Credit Union Expansion Project

1. Credit Union Expansion Project Ratnam Maheswaran Policy Manager, Department for Work and Pensions Credit Union Expansion Project Claire Porter Policy Adviser, HM Treasury Tackling Britain's High Cost Credit Problems 25 February 2013

2. Content Background Department for Work and Pensions & Credit Unions Feasibility Study Credit Union Expansion Project Aims and requirements Funding Model Next Steps HM Treasury Interest Rate Consultation Next Steps Credit Unions and Welfare Reform OGD Support for Credit Unions Questions

3. Background – DWP and Credit Unions < 2006 – Limited involvement > 2006 – Significant involvement Invested over £100m Contracted with 150 organisations 610k loans worth over £275m Saved (low income) borrowers £245m in interest 40% borrowers, also save 2012 Feasibility Study identified challenges and opportunities

4. Background – Feasibility Report The report said Credit unions can and should expand, modernise and become financially self sustainable Government needs to support that change with: Funds Consultation on the maximum interest rate cap To receive funds the contractor needs to demonstrate commitments and make financial contributions towards some products

5. Objectives & key deliverable dates CUEP CUs to become sustainable by March 2015; Serve more people on low incomes by March 2015 and 1 million more people by March 2019; Save low income consumers up to £1 billion in loan interest repayments by March 2019; This will be achieved through, for example, the introduction of: Automated decision making Integrated / centralised services New financial products that people want Marketing of the new improved services

6. CUEP – Requirements Minimum 15 credit unions with maximum of 120k members Plan for a minimum further 25 credit unions by October 2014 with a further minimum 200k members Plan for 500k additional adult members by March 2015 Each credit union to be financially solvent Plans to detail membership growth in Tiers

7. CUEP – Expected Funding Model Payment based on results, achievements of growth targets and meeting product delivery milestones Management information to inform payments by results that will measure: Efficiency New member volumes Deposit and loan values Payment for Growth targets subject to evidence of achievement Payment for achievement of milestones will be split with payment linked to product development milestones, product and service delivery and of proven usage

8. CUEP Next Steps Tendering process has ended and DWP received a number of bids Bidding organisations were advised of our preferred supplier to deliver credit union expansion on 31st January Subject to satisfactory outcomes to discussions with the preferred supplier, we anticipate we will be in a position to contract soon Contract will run until 2015

9. Why increase interest rate cap? The Feasibility Study found the average unit cost to a credit union to deliver a loan was £108 The maximum income a credit union makes on a typical £500 loan is £68.00 Resulting in a shortfall to the credit union of £40 This illustrates that the average gross income from a £500 loan does not match the costs involved in making that loan For loans of less than £500 the shortfall to the credit union is even greater

10. Options considered Remove the interest rate cap Increase the interest rate cap to 3% Increase the interest rate cap to a fixed amount, higher than 3% Any change to the interest rate is permissive

11. Interest Rate comparison CUs charging 3% per month (42.58% APR) on a £400 loan over one year Total repayment of £477.36, cost to the consumer of about £19.34 per £100 borrowed per year Home collected charges 254.5% APR, on a 3400 loan over 50 weeks Total repayment of £700, and a cost to the consumer of about £75 per £100 borrowed per year Payday lender loan over one month (rather than one year), charge at 1,410% APR on a loan About £25 cost per £100 borrowed over one month If the loan is rolled over, the cost doubles to £50 per £100 borrowed over two months

12. Consumer Credit Act Credit unions are exempt from the CCA-1974 The Consumer Credit (Exempt Agreements) Order 1989 means CUs charging up to 2% are not regulated by the Consumer Credit Act 1974 If the cap increases credit unions can charge from 2% to 3%, then the Government plans to amend the cap as listed in the Consumer Credit (Exempt Agreements) Order 1989

13. Interest Rate Increase Next Steps - Indicative HMT Consultation period ends: 15 March 2013 Government Response Summer 2013 HMT & BIS Parliamentary process Interest Rate Consumer Credit Act 1974 Autumn 2013 Rate Cap / CCA introduced April 2014

14. Credit Unions and Welfare Reform A key aspect of Universal Credit is that it should mimic work and receipt of a salary Credit Unions can make an impact as benefit claimants transfer to Universal Credit and into work by offering the products and services they need UC Exceptions Programme Delivery of new local provision to replace Community Care Grants and Crisis Loans for general living expenses

15. Other Government Departments HMT – Credit Union Legislative Reform Order, last year, allowed credit unions to serve tenants of housing associations and employees of national companies, even where they live outside the geographical area HMT – Rate Cap Consultation OFT – Interim report on the payday lending market issued last year. Final report due shortly BIS- Commissioned a study on high cost credit to look at the impact of a cap on the total cost of credit. The report and government response due shortly. MoJ – Working with ‘Unlock’ to get prisoners better access to CU bank accounts etc DfE – Currently consulting on the new National Curriculum which includes the teaching of financial education and literacy. Cabinet Office – Testing Digital Inclusion and attitude to savings with participation by credit union members

16. Questions