FCA - Mission Consultation
Credit unions play a crucial role in providing choice and competition in financial services and, in particular, providing services to groups who otherwise find difficulty in accessing financial services on reasonable terms. This activity is particularly focussed on providing affordable credit – capped at 42.6% APR by law – to groups whose only other access to credit is in the form of high-cost credit. Credit unions also play a crucial role in promoting saving behaviour and minimising the reliance upon credit which can often lead to problem debt. This involves widespread provision of services via payroll in partnership with employers and a unbiquitous practice of encouraging saving by expecting borrowers to save an amount alongside loan repayments – termed "Save as you Borrow" (SAYB). This latter practice has been shown in soon-to-be-published research from the Fairbanking Foundation and Ipsos Mori to transform the savings behaviour of credit union borrowers with reported savings rates shifting from 71% saying they never or only occasionally saved to 71% saying they would save regularly throughout the year. Both SAYB and payroll deduction harness behavioural insights and nudge to produce better outcomes for credit union members.
In these respects credit unions are, in general, actively supporting the market outcomes, competition, choice and consumer protection aims which the FCA is committed to advancing in its mission. We do not claim that credit unions are above criticism and their small, volunteer-led nature and maturing state can lead to regulatory concerns in some cases. However, by and large, the sector is a positive force which is pursuing the same aims as the FCA in its mission. For these reasons a proportionate, flexible and responsive regulatory framework for credit unions is appropriate. We recognise the efforts FCA has taken to put this in place through measures such as a reduced regulatory fee framework, a simplified approach to Senior Managers Regime and the maintained exemption of most credit union lending from consumer credit regulation.
However, we would like to use the opportunity of this consultation to highlight a particular area in which, in respect of supervising credit unions, we feel that the FCA has not acted entirely consistenly with the Mission and its principles as set out in the consultation. This is an area in which the FCA has chosen to intervene to prevent credit unions from engaging in new and innovative activities. We believe that this is to the detriment of FCA’s core mission of protecting consumers and enhancing competition for the benefit of consumers. There is no clear harm that the FCA has identified as motivating its actions and we are concerned that in some ways the intervention has the potential to exacerbate harm.
Credit unions in Great Britain tend to operate a simple savings and loans model as governed by the Credit Unions Act. Along with co-operative ownership with restricted potential membership, the deposit-takng lending model limited by interest rate caps is the core defining feature of what makes a credit union. However, there has been an increasing recognition in legislation of the need for credit unions to modernise and diversify their activities in pursuit of sustainability and to the benefit of their members. This has seen, for example, legislation to liberalise the common bond, allow credit unions to serve organisational members and to pay interest in respect of savings deposits. It has also seen reform to make clear credit unions are able to charge a fee for ancillary services, with particular reference to payments.
Similarly, where credit unions are most successful around the world they tend to offer the full gamut of retail banking services with mortgage finance, secured car lending and credit cards making up a much-greater proportion of their lending activities than unsecured personal loans.
Similarly, they will generally offer a range of saving and investment services and partner with third parties to offer insurance services. Historically there has been a clear recognition by UK regulatory authorities that these activities are consistent with the mission of a credit union and important to the sector’s future. Several credit unions have permission to write mortgages and the FSA awarded permission for non-advised insurance mediation activity for general insurance products, permissions which credit unions retain today.
Recently, however, as credit unions look to update their offering and work with partners to develop new products and services we have found the FCA adopting a different stance to that adopted historically and interpreting the Credit Unions Act narrowly. We believe this prevents credit unions from introducing new competition and choice to consumers and, in some cases, encourages less-good outcomes for consumers. This is despite the full commitment of credit unions to engage in these services according to good practice and the regulatory standards expected of all market participants. Neither has any intervention rationale been offered other than a commitment on the part of FCA to a particular reading of the Credit Unions Act.
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