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Financial Matters

Credit Unions – A new dawn in the financial services sector?

Credit union membership was formerly restricted to individuals with a common bond, such as living in the same geographical area or working for the same employer. In addition, credit unions only rewarded savers with annual dividends. However, changes to the Credit Unions Act 1979, which came into force on the 8th

January 2012

liberated credit unions from these previous restrictions.

Membership of credit unions is no longer restricted to individuals with a common bond. This widening of access to credit union membership is designed to allow credit unions to market themselves and services to new individuals and groups. For example, a credit union providing services to anyone living or working in LB Southwark will now be able to serve all the employees of any company even if they do not live or work in LB Southwark.

The change in legislation provides three main benefits for credit unions. Firstly, they can increase their membership by reaching out to new groups such as developing partnerships with housing associations, charities and employers. These new members no longer have to reside or work within the geographical area that the credit union currently serves.

Secondly, credit unions can provide their services to these new members such as small businesses. Local small business and social enterprises will be able to join credit unions and support their local community. These organisations will be able to help increase the supply of affordable credit in a community by depositing money in a credit union.

Finally, credit unions have the power to pay interest on savings instead of being confined to paying an annual dividend. This single change is expected to increase the number of credit union savers. Paying interest will also enable credit union rates of return to be compared with other savings providers.

“These changes are a major breakthrough in the delivery of credit union services to communities around Britain,” said Mark Lyonette, Chief

Executive of ABCUL (the Association of British Credit Unions).

Current credit union members should not fear an influx of organisations or any fear of losing their voice. Although access to credit union membership has been granted to organisations the current legislation has put in place in a membership cap. Organisations cannot exceed 10% of the total membership of any credit union. This is designed to prevent organisations taking control and dominating community finances.

As financial co-operatives, owned and controlled by their members, credit unions have no outside shareholders to pay and any profit they make stays in the community and is used to develop the credit union and provide a return to savers.

The transformation of the financial services landscape with credit unions embracing all these new powers is some way off. Few credit unions have the capacity, systems and resources to implement these changes overnight. Moreover, these changes are not mandatory and each credit union will need to act in their own best interest. Perhaps the more prudent credit unions may reflect and learn from the demutualisation fever that infected our former building societies from 1989 onwards.

The new powers may not be a major breakthrough for credit unions as suggested but the arrival of a new headache for some boards of directors, as they battle for long term survival in the highly competitive financial services sector. Does today’s empowered credit unions mark the revival of yesterday’s building society? Time will tell.

David Frederick FCCA Principal Marcus Bishop Associates Chartered Certified Accountants

SE21 - May 2012 | 33

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