The good, the bad and the ugly: A discusion of the impact of regulatory reform on the UK credit union sector

Ann-Marie Ward, Donal McKillop, John Wilson

Research output: Book/ReportCommissioned reportpeer-review


0. SUMMARY Credit unions are self-help cooperative financial organisations which provide simple financial services and are geared to attaining the economic and social goals of their members and their wider local communities. They are typically affiliated to a trade association (an umbrella body which provides support, training, services and a voice for their members). Credit union development in the United Kingdom (UK) has been somewhat patchy. In Northern Ireland (NI) the credit union movement is relatively strong. There are also areas of significant strength in Scotland, particularly in the west of Scotland. At the end of 2008, there were 661 credit unions in the UK with a membership of 1,168,971 and total assets of approximately £1,507 million. Of this number 177 credit unions are based in NI where they control £920.7 million in assets and have a membership of 431,605. Approximately 23.6% of the population in NI are credit union members compared to 1.6% in Great Britain (GB).The legislative environment that governs the activities of credit unions in GB is more lenient than that facing their counterparts based in NI. This more lenient legislative environment came into force in the form of legislative changes to the Credit Unions Act 1979 contained in Schedule 18 of the Financial Services and Markets Act 2000. The Financial Services Authority (FSA) took over regulatory control of credit unions in GB in 2002. The FSA’s regime also extends to the protection of credit union members’ funds under the terms of the Financial Services Compensation Scheme (FSCS). Credit unions in GB also play a prominent role in the Government’s financial inclusion agenda and receive support through the Growth Fund administered by the Department of Work and Pensions (DWP). In NI, the regulation and supervision of credit unions is the responsibility of the Registrar of Companies, Credit Unions and Industrial and Provident Societies. The extent of business activities that credit unions are allowed to engage in is governed by the Credit Unions (Northern Ireland) Order 1985. Such activities include the provision of basic savings and loans services to members. Credit unions in NI receive no financial support from government and do not have access to the FSCS operated by the FSA.Further legislative changes are imminent in GB and NI. In GB, the Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2010 will come into effect in February and April 2010. This legislation includes a number of measures that are designed to remove obstacles to efficiency, productivity and profitability of credit unions, and align supervision with that currently in force for banks and building societies. In NI, a review of credit union legislation was also undertaken in 2008/2009. The Review recommended that legislative and registrar functions remain with the NI Assembly and the Department of Enterprise Trade and Investment (NI), but that regulation is transferred to the FSA under the terms of the Financial Services and Markets Act 2000. This change will allow NI credit unions to offer a wider variety of products and services and permit access to government schemes for lending. Against this backdrop, the current study investigates the extent to which previous regulatory and legislative amendments have impacted on the performance and stability of credit unions in the two jurisdictions. Two interwoven approaches are employed in this investigation. First, aggregate financial data for the period 2003 to 2008 is utilized to examine a number of themes related to consolidation, failure, product diversification and efficiency. Second, semi-structured interviews are undertaken with key stakeholders, namely representatives from credit unions, trade associations and regulatory bodies to determine perceptions as to the impact of the regulatory framework and economic environment on the sector in both regions. In particular, the interviews sought views on the causes of credit union consolidation in Scotland and of increases in loan arrears in both regions. A summary of the key findings from the analysis is are as follows: • Over the period 2003 to 2008 credit unions have experienced significant membership and asset growth. Such growth was more pronounced in GB than in NI. • Credit union numbers have contracted in GB, but not in NI. • The decline in credit union numbers in GB is posited to be a consequence of a a variety of factors such as: volunteer burnout; the desire to create larger credit unions; and the desire to widen common bonds. • Bad debt write offs and loan arrears have significantly increased. Evidence collected from survey participants suggested this was a consequence of a deterioration in economic conditions, insufficient screening of borrowers, changes in insolvency legislation (more favourable for debtors), widening of the common bond and an increased focus on the financially excluded (in the case of GB credit unions). • For the first time, bad debt write offs as a percentage of gross loans reached 1% for NI credit unions in 2008. The comparative figure for GB credit unions was 1.6%. • Over 20 credit unions in NI have no form of compensation mechanism to protect the savings of their members. Furthermore, the protection schemes operated by the two trade associations (the Irish League of Credit Unions, ILCU and the Ulster Federation of Credit Unions, UFCU) may not be in a position to guarantee all savings should a significant number of credit union failures occur. • The product mix and product flexibility of NI credit unions is more limited than their GB counterparts. The research findings presented above are interpreted in light of the changes that are already taking place for credit unions located in GB, and which are suggested for their counterparts in NI. Credit Unions in GB Drawing from the research findings this study, contends that:• The forthcoming legislation which will loosen the common bond requirement; widen the requirements relating to membership qualifications; and reduce the restrictions on non-qualifying members of credit unions, are perhaps premature given the development of the movement thus far.• Recent changes in insolvency legislation in Scotland make it an imperative that credit unions tighten credit control procedures. For example, they might consider using credit rating agencies and/or requiring documentary evidence to support the credit rating of a guaranteeing member, as well as the loan applicant. Credit Unions in NI Drawing from the research findings this study: • Supports the proposal that NI credit unions should come under FSA regulation which would then permit members to have access to the FSCS and be eligible for compensation of up to £50,000 in the event of a credit union failure. However it would seem prudent for NI credit unions to seek assurance that the prior liabilities of the FSCS do not extend to them (given the large payouts made by this fund during the current financial crisis).• Supports diversification around core products. Diversification away from this core is not supported as this is not likely to enhance credit union returns, nor result in risk reduction for credit unions. • Does not support the promotion of a scheme such as the Government sponsored Growth Fund in NI, as offering incentives to the financially excluded to join a credit union risks NI credit unions receiving a similar label to their counterparts in GB, namely the ‘poor man’s bank’.
Original languageEnglish
PublisherICAS Foundation
Number of pages53
Publication statusPublished (in print/issue) - 30 Apr 2010

Bibliographical note

ISBN 978-1 904574-66-8


  • Credit unions
  • Regulation


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