Ever wonder how credit unions are doing across the pond?

‘Credit union popularity rising as they plug lending hole in the market’

Credit unions are experiencing something of a boom. Their lending jumped 42 per cent between 2019 and 2023, according to analysis of Bank of England data.

The mutuals, which are owned by members with a common bond, such as location or industry, had £2.3bn in outstanding loans to their roughly 2.2mn members at the end of 2023, compared to £1.6bn at the end of 2019 – 2023 alone saw lending growth of 21 per cent, the largest annual increase on record. 

The relatively recent hike in the popularity of their form of finance has been substantially down to mis-selling claims all but closing down payday lending as a source of high-cost short-term loans, and the introduction of the Financial Services and Markets Act 2023, which allowed credit unions for the first time to offer car financing, mortgages, credit cards, and general insurance.

This surge in demand looks set to continue, with the Labour government viewing credit unions as key to delivering on its pledge of doubling the size of the mutual sector. It sees a sector in its early stages of development and one that would benefit from a more permissive lending environment. 

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With this in mind, HM Treasury is currently consulting on changes to the common bond requirement for credit unions, which would see increased membership, and the Prudential Regulation Authority has been updating the regulatory framework with a view to freeing up significantly more lending scope via cuts to credit unions’ overall capital requirements. 

Given this backdrop, a future of continued lending expansion looks certain for this still relatively small niche of financial services. 

However, many within the sector privately acknowledge that such expansion, while welcome, is going to present significant organisational challenges. 

And the BoE has warned that more lending to greater numbers of borrowers has and will create risks and stresses that the sector has not been used to. It says many in the sector have failed to recruit experienced leaders, even suggesting that some of the smaller unions might consider winding down or being swallowed up by rivals if they cannot step up to the plate. 

It will not have escaped their notice that some still rely on volunteers to govern or run their everyday operations, while others’ back offices fall well short of best practice elsewhere. 

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Such credit unions should note that oversight by the Financial Conduct Authority is going to be given greater impetus as the sector’s profile grows. The risks of having poor controls were evident recently with the FCA starting criminal proceedings against four individuals at the Dial-A-Cab Credit Union for conspiracy to commit false accounting. 

Thankfully, for those keen to have more professionally-run back offices, there is now no excuse for inadequate risk management systems. Credit unions can easily and rapidly advance their capability in line with growing demand and increased risk.

Plug-in automated technology exists which can allow companies to adopt digital underwriting and onboarding within days. Such platforms, which require little or no IT knowhow on the part of users, help ensure 100 per cent compliance while at the same time enabling lenders to toggle risk with highs and lows in demand. 

They also come with another key advantage: an electronic audit trail. Something many payday lenders were unable to fall back on when they most needed it. 

David Wylie is commercial director of LendingMetrics