However, a Yorkshire-based analyst has warned credit unions could struggle to challenge the major banks because they don’t have as much cash to spend on advertising.
Stephen Baylis, a financial lawyer, said any credit union would need to have significant reserves if it was going to make its voice heard above the chatter of high street brands. The changes, under a Legislative Reform Order, mean credit unions, which are not-for-profit organisations, can pay interest on savings and expand beyond their traditional customer base.
In the past, credit union membership has usually been limited to a geographic area or a ‘common bond’, such as membership of a church, community group or employer. There are 34 credit unions in Yorkshire with 100,000 members. Altogether, there are around 420 credit unions in England, Scotland and Wales with about one million members.
A spokesman for the Association of British Credit Unions said: “Along with the legislative changes which came into force this week, which will strengthen credit unions by enabling them to broaden their membership base and develop new partnerships and products, the FSA (Financial Services Authority) has introduced new rules for credit unions which will strengthen prudential standards.
“The FSA is increasing its supervisory emphasis on securing compliance with governance, prudential and reporting requirements in a more timely fashion.”
On average, around six credit unions are declared in default each year, with customers compensated by the Financial Services Compensation Scheme. In 2009, Leeds City Credit Union received an emergency bail-out of £4m from public funds to stave off financial collapse.
In a statement, the FSA said: “In cases where we find the quality of governance is inadequate, even if the credit union is solvent, we will look to take action to address the risk that poor governance poses to the credit union.”
In most cases, smaller credit unions will need to have initial capital of at least £10,000, while larger credit unions must have at least £50,000.
Mr Baylis, who is head of finance law at Langleys’ York office, said: “The major problem credit unions have in the UK is that there is a very low rate of participation. In other countries, for example Ireland, 50 per cent of the adult population are members of credit unions. If it is to be a revolution in banking it is likely to be a quiet one, spread by word of mouth. In that regard, the consumer can spark a surge in product interest through the internet. This probably represents the credit unions’ best chance of spreading their message. In reality that message will only spread if it is a good one.
“That in terms of finance means the credit unions offering higher than market interest rates to savers and lower than market interest rates on loans. The change in the legislation on its own will not allow the credit unions to offer such options. They may still be left to trade on their current selling premises of ‘not as good in terms of rates but ethically more acceptable than the high street brands’.”
Mr Baylis said that this line had been taken by organisations such as the Charity Bank, but they have not been able to make much of a dent in the market, because they need to price products to reflect the extra cost of taking an ethical stance.