Nikhil Rathi, chief executive of the Financial Conduct Authority, made a pilgrimage on Friday from its glass and steel HQ in east London to the Pioneers Museum in Rochdale – the spiritual home of the co-operative movement.
His unlikely day trip aimed to highlight the City watchdog’s role in opening the way to a doubling of the size of the mutuals sector – a Labour manifesto pledge.
Among these customer- or worker-owned organisations, including huge companies such as John Lewis and Nationwide building society, are the 350 credit unions.
These are locally based lenders whose interest rates are capped by law and whose clients tend to include the low-income consumers left behind by major banks. Holding assets of £4.9bn between them, the UK’s credit unions serve about 2 million members. Their US counterparts have more than 143 million.
The FCA’s new report, which Rathi was in Rochdale to launch, included a series of recommendations aimed at encouraging credit unions to expand, and to offer more services.
The Treasury has already promised to review the “common bond” – the legal promise that governs each credit union, for example specifying the area it serves – to allow these to adapt more easily to changing circumstances. Ministers have also set aside £30m to fund modernisation – updating credit unions’ IT systems, for example.
Yet campaigners for fairer lending fret that cash-strapped customers will continue to be left at the mercy of loan sharks unless mainstream banks are forced to do more.
The need is certainly there. Visiting an employability project on a housing estate in Stockton this week, it was depressing to hear about residents resorting to loan sharks, often unaware of the cheaper and less unpleasant alternative of a local credit union.
That chimed with evidence from a recent roundtable discussion organised in Glasgow by campaign group the Finance Innovation Lab, where low-income borrowers recounted their experiences to local MPs.
“When there’s an unexpected cost like that you just need to get it sorted, but you’re left with no good options,” one woman said, citing a broken bed as an example of the kind of expense that can drive consumers into paying extortionate interest rates to unscrupulous lenders.
Recent research by Fair4All Finance, the government-backed not-for-profit that promotes financial inclusion, found that 1.9 million adults in Britain had turned to unlicensed money lenders or loan sharks in the past year.
Dr Paul A Jones of Liverpool John Moores University is an expert on the credit union movement. He is optimistic about its future, and argues that some of the impetus for growth must come from within the sector itself.
“We need more credit unions of a significant size. We need more credit unions to get in the fast lane,” he says. “If you don’t want to, and you want to carry on in your village hall with 1,000 members, no problem, but that’s not where growth is going to come from.”
He welcomes some of the changes promised by the government – but warns that the constraint on many credit unions is lack of capital. “External investment is going to be important,” he says.
That’s where the Finance Innovation Lab and a coalition of other charities and lenders argue that legislation is needed, to force the powerful high street banks to play their part.
The government published its financial inclusion strategy last month, aimed at easing the struggle of consumers to secure affordable banking, insurance and other crucial services. But it included no specific targets, and made few firm demands of the finance sector.
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There was backing for a “small sum lending pilot”, led by Fair4All Finance, “to help expand access to affordable credit in England”. But the scale of the pilot was not specified – and it was unclear how it would differ from existing mutual lenders that already make small loans.
Campaigners including the actor Michael Sheen, who made a TV documentary on the exorbitant cost of debt for low-paid consumers in his home town of Port Talbot, argue for the much more muscular approach of a “Fair Banking Act”.
This would be a new law, modelled on the US Community Reinvestment Act, which has been in force for almost 50 years. Under the US version, banks are ranked by regulators according to how well their services reach underserved communities – and obliged to publish strategies to show how they will improve.
In many cases this then involves working with credit unions, or community development financial institutions (CDFIs) – another form of non-profit lender – hugely expanding the amount of capital these institutions have available to back new lending.
The coalition promoting the idea, which includes the Finance Innovation Lab alongside a string of mutual lenders and other campaign groups, argues that if such an act were implemented in the UK, it could lead to lending by credit unions and CDFIs to jump from £250m today to up to £3bn a year.
The proposal is backed among others by the Co-operative party, whose members include 41 Labour MPs, including the Treasury minister James Murray and the Treasury select committee chair, Meg Hillier.
It is a stretch to imagine the government slapping a Fair Banking Act on an industry that Rachel Reeves has called the “crown jewel in our economy”, but with the sector’s power should come responsibility.
The banks escaped the windfall tax that many on the left had hoped to see in the budget, and which the Institute for Public Policy Research (IPPR) argued could raise £8bn a year. It does not seem too much to ask that, in return, they put a fraction of that sum behind supporting the local, mutual lenders that help to keep the loan sharks at bay.