Co-operatives and Mutuality

Part of Backbench Business – in Westminster Hall at 2:57 pm on 30th June 2011.

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Photo of Damian Hinds Damian Hinds Conservative, East Hampshire 2:57 pm, 30th June 2011

It is a pleasure to serve under your chairmanship, Mr Amess. I congratulate the hon. Members for West Bromwich West (Mr Bailey) and for Islwyn (Chris Evans) on securing this important and timely debate, which coincides with co-operatives fortnight. I will talk about financial mutuals, particularly credit unions. This is a promising time for financial mutuals, in the wake of the banking crisis and against the backdrop of the big society agenda and the emphasis on debt affordability at all levels.

Financial mutuals remain large, in spite of what has happened over the past couple of decades, and still serve one in three of the population through building societies, mutual insurers and friendly societies, co-operative financial services and credit unions. Credit unions, sadly, come at the bottom of that list, because it is ordered by number of members or customers or by assets under management. If the list were ordered by number of individual institutions, credit unions would come at the top. There are 48 building societies in the UK, with more than £300 billion in assets. The number of credit unions is about 10 times higher, at 426, but they hold assets of less than £1 billion.

Nevertheless, despite their relatively small size, credit unions in this country have been growing rapidly. Over the past 20 years, from 1990 to 2010, the number of members has grown from 54,000 to 800,000 and assets from £17 million to £750 million. However, there is an awfully long way to go. Compared to other countries such as the United States, Ireland, Australia and elsewhere, the penetration of credit unions among the UK population is small indeed. I see that as an opportunity rather than a problem.

Credit unions are traditionally mutuals owned by their members, who are savers and shareholders, and managed or overseen by a board of directors elected on the traditional one-member, one-vote basis. Critically, the interest rate at which they can lend is capped. It is about the only part of the financial sector that has such a cap. Historically, it was 12.7%, but it is now 27%. That still means, however, that anybody borrowing from a credit union knows that they are getting their loan at a reasonable rate. It is very important, because the market in which they operate features many other operators that charge a good deal more.

Payday lenders are a part of the financial market that Stella Creasy might mention later. They represent an area of growth in the market and have received a lot of attention, but there are plenty of others. Home credits, for example, are a much larger part of the sub-prime market, have been around in this country for much longer and serve many more customers. Other parts of the market may not appear to have the same sky-high rates of interest, but they end up being just as bad a deal in terms of their overall charging structure. I am thinking in particular of some rent-to-own operators.

There are some brilliant opportunities for credit unions at the moment, and some strong and encouraging news from the Government, particularly the £73 million that they are making available in the modernisation fund for credit unions. Many areas of modernisation need to be looked at, but I think that what the sector finds most exciting is the development of the back-office platform and the potential to interface with the Post Office. That opens huge opportunities to bring credit union services to a much larger part of the population and for them to be much more visible in the marketplace.

Another critical piece of the jigsaw is the legislative reform order, for which the credit union sector has been waiting for some time. The issue has straddled the change in Government and we hope that it can now progress with great speed. It will enable critical changes in the sector to facilitate its further development. First, it will soften the common bond requirement—which relates to where someone lives or works, who they work for, or which organisation they are a member of—to become a member of a credit union. Secondly, it will enable credit unions to offer services not just to individuals, as is the case at present, but to organisations, particularly charities and voluntary organisations, although it might also apply to firms. Thirdly, it will enable credit unions to offer a fixed rate of interest to savers, if they wish. That will make them more attractive and enable them to provide a better range of financial services.

There are other issues. The sector looks to Government for a proportionate approach to regulation. They are, relatively speaking, only little and have not had the problems that the big banks had during the crisis. They want an appropriate level of regulation that matches their size and role.

There are also new opportunities, such as the big society bank, which is a wholesale bank that needs organisations on the ground to administer its funds. I am sure that community development finance institutions will play a big part in that, as will credit unions, in a post-legislative reform order world. Not all credit unions will find that appropriate, but some of them may. Credit unions could also play a role with the son or daughter of the social fund, in its new, evolved form. Local authorities will be more responsible for elements of that. They do not have a long history of dealing with crisis loans and so on, but their local credit unions could help them in that regard.

Looking to the future, I think there will be some blurring of the exact lines between credit unions, CDFIs, social lenders and microfinance institutions. It would be good to see the development of more microfinance institutions of one sort or another in this country, as well as internationally. Technology may also help us to broaden the boundaries of credit unions and to bring more people in, particularly as savers, which will allow them to expand their business. That is also applicable to microfinance and, eventually, to retail investors in social impact bonds.

Two key developments will enable that. They might involve a role for Government, but they might not—they might come from entirely different parts of the social finance sector. The first is the development of a social ISA, which I wrote about some years ago in a Bow Group pamphlet on credit unions and increasing the capitalisation available for them. Others have written about similar things in relation to all sorts of other projects. It sounds very much like an idea whose time has now come, to enable ordinary retail investors to put their money behind socially worthwhile projects and accept a slightly lower financial return as a result.