Page last updated at 14:57 GMT, Wednesday, 23 July 2008 15:57 UK

Credit union rules to be reformed

A purse
Life for credit unions and their members should become easier

Measures to strengthen the finances of credit unions are set to be brought into force by the government next year.

It wants to allow credit unions to broaden their membership and pay interest on members' deposits.

Credit unions are small-scale savings and loan co-operatives that typically serve people on low incomes.

Last month the government said it wanted to help credit unions expand so people under financial pressure were not forced to use loan sharks.

"My vision is of an expanding and vibrant mutual sector, unencumbered by outdated legislation, competing strongly with other legal forms of business, both nationally and globally," said Treasury Minister Kitty Usher.

"We can give co-operatives and credit unions the chance to compete much more fairly and freely with companies," she added.

Among the changes being proposed are that:

  • the "common bond" requirement for membership should be liberalised
  • groups of people will be able to join, not just individuals
  • interest can be paid on savings, which will attract more deposits
  • and credit unions can charge a commercial rate for services such as issuing cheque books.

Sounder finances

At the moment there are about 535 credit unions in Great Britain with about 600,000 members between them.

The unions, which are self-governing, cannot pay interest to members, and any dividend payable to them is discretionary.

From time to time some run into trouble and are closed down.

In February this year, the Financial Services Compensation scheme paid 30,000 to the members of the Caia Park credit union in Wrexham after it collapsed.

Last year the Streetcred credit union in Rochdale, with more than 3,000 members, closed down with debts of about 450,000.

"[The reforms] will help credit unions become financially sounder and better managed and thereby better placed to take maximum advantage of the possibilities the legislative changes open up for them," said Paul Sharma of the Financial Services Authority (FSA).

"The experience of recent years where a number of credit unions have failed also indicates the need to strengthen some aspects of our regulatory policy for the sector," he added.

Under the government's plans, changes to the laws governing credit unions will come into effect in October 2009, while the laws affecting industrial and provident societies will be changed in April that year.

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