Other initiatives and support raising the profile and capacity of credit unions
87. he group considered a number of areas of work which were raising the profile and capacity of Scotland's credit unions.
UK payments systems and regulatory environment
88. Credit unions are regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and are classed as deposit takers along with banks and building societies. Regulation of financial services is a power reserved to the UK Government.
89. The regulatory environment under which credit unions operate has been undergoing review over the last few years, and significant changes have taken place at European and UK level.
90. The UK payments system facilitates every payment to or from individuals, organisations and businesses. Credit unions currently handle their transactions by indirectly accessing the payments system via a sponsor institution such as one of the major UK banks.
91. The Working Group engaged with representatives of Payments UK, the Prudential Regulation Authority and the banking sector, in its effort to review access for credit unions to the payment systems and to advocate for fair and proportionate regulation.
92. The UK payment systems are complex. The various ways of making a payment, e.g. bank to bank transfer or cheque, are supported by infrastructure providers who operate under the oversight of the Bank of England, and are regulated by the UK's financial and economic regulators. The board which oversees the infrastructure is composed of the main banks in the UK, with independent representation (including the chairperson) serving on the Board.
93. There are two ways to access the UK's payment systems:
- Direct Access - where a Payment System Provider (PSP) has a direct arrangement in place with the operator of a payment system. The PSPs with direct access to payment systems are primarily the large credit institutions in the UK that offer end customers with current account related banking services. Depending on the payment system, it may also include smaller banks, building societies and foreign banks.
- Indirect Access - where a PSP has an arrangement with another PSP with direct access to a payment system.
94. At present credit unions that offer the Credit Union Current Account gain access to the payment systems indirectly through The Co-operative Bank (PSP) as they do not have direct access. They are provided with sort codes from the bank's allocation. Some credit unions wish to have direct access to payment systems (i.e. BACs, CHAPs). They are effectively prevented from gaining direct access as it is very challenging for them to meet the eligibility criteria to achieve this, such as the capacity to have a direct banking relationship with the Bank of England. The Group was advised that credit unions are seeking improved terms for indirect access, as the costs and processing times seemed to them to be unfavourable. As costs are based on a cheaper rate for higher volume of transactions, this could appear to be weighted against smaller financial institutions such as credit unions.
95. Changes to the nature of indirect access have begun. In the short term, the Credit Union Expansion Project, funded by the Department for Work and Pensions, involves the development of a banking platform through which credit unions will be able to access the payment systems. This is because the commitment and co-operation of a number of credit unions to this arrangement has created sufficient volume to make an agency banking agreement viable for both parties.
96. Looking further ahead, the new Payments System Regulator (PSR) has conducted a market review into the supply of indirect access to the payment systems (PSR MR 15/1/1) and will publish its interim findings in February 2016. The PSR aims to promote competition and innovation in UK payment systems. The Working Group acknowledges some representatives are highly engaged with the regulator, but if the credit union sector wishes to influence the direction, all those with an interest are encouraged to engage fully with them.
97. Payments UK published their report World Class Payments in the UK - Enhancing the payments experience in August 2015. The findings were informed by consultation with consumer organisations, corporates, businesses, government, trade associations, software vendors and fintechs[ A fintech is a type of business that uses software to provide financial services.], and by conducting quantitative research.
98. From the point of view of financial services providers, Payments UK were advised of the need for common or simplified access to payment systems and services, in terms of common technical standards, rules and practices. This would deliver a more level playing field for smaller financial institutions. It would facilitate innovation and competition, resulting in a better choice for customers.
99. They have listed this as a priority for more detailed analysis to understand how the industry can deliver these changes. A further update will be published in 2016. Any findings will be considered in the context of the European Commission's Payments Service Directive 2 and the ring-fencing requirements within the Banking Reform Act.
100. At has been reported that a number of fintech companies stand poised to provide an alternative method of access to the payment systems instead of the main banks (Wallace, 2015). The Faster Payments system has indicated that in the coming months challenger banks will be able to access their payment scheme via fintech companies. The alternative access providers may in the future also offer access to BACS, CHAPS and other payment schemes. The credit union sector will no doubt monitor these developments and the evolution of costs, with a view to possible future participation.
101. The Working Group representatives reflected the difference in the sector, with some credit unions advising that access to the payment systems was a low priority issue for them, and others expressing a desire to enter into the payment system depending on cost and governance conditions.
Credit Union Expansion Programme (CUEP)
102. The Credit Union Expansion Project (CUEP) was established in April 2013 by the UK's Department for Work and Pensions (DWP). This followed a feasibility study that recommended the credit union sector should be developed to meet the significant market demand, including from low income consumers, for modern banking products and affordable credit. However, the report found that in order for the sector to better meet that need, it required to receive some initial funds to expand, modernise and become financially sustainable.
103. Following a competitive tendering process, the Association of British Credit Unions Ltd (ABCUL) was contracted by DWP to manage the CUEP, which it does so through a wholly owned subsidiary, Cornerstone Mutual Services (CMS). DWP has agreed to invest up to £38 million in the CUEP.
104. CUEP's stated aims are to:
- extend access to financial services to at least 440,000 more people on low incomes by April 2016 and a total of at least 650,000 more people by March 2019;
- enable credit unions joining CUEP to reduce costs and become financially sustainable by March 2019;
- save consumers £180 million in loan interest repayments by March 2019; and
- save consumers £524 million in loan interest repayments by March 2022.
105. Every credit union in Britain was eligible to apply to join CUEP, and of the 76 credit unions taking part, eight are Scottish.
106. The project includes an opportunity for credit unions to use an Automated Lending Decision Tool; a procurement hub, which allows credit unions to join up and save on services; and marketing to encourage growth, for example by providing services such as payroll savings for employees. The first wave of credit unions has now agreed to join a new Target Operating Model (TOM) which includes access to an online banking platform, future proofed to allow updating in line with advances in technology, and which carries assurances of strong cyber security. An agency bank will provide each credit union with their own sort code, and every product will have a unique eight digit account number, which should allow access to straight-through processing for savings, loans and transactions.
107. Although currently restricted to credit unions that are part of CUEP, the existing participants have been advised that it is expected that other credit unions will be given the opportunity to join from 2016. The charge to use the platform is likely to be calculated on a per member, per month basis. It is expected access to the model will be at a cost but it will generate growth and deliver savings, and the cost per member will reduce based on more credit unions joining, more credit union accounts using the platform, and more new members being recruited by those credit unions.
108. At present six Scottish credit unions, serving almost 28,000 adult credit union members, have signed up to be part of the TOM. They will be migrating to the TOM between January and October 2016.
109. Following the end of the CUEP in 2016, CMS will continue to supply and manage the products and services and to encourage collaborative working developed through CUEP.
110. Over time and subject to terms and conditions, all credit unions in Great Britain will be able to access CMS services on a commercial basis.
Reform of the legacy Credit Unions sourcebook
111. In 2015, the PRA and FCA undertook a joint consultation on reform of the rules governing the operation of credit unions (PRA CP22/15, FCA CP15/21). The legacy Credit Unions sourcebook (CREDS), is one of the modules of the Handbook inherited by the two regulators from the Financial Services Authority (FSA).
112. Whilst regulation of financial services is important for consumer protection and confidence, certain of the proposed changes to the legacy Credit Unions sourcebook deeply concerned the credit union sector in Scotland. The consultation closed on 30 September 2015, and all the main credit union representatives in Scotland submitted responses. ABCUL facilitated a meeting between the UK regulators and the World Council of Credit Unions to discuss international precedents, and invited the PRA to engage with stakeholders and MPs on this issue at the All-Party Parliamentary Group on Credit Unions at Westminster. In the main, Scotland's credit union representatives considered that the proposed regulatory changes in the consultation paper did not provide large credit unions with any additional powers or opportunities to develop their business and serve more people. They also believed they would have the effect of undermining the credibility of credit unions as a safe place to deposit savings.
113. Specific proposals of concern raised included:
- Restriction of credit union deposits to the Financial Services Compensation Scheme (FSCS) limit - credit unions concerned this would mark them as "second class deposit takers";
- Imposition of an absolute cap of £500,000 on credit union loans - this could result in a restriction of the ability to serve the current UK mortgage market and the demand for commercial loans;
- Requirement of a 10% minimum capital standard for large credit unions - it would be impossible to increase to this percentage overnight; the 10% figure seemed to be based on a World Council of Credit Unions standard of excellence which was not intended to be a minimum standard;
- Restriction of credit unions to solely "regulated mortgage contracts" - may limit their potential to enter into future secured commercial lending;
- Proposal for credit unions to generate loan book income greater than 6% of the loan book value (in order to undertake lending, mortgages and payment services) - could stifle competition;
- Matrix of compliance ratios - concern at number of tests required to pass.
114. The Minister for Business, Energy and Tourism raised these concerns at a meeting with Martin Stewart, Director of the UK Deposit Takers Division of the PRA and Roger Marsh, Manager of the PRA's Credit Unions Team in London on 24 November 2015. The consultation outcomes should be available by February 2016.
Bank-funded development programmes
115. The Barclays Credit Union Programme is a £1 million project spread over a period of four years which is being delivered in partnership by ACE Credit Union Services, UK Credit Unions Ltd (UKCU) and Toynbee Hall. The two credit union trade associations ACE and UKCU are responsible for the delivery of capacity building training to eleven British credit unions who successfully bid to participate in the first year of the programme, with Toynbee Hall delivering training on improving financial capability and resilience amongst targeted credit union members. One of the successful credit unions is based in Scotland with the remainder based in various parts of England.
116. No two credit unions identified the same set of training needs as each other reflecting the diversity of the range of selected credit unions, with the smallest having just a few hundred members and the largest in excess of 12,000 members. Training on capacity building for Year 1 is expected to be completed by April 2016. In February 2016 Barclays will invite British credit unions to apply for the second round of funding when a similar number of credit unions are expected to be successful. The financial capability section of the training will be delivered by Toynbee Hall over the same period of time. As part of the programme, Barclay's staff are being identified internally in the regions where the successful credit unions are based to offer a support and mentoring service, using staff expertise to support their local credit union. This could include Barclay's staff joining the credit unions as volunteer directors or providing a credit union payment service at local Barclays branches.
117. West Lothian Credit Union is currently a participant in the programme, but it is hoped that more Scottish credit unions will apply and be accepted onto the programme in Year 2.
Lloyds Banking Group
118. Lloyds Banking Group's Credit Union Development Fund was set up with £4 million funding and resources. Managed by the Credit Union Foundation and an independent Grants Committee, all credit unions authorised to operate in England, Scotland, Wales and Northern Ireland can apply for an award, provided they have not already received a large grant from the programme.
119. The funding programme aims to strengthen the financial position of credit unions and increase their capacity to allow the development of new strategies for sustained and effective growth.
Credit union health check
120. In 2001, the Scottish Executive, in partnership with Glasgow City Council and the Scottish banks, funded a £60,000 pilot health check programme for credit unions in Strathclyde which was undertaken by CEIS (Community Enterprise in Scotland) and Strathclyde Credit Union Development Agency. The aim of the health check programme was to explore ways of ensuring that existing credit unions were robust and able to deal with new regulatory changes. At the time it was hoped that a self-help tool kit would be developed from the evaluation of the programme.
121. In the event, a self-help tool kit was not developed. However, the Scottish League of Credit Unions (SLCU) believe that the concept of credit unions voluntarily undertaking a self-help health-check exercise remains a valid initiative.
122. They advocate that, as with all businesses, credit unions should review and measure key indicators of their "health" (membership/products and services/infrastructure/risk) for compliance against regulation and industry best practice; thereby better understanding and managing their business. Such an exercise would be particularly useful for community credit unions which are often volunteer-led and most impacted by the weight of regulatory requirements.
123. The SLCU presented the concept of a voluntary self-assessment and improvement tool to other credit union representatives in February 2015.
124. The suggested delivery model was an online portal where data captured would be processed into the initial "health-check" summary for immediate consideration, and follow up action points generated. Progress in priority areas could be tracked, and each completed objective automatically removed.
125. SLCU have since developed the concept further by scoping out the project with a professional developer. They aim to develop a prototype by spring 2016 and remain open to collaborative working with the other credit union representatives.
Financial capability for the wider community - linking with credit unions
126. Credit unions, with their personalised service and commitment to promotion of thrift and balance (Credit Unions Act, 1979), have a valuable role to play in tackling financial exclusion.
127. cottish Government, working with its stakeholders, is committed to improving financial well-being and reducing income inequality, to create a wealthier and fairer Scotland for all its citizens. It has a wide-ranging agenda to improve financial capability so people are better able to manage their own finances, much of which was set out in the Financial Capability Strategy for Scotland launched in January 2016.
128. One example was the launch of the Scottish Financial Health Service which guides people to a range of stakeholder organisations who offer information and advice on various financial considerations in an individual's life, including debt, managing money, housing, homelessness and ethical lending.
129. Credit unions are a key participant, with the website offering a search function for users to locate their local credit unions and find out about the products offered by them. Users are therefore signposted to services which promote long-term saving rather than solely short-term solutions.
130. The website currently promotes over 100 credit unions throughout Scotland, thereby not only assisting the public in locating an ethical lending provider, but boosting the credit union sector by showcasing their presence
131. The Scottish Government's 2014 bankruptcy reforms placed financial education and money advice at the heart of the statutory solutions for those needing debt management or relief. The Scottish Government has worked in partnership with Money Advice Scotland and the Money Advice Service to develop a financial education module to help individuals learn about how to manage their money effectively during key financial stages in life, maximise their income and improve a user's overall financial capability. The module on borrowing includes a detailed section on the advantages of credit unions and is available on the Scottish Financial Health Service website for anyone to access and complete at their own pace.
132. There is potential for even stronger links to be made between money advice organisations and the credit union sector in Scotland. It is recommended that credit union representatives and advice services such as Citizens Advice Scotland, StepChange Debt Charity and Money Advice Scotland seek to co-ordinate the promotion and referral of service users and clients between the two sectors, especially at local level. This will help create a joined-up approach to improving financial capability in the community.
Promoting credit union membership to students
133. In summer 2015, the National Union of Students and the National Association of Student Money Advisors distributed amongst all their affiliates an article provided by the Credit Union Working Group.
134. This article detailed the benefits of credit union membership as an ethical financial provider and referenced the Scotland's Financial Health Service website's credit union finder tool.
135. Scottish Government marketing advisers detailed the wide scope for marketing of credit union membership to students, which credit unions could tap into.
136. The student media sector is very active, spanning institution-led publications and websites (such as Glasgow University Guardian) to cross-institution magazines (such as The Journal) and more general "youth" titles, like Scotcampus, The List, The Skinny, etc.
137. Credit unions could also seek to engage with students at the various events they attend such as Freshers' Weeks, careers fairs etc. A strong option for field marketing can be found in Scotcampus, who run a series of events (Futures Fest, Fresher's Festival) that bring in large numbers of students.
138. Those credit unions with a presence on social media could also look to link in with student body social media accounts to highlight their services.
Skills and training
The Certificate in Credit Unions Principles and Practice
139. The National Credit Union Forum funded the development of the certificate. It is delivered by the Chartered Banker Institute.
140. The qualification provides an overview of the role played by credit unions in UK society. It considers: the development and purpose of credit unions; their organisation and operating principles; business, financial and ethical objectives; regulatory framework; risk management; governance and oversight. The qualification also considers the implications to credit unions of the incoming regulation in relation to conduct rules for individuals due to be effective in 2016.
141. SLCU have been working with LearnDirect to adapt a "Scottish Modern Apprenticeship" in "Providing Financial Services Banking", funded by Skills Development Scotland and aimed at 16-24 year olds. This programme is expected to be rolled out by spring 2016.
142. They feel this would contribute to the resilience of smaller credit unions in an increasingly regulated environment, particularly around staff competency. It may also attract new staff and volunteers, bringing with them fresh ideas.
143. SLCU have met with the other trade bodies in Scotland, to pursue a movement-wide training programme. Each trade body had a different preferred approach which reflected their own membership composition, however there was willingness to share details of individual training programmes.
Association of British Credit Unions Limited - training provision
144. ABCUL is the largest provider of training to the Scottish credit union movement, and has developed a new suite of training with funding from The Credit Union Foundation.
145. The first phase involved a root and branch evaluation of training already delivered for the sector by ABCUL and by other providers, and the development of a curriculum of learning that meets the movement's requirements, developed as a result of comprehensive needs analysis.
146. This curriculum was delivered as a series of classroom workshops in 2015 to credit unions in Glasgow, with the sessions funded by Glasgow City Council's Co-operative Development Fund. Glasgow is widely recognised as Britain's "credit union capital", with around 25% of the city's population saving with a credit union, so this provided a fertile ground for testing the modules given the diversity of the population to be trained.
147. The curriculum developed is robust and comprehensive, and has been built to enable agility of delivery. In recognition of the considerable challenge of making exclusively classroom-based training cost-effective, affordable and sustainable - as well as the fact it is often not the most appropriate delivery method for certain courses or for some students - the materials are being converted into a fully blended solution that can be deployed as a distance learning package, taking advantage of the available technology.
148. n order to host the online content that will ensure affordable and accessible learning modules are available to all, a Learning Management System is being developed with a provider recognised as a market leader with particular expertise in financial services. Importantly, this will enable participating credit unions to be able to plan, track, test, document and report any development undertaken by their team.
149. ABCUL is collaborating with the ifs University College on the provision of a qualification. They have been identified as the best-fit partner given their credibility within the financial services industry and their ability to provide cost effective solutions and the most extensive availability of exam centres (165 across the UK), meaning more flexibility for students to choose when and where the assessment can be undertaken.
Email: Nadia Bessos