Loosen Credit Union Lending to Help Vulnerable Consumers, FCA Urges

The Financial Conduct Authority (FCA) has urged the government to loosen regulation on credit unions so they can be an alternative to payday lenders for vulnerable consumers.

The financial regulator said more lenient laws would allow credit unions to offer a wider range of lending products, keeping them from turning to expensive payday lenders.

Credit unions are non-profit cooperatives controlled by members and operating as alternatives to commercial banks. There are more than 400 in the UK, offering savings and loan products for local communities, especially the less financially secure.

While their lending criteria is generally less stringent than that of commercial banks and they offer loans for smaller amounts, they may still turn away more vulnerable customers, who then resort to payday loans.

Easing regulation on these lenders would allow them to serve as a safer alternative for more high-risk customers, the FCA said.

The FCA made the recommendations in a report on alternatives to high-cost credit, published this week.

Regulation from the FCA, introduced in 2014, limits the amount of interest and fees payday lenders can charge to less the amount borrowed. And last August, toughened regulation and consumer compensation complaints toppled Wonga, a payday lender once controversial for its steep interest rates—of up to 5000%.

In contrast, in England, Scotland, and Wales, credit unions can charge a maximum annual percentage rate (APR) of 42.6%, while in Northern Ireland their interest rates are capped at 12.7%.

But regulation has prevented credit unions from serving the most vulnerable borrowers.

“In the short-term at least, the capacity of credit unions to make credit available to a significant portion of high-cost credit users is limited,” the FCA said.

“We believe that, in the longer term, to facilitate the growth of larger credit unions, HM Treasury should consider if there is value in a review of credit union and society legislation.”

The Associated of British Credit Unions Limited, which represents 187 credit unions, welcomed the FCA’s suggestions.

“Credit unions – by a margin of hundreds of millions of pounds – are the most active and sustainable providers of affordable credit to those underserved by the mainstream and who borrow from expensive alternatives. Our work suggests that liberalising the Credit Unions Act to broaden our powers would allow credit unions to expand and play a bigger role in disrupting high-cost credit.”

The Treasury said it is already investing £2 million to support innovation among credit unions.