Debt Sale and Compliance Stream at CCR-interactive

1. What future for British credit unions?
An analysis of current issues in credit union
governance, regulation and service delivery
Paul A Jones PhD
Research Unit for Financial Inclusion
CCR-interactive 2015; Debt Sale & Compliance Stream
6th October 2015, Guoman Tower Hotel, London

2. 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

3. 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

4. British Credit Union Growth 2003-13

5. Many challenges still remain
• Products and services
• Governance
• Regulation

6. Products and services
Focusing on lending

7. 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.

8. The Reality: What People Choose
Source: Dept. for Business, Innovation & Skills, “Credit, Debt and Financial Difficulty in Britain” (2012)
Use of Consumer Credit Sources in Britain

9. 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.

10. 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?

11. 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
Britain
U.S.
Canada
Australia
Home mortgages No Yes Yes Yes
Second charge home equity No Yes Yes Yes
Secured new car loans (HP) No Yes Yes Yes
Secured used car loans (HP) No Yes Yes Yes
Credit cards No Yes Yes Yes
Current account overdraft loans No Yes Yes Yes
Other revolving lines of credit No Yes Yes Yes
Gov't guaranteed student loans No Yes Yes Yes
Asset-secured small business loans No Yes Yes Yes
Share secured installment loans Yes Yes Yes Yes

12. 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.

13. Governance

14. 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

15. 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.

16. 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

17. 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

18. Why the study is important?
• To ensure that the strength of credit union
governance leads and ensures business
growth and improvement

19. 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

20. 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

21. Regulation

22. 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