Oral evidence: Treatment of Financial Services Consumers HC 631Wednesday 4 February 2015
Oral evidence, 4 February 2015.
Witnesses
Lakshman Chandrasekera, Chief Executive, London Mutual Credit Union Ltd, and Andy Caton, Chief Officer for Treasury and Corporate Affairs, Yorkshire Building Society, gave evidence.
Chair
We will begin because there will be a vote and a number of colleagues want to get in. Let us begin with you, Mr Caton. The coalition agreement contains a commitment to promote mutuals and foster diversity. What has become of that commitment? Has anything happened on it?
Andy Caton
I think probably there is more evidence of protection of the mutual sector over the life of the coalition Government, but probably less evidence of promotion. The sorts of things that would come to mind are the consultation we had on the leverage ratio through the FPC. At one stage, that looked like that could have quite a draconian outcome for lower-risk lenders such as building societies. The end result of that is something that is a lot more palatable where we have a base leverage ratio around the 3% level. I think that was a major point of industry concern. Capital is obviously a very important area for mutual organisations as the requirement for better-quality capital has clearly come about. We have had the development in the building society sector of core capital deferred shares, which has now been issued by Nationwide.
Chair
That generates balance sheet risk, though, doesn’t it?
Andy Caton
I think that depends how you interpret balance sheet risk. It clearly provides extra capital.
Chair
Enough to make the regulators consider whether you need more capital to support you.
Andy Caton
Generally speaking, the regulator is pleased to see more capital come on to the balance sheet. That is meant to make the balance sheet more secure. Other external stakeholders such as wholesale investors and rating agencies want to see that institutions have access to external means of capital. Clearly, the conundrum for a mutual organisation, and in many ways the benefit, is that we are largely driven by retained earnings. The benefit of that is that our business planning is done on a very long-term basis. It is very aligned to customer needs but, on the other hand, we are often perceived as not having access to wholesale markets in the way that other share-based banks would do.
Chair
And therefore more vulnerable to both liquidity and solvency risk.
Andy Caton
Potentially. That could be the interpretation. We are very alive—
Chair
Because if you have all your eggs in one basket, you are vulnerable just on liquidity grounds because if you have mismanaged the shape of your main portfolio, you may find yourself running out of cash.
Andy Caton
To be honest, I think that that is common across a bank balance sheet structure as well as a building society structure. The perception would be more in terms of access to external capital rather than liquidity per se.
Chair
Anyway, have the Government really done much to help the mutuals or not?
Andy Caton
As I say, it has probably not actively promoted mutuals. The debate seems to have been much more centred around promotion of public sector mutuals, which I thoroughly understand. Perhaps going forwards in the development of new regulation there could be a call for explicit consideration that new regulation that is coming in does promote additional diversity, whether that is the challenger banks or existing challenger institutions, such as 150 year-old building societies, and that it is in line with the objective of promotion of mutual interests.
Chair
Mr Chandrasekera, you are offering similar services to those of banks and building societies. Are you actively trying directly to compete with them?
Lakshman Chandrasekera
Yes, we are. We are working with the local communities, so it is very different to any other business model. We are trying to be transparent from day one. We have a current account and we charge 95p a week, because we know what it costs to run the current account, and our members know exactly what they are getting from day one.
Chair
Were you listening to the discussion that took place at the latter stages of this last hearing?
Lakshman Chandrasekera
Yes.
Chair
You then went out of the room just at the moment we would have liked to ask you follow-up questions to that.
Lakshman Chandrasekera
I am sorry.
Chair
Perhaps you can say what you might want to say in response to that. Are you saying that you are finding that by telling people how much they are being charged, you are getting more custom?
Lakshman Chandrasekera
Yes.
Chair
People welcome the truth is what you are saying.
Lakshman Chandrasekera
That is exactly what it is. We are transparent from day one. There are other products and services that they are getting from the credit union. Yes, they pay 95p a week, but they have access to cheaper loans, advisory services and so on. That is one of the reasons why so many members are joining.
Chair
Very interesting.
Teresa Pearce
Is it correct that London Mutual’s cash ISA is market-leading?
Lakshman Chandrasekera
It was last year. We were offering 3%, but it was too demanding, so we reduced the interest to 2%.
Teresa Pearce
Have you now ceased taking applications for it?
Lakshman Chandrasekera
That is right, yes.
Teresa Pearce
Was it too popular?
Lakshman Chandrasekera
It was too popular and we did not need that much liquidity in our balance sheet, so we had to stop that.
Teresa Pearce
Do you think that credit unions are better equipped to compete in the savings market than the ordinary personal current account market?
Lakshman Chandrasekera
We are specialised in the loans market—it is our forte. A larger number of members are borrowing a small amount of loans. In order to lend money we need to raise capital, so we found ways of raising capital. One thing that came from the 2010 legislation was allowing the credit unions to have interest-bearing accounts, so we introduced the cash ISA, and if we are running out of cash, we increase the interest.
Teresa Pearce
You say that the cash ISA was very popular—or a bit too popular. Are there any risks posed by attracting too much ISA savings?
Lakshman Chandrasekera
Yes. We were monitoring very closely and we took action last year to reduce it. We knew our liquidity was going up and we could not lend that money to the members. It is risky, but we need to monitor it.
Teresa Pearce
You reduced the rate and then you closed it altogether.
Lakshman Chandrasekera
Yes.
Teresa Pearce
Right, okay. Mr Caton, the Yorkshire Building Society offers 19 different savings products to the over-18s. Many of them look very similar to me. Why does it have so many?
Andy Caton
It probably reflects the fact we operate under different brands. Through the financial crisis we went through a number of mergers. We merged with Norwich & Peterborough Building Society, Chelsea Building Society and Barnsley Building Society, for example, and we tend to have very similar products, but we like to keep those local identities. Those original building societies are very well known in their own locality, hence we have quite a replication of products.
Teresa Pearce
Are you saying that most of these 19 different savings products are pretty much the same product with a different stamp on it?
Andy Caton
Yes, more or less. I am sure there will be some differences between them. I am not familiar with every single one of them.
Teresa Pearce
Do you think that would make it difficult for savers to try to look through and see whether they are the same or different? Is there any way you could make it simpler for a saver to identify the best deal for them?
Andy Caton
We certainly try to do that. One thing we are keen to emphasise is disclosure of interest rates, and making sure that is very prominent in statements, on our website and on the investor page, and keeping the range itself fairly simple as well.
Teresa Pearce
Clearly you want new customers. Do you offer better rates of interest to new customers than to existing savers—old savers?
Andy Caton
No. We are slightly the other way round. One of the rather painful experiences, to be honest, over the past couple of years has obviously been the impact of low base rates and the impact of the Funding for Lending Scheme, and we have gone through three broad waves of adjustments downwards in administered savings rates—the rates that we manage as a society. In each of those cases, we have tried to protect existing members as much as we can. We have a number of off-sale accounts that offer higher rates than on-sale accounts. Part of that is the fact we are a member-owned organisation, so it is logical that we benefit existing members, and partly we are in an environment where we are trying to protect ourselves against too much retail savings inflow as well.
Teresa Pearce
You would never offer teaser rates?
Andy Caton
No. We have a long-term agenda to try to maximise customer benefits over the long term. We will be actively in best buy tables, for example. I think over the first six months of last year we had over 700 savings best buys, but we try to maintain those price positions over the long term, rather than being in and out of the marketplace.
Alok Sharma
Mr Chandrasekera, can I turn to you? I think London Mutual was the first credit union to offer payday-style loans. What motivated you as an organisation to get into this market?
Lakshman Chandrasekera
There were two reasons. It was to protect ourselves and our business to begin with, because we found that some of our members were getting into trouble with payday lenders and not paying our loans. When it comes to collecting money at the end of the month, they do not have money in the bank.
Alok Sharma
That is interesting. When you do the application test, I assume your potential customers are required to tell you whether they have outstanding payday loans already?
Lakshman Chandrasekera
They will tell, but most of them do not tell. They do not lie. They do not give the whole picture. We use the credit reference agencies to find exactly what amounts are outstanding, but with the credit reference agencies, there are so many things missing in there as well. Someone can take a loan from one lender last week and it is not updated.
Alok Sharma
Right now, what percentage of your balance sheet is payday loans?
Lakshman Chandrasekera
Very small. I would say 5%, if anything.
Alok Sharma
Do you have a limit in percentage terms that you will allow for payday loans, so there comes a point where you just say, “That is it, we have reached 10%, 15%”?
Lakshman Chandrasekera
No, because through the payday loans we are attracting a new breed of customers or members who are working and who earn good money, but have some small problems in the short term. Once we start to attract them and give the first loan, they start to take long-term loans from us and then stay with us borrowing money. That is how we make money from them.
Alok Sharma
Okay, but your payday loan business is still making a loss?
Lakshman Chandrasekera
Not now, no. Last year the interest rate increased from 2% to 3%, so we have started at least to break even now.
Alok Sharma
Okay, you are now breaking even, because I think you were making a loss of £1 per payday loan at the time.
Lakshman Chandrasekera
At that time, yes.
Alok Sharma
Has the PRA, the Prudential Regulation Authority, expressed a view on your payday loan operations?
Lakshman Chandrasekera
No.
Alok Sharma
Nothing at all?
Lakshman Chandrasekera
Nothing at all, because I think we are not breaking any laws and we are upfront, and we do not have any hidden charges or anything like that.
Alok Sharma
Can I talk to you about your default rates? The figures that we have in front of us suggest that your default rates are higher than those of payday lenders such as Wonga, for instance. Does that suggest that your checks are not as tight as they could be?
Lakshman Chandrasekera
I do not know what the Wonga payday default rate is.
Alok Sharma
As I understand it, the comparators are that you have a 10% default rate and Wonga, as an example, has just over 7%.
Lakshman Chandrasekera
Yes, we do have 10%, but 80% of our applications are going through non-automatically. Someone has to decide on the loan application.
Alok Sharma
Obviously, when you go through and work out who basically to lend money to, there is quite a large attrition rate. There are a lot of people you reject. Could it be argued that what you are doing is effectively taking the best payday loan customers and the rest are being shoved out on to the high street lenders?
Lakshman Chandrasekera
No, I think most of the people who get rejected are people who are probably unemployed and not earning enough money. We have a threshold of a minimum earning of £12,000 per annum, so if they do not fulfil that, they get rejected. At the same time, we have other loan products for them. We reject the payday loans, yes, but we offer them other loans—open the account and save with us.
Alok Sharma
How many other credit unions that you are aware of are offering the same style of payday loan as you?
Lakshman Chandrasekera
None in the UK.
Alok Sharma
Why is that?
Lakshman Chandrasekera
I do not know. I think some of them—
Alok Sharma
That must be a discussion that you must have with your credit union peers. If you are telling us that you have a model that is now break-even and the reason for having this model is that you get additional business that is profitable, why is not everybody else doing this?
Lakshman Chandrasekera
We are talking to a number of other credit unions and the Welsh Government are interested. They are coming to see our systems. One credit union is trying to use our system, because we are sharing our system free of charge. It is going on right now, but then the interest rate cap came up, so a little bit of demand—
Alok Sharma
You said you are sharing your systems. What does that mean? Are you providing the backbone infrastructure and saying to other credit unions, “You can use this for free”?
Lakshman Chandrasekera
Yes.
Alok Sharma
How many have expressed interest?
Lakshman Chandrasekera
Only one so far, and then there are a number of others talking.
Alok Sharma
A very final question. Is it right that you use psychometric tests to determine eligibility for payday loans?
Lakshman Chandrasekera
Yes, we did up until last year. We stopped that one because we wanted to see whether that theory is working or not. We stopped it.
Alok Sharma
It did not work.
Lakshman Chandrasekera
It did not work.
Chair
Was it the Reverend Flowers who was appointed on psychometric testing? I think he was partly.
Mike Kane
Mr Chandrasekera, you just mentioned that the Government introduced a cap, but the problem with the cap, speaking as someone who campaigned for the cap before I came to this place 10 months ago, is that you can take out a payday loan with a credit union, which I think is at generally much more preferable rates—there are other credit unions in Southampton and Manchester, of which I am a member, that do some payday loans—and then, unlike in the United States, you can go ahead and take out a payday loan from the commercial sector at the same time. Is that a big problem?
Lakshman Chandrasekera
Yes, it is. Right now, one of the problems we are having with the credit referencing agencies is we cannot get the true picture of a member. That is why we are talking to them to see if we can get things updated on a daily basis—someone can take a loan from one payday lender yesterday, but we will not know if that person came to us today what the existing balance is and so on—so that we can make a better decision based on that.
Mike Kane
You do not have real-time market information on that customer, do you?
Lakshman Chandrasekera
No, we do not right now.
Mike Kane
Do you think that is the next stage of what the next Government should be thinking about in terms of tackling this industry?
Lakshman Chandrasekera
Definitely. To add to that as well, it is for the credit referencing systems to include the rent and council tax aliases so that we can get a better picture of someone by having all that information in one place.
Mike Kane
Is it a lonely place being the chief executive of a credit union? Do you feel you get much political support?
Lakshman Chandrasekera
I think Governments are supporting. The current Government have spent nearly £33 million on the development project and the previous Government spent something like £80 million on the growth fund. Governments are supporting the credit unions a lot, yes.
Mike Kane
Good. Are any senior party members customers of yours?
Chair
You are not obliged to answer that question.
Lakshman Chandrasekera
Okay, maybe I won’t then. We have quite a lot, yes. I do not want to name names.
Mike Kane
I want to ask both of you a question. I am a Co-operative Bank customer back home in Manchester. Should I keep this card or should I not?
Andy Caton
I cannot answer that question. I think that is probably down to your own personal choice. I would like to see Co-operative Bank getting over its current troubles and being a thriving mutual.
Mike Kane
That is very nice of you.
Andy Caton
It is part and parcel of the diversity of UK financial services.
Chair
It adds to diversity, yes.
Mike Kane
You are expanding into more diverse products, but that is what the Co-operative Bank got into trouble for. How do you think you will do it better than perhaps it did?
Andy Caton
If that is a debit card, I am not sure whether debit cards were at the centre of the Co-op Bank’s woes. I think it had more to do with commercial lending, but I do take the point about diversification. Ultimately, that has to be driven by customer need and by the competence of the organisation to deliver that. We currently are very much a bit player in the current account market. We have 100,000 customers through our Norwich & Peterborough brand, but in the fullness of time, we would like to see that developing into a group current account proposition. We are looking with great interest, obviously, at the review of the market, barriers to entry and the need for some quite determined structural reform there.
Mike Kane
Mr Chandrasekera, critical to your business is having a bank of affluent customers. A credit union cannot be seen as a repository just for poor people because it therefore cannot raise capital to lend. Key to that is payroll deduction at source, is it not?
Lakshman Chandrasekera
Yes, it is. We need the balanced membership. Most of the credit unions have one or two either local authority or hospitals doing the payroll deductions. It is nice to expand that idea to all employers who are taking part in pay-as-you-save schemes or something like that. The money deducted from the salary goes to the credit union, so people will start to save money as well as borrowing.
Mike Kane
What is your view in this time of austerity with multiple Government Departments? The Cabinet Secretary writes to tell me that there are multiple HR departments across Government, yet it is up to them whether they introduce payroll deduction at source for members of the civil service to become members of a local credit union?
Lakshman Chandrasekera
Yes. Right now we are talking to the Ministry of Defence and DWP on the payroll deduction facilities, and we have been told that the personnel departments are consolidating and becoming one, so it could be in the future.
Mike Kane
But at a stroke of the pen the Government could make a real contribution to credit unions by allowing payroll deduction at source.
Lakshman Chandrasekera
They could do, yes. We are talking to the Government Ministers and so on about payroll deduction schemes, especially for the DWP.
Mike Kane
Do you think the credit union movement needs to be better at lobbying across not only central Government, but local government as well?
Lakshman Chandrasekera
Yes. We could do a bit more lobbying and get the message across, especially on payroll deductions and on having some level playing field, and access to the payment system in the UK and the Bank of England settlement accounts. I heard that some larger credit unions are putting their money on 10 or 15 different banks just in case one falls down. We do not have anywhere to put all our money in one place, and it is a risk.
Mike Kane
Just to finish, I will declare my interest as a member of the Manchester Credit Union.
Chair
Some personal information coming into the Committee this afternoon.
Mike Kane
I like to liven it up.
Chair
Absolutely, I agree. I call Mark Garnier—I am sure it will be livened up now.
Mark Garnier
I will keep all my personal information to myself, if I may. Mr Caton, you and Mr Kane were chatting about Co-operative Bank. I was very interested in your views on Co-operative Bank because, probably by any traditional judgment, it would no longer be a co-operative bank. It is, of course, now owned by—
Andy Caton
Just a change in its ownership structure.
Mark Garnier
Absolutely right, and there is an interesting question: how significantly do you think it has changed, and its culture has changed, as a result of the change of the management and the ownership structure?
Andy Caton
It is very difficult for me to make comments about another organisation. Obviously I do not sit within the Co-op, so I do not feel that change in culture. I see from the outside that it has done a review of their ethical stance and reiterated how it stands as an organisation. I also appreciate the point that, as you increasingly get external stakeholders taking a stake in a mutual organisation, that must imply some sort of change in direction or diversion of financial benefits. Within our own business we are 100% customer owned, so all our profits are going to retained earnings, and that drives the capital of the organisation and how we drive the business. We do not have that compromise.
Mark Garnier
No, exactly right. This is perhaps why I am driving at this because, of course, the co-operative model is a different model anyway from the mutual model, but none the less, in some respects, broadly similar. But certainly with the Project Verde report that we did on the Treasury Committee and then also looking at the various different models of the Parliamentary Commission on Banking Standards, there were some pros and cons of both. The interesting one about the co-operative model was that one of the failings that we found was that, while it is very well intentioned that you have members who are running these organisations, when you get into the extraordinarily complex world of financial services, particularly when you have complex things like banks, balance sheets, reserves and all that kind of stuff, it becomes slightly too difficult for what ostensibly is a layman, as a non-executive director in the Government, to be able to handle it. The conclusion we broadly came to was they made an awful lot of terrible decisions. Trying to increase the size of that bank tenfold in the space of a few short years at the time of incredible stress on the banking industry, which is still there, of course, was a very bad corporate decision, supported by laymen. Whereas in your model, while it is not that similar, you do none the less have a one member, one vote, type of system, and you do of course also have the fact that you have a more family-type feeling about your organisation than you would in a purely commercial, traditional publicly listed company. However, do you find that sometimes you get unhelpful outcomes in members’ meetings when a well-intentioned group of members might vote for something that is commercially idiotic?
Andy Caton
No, because we do not have that direct linkage into the active decision making of the organisation, in reality. All directors are members, but they are appointed in accordance with their expertise in overseeing the governance of the organisation. We do not have that committee-based, co-operative-style, layman-driven governance structure. Every member of the board is there due to their own expertise and what they bring round the table. We have more non-executive directors than executive directors so that, as an executive director, we have the right level of challenge across the board table, and feedback from members is very direct. I go to probably every one of our member question times, where the dialogue is very much around products, benefits and services, and what we are doing in their local communities, but we are not looking to members to drive the business on the day-to-day basis.
Mark Garnier
How many non-executives and executive directors do you have?
Andy Caton
We have five executive directors and eight non-executive directors.
Mark Garnier
So 13 on the board?
Andy Caton
Yes, and that can vary.
Mark Garnier
Sure, but again it is a manageable size board; it is not unworkable.
Andy Caton
Yes.
Mark Garnier
You said all the non-executives are members. Are they members first or are they required to be members—
Andy Caton
It can be either.
Mark Garnier
But they are chosen and put forward because of their expertise in what they do?
Andy Caton
Yes, we will go through a recruitment process just like you would do for any other senior management.
Mark Garnier
It would be a very familiar process that you would see with, for example, Metro Bank which is a small bank?
Andy Caton
Yes.
Mark Garnier
That is very reassuring. With the expansion, one mutual has done extraordinarily well in terms of expanding and then had to deal with its balance sheet. Nationwide tackled that through its capital deferred shares, which of course is now moving quite markedly away from the purist mutual model. How do you see the mutual model progressing in the future in terms of expansion? Again, you are challengers to the banks. Your success is good. It provides diversity of opportunity, diversity of product, diversity of model and, one would hope, choice of service. If you are restricted by the capital and purely by the fact that you have to get the positives to be able to expand, that will limit your ability to grow. Would you see yourselves as being restricted in order to maintain your model, or would you be prepared to go to things like capital deferred shares and move away slightly from the mutual model in order to expand?
Andy Caton
There are quite a number of points in there and it is a very interesting question. First of all, there is a question of balance in terms of how you mix 150 years of retained earnings, the best kind of capital you can have, with the amount of CCDS issues you might do in the marketplace. If you look at the nominal amount that Nationwide has issued, it is relatively small compared with that underlying capital base. I do not think that is polluting the balance of benefits of the organisation.
Mark Garnier
It could be the thin end of the wedge.
Andy Caton
It could, but I think that other things would come in as self-limiters on that, if only the cost of the capital that you were raising, which is relatively high. In Yorkshire Building Society’s case, we have no immediate need to issue co-capital deferred shares. We have very high core equity ratios—13.5% or so—and our leverage ratio is about 4.5%. We do not have those kind of immediate “still more capital” needs, but we are very mindful of things that might be coming down the path that could limit that. Maybe at that point the argument goes in two directions. First, is CCDS uniformly applicable to all building societies? Certainly in the form that Nationwide has issued it, it does have to be of a certain size to be liquid, to be publicly quoted and to be tradable—that is not applicable to probably two thirds of the rest of the sector—and yet it is providing a valuable addition to the overall industry. Hopefully there is the development opportunity for another investor base for co-capital deferred shares for smaller societies within the retail sphere. The recent consultation of the FCA on the retail distribution of mutual shares moves in the right direction, with identification of a restricted class of investor as well as sophisticated and high net worth, but maybe there is a further to go in the amount that those individuals could invest in those shares in the appropriate sales framework. Currently the discussions are around 5% of net investable assets, but investment in a crowd-funder can be 10%. There are probably very good arguments why the risk profile of a small mutual building society is stronger than a crowd-funder investing in starter businesses, although that is very worth while.
Mark Garnier
That is very interesting; thank you very much. Does Yorkshire Building Society limit itself to Yorkshire? There is great debate going on about regional banks and products. One of the questions that has not been answered by those who are advocating it is that if you want to do a mutual in the south-east or a bank in the south-east, you have a huge depositor base with lots of spare cash. There are other parts of the country that do not quite have the same amount. The north is not as wealthy as the south. That is not to suggest for a moment that it is poor, but do you think the regional mutual model is one that is ultimately completely competitive, because if you are just restricting your depositor base to one area, you are merely reflecting liquidity in that area, rather than necessarily adding something to that area?
Andy Caton
Regional building societies, to use them as an example, have a very viable business model and there are advantages that they are embedded and well known in their communities, fundamentally. From Yorkshire’s perspective, we are the second largest society in the UK, so we are much more nationally based, although we do have regional brands within our group. We are touching all parts of the UK in reality. Over the past two years we have been accounting for around about 18% of total UK net lending, so we are very much punching above our natural weight, where we would have a natural share of probably just under 4%, for example.
Chair
There has been a lot of regulatory misconduct in the financial sphere, particularly with respect to banks and their customers. Do you think customers are more or less likely, or neither more nor less likely, to be protected or—let us put it the other way round—vulnerable to that type of misconduct at a mutual?
Andy Caton
Sorry, that they would be more protected as a mutual.
Chair
You can look at it either way. Do you think that the mutual model is a predictor of whether you will get better service or less regulatory misconduct?
Andy Caton
That should certainly be the case.
Chair
Why is that?
Andy Caton
Ultimately, of course, you do have to look at governance and compliance monitoring systems.
Chair
Why will mutuals behave better than retail banks?
Andy Caton
I think fundamentally because they are customer-owned. If you take yourselves back to pre-crisis and you perhaps compare an organisation such as the one I work for, Yorkshire Building Society, with a Northern Rock, which obviously was an ex-building society—curiously the same size as Yorkshire when it demutualised—with its strategy of growth and some of the things it was doing with products such as the Together mortgage, it was running on a different rule book to the one that we were. Our business strategy meant that we were constrained, even if we had wanted to grow at those levels and make some of those short-term business decisions.
Chair
You are linking the misconduct and the mis-selling to fast growth and to a bid for fast growth, but is it not the case that the Co-op, for example, had a much higher mis-selling record and a much more serious misconduct record than the major banks?
Andy Caton
Yes, and I am sure you can always find those examples. On the other hand, if you look at some of the industry statistics—
Chair
So it was an exception?
Andy Caton
Yes, I think so.
Chair
The reason you gave was because you are mutually owned by members. Do you think it is realistic for your members to exercise that kind of influence and do they, in practice, exercise that influence? Imperfect though it is, don’t you think that the absence of shareholder pressure, which would subject a limited company to the disciplines of the market, might provide more pressure than members of a mutual?
Andy Caton
I think we are kept honest by the fact we are customer-owned and we have to—
Chair
Only in a very notional sense.
Andy Caton
We have to plan over the long term, though. The business model has to be geared around sustainability and a lot of our financial—
Chair
Is not the history of mutuals one of self-perpetuating boards?
Andy Caton
No. If that was the case at one stage, those days are very much gone. We all comply with the same regulatory framework. I think mutual building societies are fundamentally closer to their customers, either by virtue of their constitution—one member, one vote makes us uber-democratic—or the way we behave in terms of how we keep in touch with our members.
Chair
Mr Chandrasekera, on the same thing, you are offering payday loans at competitive rates of interest. Do those who take those loans out automatically become members?
Lakshman Chandrasekera
Yes, they do. They need to be a member; yes of course.
Chair
Do you think that customers who might come to you for only a very short period of time are likely to become meaningfully engaged in the running of your firm?
Lakshman Chandrasekera
They have that opportunity. For anyone who wants to become a director of the credit union, there is a process to follow and they could do that. We are attracting directors through those channels.
Chair
The Archbishop of Canterbury suggested that credit unions might be capable of putting payday lenders out of business. I am paraphrasing what he said slightly, but do you think that can be done?
Lakshman Chandrasekera
We have succeeded so far in trying to bring the cap to 1,500% APR, so that has consolidated the market quite a lot right now. It probably may be a big question, but there is some room for manoeuvring there.
Chair
Sorry, I did not hear the substance of the answer. It sounded as if it was in that last sentence. Could you say that again?
Lakshman Chandrasekera
No, there is a long way to go for us to take out all the payday lenders from the market, but the cap that we were arguing with the PRA and FCA came, so we were happy on that.
Chair
But the cap would not be a competitive driving out but a regulatory driving out. What I am trying to get at is whether it is through regulation or competition that we ought to look best to deal with misconduct. There is a lot of good lending going on in the payday lending market, but there is a lot of misconduct as well, and it is the misconduct we want to drive out.
Lakshman Chandrasekera
Even with the credit unions, everyone knows it is a mutual and we have a cap on interest rates. I do not see any problem with regulators coming and saying that you cannot charge more than 8% per month or something for the loans. In that sense, we are having some kind of level playing field in there.
Mr Love
Mr Caton, do the regulators understand the mutual sector?
Andy Caton
Yes, I think they do. We have a good dialogue with the PRA and the FCA. In the development of regulation, we are mindful of proportionality both for ourselves and for smaller players. That is where I feel the vision is largely focused at the moment. I will give you one example. There is consultation around proposals through the Basel Committee for new standardised risk weights, so that obviously goes fundamentally to our lending profile. The detail of those early proposals look like they would be quite punitive for higher LTV mortgage lending. We obviously are very focused on first-time buyers and helping people to get on the housing ladder early on. At the moment, that looks potentially quite worrying, and there are a number of different aspects to that in terms of the classification not being indexed. We could see that potentially that could create artificial churn in the marketplace. It might mean that first-time buyers do not get longer-term deals because they have been incentivised to take shorter-term deals. Those sorts of developments do not seem to be very in sync with what we are trying to achieve as a mutual or, indeed, the interest of the wider housing market in the UK.
Mr Love
Let me take two other examples. You mentioned the leverage ratio where the building society sector was unhappy with the decision of the regulator. The Financial Services Compensation Scheme is not weighted to low-risk organisations, so the building societies pay a lot more than they believe they should. How come the regulator got those so badly wrong as far as you are concerned?
Andy Caton
Those are just situations that we have to live with. We pay more than our fair share to the compensation scheme because building societies are major players in holding the UK’s national savings. The rules of the game are that you pay in line with your market share. Even though there have been very limited examples of failure within the sector, we end up paying a larger bill and, until those rules are changed, I think that will remain the case.
Mr Love
You did not mention why the regulator had structured the Financial Services Compensation Scheme in such a way, but let me carry on.
Andy Caton
We obviously lobbied hard for those rules to be changed.
Mr Love
You mentioned Basel. Basel decided that permanent interest bearing shares, which everybody thought was tier 1 capital, was not anymore. Nationwide has come up with this new capital, which we understand will be designated as tier 1, but we hit the problem you elaborated a few moments ago that you will not be able to sell this to retail investors, which is against the principles of the mutual movement. How come they are getting it so wrong on so many fronts?
Andy Caton
Perhaps this is because these instruments are new and, in fairness to the FCA, they have engaged in that debate in distribution to retail investors. We have gone from a situation where there was effectively a minimum £25,000 investment for CCDS. That was obviously a very high figure, which stands somewhat illogically against the fact that CCDS would be eligible for ISAs, and are now looking at a better set of rules for that, but it has taken time to do that.
Mr Love
The regulator is hung up on this idea of sophisticated investors and retail investors and has come along with this compromise, if I can call it that.
Andy Caton
Yes, absolutely.
Mr Love
But that does not address the issue for the mutual movement.
Andy Caton
No, I would agree with that and also, of course, any investor could invest in a share in a bank, so why not invest in a CCDS building society? We do have those anomalies as well. This is a process of dialogue with the regulator and that has evolved. I think we have ended up in a more satisfactory place than perhaps it looked when we started.
Mr Love
Mr Chandrasekera, let me ask you the same question. Do the regulators understand the credit union movement?
Lakshman Chandrasekera
I think they do. We have close dialogue with them. A group of credit unions like ABCUL contacted them individually as well. We are talking to them on applying proportionate responsible legal regulations and so on to the credit unions. Right now, yes, we have a good dialogue, and I think they also understand our needs and where we are coming from.
Mr Love
You are having a dialogue, but is the prudential regulation proportionate to the issues that you are trying to get across?
Lakshman Chandrasekera
Right now, we think it is, but there are some new things coming up, like the senior managers regime and so on, where we do not know where we are going. Again, the FCA is talking to us and we are trying to be one of the first credit unions to take part in a pilot project with it so that it can understand what credit unions’ requirements are for the new regime.
Mr Love
Credit unions go from fairly large sophisticated organisations to relatively small—and, some would say, rather risky—credit unions at the lower end of the marketplace. Do you think that the regulator fully understands that while regulation might be appropriate for the large and sophisticated, it may well be disproportionate in terms of the smaller organisations and make life even more difficult for them on the daily grind?
Lakshman Chandrasekera
Yes, some smaller credit unions are finding that the regulation is tough and they might not be able to meet certain requirements but, at the same time, we need to understand that we are looking after someone else’s money. It is getting that balance, and I think that both the PRA and FCA are trying to understand the credit union sector and apply the rules accordingly.
Mr Love
Do you think there is a pecunious streak in the regulator? I mean this in the sense that there are significant legal constraints over what you can do, and they occasionally deregulate legally, although that is very occasionally. For example, you can charge 1% interest and then they move it to 2% interest and then to 3% interest a month, yet other financial organisations can charge according to whatever the risk they are facing in terms of an interest rate. You have the legal constraints and you also have on that heavy prudential regulation. Is that appropriate for credit unions? Do they not need to be freed up so that they can challenge in the way that the Irish or American credit unions do?
Lakshman Chandrasekera
That is a fair point. On the interest rate cap, we could not understand what the reasons were behind it, so we are talking to ABCUL and our trading organisation about that. We could not understand why we are capped for 3%, but any payday lender can charge anything they want. Those are the things that we happily wait for and, within reason, we have to change going forward.
Mr Love
Let me ask you an unfair question, because it is about other credit unions. My own local credit union, the Edmonton Credit Union, went out of business some time ago. Because you are members of the Financial Services Compensation Scheme, everyone is guaranteed their own resources up to £85,000, but they continue to go on. Is it not bad news for the credit union sector that so many of the small credit unions are going out of business? What do you think we need to do to address that issue?
Lakshman Chandrasekera
We need to have a better dialogue with the regulators and the trading organisations to understand the credit unions that are struggling, for example, and then try to come up with some solutions before they go under. One of the probabilities is merging with the credit union next door.
Chair
I think we will have to adjourn there. In fact, it might be best to bring the hearing to an end. Thank you very much for coming to give evidence. If you have further thoughts that you feel have been curtailed, do put them in writing and we will be very glad to have them. We are grateful to you for your patience this afternoon in waiting so long in order to give evidence. Oral evidence: Treatment of Financial Services Consumers HC 631 21