Savers reassured after North Yorkshire Credit Union collapses

http://www.guardian.co.uk/money/2012/nov/02/north-yorkshire-credit-union-collapse

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One of Britain's biggest credit unions has gone bust, taking the number that have collapsed so far in 2012 to at least six and dealing a blow to attempts by the government and others to promote the sector as a viable alternative to banks and costly payday lenders.

North Yorkshire Credit Union was declared "in default" on 1 November and has been placed in liquidation; however, its 5,000 saver members have been told that their money is safe. They will get their cash back via the official Financial Services Compensation Scheme (FSCS) within the next seven days.

The credit union's demise has been blamed partly on high levels of bad debts on loans to members, plus "inadequate credit referencing and credit control".

It is the sixth credit union to go under in 2012, and follows at least seven that collapsed in 2011. Others that have gone bust in recent months include Tamworth Credit Union in September, the Liverpool-based Waltonian Credit Union in August, and Pallister Credit Union in Middlesbrough in May.

Most of those that have been declared in default have tended to be small, with perhaps a few hundred active members, but North Yorkshire Credit Union is one of the bigger players. Set up in 2006 and based in York, it was looking after about £1.9m of savers' cash and had branches throughout Yorkshire.

There are just over 400 credit unions in the UK, regulated by the Financial Services Authority and covered by the FSCS. In theory, they should find favour with many people following the UK's run of banking scandals, as they are not-for-profit financial co-operatives owned and controlled by their members with no outside shareholders. They are, however, yet to take off in the way they have in countries such as Ireland, the US and Australia.

Their core products are savings accounts and loans, though some offer current accounts and mortgages, and any profits they make stay in the community and are used to develop the credit union and provide a return to savers.

Both this government and the previous one have been keen for them to expand and become more of a mainstream option for borrowers and and new rules that took effect in January have allowed credit unions to compete more effectively against their financial services rivals.

But warnings have been sounded about the viability of the movement. In May, a report commissioned by the DWP concluded the sector is "not financially sustainable at present" and warned that without additional government money, many unions could close.

Credit unions frequently offer best-buy rates for people looking to borrow smaller sums as, by law, they cannot charge more than 2% interest a month on the amount owed – an APR of 26.8%. They are the only financial institutions in the UK to have such a cap on interest rates. But the report highlighted the relatively high operating costs, and said the 2% cap "does not allow even the most cost-effective to break even on smaller loans at present".

Some credit unions have decided to challenge the payday lenders on smaller short-term loans in a bid to connect with the changing needs of lower-income households. For example, London Mutual Credit Union has recently launched a payday loan service at 26.8%, compared to Wonga's 4,214%.

Kevin Murphy from accountants Chantrey Vellacott is one of the liquidators of North Yorkshire Credit Union.

He said the collapse was due to a combination of factors. "This includes bad debt provisions in respect of loans to members of over £400,000 due to inadequate credit referencing and credit control, and also inadequate cost control, which is partly due to the resources required to service the large North Yorkshire region."

In a statement, the FSCS, the official safety net for customers of financial firms that go bust, said members of the union "will not need to lift a finger to get their money back".

It added: "FSCS will use the credit union's records to automatically send payments to members ... People with less than £1,000 will receive a letter to get cash over the counter at the post office. Anyone with more than this will receive a cheque."