Largely hailed as safe alternatives to payday loan firms, credit unions in the U.K. are shuttering at the fastest tempo in years, amid fears that poorer customers might lose access to credit, according to a report by The Financial Times.
Eight credit unions closed in 2018, and they affected an estimated 14,000 people with a collective £25 million in savings. Even some of the more successful CUs have had to curtail lending. Credit unions cap rates at 3 percent a month.
The numbers highlight the worst year for the industry, which is fighting with rising regulatory and tech costs, since 2010. The news is especially troubling because the government in the U.K. and the Financial Conduct Authority (FCA) are cracking down on payday lenders and rent-to-own businesses that they say take advantage of vulnerable customers. Credit unions, the government says, are an affordable and more safe alternative.
The problem, critics say, is that credit unions are hampered by a lack of professionalism and also an inability to provide the types of digital services that a modern financial institution needs.
In a letter to firms earlier in the year, the Bank of England’s prudential regulation arm said some credit unions collapsed because of “involved fraud committed by either members of staff or directors.” Others didn’t collapse but went through significant losses.
Some surviving firms, like London Capital Credit Union, find themselves in the strange position of asking customers with big balances to lower the amount they save so it can slash the size of its loan book. This is because the amount of funds it is required by law to hold against its assets has ballooned in the last two years.
The demand is there, according to Martin Groombridge, a chief executive of London Capital, but he said “the way the regulation is applied at the moment, we will have to stagnate.”
Matt Bland, head of policy at the Association of British Credit Unions, said that despite the issues, he believes unions are still “the most mature and well-developed alternative to high-cost credit.”