14 paul jones debt sale

What future for British credit unions?

An analysis of current issues in credit union

governance, regulation and service deliveryPaul A Jones PhD

Research Unit for Financial InclusionCCR-interactive 2015; Debt Sale & Compliance Stream

6th October 2015, Guoman Tower Hotel, London

British Credit Unions – Dec 2014• 362 credit unions (England, Scotland and Wales)• 1,077,213 adult members; 120,080 juniors• From 200 to over 35,000 members

• No 1 Police Credit Union – 28,000 members; Leeds City Credit Union 35,000 members, Manchester Credit Union – 19,000 members

• Total assets of £1.26 billion• Total deposits of £1.07 billion• Total loans of £718 million• Annual turnover of £26 million

In year to Dec 2014, the sector grew• Membership by 7%• Assets by 11%• Loans by 6%• Deposits by 13%• Turnover by 8%But adult membership slightly less than 2% of population – but regional variations

British Credit Union Growth 2003-13

Many challenges still remain

• Products and services • Governance • Regulation

Products and services Focusing on lending

Loan product • Most credit unions offer a single loan product:

– A level payment, relatively low interest rate loan, secured in part by savings

• But is this a product that is only needed and wanted by a small minority of consumers?

• Credit unions account for only 0.084% of all household borrowing.

• Only 0.732% of all non-housing consumer credit.

The Reality: What People Choose

Source: Dept. for Business, Innovation & Skills, “Credit, Debt and Financial Difficulty in Britain” (2012)

Credit U

nion

Use of Consumer Credit Sources in Britain

Choices Reflect Consumer Priorities

1. Credit now, when I want it. (credit cards, overdrafts, store credit)

2. Approved once for multiple loans (credit cards, overdrafts, etc.)

3. Little risk of “No” (store/catalog credit, payday, other high cost)

4. Low monthly payment (credit cards, hire purchase, store/catalog)

5. Convenient to apply on-line, mail-in (all except most credit unions)

6. Do not need to be a saver first (all except many credit unions)

7. Low APR (advantage credit unions . . . for higher-risk borrowers)

People pay more for what they actually want.

The Hypothesis:

Credit unions mostly loan to people who can’t get what they really want from other lenders.

Credit unions are rarely most consumers’ first choice.

If so, is this a sustainable business model?

The International Experience

Highly successful credit union movements provide consumers with a full range of loan products -- everything they can get from banks, but at rates and terms that are better than banks.

CREDIT UNION LOAN PRODUCTS

Brit

ain

U.S

.

Can

ada

Aus

tral

ia

Home mortgages No Yes Yes YesSecond charge home equity No Yes Yes YesSecured new car loans (HP) No Yes Yes YesSecured used car loans (HP) No Yes Yes YesCredit cards No Yes Yes YesCurrent account overdraft loans No Yes Yes YesOther revolving lines of credit No Yes Yes YesGov't guaranteed student loans No Yes Yes YesAsset-secured small business loans No Yes Yes YesShare secured installment loans Yes Yes Yes Yes

The International Experience

Highly successful credit union movements:

1. Copy the competition’s products and then strive to deliver them better, cheaper, easier, friendlier.

2. Invest substantially in IT and automation.3. Get scale economies from robust networks of

back-office support organisations.4. Achieve a sustainable base by serving working

and moderate income consumers.

Governance

Board of directors or committees of management?

• Most CUs established as small co-ops• Directors elected to direct, control, oversee

and usually manage the business• Board meetings typically staff meetings• Functions of governance and management

overlapped

The transition to professional management• Challenging for directors• Hard to let go of operational engagement• And focus on the specific board function of

governance • Thinking about governance and

management often remain interwoven.

Some typical scenarios • When directors employ staff teams

– They continue to micro-manage or meddle

– The chair acts in practice as the real CEO– They just rubber stamp and approve

management decisions

The challenge • To set out the principles of a logical, consistent

and integrated system of governance • Which draws inspiration from the literature• But which is bespoke to the credit union sector• And which clarifies the distinct nature of

governance – not as a higher tier of management

Why the study is important?

• To ensure that the strength of credit union governance leads and ensures business growth and improvement

Key themes• Strategic planning• The role and responsibilities of a

director• Director recruitment and selection • The role of the CEO• The monitoring of performance on

strategic objectives and effective use of management information

• Internal audit and the role of the supervisory committee

• Oversight of risk and compliance• Oversight of co-operative culture,

values and principles • Accountability to the membership

• CEO recruitment, performance management and succession planning

• Delegations and escalations of authority

• The monitoring of performance of the CEO

• Board and director evaluation• Board-management relations• The functioning of sub-

committees• Board decision-making • The development of board policy

Regulation

Consultation on the reform of the Legacy Credit Unions Sourcebook

• Limits on deposits• 10% capital requirement• £500,000 absolute lending cap• Cap of £15,000 on inter-credit union lending• Reduction of borrowing limits on larger credit unions • Loan book yield – determined • Increasing liquidity requirement• Restriction to entering only “regulated mortgage contracts”• Financial ratio requirements for additional activities• Removal of 2 per cent general loan loss provision• Definition of payment services • Outsourcing requirements