Questions asked over Hackney Credit Union collapse

Mayor Pipe cuts the ribbon at the launch of Hackney Credit Union in November 2005. Photo: Hackney Council

Poor governance and recession are being blamed for the collapse of Hackney Credit Union. Around 2,000 borough residents and workers had their accounts frozen after the Financial Services Authority (FSA) revoked the union’s licence on 30 June following repeated warnings.

Members, who jointly owned the union, are yet to be told fully by the five directors what went wrong. The undated and unsigned letter sent to account holders merely tells them to claim their money back through the Financial Services Compensation Scheme (FSCS). Hackney Council, which had strongly supported the union , has largely kept quiet about its failure.

Meanwhile, the coalition government is pushing ahead with its Big Society agenda, hoping to grant grassroots initiatives like credit unions a greater role in fostering financial inclusion. Yet as Hackney Credit Union’s (HCU) experience demonstrates, more than good intentions are needed to create a sustainable community-based money service.

“HCU has experienced some difficulties during the last two years, including the departure of key staff members, difficulties in completing audited accounts, and a reduction in external funding,” said an unattributed statement posted by City and Hackney Health & Social Care Forum (HSCF).

The statement added that revenue has not grown as expected and some loans were not repaid. “Essentially, HCU no longer has sufficient funding to cover the cost of operating the branch office and it has to close down.”

The union’s chairwoman, Mary Cannon, who also chairs HSCF and sits on the board of various other local community organisations, did not return requests for comment.

When De Beauvoir Estate resident and local blogger Paul Stott first heard about the union he felt it was an initiative worth supporting. “If you have negative feelings about [big banks], it seemed like a good idea to promote [the credit union] locally.”

One of the union’s founding board members, Mick McAteer said: “We were very successful in the early years.”

According to Mr McAteer, who remained on HCU’s supervisory committee until 2009, running a credit union in a place like Hackney became very difficult after the financial crisis.

Government caps on interest charges (set at 2% per month or 26.8% APR) made it difficult to generate internal revenue. Moreover, support from central government proved a mixed blessing.

Under a Department for Work and Pensions scheme, many members had their benefits paid into the union. As it was often their main source of income, the money was then rapidly withdrawn. “Staff [were] completely overwhelmed… They were under a lot of pressure,” said Mr McAteer.

Now he believes loan sharks are returning to fill the gap left by the union’s collapse. “It is all very sad.”

The union’s problems, however, were already apparent before the recession. According to the FSA, HCU has failed to submit an audited annual report for 2008 or 2009, pointing to strained balance sheets. Former members complained of inadequate opening hours, long queues and an unheated office on Mare Street.

“As a result they just didn’t build a client base [or earn] money to keep the staff,” said a community-based finance executive who chose to remain anonymous. He added that most credit union founders are well intentioned but do not have a solid business plan. “They don’t have executive officers who are capable of running a financial company.”

Unrealistic growth expectations and under-spending on staff have sunk many credit unions across the country. According to the FSCS, 37 credit unions have gone bust bust since 2000.

Mayor Jules Pipe, who said at the launch of Hackney Credit Union that it would “play a vital role in the life of the borough”, was not available for comment. A Council spokesperson said: “The Council deeply sympathises with those affected by this matter – we are however aware that all those who have deposited money with HCU will be covered by the Financial Services regulations.”

Meanwhile, plenty of credit unions continue to flourish across the country despite the weak economy. As in any other business enterprise, the success or failure comes down to individual decisions, said Liam Carlisle who works at one of London’s largest credit unions in Lewisham, and is an executive committee member of the Association of British Credit Unions Limited (ABCUL)’s regional chapter.

Mr Carlisle said credit union membership in London is currently growing by 20% a year, as people seek to benefit from low loan interest rates and keep money in the community. Public disillusionment with high street banks in the wake of state bailouts and bonus scandals are bringing in new business, he added. A growing number of unions are adding new services such as current accounts and debit cards.

Success, however, depends on understanding local needs and adjusting customer service, opening hours and branch locations to meet them. “If you don’t meet local needs, you don’t succeed,” he said.

“As a financial co-operative it is incumbent on each and every member to ensure that their own credit union is well run and managed. This requires active engagement of the members in the credit union (as volunteers and board members) and includes attendance to the annual general meetings.”

Mr Stott received back all the money he deposited with the HCU from the FSCS after six weeks. The compensation scheme is bankrolled through insurance payments collected from its members and is not funded by the taxpayer.

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Credit Unions

Credit unions are financial cooperatives, owned and controlled by their members, and run as not-for-profit organisations.

Any surplus made is invested in the union or paid to members as a dividend.

They first appeared in the UK in the 1960s in the Irish and Caribbean communities neglected by traditional banks.

Membership is determined by a common bond. There are three main types of bonds: ‘Community’ (around a specific area), ‘Industrial’ (based around an employer), or ‘Live or Work’ (a combination of the two).

There are about 500 credit unions in Britain (35 in London), compared to about 60-70 building societies.

In 2000, there were only two borough-wide credit unions in London. Today there are 16.

Credit unions took off in earnest after the 1995 demutualisation of building societies.

Since 2006, the Department for Work and Pensions has supported the sector through its Financial Inclusion Fund.

Currently interest rates for lending by credit unions are capped at 2% per month (an APR of 26.8%).

There are almost 750,000 credit union members in Britain, with nearly £500m in savings and more than £400m in loans.

Over 600 people across London actively participate in running credit unions. Only 0.5% of the UK population are credit union members, compared to around 30% in the US, 45% in Ireland and 70% in the Caribbean.

Historically, members have been low earners who save small amounts regularly, but recent trends have seen uptake among the middle classes.

Because money stays in the community, the unions have been largely unaffected by problems of excessive capital leverage in the downturn.