legal updates
Wednesday, 11 Jun 2008
you won’t get me, i’m part of the union
New rules for credit unions
As the credit crunch bites, people are finding it increasingly difficult to secure money from high-street lenders, with banks reluctant to deal with those they see as a high risk. This leaves people with fewer options, the least palatable of which may be to resort to loan sharks to secure desperately needed finance. It seems that the Government is concerned about this prospect and has sought to address it by relaxing the rules around credit unions.
What are credit unions?
- Financial co-operatives owned and controlled by their members.
- Membership is restricted to those who meet criteria such as geographical area or workplace.
- Low-risk savings and loans providers (usually for those effectively excluded from mainstream financial services).
- Regulated by the Financial Services Authority.
There are currently around 600 in the UK with approximately 500,000 members and assets of £400 million, but these figures could increase as the rules around them are relaxed.
Why make changes?
The strict rules surrounding credit unions mean the ‘sub-prime’ sector in the UK is vulnerable to doorstep money lenders offering very high interest rates. The figures indicate that, comparatively, credit unions have failed to establish themselves as effectively in the UK as they have in other Western countries. In the UK 0.5 per cent of the population is a member of a credit union while the figure is over 50 per cent in Ireland and over 25 per cent in the US.
What is changing?
On 30 June 2008 the Government announced plans to reform the rules governing credit unions in a bid to remove some of the “outdated and unnecessary” restrictions which govern the sector. Most notably the Treasury plans to broaden entry criteria, as well as making it possible for groups, rather than just individuals, to become members. The reforms would also allow credit unions to pay interest on members' deposits and charge the market rate for services such as chequebooks and money transfers.
This is good news for those who are excluded from high-street lenders. In future, they will have better access to (relatively) low interest loans (no more than 2 per cent a month) as well as other financial services such as ISAs and mortgages. Wider membership should also mean benefits for existing customers, as credit unions' “profits” are used to cut loan rates or increase the amount paid on savings.
With the global economy looking increasingly fragile, the Government's decision to cut some of the red tape around credit unions should help those most at risk in these tough times and result in many more of us being members of credit unions. The changes are expected to come into force during 2009.
If you would like any further information or advice on this issue, please contact Caroline Maher.