Financial protection for UK credit unions

This article by Andrew Bibby, in a slightly different form, was first published in the Observer, 2002

The savings of 300,000 credit union members in Britain will for the first time be protected against loss, with the extension on July 2nd 2002 of the Financial Services Compensation Scheme to credit unions. The move will mean that money deposited with these member-owned financial co-operatives will be as safe as savings left in banks and building societies.

Britain’s credit unions have been warmly praised in recent years by central and local government for their work in combating financial exclusion but nevertheless they have struggled in many areas to grow to a viable size. There have also been some high-profile failures, including a financial crisis at the 2,500-strong Camberwell credit union in south London in 2000-1 which was resolved with difficulty, only after other credit unions stepped in with support.

For many in the credit union movement, the new compensation scheme represents a long-cherished step towards consolidating the credibility of credit unions. Under the scheme rules, the first £2000 of savings is 100% guaranteed, with 90% payable for the next £31,000 of savings.

This is, however, only one part of the story. At the same time the Financial Services Authority is introducing a much stricter regulatory regime for credit unions, including a solvency test and a minimum liquidity ratio between loans and savings. Credit unions will also be required to operate effective complaints schemes for members, who will be able to take problems to the Financial Ombudsman Scheme. In principle, most credit unions warmly welcome these new requirements. In practice, some of the smaller community-based credit unions, particularly those run entirely by volunteers, will almost certainly struggle to comply with the rules.

The changes represent therefore a key moment of transition for Britain’s 700 credit unions. "What we’re seeing is a restructuring of the movement. There are a lot of mergers going on," says Shaun Spiers, chief executive of ABCUL (the Association of British Credit Unions Ltd). He talks of the need for credit unions to become more professional, to move from being volunteer-led to being managed by professional staff, and to become less dependent on public grants for their survival. "What we’ll see are fewer, but stronger, credit unions," he says.

This view may be controversial with those who argue that the direct democratic control which members exercise is the key to the difference between credit unions and conventional financial institutions. However the process Shaun Spiers describes is already underway. In Leeds, for example, a strong credit union for employees of the local authority has recently absorbed a number of smaller community credit unions in the city. It is the same story in Telford, where the FAIRshare credit union was established two years ago from a merger of an employee credit union and two small credit unions in the town.

FAIRshare, indeed, represents the new face of the credit union movement. Sally Hall, its head, says that to survive credit unions need to offer a reliable and efficient professional service. Her own organisation has uniform-wearing staff, branches fitted out by professional shop-fitters and a modern on-line IT network, not to mention a mystery shopper who checks up on the levels of service. The formula seems to work: membership has grown from 1200 to 2700 in less than two years, with assets increasing from £0.5m to £1.2m. Significantly, FAIRshare has also negotiated with nine large local employers, so that employees can save directly to their credit union account from their pay packet. Payroll deduction means the credit union benefits from knowing that it will receive a guaranteed £90,000 in income every month.

Nevertheless, despite its size FAIRshare needed public funding of about £80,000 to become established and is still at present partially dependent on grant-funding to meet revenue costs. Financial self-sufficiently is not anticipated until 2004, when the credit union will need to have at least £1.6m out on loan.

Smaller credit unions, particularly those established in inner-city areas and estates with the help of professional development workers, tend to be even more proportionately dependent on external assistance and financial support, and when that support is withdrawn often struggle to survive. Of the 700 registered credit unions, some are effectively moribund and an estimated 10% may be insolvent. The FSA warns that in future new credit unions will not be registered if they are deemed not to have the potential for long-term success.

For ABCUL’s Shaun Spiers, Britain’s credit unions need to broaden their appeal and he points to Ireland, where from small beginnings the credit union movement has become highly professional and successful. What remains unresolved is what all this implies for the future of the ‘common bond’, the feature (such as residence in a single neighbourhood) which by law all members of a single credit union have to share. For large credit unions like those in Leeds and Telford, the original idea of a clearly defined community of interest between members of a credit union has already been stretched almost to the limits. It may not be long before the whole idea of the common bond is called into question.

Perhaps significantly Sally Hall of FAIRshare already talks of ‘customers’, rather than ‘members’. Nevertheless she still argues that credit unions have a distinctive philosophy which separates them from conventional financial institutions: "The underlying ethos is that people are encouraged to borrow wisely and to save regularly," she says.

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