Credit unions
A credit union is one way of extending low-cost financial services to local communities. Credit unions are financial co-operatives owned and controlled by their members. Each credit union has a ‘common bond’ which determines who can become a member – eg, people living or working in a particular area. They offer savings facilities and affordable loans sourced from their members’ savings.
By law, a credit union cannot charge interest of more than 3 per cent a month (42.6 per cent APR), although the average is 1 per cent a month (12.7 per cent APR). Many now provide current accounts, bill-paying services through budgeting accounts, a facility to allow payment of benefits directly into a credit union account, and savings accounts.
Credit unions, together with advice agencies, offer a range of potentially complementary services that can assist in tackling financial exclusion and overindebtedness. For example, a credit union can help clients gain access to financial services and manage their finances effectively, help and encourage them to save and budget, and may even be able to provide a loan to pay off debts. However, a loan – even at a much lower rate – is not always in the client’s best interest and more effective solutions can identified through accessing debt advice within the debt advice sector.
There are issues to consider when signposting clients to a particular credit union. To preserve independence, you should stress that you are not an agent of the credit union and must not give clients unrealistic expectations of the assistance they can expect from it. Also, make it clear that signposting does not guarantee immediate access to financial services, such as a loan. Credit unions are not charities and should only lend to people who can repay. Provided the signposting is in the best interests of the client, the fact that they may be borrowing to pay off other debts should not be ruled out in all circumstances. Bear in mind that affordable credit is not the only financial service offered by a credit union, and that access to current and savings accounts also promotes financial inclusion.
It is important to remember that credit union loans are generally not regulated by the Consumer Credit Act 1974. A credit union loan is not regulated if the APR is at or below the statutory limit (currently 42.6 per cent). The provisions of CONC, therefore, do not apply to them.
Credit union regulation
Credit unions need to apply to the Bank of England () for authorisation and approvals and they must also register with the FCA () before they can offer financial services. FSA regulation
However, the FCA’s Principles of Business (PRIN) apply, in particular PRIN 6, and so a complaint could be made to the Financial Ombudsman Service based on this – eg, unaffordable lending.
If the client defaults on a loan, the credit union becomes one of the client’s non-priority creditors. Most credit unions negotiate debt repayment terms if a client has fallen into financial difficulties, but some tend to refuse low loan repayments (such as token offers) and may decide to impose membership restrictions on other products and services. If not treated as a priority, the client is likely to lose the benefits of membership.
Debt collection is a regulated activity and the CONC rules apply.