Ethical lenders that have been touted as alternatives to high-cost firms such as Wonga and BrightHouse are going out of business at the fastest rate in years, fuelling concerns that less well-off customers are in danger of losing access to credit.
Eight credit unions across the UK have collapsed in 2018, affecting 14,000 customers with more than £25m in savings, according to an analysis of data from the Financial Services Compensation Scheme. Meanwhile some of the most successful remaining groups are being forced to cut back on lending.
The figures mark the worst year since at least 2010, as the sector battles against rising regulatory and technology costs.
Credit unions provide savings and loan products for members, with loan rates capped at 3 per cent per month.
The Financial Conduct Authority and the government have been cracking down on high-cost sectors such as payday lending and rent-to-own retailers that are seen to take advantage of vulnerable customers, and have repeatedly encouraged unions as a more affordable alternative.
Critics say the sector is held back by a lack of professionalism and inability to keep up with the demands of running a modern financial provider such as offering more digital services.
The Bank of England’s prudential regulation arm said in a letter to firms earlier this year that some of the recent collapses had “involved fraud committed by either members of staff or directors”. Several other unions avoided collapse but suffered large losses for the same reason, according to the regulator.
Even successful firms are being forced to cut back on some services. London Capital Credit Union, one of the country’s largest, said it had recently asked customers with large balances to reduce the amount they save and cut the size of its loanbook for the first time in a decade, because the amount of capital it is required to hold against assets has doubled in the past two years.
Martin Groombridge, chief executive of London Capital, said that “the way the regulation is applied at the moment, we will have to stagnate” despite a growing demand for loans, particularly of the smaller sizes traditionally provided by more expensive payday lenders.
Capital requirements for mainstream banks have also risen in recent years, but credit unions are subject to more stringent rules on how they can raise cash.
Funding from local councils has more than halved over the past decade amid wider government cuts, while credit unions are also prevented from moving into higher-growth types of product such as car loans because of the FCA’s narrow interpretation of the legislation that defines their role.
Matt Bland, head of policy at the Association of British Credit Unions, acknowledged that it had been “a bad year” for failures, but stressed that the sector had nonetheless continued to increase its membership and assets overall.
Despite the challenges, he said, unions remained “the most mature and well-developed alternative to high-cost credit”.