Charles Randell, Chair of the Financial Conduct Authority (FCA) posed the question “Is this the decade of the credit union?” when he addressed the National Credit Union Forum in January 2020. One of the key topics in his speech was whether the credit union sector is poised to offer genuine competition to established lenders. Some unions are developing a new loan offering to compete with commercial lenders, while others are seeking to turn council taxpayers in arrears into savers.
The key themes of the speech were:
- Community-based lending is key part of growing the supply of affordable credit.
- Accelerating the growth in credit union membership requires a transformation of the sector.
- Credit unions need governance that’s equal to this transformation challenge, while continuing to protect consumers and prevent financial crime
Mr Randell said unaffordable debt traps consumers in a state of financial and psychological distress and commented on the lenders who had recently been the subject of FCA enforcement action. He said the twin strategy of clamping down on unscrupulous lenders and promoting credit unions should lead to better consumer outcomes. On this topic, Mr Randell said:
“By reducing the volume of unaffordable credit being granted by the commercial consumer credit sector, we are improving consumer outcomes. And at the same time, we’re levelling the playing field a little, so that credit unions have a better chance of engaging with consumers before they fall into the hands of lenders with a very different set of values.”
In a 2017 survey of 1,553 individuals who were unable to obtain a payday loan, only two said they approached an illegal lender. The FCA chair used this to suggest that price caps work and that other caps may still be introduced on various forms of lending.
The FCA chief then praised initiatives such as ‘save as you borrow’ repayment plans and prize draws for savers as ways in which credit unions are trying to get more people into the savings habit.
Noting that growth in the credit union market has been slow, the FCA speaker said that one way of addressing this could be to offer tax relief and other incentives to encourage investment in credit unions.
After initially painting a positive scenario, Mr Randell then suggested some unions had a lot of work to do before they were deemed satisfactory. He suggested that there was a need for credit unions to learn advanced risk management and about technological solutions and said that the FCA had uncovered failings in many credit unions relating to governance, anti-money laundering and knowledge of regulatory requirements. His comments on this topic were:
“As we set out in our portfolio letter to credit unions in July 2018, it’s vital that all credit unions, regardless of their size, have effective governance arrangements with appropriate oversight, systems and controls. We found evidence that governance arrangements fell short in a number of credit unions, coupled with a lack of understanding of our regulatory requirements. In some cases, we saw inadequate financial crime controls, leading to a risk of credit unions being used to facilitate financial crime. We need the people governing sector to do these basics well. But they also need to find time to think about their long-term strategy and sustainability.”
Finally, Mr Randell acknowledged the challenges involved with achieving significant growth, saying “a transformation of the credit union sector would require an enduring partnership between government, regulators and credit unions; and potentially others: such as local authorities, housing associations, debt counselling charities and providers of basic bank accounts.”
The FCA aims to assist credit unions through seminars, roundtables and online information.
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