Another (small) screw in the coffin of smaller community credit unions

A good many small community based credit unions have had a torrid time in recent years and probably right now aren’t seeing much of an improvement.  The Co-Op Bank’s decision to cut the interest it pays on its community bank accounts – such s their Community Directplus, Co-Operatives Directplu and Social Enterprise Directplus accounts – will prove to be another, small and slow, but certain turn on the screw in the coffin of already beleagured credit unions.

Small community based credit unions are really struggling – at best, they have seen flat income levels, at worst they’ve seen their income fall away, especially from grants and interest receipts.   Yet there is often little opportunity for them to reduce their overheads in line with the fall in income.  Trying to increase income by growing the loan book can often carry a disproportionate risk of bad debts so for some they have a stark choice – grow or merge or die a death of a thousand cuts.  The Co-Op decision will prove to be just another cut…

Let’s look at what the Co-Op is doing…

Interest rates paid on customer balances have never been lower, certainly not in my lifetime.  Until June the Co-Op will be paying a tiered rate of interest – Nil% on balances up to £1,999; 0.12%  on balances £2,000 to £9,999; 0.15% on balances £10,000 to £24,999; 0.18% on balances £25,000 to £99,999; 0.21% on balances £100,000 to £249,999; and 0.25% on balances over £250,000.

That’s to say the most the Co-Op will ever pay any credit union right now is one quarter of one per cent per annum… peanuts.

Yet those peanuts are being crushed!

The new rates from June 2015 will be: balances up to £24,999 Nothing, yes absolutely nothing – the Co-Op will get to keep your money for free!; £25,000 to £99,999 0.06% – a third of the already derisory amount it had paid previously; £100,000 to £249,000 0.09% – less than half it had previously paid; £250,000 to £499,000 0.18% – a cut of one third from the rate it had paid previously; over £500,000 0.25%, no change.

The message is clear… the Co-Op isn’t interested in supporting small organisations, it’s using you, the small credit union, to extract itself from its own financial difficulties … it doesn’t have the cohonas to abuse bigger organisations in the same way as they’re prepared to abuse you.

So it’s you, the smaller community based credit unions, and organisations just like you who will feel the brunt of this decision… it will be another straw on the camel’s back…

You see, right now, because you’re getting virtually nothing on the money you are sitting on and with additional grant income difficult to come by, the only way you can meet the regulator’s solvency targets might be by increasing the interest you receive on your loan book.  As you’re limited by law as to the maximum interest rate you can charge on the loans you make, this means you need to grow your loan volumes – the number of loans you put out and the amount you loan out.

The issue is you need to do this without increasing your bad debts.  Desperate people will go to any lengths – you will be lied to, some applications will be pure fabrication. How robust are your application procedures throughout your credit union?  You might get credit reports on potential new lending, but how reliable are those reports? – they are not as accurate as you’d hope!  And you probably can’t always rely on your longstanding members’ past savings history as an indication of their ability to repay any new loans – because people have so many ways nowadays of avoiding repaying their debts – not just the formal insolvency processes of bankruptcy, DRO, and IVA, and informal debt solutions such as DMP and DRO, but also pleading poverty in any debt collection process passing through the courts, and even disappearing.

It’s easy to see the situation whereby a credit union that’s already struggling with the the regulator could be forced into administration and then closure because of its bad debt experience and low level of bank interest income.

 

Calling the boards of insolvent Credit Unions – there’s been a change in the law!

Yesterday, on 6th April, the Industrial & Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration) Order 2014 (SI 2014/229) came into force.

This statutory instrument plugs a yawning gap in the legislation that had previously left credit unions that were struggling financially with few options.  Now they can access the UK’s administration and Company Voluntary Arrangement (CVA) legislation, giving them the same options as most companies.

Click here to be taken to the statutory instrument.

Paul Brindley says ‘this is good news for insolvent credit unions- no longer are they restricted to the more brutal formal insolvency procedures such as insolvent liquidation: it must be in everyone’s interest to use the more positive rescue techniques of administration or CVA to save something of all the good work unions do’ .

Paul was appointed liquidator of South Warwickshire Credit Union in April 2014, twelve months before this instrument was enacted.

 

Calling the boards of insolvent Credit Unions – there's been a change in the law!

Yesterday, on 6th April, the Industrial & Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration) Order 2014 (SI 2014/229) came into force.

This statutory instrument plugs a yawning gap in the legislation that had previously left credit unions that were struggling financially with few options.  Now they can access the UK’s administration and Company Voluntary Arrangement (CVA) legislation, giving them the same options as most companies.

Click here to be taken to the statutory instrument.

Paul Brindley says ‘this is good news for insolvent credit unions- no longer are they restricted to the more brutal formal insolvency procedures such as insolvent liquidation: it must be in everyone’s interest to use the more positive rescue techniques of administration or CVA to save something of all the good work unions do’ .

Paul was appointed liquidator of South Warwickshire Credit Union in April 2014, twelve months before this instrument was enacted.

 

Business Resuscitation Opportunities 14 September 2012

Here are the latest opportunities for you.
Production manager urgently sought (09/6)
Black Country heritage business urgently seeks a good production manager with strong people management skills.

Development site for sale (09/07)
500 acre site in South Wales, 10% resi, 90% leisure/retail – price about £6m.

Hardworking workforce available – recycling (09/08)
I’ve just had to make the workforce of a Black Country based recycling company redundant on the closure of the businesss. I was really very impressed with how hard they worked – so if you need staff in a similar business, call me.

Leasehold factory (09/10)
Good quality factory available in Great Bridge, 9,000 square feet, with overhead cranage.

As normal, please drop me a line with any interest – paul@midlandsbusinessrecovery.co.uk.

Paul Brindley
Midlands Business Recovery

 

BERR's consultation on pre-packs – a wasted opportunity

At the end of March, the Insolvency Service issued its report following its consultancy over the transparency of pre-packs in administrations.  The headlines in the non-insolvency trade press suggests there will be major changes ahead, but I very much doubt it – those outside of the insolvency profession will be sorely disappointed, maybe not just yet, but give it 12 months or so and they will be.  Berr have effectively soft soaped those in industry, playing to their prejudices while recognising there’s no major evidence to support industry’s views that the pre-pack proedure is being widely misused.  Ultimately the report will do nothing to ease the concerns of those in industry over the alleged abuse of pre-packs or to improve the standing of those involved in the insolvency profession.  The divide between industry and the insolvency profession will remain as wide as it is now.

Here’s an article I wrote for Road Transport Today in response to the report.

‘Much of the commentary on pre-packs seems to be based on the perception that it’s the insolvency practitioners’ responsibility to ensure there is a level playing field across a given sector.  But they do not exist for this reason.  And I’m not even sure that this is the role of the government through BERR.

Like any professional adviser, insolvency practitioners are charged with doing the right thing, in the right way and at the right time so as to achieve the best result under the circumstances, where ‘right’ means ‘within the law’.  Like any other adviser they cannot allow someone else’s wider moral viewpoint to come into play.  They have to deal with the facts in front of them at that particular time.  Where the sale is to the same management, there is obviously a huge self interest element for them. It’s little different from business owners following their accountant’s advice on how to mitigate tax, except the insolvency practitioner has to explain his decisions in a detailed report to the creditors because his duties lie with them.

This announcement will do nothing to tighten pre-packs, because (i) they are accepted by the government, if not by competitors, as a proper tool for dealing with insolvency situations; and (ii) there is no evidence that pre-packs are being abused as the law stands (strange that the Insolvency Service report to effect, made the same day, got buried!).

This announcement therefore merely temporarily pours oil over the water of onlookers’ views of insolvency practitioners and pre-packs.  In reality a three day waiting period will have little or no practical impact.  I cannot see many creditors injuncting the Administrator to prevent a sale.  And how many fresh interested parties do we expect to be able to come properly to the table, make a better offer, accept similar terms, and provide evidence of unconditional funding in such a short space of time?

With the government estimating that one in four administrations is a pre-pack, and several factors in the economy often making them the only solution at the moment, the battle lines will remain drawn firmly between those for and against the process.  This debate will rumble on, and on, and on……’