WHEN the economic secretary to the Treasury John Glen stopped off in Glasgow this week, his mission was to gather information that could help inform government thinking on financial inclusion.
Having paid a visit to First Class Credit Union – an organisation that was set up in 1992, initially for employees of Royal Mail but now for all communications workers - he said the ultimate aim is to come up with ways to “encourage people to engage with and use credit unions”.
First Class chief executive Andy Wright shared his thoughts with the minister on what the benefits of a credit union are: run as co-operatives on a not-for-profit basis they are able to provide low-cost loans – of up to £20,000 in First Class’s case - to their members by repurposing the money that comes in in savings, generally directly from payroll.
For Matt Bland, head of policy at the Association of British Credit Unions, however, the laws governing how credit unions operate are outdated, with both he and Mr Wright urging Mr Glen to consider some updates.
“The law was done in the 1970s and while there have been various bits of reform it’s still not very clear and could be improved so credit unions can do more,” Mr Bland said.
“There are certain kinds of loan agreement that the regulator thinks the law doesn’t allow. We’d also like to be able to service other types of groups and provide other products.”
Yet while credit unions work particularly well for people who are in a position to save even small amounts of cash every month, there is still a large section of the population that has to rely on high-cost credit providers such as payday lenders in order to meet their basic living expenses.
Mr Glen noted that the Government is keen to “look at what it can do in the domain” of affordable credit, but conceded that for those with poor credit histories and employment records – in other words those who are most in need of an affordable credit product - the cost of debt is always likely to be high.
“I think we need to be very realistic about the fact that some individuals will not have a profile that allows them to access the best interest rates,” he said.
“We need to find them the best possible product for their profile and we need to find ways of demonstrating – for example through the rent recognition challenge – that there are ways for them to secure better loans and finance.”
The rent recognition challenge, announced in the 2017 Budget, was a project that invited fintech businesses to come up with apps that would allow rental tenants to record their success in meeting rental payments. While finished products are yet to be released, the idea is that the technology will enable renters to show their creditworthiness in order to access better terms on loans.
Mr Glen said the Government is also keen to encourage savings behaviour as opposed to a reliance on debt and has recently announced a help to save scheme that rewards low-income households that save £50 a month for two years with a £600 bonus.
While both initiatives go some way to addressing the issues faced by people who are locked out of accessing mainstream financial products, the problem for the Government will be working out a way to stop the most vulnerable in society – those that do not have access to technology or the means to be able to save – from being stuck in a never-ending spiral of expensive debt.
In the meantime, Mr Wright and Mr Bland believe the Government should do more to encourage a larger number of employers to set up or provide payroll access to credit unions for the benefit of their employees.
“It’s about an employee benefit,” Mr Wright said. “Should employers be interested in the financial wellbeing of their employees? Yes, but they look after things like health and safety but don’t tend to think about that.”
Mr Bland added that while some employers may be concerned that it would cost them money to offer access to a credit union, they would not be liable for paying anything on their employees’ behalf and would only have to foot a small monthly admin cost.
“There’s no risk to the employer but a lot of benefit because there’s evidence that lost hours and productivity from being financially stressed is actually a big cost for businesses,” he said.
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