Memorandum by the Association of British
Credit Unions Limited
1. The Association of British Credit Unions
Limited ("ABCUL") is pleased to provide this submission
on behalf of its 434 member credit unions in England, Scotland
and Wales. Our member credit unions account for 81 per cent of
the individual members and 85 per cent. of the assets of all credit
unions in the country, and they represent a cross-section of credit
unions of all types and sizes.
2. Credit unions are mutual, self-help, co-operative
financial institutions, registered under the Credit Unions Act
1979. They operate under the simple principle of pooling the savings
of their individual members to provide members with low-cost loans.
Credit unions are governed by unpaid volunteers, elected by their
members on the principle of "one member, one vote."
They are regulated by the Registry of Friendly Societies, and,
since the beginning of this year, on the Registry's behalf by
the Financial Services Authority ("FSA").
3. The purpose of this letter is to propose
two amendments to the Financial Services and Markets Bill ("FSMB")
which are essential to the future growth and success of credit
unions, as discussed more fully below.
4. Background. Government has correctly
recognised that credit unions offer great potential to meet the
financial needs of those millions of Britons who are currently
excluded from affordable and accessible financial services. A
major impediment to credit unions accomplishing this objective
has been the very restrictive limitations on credit union powers
under the Credit Unions Act 1979. For the last year and a half,
ABCUL and other credit union organisations have been united in
seeking major changes to that law.
5. In her preface to a Treasury Consultation
Document on Amendments to the Credit Unions Act published last
November, the Economic Secretary to the Treasury stated that "Government
supports fully [credit unions'] ethos of self help and thrift
and is determined to encourage the sector." Last year, 206
Members of the House of Commons signed an Early Day Motion supporting
the changes in the law that are being sought by ABCUL.
6. The de-regulation proposals published by
Treasury last November are responsive to many of our goals. However,
we are informed that two important objectives can only be addressed
through primary legislation. Accordingly, we are submitting this
letter to propose two specific amendments to the FSMB:
7. Our first proposal is to amend Section
2(3) of the FSMB to add an additional consideration which FSA
must have regard to in discharging its functions: namely, the
desirability of maintaining corporate diversity among enterprises
providing financial services, in order to widen consumer choice.
8. FSA has been given the unprecedented challenge
of regulating all financial services providers in this country.
The entities coming under its authority range from some of the
largest financial institutions in the world, with thousands of
employees and billions in assets, to small credit unions with
only a few hundred members, operated entirely by unpaid volunteers.
FSA supervision must therefore accommodate a diverse range of
organisational structures: sole traders, not-for-profit credit
unions and other mutuals, as well as stock companies, both large
9. This tremendous diversity represents a great
strength of the financial services marketplace in Britain, and
it must not be lost as a result of consolidating financial supervision
under a single regulator. At present, consumers can choose among
huge companies that offer a wide range of financial servicesbut
consumers can also choose the alternative of credit unions and
other small mutuals that are community owned and democratically
controlled by their customers. As Government has recognised, the
existence of community-based mutuals such as credit unions helps
assure that no one will be left without access to financial services,
so that those individuals excluded by the large providers will
have an alternative in locally owned financial institutions.
10. Accordingly, it is surprising that the Bill
does not impose on FSA any specific duty to assure that its regulation
preserves this necessary diversity among providers of financial
services. Nothing would appear to require the Authority to adapt
its regulatory approach to fit the unique needs and statutory
purposes of financial providers of different types. In the absence
of such a duty, we fear that predictable bureaucratic tendencies
will result over time in a "one size fits all" approach
to regulation. Such an outcome would further erode mutuality as
an alternative for consumersto the advantage of large for-profit
providers who have the resources to handle any kind of regulation
and which already enjoy huge advantages of scale and market dominance.
11. It is therefore imperative that FSA have
a clear remit to preserve this diversity, in the interest of all
British consumers. We respectfully submit that an obligation to
do so should be written into the law.
12. It should be emphasised that in all our
discussions with FSA officials we have been impressed by their
dedication to this principle. We should also emphasise that credit
unions desire effective supervision and regulation and welcome
the transfer of supervision for credit unions to FSA. We believe
that FSA's expanded resources and expertise will lead to improved
supervision. We are concerned, however, that FSA have a clear
statutory mandate to consider the differing needs and objectives
of the diverse kinds of financial organisations it regulates.
13. Accordingly, we recommend that the FSMB
be amended to add to Clause Two Subsection (3), Page 2 after line
15, the following: "(g) the desirability of maintaining corporate
diversity among enterprises providing financial services, in order
to widen consumer choice."
14. Government has correctly perceived credit
unions as offering a unique solution to pressing social problems.
That credit unions can serve such a role follows directly from
them being fundamentally different from other financial institutions.
They are, in fact, true mutuals, organised without any profit
motive, and directed by volunteers who serve with no compensation.
To assure that credit unions remain true to their fundamental
social purposes, whilst assuring they are financially sound as
well, requires a very different regulatory approach than is appropriate
to other financial institutions.
15. For example, credit union members are not
merely customers. They have the democratic power to change things
if a credit union is not being operated in their best interests.
Regulation should encourage and respect that democracy, not discourage
it. At a time when mutuality is in the decline elsewhere in the
financial sector, Government policy and legislation must assure
that it stays alive in credit unions. For it is the mutual ethos
of credit unionsnot the profit motivethat steers
them in the direction of serving those most in need of credit
16. Therefore, it is crucial that the law governing
FSA recognise the importance of different regulatory approaches
for different types of providerssuch as credit unions with
a unique ethos of volunteer democracy and service. We believe
the change we are suggesting will assure this result, while being
entirely consistent with the other considerations and objectives
that are proposed for FSA.
17. Our second proposal is to include a provision
in the FSMB to amend the Credit Unions Act 1979 to permit creation
of a credit union-owned and controlled central finance facility.
18. Experience in other countries where credit
unions have been most successful demonstrates the essential importance
of there being a credit union-owned and controlled central finance
facility or similar central service organisation that can provide
credit unions with the back-office financial and liquidity management
services needed to provide economies of scale. Such an organisation
typically contracts with commercial banks to acquire the specialised
expertise necessary for such services. By its nature, it is itself
a regulated financial services provider, subject to more intensive
supervision than the credit unions it serves.
19. Such a central facility is essential if
credit unions are to achieve Government's ambitious goals for
serving the financially excluded. Compared with other financial
services providers, credit unions are relatively small, community-owned
and community-controlled institutions.
A central organisation would provide the management
expertise and economies of scale required to allow even small
credit unions to offer a broad range of services, whilst retaining
their community focus and their local governance by unpaid, democratically
20. We have requested HM Treasury to provide
for such a central facility in the de-regulation proposals described
above. Treasury has informed us, however, that in its view such
a facility could not be provided for under a de-regulation order
but would instead require enactment of primary legislation.
21. We believe the most economical way of doing
so would be to include a simple provision in the FSMB. Specifically,
we request that a new clause be added to the FSMB to amend section
1(3) of the Credit Unions Act 1979 to add a new subsection (e)
creating an additional object of a credit union, as follows:
"(e) to invest in an authorised central
credit union organisation established to provide credit unions
with liquidity lending, investment management, information systems
and other operational support and administrative services."
22. Conclusion. We believe that these
two changes to the Financial Services and Markets Bill are essential
if credit unions are to achieve their potential of bringing accessible
and reasonably priced financial services to those millions of
citizens who are currently not well served by other providers.
We respectfully commend these two amendments for consideration
by the Joint Committee on Financial Services and Markets.
30 March 1999