Where the FCA Figures for the Credit Union Sector reveal what's really going on

Every three months the Financial Conduct Authority summarise the returns they have received from UK credit unions.

As the figures come in excel form, with a little time and care it is possible to draw a few conclusions as to what is really going on in the sector, all the hype from ABCUL about how well the sector is doing put to one side.

Here are some important figures that can be drawn from the return summary…

1. The sector as a whole seems in pretty good shape in terms of the overall numbers – there are just over 500 credit unions in the UK with 1.6 million adult members and a quarter of a million juvenile members;
2. UK’s credit unions total assets are £2.7 billion, largely £1.25 billion of money loaned out to members and £1 billion in cash and other liquid assets;
3. Total assets in UK credit unions are growing on average by £55 million per quarter – ie members’ savings are increasing by this sum – giving some credence to claims that the sector is growing at a healthy annual rate of just under 7 cent.
4. Quarterly profits across the sector are running at about 1 per cent of total loan debtors.

Sounds good, doesn’t it?

Well no, at least not in my mind, because there are several alternative other ways of interpreting the figures…

The first thing that I find interesting is how the ‘growth’ impacts on the sector’s balance sheets and income statements…

You see, loans to members – probably the prime reason for why credit unions exist – went up on average by just £15 million per quarter. That’s to say just one quarter of the increase in credit union assets finds its way into what credit unions should probably be doing more of than anything else, that’s lending to their members.

So what are credit unions doing with the rest of the cash, the £40m per quarter, they are getting from their savers?

The figures suggest that a good proportion of that extra cash is simply being hoarded.

This is worrying. You see credit unions have for a good while now been holding onto a disturbingly high level of cash – the amount of money being held on to (£1 billion) isn’t far off the figure (£1.25 billion) being loaned out. I say this is worrying because with interest rates so low, that money is doing nothing.

My interpretation of the sector’s figures therefore is that the increased money from savers is not finding its way into assets that return any significant profit and for this reason there’s no improvement in the profits.

And if profits are not growing, the sector, which by others’ standards is already not very profitable, isn’t getting any stronger, it’s just getting bigger. And if that is so, I have to ask just how the sector is going to be stabilised as the powers that be intend? Are we just going to see bigger CU failures?

Let’s look again at the income statements … but firstly let’s remind ourselves about the level of quarterly profits across the sector – they are running at 1 per cent of total loan debtors.

This figure, because it’s so low, suggests another thing to me…because of the low level of profits, hundreds of credit unions simply cannot work through any major recoverability problems that might arise in their loan books – they would rather sit on their ‘surplus’ cash, earning little or no interest than lend it out and potentially suffer a bad debt.

The government have done their level best to make it easier for Joe and Joanne Public, especially if they have few or no assets and minimal income, to avoid paying back their debts. The flip side is that it has become far more difficult for lenders such as credit unions to collect in their debts. With this in mind, I suspect there are a good many credit unions who simply will not lend to the people they were set up to service because they fear the effect the inevitable increase in bad debts will have on their own balance sheet. And with no withdrawal of the restriction on the interest rates they can charge expected soon, who can blame credit unions for choosing to sit on their cash?

Let’s look at another of the figures and from another angle…

These figures come from the Money Charity, thanks.

UK banks wrote off £550m in credit card debt in the last reported quarter.

Yes, you read that right – half a billion pounds – in just credit card debt – and in just one quarter.

At that rate in a little over 6 months the banks write off as much in irrecoverable credit card debt as the credit unions are holding onto in cash; in 9 months the banks write off as much as the entire credit union sector loans out!

I don’t know about you but I am not hearing the banks complain about how much they are being writing off – quite clearly the profits they are making are of such a magnitude that they can afford the losses. And I’m certainly not seeing an reduction in their willingness to lend. And you know what? The banks make those profits partly because they can charge what they like. Meanwhile credit unions’ charges are restricted by the law despite the fact that credit unions typically lend to people the banks wouldn’t touch! There’s no level playing field, and that’s why credit unions’ profits are poor.

I think this also explains why credit unions are sitting on so much money.

In summary, I don’t think the credit union sector is doing anything like as well as some within it would have us believe. Maybe they sit at the top of the big credit unions, for which life is far more comfortable than smaller geographically based credit unions. The figures point to there being major structural weaknesses in the sector. I don’t buy the arguments of some so called experts who have said the problems in the sector are all internal and centre around poor governance – I’ve seen some really experienced, driven boards, management and operational teams who are struggling to hold things together. What is needed is more help from the government, but given the sector’s insignificance in the grand scheme of things, I can’t see that coming. And until and unless it does come, there will be more hardship ahead and more, and bigger, credit union liquidations.

Paul Brindley

The Insolvency Expert in Credit Unions

Where the FCA Figures for the Credit Union Sector reveal what’s really going on

Every three months the Financial Conduct Authority summarise the returns they have received from UK credit unions.

As the figures come in excel form, with a little time and care it is possible to draw a few conclusions as to what is really going on in the sector, all the hype from ABCUL about how well the sector is doing put to one side.

Here are some important figures that can be drawn from the return summary…

1. The sector as a whole seems in pretty good shape in terms of the overall numbers – there are just over 500 credit unions in the UK with 1.6 million adult members and a quarter of a million juvenile members;
2. UK’s credit unions total assets are £2.7 billion, largely £1.25 billion of money loaned out to members and £1 billion in cash and other liquid assets;
3. Total assets in UK credit unions are growing on average by £55 million per quarter – ie members’ savings are increasing by this sum – giving some credence to claims that the sector is growing at a healthy annual rate of just under 7 cent.
4. Quarterly profits across the sector are running at about 1 per cent of total loan debtors.

Sounds good, doesn’t it?

Well no, at least not in my mind, because there are several alternative other ways of interpreting the figures…

The first thing that I find interesting is how the ‘growth’ impacts on the sector’s balance sheets and income statements…

You see, loans to members – probably the prime reason for why credit unions exist – went up on average by just £15 million per quarter. That’s to say just one quarter of the increase in credit union assets finds its way into what credit unions should probably be doing more of than anything else, that’s lending to their members.

So what are credit unions doing with the rest of the cash, the £40m per quarter, they are getting from their savers?

The figures suggest that a good proportion of that extra cash is simply being hoarded.

This is worrying. You see credit unions have for a good while now been holding onto a disturbingly high level of cash – the amount of money being held on to (£1 billion) isn’t far off the figure (£1.25 billion) being loaned out. I say this is worrying because with interest rates so low, that money is doing nothing.

My interpretation of the sector’s figures therefore is that the increased money from savers is not finding its way into assets that return any significant profit and for this reason there’s no improvement in the profits.

And if profits are not growing, the sector, which by others’ standards is already not very profitable, isn’t getting any stronger, it’s just getting bigger. And if that is so, I have to ask just how the sector is going to be stabilised as the powers that be intend? Are we just going to see bigger CU failures?

Let’s look again at the income statements … but firstly let’s remind ourselves about the level of quarterly profits across the sector – they are running at 1 per cent of total loan debtors.

This figure, because it’s so low, suggests another thing to me…because of the low level of profits, hundreds of credit unions simply cannot work through any major recoverability problems that might arise in their loan books – they would rather sit on their ‘surplus’ cash, earning little or no interest than lend it out and potentially suffer a bad debt.

The government have done their level best to make it easier for Joe and Joanne Public, especially if they have few or no assets and minimal income, to avoid paying back their debts. The flip side is that it has become far more difficult for lenders such as credit unions to collect in their debts. With this in mind, I suspect there are a good many credit unions who simply will not lend to the people they were set up to service because they fear the effect the inevitable increase in bad debts will have on their own balance sheet. And with no withdrawal of the restriction on the interest rates they can charge expected soon, who can blame credit unions for choosing to sit on their cash?

Let’s look at another of the figures and from another angle…

These figures come from the Money Charity, thanks.

UK banks wrote off £550m in credit card debt in the last reported quarter.

Yes, you read that right – half a billion pounds – in just credit card debt – and in just one quarter.

At that rate in a little over 6 months the banks write off as much in irrecoverable credit card debt as the credit unions are holding onto in cash; in 9 months the banks write off as much as the entire credit union sector loans out!

I don’t know about you but I am not hearing the banks complain about how much they are being writing off – quite clearly the profits they are making are of such a magnitude that they can afford the losses. And I’m certainly not seeing an reduction in their willingness to lend. And you know what? The banks make those profits partly because they can charge what they like. Meanwhile credit unions’ charges are restricted by the law despite the fact that credit unions typically lend to people the banks wouldn’t touch! There’s no level playing field, and that’s why credit unions’ profits are poor.

I think this also explains why credit unions are sitting on so much money.

In summary, I don’t think the credit union sector is doing anything like as well as some within it would have us believe. Maybe they sit at the top of the big credit unions, for which life is far more comfortable than smaller geographically based credit unions. The figures point to there being major structural weaknesses in the sector. I don’t buy the arguments of some so called experts who have said the problems in the sector are all internal and centre around poor governance – I’ve seen some really experienced, driven boards, management and operational teams who are struggling to hold things together. What is needed is more help from the government, but given the sector’s insignificance in the grand scheme of things, I can’t see that coming. And until and unless it does come, there will be more hardship ahead and more, and bigger, credit union liquidations.

Paul Brindley

The Insolvency Expert in Credit Unions

Ten things you must know about business insolvency…

These are the ten things you need to know about business insolvency:

1. This is a real turning point in your life, treat it as such!

Make sure you have identified in your own mind, and with absolute clarity, what you want to achieve first and foremost, and why.  Then identify what your next best solution is, and why.  And then identify your third best.  This will greatly help your decision-making.  Why? because you’ll probably find you won’t be able to save everything you now ‘hold dear’.

Challenge yourself – do you really want to carry on in a similar business, or would you like a complete change?  If you want to do the same or something similar, ask yourself what you are going to do differently, and how, this time around are you going to make sure it’s a success?

2. The business and the company are not the same thing 

A formal insolvency process can be used to split out a viable business from its insolvent company shell, protecting the business yet ridding it of debts it can’t pay.  This isn’t debt avoidance, it’s finding a practical solution to real life problems.  But is has to be done properly.  Recognise that the business and the company are two different things!

3.  Smaller companies have fewer options and less time to act than bigger businesses

Those on whom smaller companies depend provide less support when things go badly.  Your bank, rather than supporting you, will go into self protection mode.  It’s up to you and your advisers to find a solution, and quickly.

4.  There’s often nothing worthwhile saving in the smallest of companies

The informal way in which small companies tend to operate often means the goodwill in the business lies in the directors and key staff, rather than in the company itself.  There’s less reasonfor you or an insolvency practitioner to spend time, money and effort to save the company.  It’s this that often makes liquidation the most appropriate route for small companies.

5.  All formal insolvency procedures damage the business

Some just do more damage than others.  You’ll need to know how the different informal and formal solutions effect your business.  Don’t listen to bland assurances made by any insolvency practitioner or anyone else that the insolvency won’t have any repercussions on the business, because it will!

6.  Cost is a big issue in choosing any insolvency process

Every formal insolvency process is expensive, some more so than others.  Cost is, in relative terms, a far bigger issue for smaller companies.  This can mean, for example, that the cost of an administration of a small company can outweigh any benefits gained: a sale of the business and assets followed by a liquidation could be a less expensive option.

7.  Not all insolvency procedures are the same

Each procedure has its own nuances, from the outside they seem subtle but they’re not.  It’s vital that the right procedure is chosen, and that can be determined by what may to you seem to be small factors.  It’s important to consider all the options.

8.  You’re not obliged to spend your own money to pay the insolvency practitioner’s fees

If there’s not enough money or assets in the company to pay for the insolvency process, there are alternatives.  Couldn’t your money be better spent, say, to finance your new business?

9.  Once the company goes into formal insolvency, you lose all control

The insolvency practitioner makes the decisions.  It’s important you know his intended strategy, right from the planning stage.

10.  Liquidation doesn’t stop you earning a living

In the UK responsible entrepreneurs are encouraged to give it another go – indeed many of today’s most successful businessmen weren’t a success first, second, third, even fourth time around.  However, setting up a phoenix operation isn’t always that easy as the banks, customers and suppliers are not always as supportive as you’d like or expect.   An added complication is that the rules over re-using the company’s name, should the company go into formal insolvency, are unnecessarily complex.  And if you breach those rules, there are severe penalties, including personal liability for the debts of newco should it fail.

Go into your meeting with an insolvency practitioner with these points uppermost in your mind.  Then, and only then, can you hope to make the right decisions.

If you’d like to buy a copy of my e-book preparing you for that meeting, go to my website at www.midlandsbusinessrecovery.co.uk

What else do you need to know to solve your debt problems?

 

Some people have several options to solve their financial problems.

The problem is no one solution is ever ideal, each will mean you giving up something.  You’ll have to compromise.

Get used to this.

Focus on the bigger prize of losing your unsecured debt.

Take time to assess the relative merits of each solution.

Have in mind throughout that there’s a trade off between the control you have over the process and the amount of debt written off.  How prepared are you to surrender to a formal insolvency process?

If writing off debt is what you really want or need, as this is normally achieved through a formal insolvency process, be prepared to ‘lose control’ of any assets you have.  This isn’t as bad as it first sounds – if you know how the process works, you can still be reasonably certain of the outcome, what assets you may or may not lose.

If retaining control is important, then look at taking one of the more informal solutions.  But recognise that you will probably not be able to write off so much debt.

If you’d like to talk things over with us, call Paul on 01902 672323.

Warning signs that a Credit Union is in trouble…

In recent months several credit unions have gone bust.

It’s no accident that so many unions are failing, you see there are major structural and operational difficulties in the sector generally and within many individual unions, which problems are unlikely to go away soon.

Continue reading “Warning signs that a Credit Union is in trouble…” »