PROUDHON'S PEOPLES BANK BY ANY OTHER NAME
Kalyeena Makortoff Banking correspondent
Sun, 4 February 2024
The number of credit unions have fallen from a peak of about 700 in 2001 to 240 today.Photograph: Christopher Thomond/The Observer
When 27-year-old Basil Lewis left the picturesque parish of Clarendon, Jamaica, famed for its spa, to start a new life in London in 1954, he did not plan to shake up the UK’s centuries-old banking sector.
But the financial discrimination faced by Caribbean migrants in the UK – who were refused loans, charged higher interest rates, or forced to pay larger mortgage deposits than the rest of the population – meant there was a lack of affordable credit for newly settled workers such as Lewis.
Working with a group of fellow Union Church members in Hornsey, north London, Lewis drew on a financial model popular in the West Indies and by 1964 had launched the UK’s first credit union.
Related: Credit unions are helping Britons survive – but can they really rival banks?
The idea spread, peaking at about 700 credit unions by 2001, while assets and membership hit a record high of £2.6bn and 1.5 million members respectively this year.
But just as the UK prepares to celebrate 60 years since Lewis’s credit union launched, the industry has found itself at a crossroads.
Financial pressures have seen a decline in the number of credit unions in recent years, leaving just 240 across Britain, with some forced to wind down but most being swallowed up by rivals in a huge wave of consolidation.
And those that remain have been put on notice by the Bank of England, which in October flagged serious concerns about poor governance, liquidity risks and their ability to withstand the current economic downturn.
Labour has pledged to double the size of the entire mutual and cooperative sector if it gains power. However, without careful management, the future of the country’s credit unions, which have provided a financial lifeline for vulnerable households, could be thrown into question.
Credit unions have a modest profile in Britain. They are not-for-profit cooperatives that are owned by, and serve, members with a common bond – meaning those that either live locally or work for a certain industry. Some still rely on volunteers to govern or run their everyday operations and tend to focus on personal loans as small as £50, particularly for the less well off, who are often considered too risky by mainstream banks.
Charges are capped at an annual percentage rate of about 42.6% across most of the UK – approximately 3% a month – which can be a good deal for those borrowing small amounts over short periods, who would otherwise be driven to loan sharks or extortionate payday lenders.
That proved to be the case for 47-year-old Kelly Evanson, who originally turned to the Just Credit Union in Shrewsbury, Shropshire, seven years ago after seeing flyers for an auto-payroll deduction programme meant to build up savings. Two years later, it was a lifeline, providing a £1,500 loan to tide her over in the middle of a difficult divorce. “They were the first people that I went to, because I wasn’t sure how the marriage breakup had kind of affected my credit rating.”
“That’s the kind of story we typically see,” says Matt Bland, chief executive of the Co-op Credit Union, which serves workers in the mutual sector. “People go through a cascade of less good lenders and then they might come across a credit union that’s trying to offer them a better deal.”
Surging interest rates and living costs have triggered a reversal of fortunes that raised eyebrows at the Bank of England
The role of credit unions in financial inclusion has not been lost on the Financial Conduct Authority. In 2019, the regulator used a 49-page report to call for the government to review the use of credit unions to develop a more viable alternative to payday lenders such as Wonga, which had collapsed a year earlier after complaints over interest charges of more than 5,000%.
The review was sidelined during the pandemic, but credit unions broadly weathered the storm. Fast-forward to 2023 and surging interest rates and living costs have triggered a reversal of fortunes concerning enough to raise eyebrows at the Bank.
“The external environment has changed considerably over the past 12-24 months,” the Bank warned credit union directors in October. Not only had the cost of living crisis caused more borrowers to fall behind on repayments, but the surge in interest rates had made new loans unaffordable for many members.
They started making unexpected withdrawals to either compensate for a surge in the cost of living, or chase higher returns for their savings elsewhere. Meanwhile, the boom in buy now, pay later products by the likes of Klarna and Clearpay chipped away at both loan demand and credit unions’ willingness to lend to overstretched borrowers.
At the same time, credit unions suffered a fall in liquidity – the amount of readily available cash needed to repay savers and conduct business.
Together, those factors had created “risk and stress that the credit union sector has not had to address in recent times”, the Bank said, , warning that credit unions which failed to recruit experienced leaders should consider winding down or being swallowed up by a rival.
Robert Kelly, who led the NHS Credit Union in Glasgow for 10 years before taking over as chief executive of the Association of British Credit Unions Ltd, acknowledges the Bank’s concerns. “It was a sort of a rallying call to the sector. And we heard that.”
However, he insists that the Bank’s most pressing concerns apply to between 5% and 10% of credit unions. “It’s absolutely not the case that there are widespread governance [issues].”
Many credit unions are now reviewing recruitment and risk management strategies, while others may consider introducing more paid staff, he says. Creating a more “professional” industry may also be necessary in light of landmark changes contained in the Financial Services and Markets Act that take effect this summer. Credit unions will be able, for the first time, to offer car financing, mortgages, credit cards and general insurance.
While this change is meant to create more affordable products for members, it will also help diversify income streams.
The shadow City minister, Tulip Siddiq, has raised concern over the dwindling number of credit unions, which she said were still operating in an “outdated regulatory regime”. Labour plans to further expand the list of financial products that credit unions can offer and force regulators to prove they considered the effect on mutuals when setting rules for the City. Full plans are still being drafted.
It could help serve more consumers such as 43-year-old Sheryl Falkingham. Despite working for a local energy supplier, a surge in living costs left her with little room to manoeuvre when her 10-year-old daughter needed a new school uniform last summer. “Up until two and a half years ago, I would have had that disposable income, but because the cost of living has increased more than my salary, I just don’t have that any more,” she said. The Bradford District Credit Union arranged a £33 a month repayment plan, with £10 reserved for building up a new savings pot. Whatever the plan, boosting the number of credit unions may not be the answer, with both Kelly and Bland saying that consolidation may actually make the network more financially sound.
In the same vein, they are urging parties to reform common bond rules, which limit credit unions to serving members who live or work in a certain region, or for a particular industry, and to a cap on membership.
In the meantime, Kelly says the industry will use the 60th anniversary to showcase the differences that credit unions have made to “ordinary people’s lives”. “The next 60 years will look different,” he says. “That doesn’t mean that we lose our cooperative, and ethical and mutual values, though. Not at all.”
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