question. I echo Robin’s comments, but I will try not to duplicate them. Credit unions have an ongoing consultation with the PRA on future supervision and the regulatory environment. We have a long track record of working in tandem with the PRA, and there is a move towards making sure that the supervision model is in tandem with the legislative reform agenda, which seems eminently sensible. It also allows us to take cognisance of the fact that there are many more larger, asset-based credit unions than there were five or 10 years ago—we have to factor in whether that comes through consolidation, or just through business growth—which is hugely beneficial for all parties.
In terms of the FCA, obviously the credit union sector is dual-regulated. We have a relationship from the conduct side. It will be interesting to see how that approach develops. Again, I would echo Robin’s view: the FCA has such a broad remit, in terms of the firms that it looks after, and we are always championing the cause of proportionality. Consumer duties are an example of where we have to work in collaboration with all relevant stakeholders and interested parties to make sure that the good consumer outcomes that credit unions provide can be evidenced, and that we can go on that journey. There are live examples of those on both sides of the regulatory environment taking steps to be innovative and to future-proof the business development that we expect to see through this legislative programme. That is to be welcomed, but we are on a journey, and we are not yet at the end.
Order. I am afraid that brings us to the end of the allotted time for this panel. On behalf of the Committee, I thank our witnesses.