Official Report (Hansard)

COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT

OFFICIAL REPORT
(Hansard)

6 November 2008

Members present for all or part of the proceedings: 
Ms Jennifer McCann (Deputy Chairperson) 
Mr Paul Butler 
Mr Leslie Cree 
Mr Simon Hamilton 
Mr Alan McFarland 
Mr Gerry McHugh 
Mr Sean Neeson 
Mr Jim Wells

Witnesses:
Mr Eric Leenders, British Bankers’ Association

The Deputy Chairperson (Ms J McCann):
On behalf of the Committee, I welcome Mr Eric Leenders to the meeting. I remind members that this session will be recorded by Hansard. Eric, if you make your presentation first, members will ask you questions afterwards.

Mr Eric Leenders (British Bankers' Association): 
I am the executive director of the British Bankers’ Association (BBA) responsible for retail banking. Members may wonder why someone has flown in from London to speak about credit unions in Northern Ireland. There used to be a Northern Ireland Bankers’ Association (NIBA), but it closed its doors for business for the last time in April. As a result, the BBA was asked to take on greater responsibility in Northern Ireland; that is why I am here rather than a representative of NIBA. It also explains why the short letter that we wrote to the Committee in June was written under the BBA letterhead.

The four former clearing banks in Northern Ireland are: Bank of Ireland, First Trust, Ulster Bank and Northern Bank.

I want to consider the three areas referred to in the submission that we made earlier. However, much has changed in the economic climate since June. I will want to reconsider some of the points that were not drawn out fully in that letter but which are now prescient, particularly about protections for consumers.

As I said, there are three key areas. Under the provision of services, I want to talk about competition and regulation. I appreciate that an expert from the Financial Services Authority (FSA) spoke to the Committee earlier, but I would like to add a couple of comments to what he said. Secondly, from what I have read it would be useful to consider the customers’ perspective: specifically, their perspective on savings and financial services in the light of the credit crunch and the recession — or economic downturn — that we will face over the next couple of years. As part of that, we also need to think about redress and appropriate mechanisms for redress in cases where things go wrong. Finally, I will talk about products, which you have already discussed, and how banks see themselves supporting credit unions. As I will explain when we talk about competition, it is not necessary that banks and credit unions go head to head or that the environment becomes polemic.

The view of the British Bankers’ Association is that the banking industry would not necessarily regard the credit union movement as direct competition. Neither would it view any broadening of the mandate or the scope of activity of credit unions as competition that should not be welcomed in a marketplace anyway.

The banking industry believes that its products will stand or fall on their own merits where there are competing interests for consumers. There are constituencies of the population that would probably migrate more naturally to credit unions than to the banking sector; specifically, people who wish to obtain small sums of credit, for example, where there is more direct competition with home-credit providers and some of the emerging industries, such as those that offer auto loans and payday loans, which present their own opportunities for credit unions.

As I mentioned earlier, I am aware that the Committee has spoken to the Financial Services Authority and to Mark Lyonette. Bearing in mind the papers that I have seen and my experience of credit unions, the FSA’s regulatory model — or CRED, the credit unions’ sourcebook — is not as onerous as some might think. There are some very small credit unions, but the point that I wish to make about regulation is linked to my earlier comment about protection. In the past few months, we have seen how quickly confidence can drain away from any sector of the financial services industry. As a result, it has been recognised that there must be appropriate regulation.

There is a competitive dimension, however, and although the banks do not view the credit unions as a direct competitor, there are other bodies in more direct competition with credit unions that wish to see a level playing field with regard to regulation.

In order for consumers further to develop confidence in credit unions as they move into potential new markets with new products, they must have an assurance that if something goes wrong, there is a redress mechanism. The FSA’s regime, as established in Great Britain by the Financial Services and Markets Act 2000, includes the Financial Services Ombudsman’s scheme, which the banks subscribe to and which provides a redress mechanism. The Committee should perhaps consider that scheme from a consumer perspective rather than from that of the industry particularly.

The usual suite of products has been drawn to the Committee’s attention in the papers that have been provided. I have touched on two that were not mentioned — auto loans and payday loans. There are opportunities in existing markets in which credit unions operate. The Committee may wish to examine the existing portfolio and range of credit union services further.

By way of an advertorial for the way in which the banks support the credit union movement, I will use a neutral case study.

Barclays Bank has done a great deal of work with credit unions to develop credit-scoring and credit assessment techniques and introduce actuarial methodologies and scientific calculations rather than the simple paper-based or face-to-face assessment that is often used. That is an example of the way that, particularly in Great Britain, the banks look to support credit unions.

Banks also provide a great deal of seconded support, as well as bespoke funding for particular projects; they see it as part of their corporate social responsibility. I have heard nothing to date that suggests that that will not continue. In the UK, banks have been long-time supporters of the credit union movement and have continued to support it, although some might say that credit unions have moved into areas traditionally considered to be those of retail banking.

That concludes my short and rather rambling essay. Those are the main heads of discussion that I want to bring to the Committee’s attention.

Mr Wells:
It was almost prophetic that the Northern Ireland Banking Association decided to wind up in April: it has avoided having to face the TV cameras and explain what has happened since. It is unfortunate that BBA is asked to answer all the difficult questions.

The Committee has found in its inquiry that a huge amount of money available for child trust funds is not claimed. That tends to occur at the lower end of the market; many working-class families are unaware of it. Credit unions could offer that facility because they have direct contact with those communities. If credit unions were given powers to take on the role of managing child trust funds, might that present a problem for your members?

Mr Leenders:
I see none. One of the frustrations is that too many of the vouchers are pinned to noticeboards or stuck to fridges in kitchens and not acted upon. The underlying aspiration of the child trust fund scheme is to introduce financial education at an early stage in the curriculum; kids have a pot of money that they can talk about. The scheme does more than provide some cash for kids as they grow up.

It would be a good thing if more people got involved in the debate and if enthusiasm fired up. However, I am not wholly convinced that increased supply will trigger increased demand. Those involved in encouraging financial inclusion at policy level must give some further thought to that. Nevertheless, in principle, if credit unions want to move into the provision of child trust funds, I see no problem with it.

Mr Wells:
Many of those who have an account in a credit union do not have one in a bank. If the child trust fund scheme can be offered by credit unions, the credit union can suggest it to customers — for example, on a one-to-one basis in the office some night. Otherwise, those customers will not get such direct contact because they are not bank customers.

How do you feel about the idea of some credit unions coming under the regulation of the FSA, while others remain within the rules of the Department of Enterprise, Trade and Investment?

Mr Leenders:
Banks are, coincidentally, going through a broadly similar exercise with the regulation of retail banking. In the past 24 hours or so, the FSA has produced a consultation paper with a view to taking a closer interest in banking regulation. Until now, we have had the banking code.

It is more about making sure that there is equity in the regulatory burden so that none can take advantage of a lighter or lower regulatory threshold. There must be consideration of the extent to which that is a theoretical rather than an actual risk; however, that would take an analysis of what a lighter touch for smaller credit unions regime might look like, as against a full FSA-type regime.

Whatever scheme is chosen, it must give consumers confidence that there is sufficient regulation to ensure that prudential and supervisory responsibility would be met, notwithstanding the size of the credit union.

Mr Butler:
Thank you, Eric, for your presentation. The banking system in Great Britain operates alongside credit unions and offers financial services. Can you give us examples of how the credit union and banking systems could work here?

Mr Hamilton:
Jim Wells touched on the possibility of mixed regulation. I believe that your preferred suggestion was for all credit unions to come under FSA regulation. Would the BBA object to the restrictions on services being lifted for credit unions in Northern Ireland but having regulation remain with the Department here? Would that cause any difficulty for your members?

Mr Leenders:
I will take the last question first, because it leads more naturally from my earlier comments. Provided that there is appropriate regulation that does not create a regulatory arbitrage so that some could take advantage of a lighter-touch regime, and provided by extension that there is co-ordination in the event of different regimes, that approach could be explored. Our concern is that consumers are protected through regulation and that an innate advantage should not be gained.

Mr Hamilton:
It is more a question of the robustness of the regime rather than of who the regulator is.

Mr Leenders:
I have not heard, from the experience in GB, that the FSA’s CRED Regime has been particularly onerous, even for smaller credit unions.

Mr Hamilton:
That is what we have heard.

Mr Leenders:
I appreciate that that has been commented on. Barclays Bank is a good example of giving the mechanics to credit underwriting. The provision of personal current accounts has also proved successful, and increasing numbers of credit unions in the UK are looking to do that. They do that by partnering with co-operative financial services so that they do not have to create an infrastructure; rather, they white-label an existing product.

Some credit unions have been able to charge for personal current accounts in a very competitive market, where the retail banks in Great Britain have found it very difficult to move away from a fee-free account if in credit. That strikes at the core of financial inclusion because it involves transactions and transacting business. Others have looked at the issue very carefully and have started to provide debit cards, for example, that can be attached to products and services. That is getting into transactional banking.

I do not want to leave the Committee feeling that the banks are uninterested and trying to park those at the margins with credit unions. Across the UK, banks open about 50,000 basic bank accounts per month net. That is taking account of those that have closed. We feel that we are meeting a demand and, in the context of wider competition, we feel that there is room in the market for others as well.

The Deputy Chairperson:
There is a demand from customers that services such as ATM machines, for example, should be available from credit unions.

There is also a demand for better borrowing facilities because of the more competitive interest rates, which will benefit the consumer in these times of economic downturn. Witnesses from the credit unions told the Committee that an expansion of the facilities that they offered would attract more customers and that the increased revenue could be reinvested in social-economy enterprises. That increased custom would open up investment opportunities and assist in growing the economy and benefiting the greater community. Is that a likely outcome of increased credit union services?

Mr Leenders:
The longer-term investment of assets is quite a different skill set from the provision of retail financial services, and the Committee should reassure itself that the credit union sector has sufficient skills in that sphere. I do not think that the credit unions in Great Britain invest in that way. It would be a challenge in some areas to match the longer-term yield from such investment to the shorter-term demand for interest on savings, for example. Some fairly sophisticated balance-sheet techniques would be needed, and there would need to be a careful assessment of the capital held and clear considerations of the appropriate capital adequacy would be required.

In more simplistic terms, if all the cash is tied up in longer-term investments in community projects that are not necessarily providing a yield, where is the cash flow to meet the monthly interest commitment? It would involve significant issues of asset, investment, and balance-sheet management. Expanding their facilities would move credit unions into a field that would require sophisticated financial services and competences — although I do not suggest that they should not move into that area.

Mr McFarland:
The Committee heard a few weeks ago that, given that credit unions are of different sizes, one of the options would be for the larger credit unions that wished to move into the banking sphere to form themselves into a private company — a bank, one could argue. Such a private company would come under the remit of the FSA and would provide all those services under discussion, whereas the smaller credit unions would remain independent. You suggest that a split system may not be sensible, but could larger credit unions form a private company or bank?

Mr Leenders:
Whatever the corporate structure or form of governance involved, regulation should be considered for the protection that it provides for consumers, and that needs to be pitched at the right level. That might involve a mechanism to establish greater protections because, as a larger entity, a company is more comfortable in dealing with the FSA, for example. However, that should not lessen the responsibilities of the smaller credit unions that operate under that umbrella. There are governance issues that would need to be explored in that regard.

Mr McFarland:
Should a group, such as a football team, for example, be allowed to join a credit union, as opposed to an individual?

Mr Leenders:
I see no objections in principle. However, that would to an extent be predicated on the demands that such groups made of a credit union. In the case of a micro-enterprise — an example was a mother and toddler group — I see no challenge or difficulty.

Larger organisations with cash-flow management and borrowing requirements involve more sophisticated decision and underwriting techniques. That is not necessarily an issue, provided that the competency exists. However, from the evidence thus far, in principle, I see no problem.

The Deputy Chairperson:
If members have no further questions, I thank Eric for attending and for sharing his views with the Committee. May the Committee submit further written questions to you if necessary?

Mr Leenders:
Yes, by all means.