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

Haven Credit Union Final Administrator’s Report

To download a copy of my final progress report as administrator in the administration of Haven Credit Union, issued soon after the credit union went into liquidation, please click on the following link…

Final Progress Report of the Administrator of Haven Credit Union

If you have any problems downloading the report – give it some time to download as it is a large document! – email me at paul@midlandsbusinessrecovery.co.uk or call me on 01902 672323.

Regards

Paul Brindley

Liquidator of Haven Credit Union Limited

 

Haven Credit Union Final Administrator's Report

To download a copy of my final progress report as administrator in the administration of Haven Credit Union, issued soon after the credit union went into liquidation, please click on the following link…

Final Progress Report of the Administrator of Haven Credit Union

If you have any problems downloading the report – give it some time to download as it is a large document! – email me at paul@midlandsbusinessrecovery.co.uk or call me on 01902 672323.

Regards

Paul Brindley

Liquidator of Haven Credit Union Limited

 

Just set up a new business? Read this if you want it to be a success!

As an insolvency practitioner, I have met met hundreds of new business owners…wouldn’t it be great if you could learn what I’ve learnt from all those meetings?

Well you can!  Here’s an article just for you…

So you want to set up in business, do you?

Or you’ve recently started trading but not doing as well as you hoped?

Would you like to know how to avoid going under? How to give it the best chance of being a success?

You see, there’s a big problem with small businesses.  And that is when most people go into business, they only look at the positives such as what they’ll do when things really take off.  Things like what new car they’ll buy, how they’ll spend their increased free time, how they’ll manage all that profitable work? ….
… They build the business on two things:

(i) what they think they know; and

(ii) what they hope.

They don’t go out of their way to find out what they don’t know or to plan for things not going quite to plan.

Yet it’s often what they don’t know or haven’t thought about that will eventually kill the business.  And with it, destroy their hopes and dreams, and often their own and their family’s finances.

The bad news is that’s how it turns out for the 4 out of 10 new start-ups – yes, 40% of new businesses fail within the first 2 years!

That’s almost as many businesses fail as are still alive within just 2 years.  But it doesn’t end there – of the survivors, most then go on to fail within the next 3 years.  Only one in ten are still around by year 5.

The point is you will fail if you follow the course most new business owners do. Yet with so many not making it, there’s an abundance of experiences out there that you can learn from. And it’s free to do so!  Here they are…

The business was started for the wrong reason

Some businesses are set up and then run more like a hobby than a business.  I call these ‘lifestyle businesses’ – they tend to merely exist, either doing poorly or at least not doing spectacularly, until something happens later to cause the wheels to come off…

It scares me that right now many small businesses being set up out of necessity – because there are no jobs around – rather than by someone who has identified a profitable opportunity.

Why have you set up?

I can do it all myself!

In his book, the E-myth, Michael Gerber spoke of the 3 skill-sets needed by business owners today – entrepreneurial, managerial and technical.  No one I know has all three, in the right degrees.  Businesses that don’t have and won’t buy in all three skill-sets lack the cutting edge to succeed in today’s harsh business environment.  Seeking help from outside the business to plug skills gaps is a show of real strength, not of weakness…

Read the book, plug the gaps!

Not enough money

It always costs more to set up a business than you expected and then survive the inevitable troughs later on.  At this time when the banks are selective as to whom they lend to and seem to fail to support customers when they most need them, it’s not a good idea to rely on credit lines over which you don’t have full control.

Have you taken a good amount of time to assess how much money you will need, where you can get it from and how you’d cope with what might happen when business dips?
Poor financial skills

It is vital that you understand how the business works financially.  If you don’t, it won’t be long before you won’t have a business because you don’t properly understand the machine that brings in the cash it needs works.  Also, if you’ve got weak financial skills, you probably don’t have a strong profit motive.  Sure, you love what you do, but you’ll return to stereotype ‘manager’ or technician’ – see above – roles when things get tough, and when you do, you’ll dig the business into an even bigger hole rather than solve its problems.

Do you understand exactly how how the business ticks financially?  Do you understand the figures?  Think about going to college to learn management and accounting if you don’t.  Don’t try to abdicate responsibility for your business’s finances to an accountant – sure it’s ok to hand the processing to him, but not responsibility.
The location, the product or service is all wrong

Quite simply, the business opportunity was not fully explored, optimism blinded reality… there are many businesses in our High Streets which have got the location, product or service wrong.  I stand there and think ‘just what is the owner thinking?  It just doesn’t stand a chance!’

Have you allowed your heart to overrule your head?
No planning

Have you heard the saying ‘to fail to plan is to plan to fail’.   Have you planned for what is going to happen?  And what might happen? – you see the unexpected does happen, increasingly so today!

A lot of the things that cause businesses to fail can be anticipated, plans can be formulated to avoid failure.

Have you spent enough time thinking about what is going to happen and how you’d deal with what might happen?

Poor trading levels

Where a business suffers poor trading levels, often their owners cut costs to manage their cash flows – they do this because it’s often the easiest decision and produces short term cash benefits.  However, if this is all you do, you’re merely storing up much more serious problems into the medium term.  It’s simply not possible to cut yourself to greatness!…

If things don’t work out in terms of sales levels, what’s your plan? How certain are your planned sales figures?
Poor marketing

Many businesses wait for sales to find them, because ‘that’s what you’ve always done’.  If you have worked for someone and have now gone to work for yourself, this could be a big problem for you.  I often can’t ‘find’ any presence anywhere of such businesses – there is no website, no sales force – and if I can’t find you, how can you expect would-be customers to find you?

What’s your marketing plan?  Have you written it down? Do you follow it up?
Failing to set and follow a clear strategy for success

Without a formal plan, businesses develop haphazardly.  And one day you’ll scratch your head and wonder just how the business got to where it is now – it will then be slowly strangled, by ‘unfair’ relationships with a major customer, by your banking constraints, or something other you could have anticipated, …

What’s your strategy?  have you written it down?  Do you act on it?
Business model with high fixed costs

An inflexible business model with high fixed costs may work in boom times, but it will cause significant problems in the inevitable times of bust.

Tell me all about your fixed costs…
Finally, knowledge without action is pointless, it won’t change the outcome, so now go and do something about it!
Paul Brindley FCA, Licensed insolvency practitioner
Midlands Business Recovery