EDINBURGH, Scotland–Approximately £10 million in compensation has now been paid out to nearly 14,400 members following the collapse of six community banks in the space of three years, with one report saying it has led to “serious concerns” over how the institutions are being regulated.
At least one credit union leader has also expressed worries that CUs in Scotland are not attracting the right kinds of members.
The payouts have come as Scotland’s Financial Services Compensation Scheme intervention has incurred losses after being unable to claim back loans from customers is expected to total at least £1.9 million, the Herald Scotsman reported.
“That is above the millions that has already been written off as bad debt before the insolvency experts were brought in,” the report added.
The Herald said its investigation shows that in all cases there was a failure to publish annual audited accounts - which give a clear indication of the financial strength of a company. The Herald investigation further found two cases in which there was no publication in 10 years.
CU Director Blows the Whistle
“One whistleblowing Scottish credit union director has hit out at the lack of oversight from regulators the Financial Conduct Authority and a lack of transparency in the sector which provides lifeline financial services for people who might not be able to get credit elsewhere,” the Herald reported. “He fears that the regulators will now pull the plug on other community banks rather than support them to thrive.”
Gordon Keenan, a board director with the Glasgow Credit Union, who has a background of senior management roles across the local authority, housing & social enterprise sectors, raised concerns with the Herald that credit unions are not attracting enough borrowers with good credit ratings were borrowing from it.
He alerted the regulators to the issues with the latest credit union to collapse the Barrhead-based Pioneer Mutual Credit Union, the Herald reported.
In that case, an investigation was launched by administrators as £3.3 million was refunded to thousands of savers two years after auditors had cast doubt over its future as a going concern, the Herald reported.
Government Support, But…
Pioneer Mutual received £45,000 in support from a Scottish Government support fund during the summer along with other community banks during the COVID crisis, the Herald stated.
Keenan, who was a member of Pioneer Mutual for six years, told the Herald he alerted the FCA to "serious concerns" including the fact that in 2019 the latest set of audited accounts available were eight years old and raised other governance and transparency issues. He said they "dismissed" his concerns, the Herald reported.
Lawyers & Debt Collectors
“Details of the raft of credit unions that have gone to the wall show an array of lawyers and debt collectors have had to be called in to force repayment of loans after they have gone bust and in some cases insolvency experts admit they will only recover a fraction of what is owed,” the Herald reported.
Scotland’s nearly 100 credit unions have approximately 400,000 members—about 7% of the population–and hold assets of £650 million and loans of about £362 million.
According to the Herald, many Scottish CUs have been placed in what is known as administration, or conservatorship, when they have been unable to pay savers back their money when they want to transfer their accounts.
Keenan told the Herald “urgent action” must be taken to ensure credit unions are properly regulated, but also supported to allow them to stay afloat.
He further said he believes the credit unions have suffered as an extended period of low interest lending rates over 15 years has effectively driven a significant portion of regular middle income borrowers from credit unions towards mainstream banks who can offer better deals.
‘Largely Ignored’
The same low interest rates has resulted in less income from the cash Scotland’s CUs hold, Keenan told the Herald. He called for regulations to change so CUs can also invest excess funds as banks can.
"The credit union sector in Scotland stands as a largely ignored and certainly under-acknowledged source of extensive co-operative community wealth,” Keenan told the Herald. "Across Scotland, and specifically across the central belt we have more than 85 community and workplace credit unions holding in excess of half a billion pounds in Scottish member deposits. This is not an insubstantial sum and it is owned mutually at community level by members, loaned to members and with profits redistributed among members.
"In simple terms, Scotland’s credit unions are finding themselves unable to disperse sufficient loans among members and prospective customers and are struggling to match growing business costs with sufficient income either from loans to members or through interest on excess cash sitting in UK bank deposits,” he continued. “"As a sector there is literally £10s of millions of unused funding sitting on deposit which is earning nothing and which with just a little coordination and shared strategic investment at local and Scottish government level you could quickly treble or quadruple the funds available to those low-middle income households in need.
An ’Urgent’ Need
"It does however urgently require the bringing together of the key parties around the table, to come up with a genuinely coordinated delivery model - one which not only responds to immediate hardship but which explicitly looks ahead to build long term financial resilience at individual, household and community level,” Keenan said, according to the Herald report.
Other credit unions that have closed in recent years include North East Scotland Credit Union, Parkhead Credit Union, the Greater Milton and Possilpark Credit Union, the Mercat Cross and The Bruce Credit Union and the North Airdrie Credit Union.