AFTER LEEDS DEBACLE WHAT NOW?

by Bill Johnston

For some time now there has been a movement towards bigger but sustainable credit unions. Economies of Scale were trumpeted as the way forward.

Well it now looks like that that is no way forward using Leeds City Credit Union as a template for the future development of credit unions.

Getting back to basics the idea behind the credit unions was that it knew its members, and more importantly, its members knew the credit union and how they affected it badly by not being a responsible member. There was an empathy, which bound the members to their credit union. In one way or another this was described as a common bond. The tighter the common bond the greater was the quality of service and the greater was its success. This enabled debt to be controlled and the financial model using 1% per month would work.

However the movement to larger “more sustainable “ credit unions meant that this common bond had to be diluted to encompass a larger population.

Some ambitious credit union workers used this idea to develop their credit union by enlarging their own common bond in order to mop up smaller credit unions. They then took on the belief that they could compete with banks and building societies by offering banking services and mortgages to their members on the false premise that what happens in the rest of the credit union world should also apply to the UK. They have failed to take into account the difference in the financial structure that exists in the UK to other parts of the world. Whilst we do have some real problems the UK at the moment compounded by financial deregulation that has come back to bite the financial sector the overall financial requirements of the ordinary citizen for a bank account and mortgage has been in the main efficiently met.

The credit union movement in the UK should not be about competing with banks and building societies but be involved in retail finance. Knowing its members and their needs a credit union can be more flexible in its approach to the savings of its members and its loans. However the movement does need help especially to exempt the members from tax consequences (subject to limits). In addition the Savings Gateway scheme could have enormous benefits to credit unions if the recipient definition is not made too narrow.

Returning now to larger common bonds this has been actively encouraged by Government departments for example the DWP and FSA, as that made their life easier, from an administration point of view. Monitoring a large credit union took only slightly longer to do than monitoring a credit union a tenth of that size. Similarly the DWP could issue growth fund of £150,000 to a large credit and improve its own performance results but it would take just as much work to issue £20,000 to a smaller one but wouldn’t impact its performance reports to the same extent.

The larger the common bond the greater is the remoteness of the credit union to its membership and the membership to that credit union. It ceases to become a member’s organisation and takes on the mantle of a financial institution.

The fundamental problem in the development of credit unions is the lack of sufficient volunteers. This is not just applicable to Credit Unions as the same problems afflict all voluntary organisations including charities. Its just a shame that the volunteers we have are treated as unsung heroes and more acclamations (gongs) should be given to them to encourage others to get involved. However the lack of volunteers is not helped by the bureaucracy that is currently applied to officers of credit unions. Rather than segment the credit union movement according to size we have a one rule fits all situation and potential volunteers are put off by the form filling to become “approved”

Small credit unions under £100,000 in assets should be unregulated except to the extent that they need to file accounts with the FSA and have an audit certificate. No monitoring of the credit union should take place but the credit union must have the word “unregulated” in its name and would not be part of the Financial Compensation Scheme.

Medium sized credit unions under £1M in assets would be regulated in so much as they would submit a quarterly account of the income and expenditure account and balance sheet and also specific details of their loans book and have their bank balances certified by 2 officers of their credit union .The current quarterly return should be abandoned as it does not do the job. The annual accounts should be filed with supplemental information and the current annual return abandoned.

Large credit unions over £1M in assets should be subject to regulations attaching to medium sized credit unions but should also be subject to regular audit visit from the FSA.

The Leeds situation has occurred through the over ambition ness of its officers and the acquiescence of government departments to let it happen. There is no inherent structural problem with the credit union movement provided we do not task them with activities outside their main area of expertise, which are retail finance and an organ for collecting small savings.

© Copyright 2009 W.P.(Bill) Johnston F.C.A. mobile 07778934125

Bill Johnston is a chartered accountant specialising in the credit union industry for more than 40 years. He has build a successful audit practice serving at one time nearly 200 credit unions and currently directs Conaccess Ltd which services the IT needs of almost 150 credit unions.