Welsh Government - options to replace elements of the Social Fund
Credit unions – as third sector, community financial services – have a particular insight and experience of the problems of financial exclusion and poverty which are central to the aims of the discretionary Social Fund and of providing lending services to the groups it targets. As such, the Welsh Government has consistently supported the sector since devolution more than ten years ago. Together the credit union movement and the Welsh Government have made great strides towards putting the Welsh credit union sector on a sustainable footing whilst serving the needs of the financially excluded.
In 2009, which is the most recent year for which full statistics are available, credit unions in Wales had more than 36,000 members and 6,628 junior savers with £17.3 million in deposits, £9.6 million in loans and £19.6 million in assets. This puts the Welsh credit unions sector as – by some distance – the most established provider of community, ethical finance in Wales.
With this in mind, the devolution of the Social Fund in Wales should not be considered without exploring the role that credit unions could play in its delivery or the support thereof. ABCUL represents 18 of the 21 credit unions operating in Wales and in consultations with them they have expressed an interest in actively exploring the role that they can play in delivery of the devolved Social Fund.
However, there are a range of factors that must be taken into account when considering what Welsh credit unions might be able to deliver in respect of a devolved Social Fund.
Firstly, credit union development – in Wales as in the UK generally – is variable. Whilst some credit unions provide a consistent and accessible service with a range of products and services available including current accounts and mortgages, others are much less well developed relying entirely upon volunteer labour, with limited accessibility and with an a small range of products and services. Given that this is the case, it is unlikely that at any point in the near future credit unions would be able to be the sole provider of a Social Fund replacement in Wales. Only where credit union capacity is such that it can meet the demands of the scheme’s administration could credit unions feasibly play a role.
Secondly, credit unions’ financial sustainability is variable from place to place and, furthermore, given the size of the awards provided at present under the discretionary Social Fund, it is unlikely that any interest charge permissible under the cap imposed by the Credit Unions Act – 26.8% APR – could provide revenue sufficient to meet the costs of administering the awards. Therefore, any credit union involvement would necessarily require full funding to be provided – either instead of or supplementary to any interest revenue – in order to ensure that the service is administered to the standard expected by the Welsh Government. Heed should be paid here, of course, to the controversy that surrounded the proposal for interest to be charged on crisis loans under the previous UK Government.
Thirdly, each credit union is an independent entity with its own governance structure, policies, and products. As such, the appetite and willingness of credit unions to be involved in the scheme will vary. Even where credit unions are able to be involved from the point of view of sustainability and capacity, therefore, the credit union may not be willing to be involved.
There are, though, considerable advantages to the involvement of credit unions in the scheme.
First, credit unions are experienced in assessing, approving and delivering applications for loans, as they are in the collection and enforcement of payment, all of which will be critical to the successful delivery of the scheme but are likely to be lacking from many other possible delivery mechanisms.
Secondly, credit unions have the ability to take loan repayments from benefits at source through the DWP’s Eligible Loan Deduction Scheme (ELDS) in instances where a benefits-receiving member consistently fails to repay. Similarly, credit unions are able to receive the direct in-payment of benefits on behalf of a member. This arose from the DWP’s Financial Inclusion Growth Fund which ended in March 2011. This ability increases the capacity for credit unions to successfully collect the monies advanced under any devolved Social Fund.
Finally, credit unions – through the support they have received from the Welsh Government and their central position in the Welsh Government’s Financial Inclusion Strategy – are ideally placed to provide longer-term support to those referred to the discretionary Social Fund. Therefore credit unions are in a perfect position to meet the Welsh Government’s ambition that this new scheme will fit into and complement the Welsh Government’s wider aims around tacking financial exclusion and poverty. Credit unions are linked into the necessary networks of agencies operating in this space locally in order that they may effectively signpost those requiring longer-term assistance and as ethical, community financial service providers in their own right, credit unions are able to provide long term solutions to chronic financial difficulties themselves.
In conclusion, therefore, we feel that credit unions and the role they can play in the delivery of this replacement scheme should be high on the Welsh Government’s agenda in its considerations moving forward. However, despite the fact that credit unions have many strengths in this area, there are also a number of obstacles which will need to be considered. Only a partnership or consortia approach would be appropriate, for example, since only in certain areas will both the capacity and the will be apparent to make credit union delivery feasible. Similarly, any credit union involvement would need to be fully funded as credit unions are unlikely to be able to meet any extra expectations without being supported to fund the necessary resource.
Credit unions have grown strongly over the past decade or so in response to a new model for successful development driven by tackling the sustainability imperative as a priority in order that social goals can be met. This has seen a dramatic increase in credit union use and a concurrent improvement in the credit union offering. New legislation now in place removes many of the obstacles to credit union development which have been enshrined in law hitherto. UK and devolved Government investment has acted as a catalyst for continued improvement. And as the DWP contemplates if and how it is to invest a £73 million credit union modernisation and expansion fund in recognition of the great strides the sector has made and the role it can play in the reformed welfare system, the Welsh credit union sector will continue to grow and develop as time progresses. A partial role in the delivery of the Social Fund could well be a key feature in the continued relationship between Welsh credit unions and the Welsh Government in achieving the common goals of ending financial exclusion and reducing poverty.
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