§ Order for Second Reading read.
§ 3.59 p.m.
§ The Minister of State, Treasury (Mr. Denzil Davies)
I beg to move, That the Bill be now read a Second time.
This Bill provides a statutory framework for credit unions, together with a system for their registration and supervision. Credit unions are not widely known in Great Britain, although they have been successful in Northern Ireland and abroad.
A credit union is a self-help association, run on mutual lines, in which members agree to pool part of their savings, in order to provide themselves with a source of low-cost credit. Interest—in the form of dividend—is paid upon money invested in the credit union, and, from the funds accumulated from those savings, loans are made to members upon which they pay interest to the credit union. Members of a credit union will have a "common bond"—the significance of which I will explain later—and only members of a credit union can borrow from it.
The loans that a credit union makes are made on a personal basis and borrowers do not necessarily have to give security. Credit unions are, in effect, therefore, financial co-operatives whose main object is to provide their members with loans for everyday requirements—whether goods or services—at the lowest posible rates of interest.
Northern Ireland and the Republic of Ireland, New Zealand, the Caribbean and Latin American countries and the United States all have strong credit union movements. Since 1969, credit unions in Northern Ireland have been regulated under the Industrial and Provident Societies Act (Northern Ireland) of that year. The terms of the Credit Unions Bill now before us owe much to the experience gained in administering the Northern Ireland credit union legislation.
There are already more than 50 credit unions operating in Great Britain, 10 of which are registered under the Companies 800 Acts, and four under the industrial and provident societies legislation. But the Companies Acts do not provide an entirely suitable statutory framework. Neither does the Industrial and Provident Societies Act, as it stands at present. The majority of the credit unions so far established in this country have, therefore, preferred to operate as unregistered societies. Moreover, neither the Companies Acts nor the Industrial and Provident Societies Act provide the kind of prudential or supervisory requirements nowadays regarded as appropriate to a financial organisation of the savings and loan kind.
The Crowther committee on consumer credit considered credit unions in its report in 1971, and concluded that there was a… case for encouraging the credit union movement and for taking steps to make its existence, its aims and methods widely known in the hope it may take root here …Since then, support for the concept of credit unions and for the need for legislation has increased. I would like to pay tribute to the work done in this direction by my hon. Friend the Member for Farnworth (Mr. Roper), who sought to introduce a Credit Unions Bill in 1972 and who has frequently since then spoken on behalf of the credit union movement. Support for the Bill has been given by the National Consumer Council and by the two organisations which sponsor and encourage credit unions in Great Britain—the National Federation of Credit Unions and the Credit Union League of Great Britain, which is affiliated to the World Council of Credit Unions.
A basic feature of a credit union is that it is owned and run by its members on a democratic basis. It will normally be run through committees which are elected by the members. Credit unions are non-profit-making in the sense that, having made provision for interest on the savings placed with them by their members, and for running expenses, they do not aim to make any profit on lending other than a marginal amount to provide and service their reserves for the ultimate protection of members. In a credit union there is normally very little restriction on the purpose for which loans may be made to members. The loans may, for example, be for household goods, season tickets. 801 and so on. There will, however, be statutory limits to the amount which a member can borrow, and the loan will normally have to be approved by a committee of the credit union concerned. Subject to the limitations which the Bill lays down, the arrangement for repayment of the loan will also be determined within the credit union itself.
Hon. Members will no doubt ask how safe is this kind of lending, bearing in mind that loans are often unsecured. The experience of existing credit unions suggests it is very safe indeed. For example, in the few cases where credit unions registered in Northern Ireland have been dissolved, there has been no loss of money whatsoever, nor have any defalcations been reported. By the end of 1977 there were 97 credit unions registered in Northern Ireland, with a total membership of nearly 85,000, total assets of £16 million and total loans outstanding of £14 million.
There are several reasons for this good record. The first is that members of a credit union already have something in common. They may, for instance, live or work in the same place, or be members of the same church or group. This means there is a degree of co-operation and trust among them, and a network of personal acquaintance. Borrowers are generally no strangers. A credit union can usually assess their creditworthiness on the basis of at least some personal knowledge. Deliberate defaulting is also rare, because the money belongs to workmates, friends, or neighbours.
A second factor is that a well-run credit union is more than simply a savings and loan club. When someone comes for a loan, for example, the credit committee may give advice on how rapidly it would be sensible to repay this and other debts. A third point is that most credit unions are comprehensively insured against fraud and theft.
These features will be reinforced by the many prudential rules in the Bill, which will substantially reduce any remaining risk of insolvency. I shall come to these later. In addition, the credit unions have agreed that they should have some sort of scheme for share and deposit protection, comparable to those which other institutions are setting up under the impulse of the Banking Bill. We are discussing with the credit union organisations what form this should take.
802 I turn now to the Bill itself. If it is accepted that the credit union movement should be given a full opportunity to develop and expand, a new statutory framework is essential.
Hon. Members should be aware that this Bill needs to be considered together with the Industrial and Provident Societies Act 1965, because it provides an extension of the provisions of that Act to cover credit unions. The provisions of the Bill will be administered by the Chief Registrar of Friendly Societies and the assistant registrars for England, Scotland and Wales.
Registration of a credit union will be accomplished under the Industrial and Provident Societies Act 1965. Provided that the rules of the credit union contain those matters specifically required by the Bill and provided also there are the requisite number of members—a minimum of 21 and a maximum, normally, of 5,000—registration will be effected if the registrar is satisfied on two main factors. These are, first, that the objects of the applicant society are those, and only those, of a credit union, and, secondly, that admission to membership is limited to those persons who satisfy the conditions of a common bond, which must be set out in the credit union's rules.
The Bill defines what are to be the objects of a credit union. They are the promotion of thrift among the members of the society, by the accumulation of their savings; the creation of sources of credit for the benefit of the members of the society at a fair and reasonable rate of interest; the use and control of the members' savings for their mutual benefit; and the training and education of the members in the management of their financial affairs.
Clause 1(4) lists the common bond qualifications which are appropriate, as being one or more of the following: following a particular occupation; residing in a particular locality; being employed in a particular locality; being employed by a particular employer; or being a member of some other bona fide organisation. The Bill also makes provision for such other qualifications as are approved by the registrar. This will enable the registrar to approve other forms of common bond, from time to time, which are appropriate to a credit union.
803 It is also necessary to ensure that the common bond is a real one. A society whose only qualification for admission to membership was one which was so wide as to lack any real element of community would not provide the necessary foundation of mutual trust and co-operation. For example, a requirement that all members must reside, or be employed, in Greater London would be unlikely to be acceptable as a qualification for registration even though, on the face of it, it might be said to meet the criterion of residence in a particular locality.
So, Clause I gives the registrar some discretion to consider the circumstances in deciding whether the qualification is appropriate to support the existence of a common bond in any particular case.
There is one exception to the "common bond" requirement for joining a credit union. Provided the rules of the credit union concerned so allow, a person may be admitted to membership of a credit union if he belongs to the same household as someone who is already a member and who fulfils directly the specified qualification for membership.
When the registrar is satisfied that the rules, objects and common bond provisions of the applicant society conform to the statutory requirements for registration, and he is also satisfied as to the society's name, an acknowledgment of registration is given. The credit union thereupon becomes a body corporate under its registered name by which it may sue and be sued, with perpetual succession and a common seal, and with limited liability.
I should also mention that the Bill makes special provision for the re-registration of those few credit unions already registered under the Industrial and Provident Societies Act, and for conversion of credit unions registered under the Companies Acts into societies registered under the new provisions in the Bill.
The registered rules of a credit union, like those of any other industrial and provident society, are broadly equivalent to the memorandum and articles of association of a company.
Within the limitations of the Bill, a credit union can make whatever provisions in its rules for the society's 804 management that it wishes. It must, however, include those particular matters which are set out in schedule 1 to the Bill.
In addition to the name, objects, registered office and membership qualifications, the following matters must also be covered in the rules: how meetings are to be held, and how rules are to be made or altered; the methods of appointing and removing a committee of management and of officers, their powers and remuneration; the maximum shareholding of a member, and the mode of withdrawal of shares; how loans to members are to be made and repaid; audit of the society's accounts; provision for the withdrawal of members, and for terminating the membership so as to keep members within the permitted maximum, and for the repayment of shares of, or loans to, any member whose membership is terminated in this way; the manner in which the society may be dissolved.
Membership of a credit union will be limited to individuals; a body corporate may not be a member. Each member must hold at least one fully paid-up share in the credit union; though he cannot be required to hold more than £5 in fully paid-up shares as a condition of membership, a member may hold up to a maximum of £2,000 in shares in a credit union.
To join a credit union, a person must qualify through the common bond. However, it will occasionally happen that a member may cease to be within the common bond of his union. For example, if the common bond is employment by a particular employer, a member may leave that employment and thus might no longer qualify for membership. In such a case, where a member ceases to enjoy the common bond qualification, he will be allowed nevertheless, to continue as a member, provided that the number of such persons does not at any time exceed 10 per cent. of the total membership of the credit union.
One of the principles of all registered co-operative societies—and credit unions will be no exception—is the entitlement of each member to cast one vote, regardless of the number or value of the shares he holds, on any matter which falls to be decided by vote. This is specifically provided for in clause 5(7).
805 The Bill provides that each society must have a minimum of 21 members and a maximum of 5,000 members. The registrar has a discretion, however, to permit the maximum to be exceeded.
The actual operation of a credit union is, like that of any mutual society, very much a matter for the society itself. The registrar has powers to intervene in certain circumstances but, provided it keeps within the law and remains financially sound and viable, a credit union will be left to manage its own affairs without interference by the registry. The Bill does, however, make certain provisions in relation to the administration of a society, and I shall refer briefly to those matters now.
First, I will mention some provisions with regard to those who put their money into a credit union. As distinct from a company, a credit union, in common with other industrial and provident societies, is not required to provide in its rule for the number or value of shares which it may issue. Every member must hold at least one fully paid-up share, and he may hold shares up to a maximum of £2,000, but he cannot be required to hold more than £5 in fully paid-up shares as a condition of membership. In practice, there-force, the share capital of a credit union will vary from time to time according to the shares allocated.
All shares have to be of £1 denomination, and the dividends payable are not to exceed 6 per cent. per annum, or such other rates as may be specified from time to time. Shares are not transferable, the only exception being that they may be transferred by nomination on the death of the holder. Shares are withdrawable, but they may be issued only on terms enabling the credit union to require not less then 60 days' notice of withdrawal. There is, however, as I understand it, nothing to prevent a credit union in practice waiving this notice of withdrawal.
Generally speaking, a credit union will not be able to accept money on deposit, but there is one exception. No one under the age of 16 can be a member of a credit union, but a credit union is to be allowed to accept sums on deposit up to a specified total amount from young persons under 16, which will be held in a separate fund on trust for them and invested so 806 as to produce an income, which will be distributed as interest to the depositors.
There are a few provisions relating to those who may wish to borrow from a credit union. A credit union may only lend to a member, who is of full age, for a provident or productive purpose. It is left to the credit union concerned to provide, by its rules, whether, and if so what, security is required, but, if present practice is followed, most loans will be unsecured.
The total amount which may be lent to any one member at any one time may not be more than the sum of his paid-up shareholding at the time, plus £1,250. This last figure may be varied from time to time by an order made by statutory instrument. Thus, if a person's paid-up shareholding is £250, his total borrowing must not exceed £1,500. In practice, the amounts borrowed are, on present experience, usually likely to be very much smaller than this.
Any loan must be repaid in full within two years if it is unsecured, or within five years if it is secured. Again, these periods may be varied by statutory instrument from time to time.
The statutory limit at present proposed for interest charged on loans is 1 per cent. per month on the reducing balance, and, although the rate charged by a credit union may be less than this, the rate may not be exceeded.
The Bill makes provision for the holding and investment of a credit union's surplus funds, the funds received or accumulated from members, which are not currently required for its purposes.
Apart from working cash, such funds will be kept in banks designated for the purpose by the Chief Registrar or invested in investments according to the manner laid down by the Chief Registrar in an order made by statutory instrument. This order will, I expect, be somewhat similar to the authorised investments orders made under the Building Societies Act 1962.
In addition to holding a proportion of its funds in liquid and near-liquid form, the building up and maintenance of adequate reserves is obviously essential for the sale and successful operation of a credit union. The Bill therefore requires that at least 20 per cent. of any profit in any year of account is to be transferred to a general reserve, until such 807 time as the reserve is equal to at least 10 per cent. of the total assets of the credit union. Thereafter, the general reserve is to be maintained at not less than 10 per cent., but not more than 20 per cent., of the total assets.
This provision for the building up and maintenance of the general reserve has first call on a credit union's profits. After that, not less than 90 per cent. of any profits remaining must be applied in payment of a dividend to members on their paid-up shares; or as a rebate of interest paid by or due from members who have received loans; or, provided that a dividend of at least 3 per cent. is paid to members on their paid-up shares, up to 10 per cent. of the year's profits may be applied for any social, cultural or charitable purpose.
Exactly how the profits are to be applied within these guidelines is determined by the credit union itself—that is to say, by its members in general meeting.
The bulk of a credit union's income will come, of course, from lending to its members, and the Bill provides that this will be completely free from tax.
Credit unions will also have some income from investment, but this will be relatively small. It will be subject to corporation tax at the special rate of 40 per cent. which applies to all industrial and provident societies. The dividends that a credit union pays its members will be subject to personal tax, but because these dividends have not so far been taxed in Northern Ireland—with the knowledge and approval of the previous Government—the dividends paid by existing credit unions throughout the United Kingdom will, as provided in the Bill, be exempt from tax.
The registrar is also to be given powers which may be exercised in the interests of members of a credit union or those who are likely to become members. These powers broadly correspond with the powers which he already has in relation to other societies, in particular building societies and friendly societies. For example, he may, with the consent of the Treasury, if he considers it in the interest of members or potential members, suspend the operations of a credit union, by prohibiting it from borrowing money, 808 from lending money, from accepting new subscriptions or making repayments of shares, or from doing one or more of these things.
§ Mr. John Lee (Birmingham, Handsworth)
Concerning the registrar's powers, will my right hon. Friend indicate the sorts of circumstances in which he would envisage that the registrar might permit a maximum to go beyond the statutory provision of clause 6(2), namely, 5,000?
§ Mr. Davies
I think that they would be fairly exceptional circumstances, as far as one can see at the moment, but if credit unions were to develop and the 5,000 limit appeared to be a little low—that might take a considerable time—no doubt the registrar would consider exceeding the maximum. But, apart from one or two specific cases, it is very unlikely at the moment that the maximum limit would be allowed to be exceeded.
The registrar may also cancel or suspend the registration of a credit union in certain circumstances, for example, if it appears that there no longer exists a common bond among its members.
There are also fairly wide powers to appoint an inspector to investigate and report on the affairs of a credit union as well as to petition for winding up.
I have touched only upon what I think to be some of the more important provisions of the Bill, but I hope that this will have been of some assistance to hon. Members in providing a broad outline of the proposals in it.
Credit unions have the twin virtues of providing a source of low-cost domestic credit while encouraging saving. In recent years, we may have overlooked the value and advantages of such institutions operating on a smaller, more human scale, and particularly of institutions which embody mutual co-operative principles of self-help. The Bill will rectify that omission and provide a statutory framework within which credit unions can be recognised, supervised and made accountable. This is a goal for which credit unions themselves have fought, and I believe that it is a worthy one.
§ 4.19 p.m.
§ Mr. Peter Rees (Dover and Deal)
I am sure that the whole House is grateful to the Minister of State for the 809 moderate and lucid way in which he expounded the Bill. The debate on the Bill might he regarded as a tranquil interlude amid rather more contentious business. Some people outside the House might even wonder why we should be devoting our time, at this juncture in the nation's affairs, to a matter apparently of such small importance, but I hope that the speech of the Minister of State—and, indeed, the contributions from each side of the House—will persuade those in the country outside that this is a small but important matter.
Credit unions, as the Minister of State, I hope, has demonstrated, are both interesting and useful phenomena. I pay tribute to the hon. Member for Farnworth (Mr. Roper), who has drawn to the attention of the House the possibilities of credit unions. I have no doubt that he will take personal satisfaction in this Bill.
The House will have become used to industrial co-operatives, and so we perhaps could describe credit unions as banking co-operatives. But in so describing them I should not like to be thought to be encouraging either the NEB or the right hon. Member for Bristol, South-East (Mr. Benn) to take a closer interest in them.
§ Mr. Rees
Because I believe that credit unions have flourished without undue Government interference or supervision. So far as possible we should encourage that. Where it is necessary to regulate and provide a legal framework, it is the duty of the House to do so. But, subject to that, I believe that if people can regulate their own affairs and can develop a useful, practicable and profitable vehicle for saving and for credit, they should be allowed to do so without excessive public interference.
The history of credit unions shows that they have flourished without undue attention from this House. As a matter of historic interest, I remind hon. Members that credit unions were first devised in Bavaria in the middle of the last century. They were exported to the United States and to Quebec, and they found their way back to these islands through Ireland, where I suppose they have become the successor to the gombeen man. I have no doubt that the right hon. Mem- 810 ber for Down, South (Mr. Powell) will have pertinent comments to make about that. They have also come back through the West Indian community in Great Britain.
The Minister of State told us how the Crowther committee gave them a favourable nod, and I suppose that the House today is taking up the story where the committee left off. The Minister of State commended them to the House as providing a form of low-cost domestic credit. At this juncture in our affairs, with the minimum lending rate at 14 per cent., that must be a laudable and praiseworthy objective, and one that I am sure will commend itself to the country. Perhaps as a result of the combination of this debate and current financial circumstances more people will be induced to take a closer look at credit unions and their advantages for themselves and their families.
The Minister of State referred to the objects of the credit unions and he quoted from clause 1(3), which demonstrates clearly what they are all about. I have some slight reservations about subsection (3)(d), which states that one of the prescribed objects of a credit union must bethe training and education of the members in the wise use of money and in the management of their financial affairs.Without seeking to introduce a contentious note, that strikes me as being a little paternalistic, not to say patronising. It smacks a little of a committee of prosperous members of that Edwardian middle class, presided over, perhaps, by the Webbs, devising a form of uplift for the Edwardian working class. I hope that we have moved beyond those days and that if there is to be training for the members of the society in the management of their financial affairs it will be merely as a pleasant by-product of a credit union rather than a prime objective.
§ Mr. J. Enoch Powell (Down, South)
Did the hon. and learned Member for Dover and Deal (Mr. Rees) happen to notice that in his opening speech the Minister of State omitted the wordsthe wise use of moneyfrom his quotation from subsection (3)(d), which suggested to me at the time that he, too, might be sharing some of 811 the sensations experienced in this connection by the hon. and learned Gentleman?
§ Mr. Rees
I noticed that, but since, as I said, I did not want to introduce a note of acrimony into what I hope will be a constructive and friendly debate, I did not wish to make excessive use of the Minister of State's sensitivities on this point. It is fair, however, to bring to the attention of the House the precise wording of the object prescribed in the clause. If a credit union cannot demonstrate that one of its prime objects is the training and education of its members in thewise use of money and in the management of their financial affairs",the registrar would be within his rights, or even bound, to deny it registration. But perhaps this a minor matter best probed in Committee. I am glad that the right hon. Gentleman's sensitivities on this point are the same as mine and, I suspect, the same as those of the Minister of State.
I suppose that the first question that we ask is whether we need legislation of this kind. Certainly we Conservatives do not applaud legislation for its own sake. However, I understand that there has been pressure from a steering committee of the credit unions, over which the hon. Member for Farnworth presides, because it feels that they need to be legitimised in some way. Perhaps they feel that it enables them to exercise a closer claim on the loyalties of those who might participate, especially if credit unions are to expand. I am not entirely certain whether I understand their fears and anxieties on this point, but perhaps I had best leave the matter to the hon. Member for Farnworth to tell us in what way the committee feels that the position of credit unions would be made more secure under the Bill.
I well understand that there is a problem about how credit unions should be fitted into an extremely complex legal and financial mosaic. Somehow they must be reconciled with the Industrial and Provident Societies Act, the Consumer Credit Act and the Banking Bill, of which my hon. Friend the Member for Hitchin (Mr. Stewart) will be able to tell the House something since he has been on the 812 Standing Committee examining the Bill. We shall no doubt have to explore in Standing Committee how this Bill fits into this complicated jigsaw.
We shall have to explore such esoteric questions as how far the committees or members of credit unions should be regarded as debt counsellors for the purpose of the Consumer Credit Act, but I do not think that it is necessary to take up the time of the House on that subject now.
The next question is whether, in deferring to the steering committee of credit unions and in helping credit unions to achieve the laudable objectives set out in the Bill we may not be trussing them up a little too tightly.
The Minister of State, with his customary fairness, has drawn attention to some of the restrictions, limitations and safeguards which are to be built in. I merely draw the attention of the House —briefly now, because this matter is more appropriate for examination in Committee —first to the limitation on dividends in clause 7(6), and, secondly, to the provision for 60 days' notice of withdrawal. I was not entirely certain from what the Minister of State said whether this is merely an enabling provision for the committees to impose a 60-day limit or whether it is mandatory. The Minister of State has a keen eye for these legislative details, and perhaps mine is a little blurred.
I am a little perturbed, too, about the inability of credit unions to accumulate their investment income because of the restriction in clause 8 about the requirement that they are to sell any land required as a security as soon as may be, under clause 11(4), and, finally, at the power of the registrar to suspend the operations of a credit union.
This has always been found to be a particularly difficult power for any registrar to operate. I call to mind particularly the operation of the power in relation to insurance companies. There will always be the temptation, so as not to prejudice the existing members of a credit union, not to exercise such a power until the horse has bolted from the stable.
Hon. Members may feel that, having made these points on the limitations imposed by the Bill, if I should now suggest that, if credit unions are to expand 813 this framework might not be adequate, I am being inconsistent. I hope not. It may be that what has been devised by the Minister of State is suitable where a credit union involves 21,210 or maybe 2,100 members. The House knows that the present limits are now set at between 21 and 5,000 members. However, the registrar has a discretion to accept a greater number of members for a credit union. If the experience in other countries is anything to go by, it could be that if credit unions catch on we could be faced with credit unions with many more members.
I understand, for example, that the Caterpillar Credit Union of Illinois has 55,000 members, while the Navy Federal Credit Union, again a United States organisation, is worldwide in operation, presumably because it recruits from the United States Navy and has about $500 million of assets. If credit unions expand to that extent, we shall have to consider whether the framework of this Bill is appropriate and whether we should not go over to something that is more akin to our Companies Acts.
I hope that whoever replies to the debate on behalf of the Government will say what will be the registrar's policy if a particular credit union is so successful that it wishes to expand beyond the 5,000 members mark, and whether he will insist that a new credit union is formed or will feel that a credit union of, say, 10,000 members can be comfortably contained within the provisions of this legislation.
If the figure goes beyond the 5,000 mark, the House may wish to impose rather more restrictive conditions on those who form the committee of the credit union. Indeed, we may have to consider whether there should be any restriction or regulation on the transmission of money between various branches. If a credit union has as many as 55,000 members, it will be not much less than a clearing bank, although perhaps devoid of some of the functions of a clearing bank. It will be necessary to see whether it should be supervised in a closer and more professional way.
I now turn to the subject of taxation. I hope that the Minister of State will forgive me if I say that I thought he skated a little cursorily over the thin ice of that pond. We are told that the profits of a registered credit union are not to be sub- 814 ject to corporation tax or income tax. That may seem to be a massive privilege and one that offsets all the limitations and restrictions imposed by this Bill.
I wish to remind the House—and I hope that the Minister will be able to confirm this later—that most credit unions will probably not be subject to corporation tax or income tax in any event because of the principle of mutuality. I am referring to the mutual interest of all the members involved who will be borrowing from and lending to each other. This is not a massive privilege. I also notice that interest on loans is not to be taxable.
§ Mr. Denzil Davies
I should make it clear—and I shall expand on this later if I have the opportunity to do so—that the Inland Revenue has taken the strong view that without legislation credit unions will not benefit from the exemption of mutuality to which the hon. and learned Gentleman has referred. Without this legislation giving them a specific exemption, they would be taxable and would not gain the mutual benefit exemption.
§ Mr. Rees
We are grateful to the Minister for making the position clear. He is right to state the Inland Revenue's view. I can only say to the House, with a certain diffidence, that I should have thought that the mutuality principle did apply. There has been no test case taken, so far as I know, and no doubt the hon. Member for Farnworth will be able to confirm this. Certainly, so far as I know, no case has gone to the general or special commissioners—and certainly none has been heard by any higher court which supports the proposition just advanced by the Minister of State.
I do not think there is a great gulf between us on whether credit unions should be exempted in the future. This Bill will put the matter beyond doubt. It may be a matter of academic interest for tax lawyers as to whether credit unions should or should not have been subject to tax in the past. But if a credit union is not eligible for registration, or if it is de-registered, the point may become somewhat acute. I have no doubt that such unions will take advice and test the position in the courts.
I see from the Bill that interest on loans to members is not to be taxable. I would have thought that such interest 815 would also be subject to the mutuality principle. The Minister has said that income from outside sources is to be taxable. It may be that my attention wandered at that point in the Minister's speech, but I was not sure at what rate it would be taxable. Perhaps he will say whether it is to be at 40 per cent.
§ Mr. Rees
I am grateful to the Minister for that information. If that is so, there may be a case—and this point is more appropriate for Committee—whether they should be entitled to at least a measure of relief for their management expenses against their outside investment income. I do not think that we have a concluded view from this side of the House, and we should like to hear the arguments deployed in more detail.
The next, and perhaps the most important, point to be considered is how the distributions of a credit union to its own members should be treated. The Bill appears to say that credit unions which now exist, or new credit unions that take over the business of established credit unions, will not be subject to tax on any distributions which they make to their members. This is certainly the position that has obtained until now in Northern Ireland, and it may be the position that has obtained until now in Great Britain. However, henceforth new credit unions, whether formed in Northern Ireland or Great Britain, will be subject to tax on distribution to their members.
This may be a point of some importance since they are obliged after a certain level is reached to distribute their surpluses. This will bear hardly on new credit unions and will provide an incentive to people to try to join old credit unions rather than to form new ones. I do not believe that such a move would necessarily be for the good of the credit union movement. Indeed, it will increase the pressure to push credit unions beyond the 5,000 members mark. Therefore, there is an inconsistency which we shall have to explore. The position is a little untidy, but that is not the important point. The important point is that there should not be discrimination between old and new credit unions. We shall have to press the Minister more closely in Committee about why he feels that this distinction 816 should be drawn. I do not know whether the Minister of State now wishes to add to his earlier remarks.
§ Mr. Denzil Davies
Perhaps I may ask the hon. and learned Gentleman—I do not necessarily wish to have an answer now, and I appreciate that there is a certain inconsistency—whether he is arguing that in all credit unions dividends to members should be free of income tax or that dividends to members should be taxed in respect of all credit unions.
§ Mr. Rees
The Minister of State is right to press me on this matter. There are two logical positions. One can argue that the exemption should apply to all credit unions, notwithstanding what has happened in the past, or to none. I concede that the Conservative Administration tolerated, connived at and perhaps even encouraged the exemption from tax for credit unions in times past. All one can say is that logically all should be exempt on distributions to members or none. We should like to hear the arguments deployed a little more fully, because the Minister of State will readily concede that he merely indicated the position without advancing any arguments for either course of action.
Since I have not had the chance to consider the matter in the light of any further arguments to be advanced by the Minister of State, I prefer to reserve our position. This was a point which the Minister did not explore very fully in his introductory remarks and perhaps this is a matter which we shall wish to examine in Standing Committee.
In conclusion, I shall say that we on the Opposition Benches support credit unions. We support any measure that will give them legitimate encouragement and, therefore, in principle we welcome the Bill. We have reservations about the details, but these we can explore in Committee. We welcome the introduction of the Bill and we hope that it has a fair wind tonight.
§ 4.40 p.m.
§ Mr. John Roper (Farnworth)
I begin by declaring an interest in the Bill, albeit a totally non-pecuniary interest. For the past eight years I have advised, in an honorary capacity, the Credit Union League of Great Britain on matters associated with credit union legislation. 817 More recently I chaired the credit union steering group, bringing together the various credit union organisations in this country.
The debate marks an important milestone in the efforts of the league and the National Federation of Credit Unions to obtain a satisfactory legislative framework. In a moment I hope to come back to the point raised by the hon. and learned Member for Dover and Deal (Mr. Rees) about why it is necessary to have a satisfactory legislative framework for credit unions.
I begin by paying tribute to the considerable efforts made by my right hon. Friend the Minister of State and his officials in the Treasury to understand the practice and problems of credit unions and to incorporate the result of their understanding in the provisions of the Bill. I should also like to mention the helpful advice provided by not only the Chief Registrar of Friendly Societies for Great Britain but those in the Department of Commerce in Northern Ireland responsible for the administration of credit unions and the registrar in that Province. As I believe my right hon. Friend said, that advice led to a number of important changes in the Bill.
The hon. and learned Gentleman, in the historical excursion with which he began his speech, went back to Bavaria. Indeed, one of the roots of the credit union movement is the Schultze-Delitsch in that country. It is interesting that, according to the autobiography of Ed Filene, who was a prosperous Bostonian largely responsible for the development of the credit union movement in the United States, he discovered the idea of small-scale credit co-operatives on a world tour during the opening years of this century. He made the discovery in India, where, in the province of Bengal, a Scottish agricultural development officer had started small-scale credit co-operatives. It is perhaps approprate that what Filene learnt from a British—I was going to say colonial British—administrator in Bengal in the early part of the century has gone round the world and, in a sense, is now coming back to this country through the Bill—although, of course, we have learnt from other movements such as Desjardins, started by the French in Canada, and the German tradition.
818 I should like to say a word about the points made by the hon. and learned Gentleman on the need for legislation. Quite clearly, whenever we consider additions to the statute book, a case must be made for them.
There are three reasons for legislation. The first is to find an appropriate form of corporate law in which a cooperative body such as a credit union can fit. The Companies Acts sit somewhat heavily on a co-operative body. That is why we have a separate body of co-operative law and the industrial provident societies legislation in general. That legislation does not provide for a financial co-operative's making small-scale loans to members. For example, it is not able to make unsecured loans. Therefore, there is clearly a need to amend the existing industrial and provident societies legislation if there is to be a corporate structure for credit unions.
Secondly, as the hon. and learned Gentleman hinted, within the new framework of legislation for financial institutions in general, which was introduced by the banking legislation and which, as the right hon. Member for Down, South (Mr. Powell) is noting with some glee, derives from the EEC directive on financial institutions, there is a need to make provision for credit unions.
Thirdly, there is a case for protecting against abuse the good name of a body such as a credit union which is acting on a relatively small scale, in a voluntary way in many cases. If we did not have —as we do in this legislation—restrictions preventing people from using the words "credit union" unless they operate in a proper way, a way laid down in statute, there would be a risk of abuse of the concept of a credit union. We could have people setting up something which they called a credit union but which operated in a totally unscrupulous way. If such institutions are to develop, which I think would be a good thing, we need a legislative structure.
It is interesting to note that in almost all Commonwealth countries—I have checked most of them—there is already credit union legislation, much of it broadly falling within the general structure of their co-operative and industrial provident society legislation.
I should like to make one or two comments about the matters contained 819 in the Bill and then say something about the general position of credit unions in the United Kingdom in the light of the Bill. As my right hon. Friend said, the Bill draws very largely on the legislation adopted in Northern Ireland in 1969. Indeed, that was the basis for the Private Member's Bill which I submitted to the House in 1972. The Government have taken advantage of this opportunity to make a number of changes. Many of them were foreshadowed by last year's White Paper, and many are based on the experience of credit unions, both in Northern Ireland and this country, since the passage of the original Act in Northern Ireland. Indeed, I think that power is taken in the Bill to enable these improvements to be made in Northern Ireland by statutory instrument in due course.
Almost all of the changes are welcomed by the credit union movement as providing a firmer and more secure framework for the small-scale financial co-operatives. I would rather call them financial co-operatives than banking co-operatives. The concept of a bank is rather precise. I thought that the use of the phrase "banking co-operatives" by the hon. and learned Member might be misconstrued by the public.
I am convinced that in the early stages of the development of the credit union movement it is right to have certain restrictions on their scale of operation and on the financial size of a member's participation in a credit union or, indeed, his borrowing from it. I should, however, warn my right hon. Friend that the figures quoted in the Bill—£2,000 and £1,250—as the limits of shares and the limits of borrowing beyond a member's shareholding were fixed about three years ago. In the light of inflation it may be necessary to increase them in Standing Committee so that they are more realistic.
The role of the registrar, referred to by my hon. Friend the Member for Birmingham, Handsworth (Mr. Lee), is very important in connection with credit unions, as has been seen in Northern Ireland, where the registrar has played a particularly constructive role. Certainly, until a credit union reaches a membership of about 800 to 1,000 it is likely to be run largely by volunteers with limited professional assistance. In that 820 situation a clear legislative framework and satisfactory rules approved by the registrar—and, if necessary, the intervention by the registrar as outlined in clauses 15 to 18—are safeguards which I believe should be welcomed.
I should now like to turn to two matters to which reference has already been made and which will no doubt take up some time in Committee. The first is the question of the best method of protecting the shareholdings of members of credit unions. There would appear to be two kinds of risks to which members' shareholdings might be subject—the first the risk of loss through fire or theft and the second the risks of loss through financial mismanagement or through a credit union's getting into financial difficulties.
Although clause 14 makes some provision for insurance arrangements, I hope that in Committee we shall be able to look at the matter more carefully and, in particular, examine ways whereby it would be made obligatory for credit unions to provide insurance against loss of their members' savings through fire and theft.
I hope that in the foreseeable future arrangements will be developed so that all credit unions have to provide obligatory insurance for their members' share accounts, as is already the case in most other countries, and as will apply to many of the other financial institutions covered by the Banking Bill. It may be difficult for what is at present an embryonic credit movement in this country to establish such an arrangement overnight, but it does not seem to me at all unreasonable for credit unions to be expected to do so within the next five years or so.
The second subject, which was treated in a most interesting way by the hon. and learned Gentleman, and which will no doubt take up a good deal of our time in Committee, is the question of taxation of credit unions. The problems of mutuality when it comes to individual organisations are very complex. Although it is true that credit unions would presumably have been able to pursue the idea of mutuality, through the special and general commissioners, to lay down a satisfactory tax structure for them in a Bill of this sort may well be more 821 satisfactory than that somewhat risky alternative, particularly in view of the limited funds available to organisations such as credit unions to take cases through several stages of litigation. Unlike my right hon. Friend and the hon. and learned Gentleman, I am not expert at the tax bar. One of the points to which we shall need to return in Committee is the one that the hon. and learned Gentleman made about the need for relief for management expenses, which I do not think is totally satisfactorily dealt with in the Bill.
On the more general problem of relief on share interest, my right hon. Friend has a most difficult task to be fair to the existing credit unions—especially those in Northern Ireland, which has so far enjoyed a very favourable tax regime—without creating unacceptable anomalies in the treatment of credit unions and comparable financial institutions. Clearly, the movement is very unhappy about the situation that will now be created, in which there will be a distinction between new and old credit unions. I know that in Northern Ireland this matter has given rise to serious concern. We shall no doubt return to the matter in Committee, where I hope it will be possible to find a satisfactory solution, although I think that it will be a difficult task.
I now turn briefly to the broader issues of the movement's future in this country. It is still relatively small in scale, although the remarkable progress that has been made in Northern Ireland since 1969, in a period which has not been very likely to be conducive to the growth of a new social movement, but where the movement has grown so that it now has assets of about £16 million, is an indication that the passage of legislation may well provide an important spur to growth in this country.
There are some—the hon. and learned Gentleman referred to them in passing—who point to the United States credit union movement and in particular the rather atypical giant credit unions there. They suggest that the British credit union movement will suddenly follow their example. The hon. and learned Gentleman referred to the navy credit union. I was interested to learn recently that it has two branches afloat in aircraft carriers of the United States navy and has a branch in the British Crown colony of 822 Hong Kong—and, for all I know, in other places.
Having said that, I think it is worth remembering that 80 per cent. of credit unions in the United States have fewer than 1,000 members. The typical American credit union is not one of the giants but is something much more closely linked to a particular workplace or community. Although there are the giants, somewhat atypical, they should not be allowed to distort the general national picture. Rather less than 10 per cent. of American credit unions have moved from the bread-and-butter business of credit unions into such matters as credit cards and share draft arrangements.
I believe that, in spite of the extra range of financial services already provided in the United Kingdom, there will be a place for credit unions in Britain and that additional competition in the provision of financial services can only benefit the consumer. In particular, we may see a fairly rapid development of credit unions associated with people's workplaces. This has proved an important aspect of credit union development in Australia and Canada.
When in the United States recently I was interested to see that both the Senate and the House of Representatives had their own credit unions. I hope that the day will not be too far off when we establish a Palace of Westminster credit union. I was glad to hear what my right hon. Friend said about the fact that those ceasing to enjoy membership of the common bond could retain their membership of the credit union.
The Bill is no guarantee of the successful growth of credit unions in this country. However, its passage will ensure a fair base for their future competition in the financial market place in bringing basic financial services to their members on a co-operative basis.
I am very pleased to have heard Second Reading moved in the way that it was on behalf of the Government and to hear the words of support from the Opposition.
§ 4.57 p.m.
§ Mr. J. Enoch Powell (Down, South)
If I had dozed off and then woken with a start to see you in the Chair, Mr. Deputy Speaker, and to hear myself called to follow the hon. Member for Farnworth 823 (Mr. Roper), I should certainly also have seen the hands of the clock move to about midnight and reached instinctively for the latest piece of EEC legislation. It is, indeed, ironical that even in this debate the hon. Gentleman and I have found ourselves dogged by the subject, but it is at any rate a relief to be only tangentially concerned with it, and I am glad to follow someone who is so much better informed on this subject not only than I am but, I think, than most hon. Members.
As the explanatory memorandum asserts, and as the Minister of State made clear in his opening speech, in this legislation the House is following a precedent set by Northern Ireland. For once, Northern Ireland has been in this respect the pacemaker for the kingdom.
The Bill will, however, also alter the law governing credit unions in Northern Ireland. Indeed, if hon. Members look at clause 30(4), a newly devised but useful formula, they will realise that the various stages of this Bill are effectively the only opportunity that hon. Members representing Northern Ireland constituencies will have to influence the law that will apply in Northern Ireland.
Therefore, I should be obliged if before the Committee stage the Minister of State could possibly provide a brief analysis which would show how the law as it will result from the Bill as it stands differs from that obtaining now in Northern Ireland under part III of the Industrial and Provident Societies Act (Northern Ireland) 1969. That would be a convenience not only in Committee but in the consultations which it will be the duty of my hon. Friends and myself to hold with those who are managing credit unions in the Province.
There is, however, a mysterious rumour—perhaps it is no more—going about which perhaps the right hon. Gentleman could clear up before we end this debate. I was told in a communication from one of the credit unions in Northern Ireland that the board of the Irish League of Credit Unions had a meeting with officials of the Department of Commerce in Belfast, who informed them that credit union legislation in Northern Irelandwould not always have to run parallel to credit unions on the mainland and that it was 824 the intention of the Northern Ireland administration to commence drafting a consolidated Credit Union Act for Northern Ireland credit unions. This Act would be completely separate from the Industrial and Provident Societies Act.I find that statement—it is evidently an impression which has been gained by credit unions in Northern Ireland—difficult to square with the purpose and content of this Bill. While obviously consolidation is always useful, I should have hoped that the result of legislation would not be to continue the development of the law in the two parts of the kingdom on different lines but to bring them into one corpus. Perhaps any misunderstanding on that score could be laid to rest by the right hon. Gentleman.
Incidentally, it may be that this and other misunderstandings have been assisted by the fact that whereas in Great Britain the Association of Credit Unions covers Great Britain only, in Northern Ireland the relevant association, which is the Irish League of Credit Unions, covers credit unions which are operating in two different countries under different codes of law—perhaps under codes of law which will continue to be different. It might well be that it would be to the advantage of credit unions operating in Northern Ireland to form their own association, especially now for the purpose of dealing with this legislation and with the changes which will flow from it. I say that in no desire to create division where division does not exist but simply because it is obviously more convenient for collective representations to be made in respect of one system of law only.
Clause 30, to which I have already drawn attention, provides for certain reciprocal arrangements between the Treasury and the Northern Ireland authorities to be made under subsections (1) and (2). I wonder whether the Minister of State could explain a little more fully what is the purpose of those reciprocal arrangements. It may be that they are simply to facilitate the operations of Northern Ireland credit unions, whose members are resident, either temporarily or permanently, in Scotland and in England, and vice versa, or there may be some deeper purpose in these reciprocal arrangements which are to be made under clause 30. If the right hon. Gentleman can obtain the information in time, I 825 wonder whether he could give some enlightenment on that matter, as it may be of guidance in preparing for the Committee stage.
Certainly there is one feature of clause 30(1) which, for those not in the know, may require a little elucidation. The clause refers to the Treasury making reciprocal arrangementswith the Department of Commerce or such other authority as may be specified … by any measure of the Northern Ireland Assembly.There is, however, no such body as the Northern Ireland Assembly. It may be that we are not within sight of the existence of such a body as the Northern Ireland Assembly. Nor would the Treasury, I believe, under present arrangements, deal direct with the Department of Commerce for Northern Ireland. The Treasury, as is well known to cognoscenti, is in fact a Minister, although it does not sound like a Minister. One Minister would presumably deal with another Minister—in this case the Secretary of State for Northern Ireland.
The secret—or part of the secret—is that all these terms are reinterpreted by a schedule to the Northern Ireland Act 1974, the constitutional Act under which we are at present working. I shall not repeat, other than formally, my protest against writing into current Acts of Parliament provisions which relate to hypothetical and improbable circumstances, but perhaps the Minister of State would indicate how these reciprocal arrangements will be made and between which actual authorities they will be agreed; for it is obvious from the commencement clause—clause 31—that the reciprocal arrangements are intended to be made without appreciable delay, so that they clearly cannot be made as a result of anything done by the Northern Ireland Assembly. Perhaps the right hon. Gentleman will indicate how this will be organised.
Not unnaturally, a good deal of what has been said already—and I am sure that this will hold true of the remaining stages of the Bill—has related to taxation. It is unfortunate that clause 23, relating to taxation, is the only clause which was not in the form of the Bill previously published in Command Paper 7303 issued in the summer. Certainly we should have come better prepared and better briefed 826 on this subject if that clause had featured in the White Paper edition of the Bill. It might even be that the hon. and learned Member for Dover and Deal (Mr. Rees) would have been in a position to answer the question put to him by the Minister of State; but he and I have been under the disadvantage that it was only when the Bill appeared that we were able to concentrate our minds upon the problem of taxation.
As was indicated, the impact of this clause on credit unions in Northern Ireland will be severe. Owing to arrangements which were made locally under the Northern Ireland Administration, the outside income of credit unions—if I may use that convenient but inaccurate expression; I hope that it is understood—has borne only 20 per cent. corporation tax instead of the proposed concessionary 40 per cent. and members of unions have been free from taxation altogether on the share interest which they received.
Incidentally, I wonder whether I am right in thinking that hon. Members who received loans from credit unions were not able to offset against tax the interest that they paid on those loans. I have seen a suggestion to that effect. It would perhaps bear upon the principle of mutuality and might be relevant to our subsequent debates if that were the case.
I gather that the arrangements so far for credit unions in Great Britain have not been on the same advantageous lines tax-wise as those prevailing in Northern Ireland.
§ Mr. Roper
As I understand it, the position in Great Britain is far from clear. The credit unions are not a homogeneous group. Some of them are incorporated and some are unincorporated. Some may have enjoyed the same position as those in Northern Ireland. Certainly there is no clear position for the credit unions in Great Britain.
§ Mr. Powell
I am much obliged for that clarification.
It is obvious that if we are now enacting what is in effect to be a United Kingdom code for credit unions—and surely a matter such as this should be regulated upon a United Kingdom basis —there must be uniformity in taxation. 827 Whatever might be the private feelings of the citizen about taxation in general or in particular, those whom my hon. Friends and I represent have no desire to be differentiated, for good or ill, in matters of taxation, from their fellow citizens in the rest of the United Kingdom. So we start upon the problem which is undoubtedly present with that presupposition.
However, the solution which has been proposed in the Bill is unsatisfactory. It is unsatisfactory because it treats differently for tax purposes individuals who are in the same position: an individual who becomes a member of an existing credit union will be treated differently for tax purposes from an individual who, in identical circumstances, becomes a member of a new credit union. That seems to offend against one of the canons of taxation—that taxpayers in like situation should be treated alike.
It also creates two classes of credit union, as well as two classes of taxpayer—the pre-1979 and the post-1979 credit unions. I wonder whether it can be in the interests of the development of this movement, to which evidently the House generally looks forward, to place disadvantages upon new credit unions. As the hon. and learned Member for Dover and Deal said, it must obviously stimulate the growth in size of existing unions. It may even generate pressure towards increasing the upper limit upon the size of unions. What it must do is to deter the creation of new credit unions. I do not think that this can be desirable.
Credit unions reflect a common bond of many different kinds, sometimes connected with the place of work—I gather that that is the norm in the United States—at other times connected with place of residence. Almost without exception, the credit unions in Northern Ireland represent common residence and have, in fact, become credit unions for localities or communities. Surely we do not want to introduce into the Bill anything which will freeze the development of the movement exactly at the point which it has reached. If there is benefit in the spirit of this process— that was a view which the right hon. Gentleman the Minister of State evidently espoused—we ought to place no obstacle in the way of the establishment of new credit unions and new varieties of credit 828 unions. Yet here we are placing the most gross obstacle in the way by saying that existing credit unions are to live under one dispensation but the members of new credit unions will suffer comparative disadvantages.
On the other hand, it would clearly be harsh for the credit unions in Northern Ireland suddenly to be brought into the full rigour of the proposed regime of taxation.
I hope that it is in the light of the three factors which I have brought out—first, the desirability of a uniform United Kingdom tax system; secondly, the desirability of not making two classes; and, thirdly, the desirability of shielding the Northern Ireland credit unions from the wind of tax liability—that we ought to seek a more satisfactory solution in our deliberations in Committee.
That said, I welcome, on behalf of my hon. Friends and myself, the introduction of this Bill. We believe that it will be beneficial in the Province from which we come, and we welcome it as another step towards uniformity of law and uniformity of practice between that part and the other parts of the United Kingdom.
Obviously, there are many matters that will be dealt with in Committee; but if the right hon. Gentleman can contrive to respond to some of the points which have been put to him this afternoon before the close of the debate we shall enter upon the Committee stage better prepared.
§ 5.15 p.m.
§ Miss Betty Boothroyd (West Bromwich, West)
The right hon. Member for Down, South (Mr. Powell) rightly indicated that Northern Ireland had been in the vanguard in the establishment of credit unions. He posed a number of questions about their future functioning under the proposed legislation. Alas, I am not in a position to respond to many of his questions. However, I believe that he is far too modest in saying that his knowledge of this matter is limited and that he was not particularly well briefed. He seemed to me to be particularly well briefed. No doubt he will go on posing his questions to my right hon. Friend the Minister of State, perhaps during this debate and certainly in Committee, so that, rightly, we are able to resolve this matter between 829 Northern Ireland and the rest of the United Kingdom.
Those of us who are interested in the credit union movement and anxious to see that it flourishes in this country welcome the Bill as a worthwhile measure of social legislation. My hon. Friend the Member for Farnworth (Mr. Roper) introduced the subject into the House many years ago. I think that it was as a result of the basic work that he had done that almost a couple of years ago I initiated an Adjournment debate on this subject. Because of the procedures of the House, all that could be done at that time was to give the subject a general airing. Even so, it received a good deal of publicity. I probably had as much correspondence from individuals interested in this matter as on any other subject during my membership of the House. There is a great deal of interest in the whole subject.
In replying to that Adjournment debate, the Minister of State naturally had to walk a tightrope over the question of legislation, but it appeared obvious then that the Government favoured such a development. Now, a couple of years later, it is with some satisfaction to me, at any rate, that the proposed legislation is before us.
I am pleased, too, that the Minister of State introduced an international flavour in discussing the credit union movement, because it flourishes not only in Australia and Canada but in other countries throughout the Commonwealth. There are Commonwealth countries in which certainly the movement meets with success and performs a very valuable function. It is also very successful in those parts of the Commonwealth which are not, perhaps, as socially and economically developed as others.
A good deal has already been said about Northern Ireland, so I shall not develop that point. However, I believe that in Eire there are about 280,000 members of credit unions, with assets totalling about £50 million.
In all these countries there appears to be a legal framework. The framework and regulations which ensue from it have stimulated growth. We certainly look forward to similar success here for those unions which already exist.
As I see it, the most important aspect of credit unions is that they encourage 830 regular savings. However small those savings are, regular savings are important. In turn, the way in which this operates also encourages a spirit of self-help and it fosters the community spirit. However, I share the sensitivity of the hon. and learned Member for Dover and Deal (Mr. Rees) in his point about clause 1(2)(d) and the wise use of money. Certainly I want to see fostered an educational objective by providing members with experience of financial management, but we must not be too paternalistic about the use of the words in the subsection.
While savings are commendable, the loan facilities are also important. It may be no surprise to hon. Members to learn that half of Britain's working families do not have a bank account or a building society account. In times of real need, when a crisis arises and ready cash is needed, or when some unforeseen event strikes the family, it is in seeking to borrow money to cover that type of eventuality that people who have few savings and no collateral in terms of a bank account have to pay the high interest rates usually charged by the finance houses or the extortionate rates demanded by moneylenders.
Those of us with bank accounts are able to provide some evidence of a track record, albeit not a very consistent one, and there is at least some collateral there. But the real problem for low-income families and small savers is not that they are unreliable borrowers. The contrary is the case. There is a good deal of evidence to suggest that it is not the poorest borrowers who default frequently. However, they lack the evidence to reassure those commercial lenders that they are reliable in their repayments. In this respect, therefore, the small borrower is assisted through credit unions.
It needs to be emphasised that there have not been any cases of fraud. The existing credit unions are managed by very honest people who are leaders in their own communities and who are seeking to help their communities. But there is a potential danger that even one case of fraudulent practice could tarnish the image of the credit union movement and do considerable harm to its growth and to the individuals working in it. The earlier clauses in the Bill which provide for the legal framework obviously stem 831 from the realisation that there is at present little protection under the law in terms of a framework which is an essential ingredient for the movement's prosperity.
Clauses 5 and 6 deal with membership and the rules of credit unions. The minimum membership is to be 21. This is quite realistic, bearing in mind the distinctive feature of credit unions, which is that those who form their membership have a common bond. The members of a credit union are known to each other. They work in the same shop or factory. It may be that they belong to the same voluntary organisation. They may be members of the same tenants' association or immigrant group. There is an interdependence and, because of this feature, it is necessary to have a fairly low minimum membership. Many of them are in small communities. If the members make up a tenants' association, it may be that there are few people involved. The same often applies to those on the shop floor in a small factory. So I do not challenge the number, but it will be interesting in Committee to discover how the number has been arrived at.
I was grateful for my right hon. Friend's explanation about the procedure to be followed when because of a member's mobility he moves out of the neighbourhood or changes his job and has to break the common bond and withdraw from the credit union. No doubt a good deal further will be said about this in Committee.
Moving on to clause 10, I hope that my right hon. Friend will explain the thinking behind the sum of £1,250 which is to be the total amount of a loan to a member. I confess that I did not understand his opening remarks, and I hope that he will say how the sum has been arrived at. Has it been arrived at by examining the loans to members in similar societies in Northern Ireland or Canada. and has their experience been drawn upon?
I do not wish to delay the Bill any further. As I said earlier, we had a debate on the matter some time ago. The Bill does not seem to be particularly contentious. At least that is the impression of the hon. and learned Member for Dover and Deal (Mr. Rees). I hope 832 that any creases in it can be smoothed out easily in Committee.
It may be that the Bill is not too contentious because of the back-room work which has been put in over many years by the Treasury and by representatives of the credit unions and because of the early agreement which was reached on the rules for operation and supervision. I understand that the draft Bill has received support not only from the organisations directly concerned but also from the National Consumer Council, which acknowledged that such legislation would provide a proper foundation for the successful operation and the further growth of the credit union movement.
All that I need say in conclusion, therefore, is that I hope to see the Bill make speedy progress not only this evening but in Committee, too.
§ 5.25 p.m.
§ Mr. Jim Craigen (Glasgow, Maryhill)
I, too, welcome the Bill. My colleagues in the Co-operative parliamentary group feel that this is a very useful measure which will do a great deal to develop the role of credit unions as genuine self-help co-operatives and assist them at the same time in encouraging sensible borrowing arrangements and mutual aid to the members of credit unions.
The credit union movement has developed quite distinctly from the traditional consumer co-operative movement in this country. However, they have common aims in the operation of the co-operative principle. Unfortunately, until now they have not had the advantage of operating under the industrial and provident legislation.
Tribute has been paid to my hon. Friend the Member for Farnworth (Mr. Roper) for his efforts to achieve a framework of legislation through a Private Member's Bill a few years ago. In essence he was trying to do for Great Britain what Northern Ireland had done for itself back in 1969.
I take up a comment by the hon. and learned Member for Dover and Deal (Mr. Rees) about the timing of this Bill. I suppose there is never an appropriate time to deal with what appears to be a small piece of legislation. Yet, ironically, the Bill comes along at a, significant time when we are all concerned with inflation and the means of reducing it. I have no 833 doubt that in the years to come this legislation will do a great deal to accommodate those who do not readily find themselves catered for by the banks. hire purchase or the money-lending institutions. Moreover, it has the advantage of ensuring that the borrower knows the true cost of his borrowing.
It is understandable that the Government should be sympathetic to the credit unions, since they are non-inflationary. They make loans out of existing savings and therefore do not create additional credit in the way that the banks do or more particlularly in the way that the credit card system is operating and creating a massive expansion of credit.
Many detailed matters will be dealt with in Committee, and reference has been made already to the special problem of taxation on the dividend on members' share capital. I agree with the right hon. Member for Down, South (Mr. Powell) that it is quite wrong to operate double standards between new credit unions throughout the United Kingdom and those already in existence in Northern Ireland. Moreover, the idea of taxing all the dividend on share capital paid to members is unlikely to facilitate the type of growth which the Government clearly envisage for credit unions. such a liability to tax obviously will inhibit that initial growth and may oblige the credit unions to break through the 6 per cent. maximum dividend since they will come up against competition from the building societies and the National Savings Bank, for example. The answer is surely for the Treasury to exempt, say, the first £6 of interest on share capital. That would make it possible for any member of a society registered under the industrial provident legislation to invest the modest sum of £100 in fixed interest shares without being liable to tax.
The cost of such an exemption to the Treasury would be insignificant, particularly bearing in mind the savings that would be involved through the Inland Revenue not having to deal with thousands of forms returning only minimal amounts liable to tax. If the Government are serious about wishing to see the increased development of credit unions, I suggest that such an exemption would be a considerable act of faith which would facilitate their growth.
834 Without detracting from earlier legislation on industrial common ownership and the Co-operative Development Agency, I suggest that this Bill will lead to the biggest development of co-operative organisation in the post-war years and do much to develop the idea of social and financial co-operation.
I welcome the Bill and I hope that it will be strengthened in Committee, particularly in respect of the taxation provisions.
§ 5.32 p.m.
§ Mr. Michael McGuire (Ince)
The story of credit unions is not well known, but, while it has not been spectacular, it has been a success. Credit unions have a record of solid achievement and it is incredible how little is known about them in this country.
The right hon. Member for Down, South (Mr. Powell), quite properly from his point of view, always looks at the connection between Northern Ireland and Great Britain. He skated over the fact that although legislation already exists in Northern Ireland, credit unions did not really start there. The movement started in the Republic. I am not sure when it spread north or whether the credit unions existed in Ireland when it was a united country.
§ Mr. Powell
I am advised that the first credit union in Northern Ireland was established in Londonderry in 1961. There had been credit unions in the Republic a few years previously, but much later than the 1920s.
§ Mr. McGuire
Credit unions have certainly been much more a feature of life in Ireland than in this country.
I agree with my hon. Friend the Member for Glasgow, Maryhill (Mr. Craigen) that the Bill will give an impetus to the co-operative principle. My hon. Friend is always magnanimous and, although he wants to pay tribute to the Co-operative Party, to which he proudly belongs and of which he is such a capable spokesman, I think that he will agree that the Bill will lead to an extension not of the Cooperative Society movement but of the spirit of self-help—though in a different form from the self-help that most of us know in our working-class communities.
Immediately before becoming an hon. Member, I was a pit secretary and, before 835 that, a miner. We had our mini versions of self-help, including help with funeral expenses. That is an area that will become increasingly important because the State grant for burials is abysmally low and needs to be substantially increased. Our self-help schemes were well received and most members appreciated them, particularly when their families were in trouble. However, we had nothing like the framework of credit unions.
The Bill will strengthen credit unions. I do not suggest that the movement lacks respectability, but the Bill will reassure people that legislation exists to guarantee various aspects of credit unions' affairs and it will encourage their growth.
I join the tributes to my hon. Friend the Member for Farnworth (Mr. Roper). He has been a good advocate of credit unions and, as the right hon. Member for Down, South said, my hon. Friend probably knows more about this subject than anyone else. He would probably disclaim that because he is a modest man, but it is generally acknowledged.
I know a little about credit unions because their headquarters is in Skelmersdale, which has one of the biggest single groups of members. There is a group in London which may have just a few more members than the Skelmersdale group. The movement in Skelmersdale has been a success story. The great value of credit unions was demonstrated when we had the massive blow of 3,500 jobs being lost in the town a few years ago. The credit unions were able to help the casualties of those factory closures in a way that even the best organised tontines and working men's clubs did not have the capacity to match.
The credit unions have gone from strength to strength. The national organiser, Mr. Len Nuttall, is a personal friend of mine and he told me recently that even in advance of the Bill, which redeems a promise given by the Government, he is busier than ever. I hope that he has to take on more assistance and that credit unions will become as well known here as they are abroad.
My hon. Friend the Member for Farnworth said that the American Senate and the House of Representatives have a credit union. He suggested lightheartedly 836 that perhaps we may soon have one in the Palace of Westminster. I do not know what our common bond would be, but apart from hon. Members and their Lordships we have about 2,000 people looking after us and it may be that the common bond would be the fact that we all work here.
The Bill includes a provision that 10 per cent. of the members of a credit union can leave the common bond and retain their membership. In view of recent opinion polls, we may have to stretch that a bit in the Palace of Westminster, but polls are volatile and, when the good things that we are trying to do get through, the polls may turn back in our favour.
A number of matters have cropped up in the debate on which we shall need reassurance. An important one is the question of taxation, and the exemption suggested by my hon. Friend the Member for Maryhill would be an act of faith that would positively encourage the growth of credit unions. This could be done without our feeling that we were conferring an extraordinary benefit on credit union members.
I give my support to the Bill. It should have a speedy passage tonight, judging fey the number of hon. Members present. I hope that it will have an equally speedy and not particularly contentious passage in Committee. The result will be a Bill which will make credit unions much better known. They should be better known. The Bill will facilitate their growth. We will have helped positively to make a great success story out of what is at present a modest but solid success story.
§ 5.41 p.m.
§ Mr. Ian Stewart (Hitchin)
I am happy to follow the hon. Member for Ince (Mr. McGuire) and other right hon. and hon. Members in welcoming the Bill. The hon. Member for Ince was right in saying that a certain obscurity surrounds credit unions in this country. I have learnt much about them in the past few weeks since this Bill appeared on the horizon. I have learnt more today listening to some of the instructive speeches that have been made.
Some hon. Members have made incursions into the history of the credit union movement. I want to make one lesser 837 incursion into history in my congratulations to the hon. Member for Farnworth (Mr. Roper) for his work to promote the idea of credit unions in this House in recent years. He has an impeccable financial background. He and I, 24 years ago, used to sling our hammocks in the same mess deck of HMS "Theseus". Between us, if I remember rightly, was the hammock of my hon. Friend the Member for Blaby (Mr. Lawson). How could anyone, having that sort of background, speak with greater knowledge and authority?
There is little quarrel with the main body of the Bill. Like other hon. Members who have spoken, I welcome the objectives that the Bill sets out as justifying the development of credit unions. The emphasis on Scottish thrift and Victorian self-reliance appeals to the instincts of one with my Presbyterian ancestry. Hon. Members have been right to emphasise how helpful could be the development of credit unions in making finance available to those who have found it difficult to borrow from traditional sources. The remarks of the hon. Member for Glasgow, Maryhill (Mr. Craigen) were apposite on this point. If all goes well, the credit unions set up under this legislation could prove a useful form of co-operative activity.
I do not know exactly what is meant by the phrase in clause 10 about lending fora provident or productive purpose".I hope that it does not refer only to funerals, illnesses and such like. It seems to me that much more general, unexpected or unusual demands on credit, such as the cost of moving house, a holiday, a wedding or some family occasion may be financed in future by members of credit unions through borrowings from them.
§ Mr. Michael McGuire
The hon. Gentleman mentioned funerals, to which I referred in an aside. I spoke of how people try to provide for that eventuality. The hon. Gentleman will be aware that the present scheme of credit unions provides a free insurance scheme which caters essentially for that purpose. It is provided as an extra benefit provided small conditions are met.
§ Mr. Stewart
I agree that the guarantee fund idea and the arrangements under it providing for lump sums in such circumstances are a benefit of the system and 838 could be one of the factors which enable the movement to develop.
The hon. Member for West Bromwich, West (Miss Boothroyd) emphasised, rightly, the value of the common bond and the personal knowledge between members of a credit union and potential borrowers which resulted. If that is preserved throughout the structure of credit unions, as governed by this Bill, all will probably be well. Doubts arise perhaps in cases where the common bond may become diluted or so extended that it is not meaningful. That may be one reason why there have been problems in other countries.
It is true that there have been few credit unions in Great Britain. The hon. Member for Farnworth, with his great experience of the subject, explained why the legislative framework had not been suitable to credit unions in the past. Several hon. Members have contrasted this situation with that in Northern Ireland, where credit unions in the past 10 years have flourished and have more than doubled in number. The savings that they contain have risen more than eightfold in that time.
This Bill is in many ways parallel to the provisions for Northern Ireland. It contains many detailed items which we shall need to examine in Committee. These include the criteria for registration, methods of supervision, rules for accounting, the size of membership, the use of funds, procedures for suspension and amalgamation, and so on.
My hon. and learned Friend the Member for Dover and Deal (Mr. Rees) picked on the problems which may arise from anomalies in treatment for taxation. This point was also made, with his usual clarity, by the right hon. Member for Down, South (Mr. Powell). I do not wish to rehearse the points which have been made. It is clearly an area to which we shall have to pay further attention. I can think of a number of detailed implications. I give one example. If one credit union has a tax advantage over another, what would be the position on amalgamation? Would this preferential tax position carry through if one of the parties to the amalgamation had the tax advantage and the other did not? These sorts of matters, although proper for Committee stage, need to be mentioned now, not only to give the Minister and his 839 advisers notice of the issues we shall want to discuss but because they are typical of the difficulty of all regulatory legislation of this kind. When, a few months ago, we were discussing the equivalent stage of the Banking Bill, I had not realised the degree of complexity that could emerge when one considered detailed provisions in Committee.
Another area to which we shall have to pay attention is the relationship of the Bill to other legislation. I mention the Consumer Credit Act. Will credit unions need to be licensed under part III of that Act? Will they be governed by the subsequent parts of the Act on seeking business, advertising, agreements and so on? Perhaps there is a clear answer. I ask this question because there is a strict requirement under the Consumer Credit Act that the true cost for all lending should be expressed at an annual rate of interest in very specific terms. In clause 10 of the Bill there is a limitation of 1 per cent. a month, but it is not expressed on an annual basis. This is the sort of issue on which we need to check.
Another point comes to mind. In one of the schedules to the Banking Bill we already exclude credit unions in Northern Ireland, but, I imagine, for technical reasons, we are not yet ready to exclude credit unions which may be set up under a hypothetical Credit Unions Act 1979. I would think that a Credit Unions Act 1979 is at least as imminent a possibility as a Northern Ireland Assembly, referred to in clause 30. Perhaps we are allowed in legislation to anticipate the future to some extent. Obviously credit unions do not impinge on the Banking Bill but they are part of the financial framework which flows from it.
Another point which is reminiscent of some of our debates on the Banking Bill relates to clause 3, which provides thata person shall not, unless registered as a credit union … use in reference to himself a name, title or descriptive expression containing the words 'credit union' or any cognate term or any derivative of those words".Does that prevent anyone from describing himself as the treasurer of the XYZ credit union? I am sure that that is not the intention—it is tightly drawn and one can see that the intention is that unscrupulous people should not be allowed to use this term to make their activities respect- 840 able—but if it were to cause technical problems for credit union officers, that would be an absurdity.
More importantly, we need to consider the position of credit unions within the country's financial structure. I hope that the Bill will enable credit unions to grow so as to enhance that structure rather than threaten it. There have been unexpected financial developments in recent years, such as the dramatic growth of the building societies and the pension funds.
Probably few people would a few years ago have expected those bodies to reach their present size, yet both have developed by attracting funds from a large number of small contributors. That is exactly the basis that we are now planning for the future of the credit unions. Nowadays, the building societies and the pension funds are major components of our financial system. Credit unions may, and I hope will, also play a more significant part in future.
That is why there has been some point in the discussion tonight of comparative international figures. I have been told that one-sixth of all the consumer credit in the United States is provided through credit unions. That is a high percentage. We have heard figures for the numbers of credit unions in Ireland, parts of the Commonwealth and the United States. I believe that there are almost 4,000 in Canada, covering almost one-third of the adult population. We must therefore be concerned about size.
There are some anxieties about clause 6. As drafted, it appears to suggest that the Chief Registrar could have wide powers to circumvent the limit of 5,000 members for a credit union. As I said, the common bond factor might quickly become diluted in that case. That may not be the way in which the Chief Registrar will operate—creating joint credit unions on the pattern of other countries—but the powers seem to exist, so we should be aware of the dangers.
The other area of anxiety relates to the functions of credit unions. Wisely, the Bill is fairly tightly drawn here. In America, what is called "correspondent credit unioning" has developed, under which credit unions interlock and provide reciprocal arrangements, thus creating a wider financial framework than the local or narrower common bond which was first 841 envisaged. They have even gone into money transmission with cheque-like instruments, the status of which is at present subject to litigation. In this respect the Bill is, and should be, tight.
I hope that the Bill will prevent the exploitation of the credit union movement in undesirable ways. If we can avoid those dangers, it could have a substantial and valuable part to play. Parliament should be aware of the implications and the dangers, but I hope that it will not be frightened of accepting the Bill, after looking at it carefully and ensuring that it provides the proper basis for the development of credit unions.
Regulation is obviously needed, and it must not be so tight as to stifle the movement altogether. Nor should it be so loose as to permit the uncontrolled proliferation of credit unions and their entry into areas of finance from which they are at present excluded in this country. I hope and believe that the Bill will achieve that balance.
The acid test in such a matter is whether a Member would welcome such institutions in his constituency. I have not been able to discover that there are any credit unions in Hitchin—
§ Mr. Stewart
You have possibly put your finger on one of the complications of credit unions that I was too tactful to mention, Mr. Deputy Speaker. But, avoiding the domestic aspect, from the constituency point of view, if there are not credit unions in Hitchin now, I hope that there will be in future. I shall have no hesitation in encouraging them.
Subject to some of the anomalies which have been mentioned and questions which have been raised, which we can pursue in Committee, the Bill has been welcomed on both sides of the House. I trust that it will have an uncomplicated passage.
§ 5.56 p.m.
§ Mr. Denzil Davies
Hon. Members on both sides of the House have welcomed the principles of the Bill. Some of their points are better left for Committee, but I shall try to deal with the major ones now.
842 The hon. Member for Hitchin (Mr. Stewart) asked whether the Consumer Credit Act applied to credit unions. Yes, it does, except that there is provision for the exemption of organisations which lend money at a certain rate of interest. In other words, because the interest is 12 per cent. the credit unions come within the exemption laid down by order in 1977. That exemption is not specific to credit unions. It is common to other organisations as well. Thus, basically, that Act applies, subject to the exempting order.
On a technical point, the hon. Member asked whether a person would be able to describe himself as the treasurer of the XYZ credit union. The drafting may not be entirely accurate here. We shall look at that and see whether any change is necessary.
The hon. Member also mentioned, as other hon. Members have done, the membership limit of 5,000 and the powers of the registrar. The registrar will have a fairly wide discretion. At the moment, I do not think that there is any problem. Most credit unions are far below the 5,000 limit. There may be one or two—there is certainly one in Northern Ireland—above that limit, but generally they are well below it and will stay below it for a long time. These matters may have to be considered again eventually, but not in the immediate future.
The hon. and learned Member for Dover and Deal (Mr. Rees) asked why we needed legislation. I assure him that Treasury Ministers in this Government are not over-enthusiastic about promoting legislation, since we have now been legislating for almost four years. I ask that question, too, when any proposal for legislation is made.
However, my hon. Friend the Member for Farnworth (Mr. Roper) answered the point about why a statutory framework is necessary. There is one in Northern Ireland which has encouraged and helped credit unions, and it is only right that they should be encouraged statutorily.
The hon. and learned Member also asked about the 60-day notice of withdrawal. This is a backstop to enable a credit union, if it wishes, to lay down such a limit. It does not have to do so and in most cases it would not, but if it wanted to stop a run on the credit union 843 —a rare situation—it would have this power.
The hon. and learned Member also mentioned accumulating investment income. One does not want credit unions to turn themselves into discretionary trusts accumulating all their discretionary income. They do not exist for that purpose. The same goes for selling land. They are entitled to own land for their own purposes, but one does not want to turn them into a kind of property company.
§ Mr. Peter Rees
The Minister said that he did not wish to see credit unions develop into accumulating trusts, but there is a certain inconsistency between that proposition and the provision in the Bill that stipulates that they must accumulate part of their income until they have built up a certain reserve fund. I ask somewhat plaintively why they may not also accumulate their investment income to build up their reserve fund.
§ Mr. Davies
I did not gather that the hon. and learned Gentleman's question was directed to building up the reserve fund. I thought that he was criticising the fact that they could not accumulate investment income. They obviously have to build up their reserves.
My hon. Friend the hon. Member for Farnworth, from his great experience, made some important points. He thought that insurance should be made obligatory. We are examining insurance and the protection of deposits. It is difficult to deal with that in the context of small credit unions, but we shall no doubt come back to it in Committee.
The right hon. Member for Down, South (Mr. Powell) raised a number of points on the Northern Ireland constitutional position and taxation. Before the Committee stage I shall provide him with a synposis of the difference between the present position and the position under the Bill.
On clause 30(4), if the Bill becomes law it is intended that the Department of Commerce in Northern Ireland will bring forward legislation by an affirmative resolution—similar in substance, though there may be slight technical differences—to apply the provisions of the Bill to Northern Ireland. I do 844 not wish to encourage the right hon. Gentleman to put down too many amendments in Committee, but because of clause 30(4) he has the opportunity to influence the content of the affirmative resolution.
§ Mr. Powell
The right hon. Gentleman may have made a slip of the tongue when he said "affirmative" resolution. I think that he means legislation subject to negative resolution.
§ Mr. Davies
I stand corrected. Under the normal procedures it would be subject to negative resolution. But my point is that, although there may be one or two technical differences, the legislation will not substantially differ from the Bill, and the right hon. Gentleman will be able to influence the content of the Bill as it goes through the House.
The right hon. Gentleman correctly suggested that in clause 30(1) the mutual arrangements are to enable Northern Ireland credit unions to have members in Great Britain and vice versa. That is not exclusive to trade unions, and applies to other provident and industrial societies.
The point on the Assembly is that, if and when it is set up, it will be able to change the persons or authority whom the Treasury would consult. Under clause 31, the Treasury consults the Department of Commerce. If the Assembly were set up and wished the Treasury to consult its own officials rather than the Department of Commerce, it could do that under clause 31.
§ Mr. Powell
Does that mean that at present it is with the Department of Commerce that the Treasury consults? If so, is it not an abnormal form of legislation to provide for a Minister—the Treasury is a Minister—to consult a Department? I do not necessarily expect the Minister to respond.
§ Mr. Davies
It is not particularly abnormal. The consultation is between Treasury Ministers and Ministers of the Department of Commerce. But I shall consider whether this is the correct form of drafting.
It has not been easy to resolve the taxation problem. There are three areas of taxation. The first is the mutual profit or the profit from the internal 845 activities of the credit union, taking money from and lending it to members. Under common law the position has not been clear. The hon. and learned Member for Dover and Deal might be prepared to write a strong opinion that that profit is not taxable on the mutuality principle. But the Inland Revenue would not accept that argument. We have considered this carefully. Ministers can only work with the advice of the Inland Revenue, and it is strongly of the view that the mutuality principle does not apply. There is great doubt whether these profits are taxable. That is unsatisfactory. For a long time these profits have not been taxable in Northern Ireland. In the United Kingdom, some bodies have been taxed and some have not. There is no uniformity, and taxation matters should not be dealt with in that way. The Bill makes it clear that throughout the United Kingdom the surplus of the internal profit is exempt from taxation.
There is then the outside income, which is usually small in relation to the total. This incomes comes to the credit union from depositing surplus funds with a building society or bank. In Northern Ireland, in the past that income has been taxed at two-thirds of the basic rate. This was the result of some confusion several years ago about the true nature of credit unions. In the rest of the United Kingdom there has been no problem. That income has been taxed at 40 per cent., which is the normal rate for industrial provident societies. Again, the position in Northern Ireland was different, and it was only right that, where possible, taxation arrangements should be similar throughout the United Kingdom. There was no reason why in Northern Ireland outside investment income for credit unions should be taxed at only 20 percent.
The dividend paid by credit unions to their members is the most difficult problem. Again, in Northern Ireland, as a result of administrative decisions not backed by law, which were taken some years ago, dividends received by members of credit unions were exempt from tax. Dividends or interest received from small or large bodies are generally taxed. That should apply throughout the United Kingdom, but in Northern Ireland members of existing societies have in the past received 846 dividends exempt from tax. We have tried to solve this problem and achieve uniformity in the legislation. The solution is not perfect. I shall be interested in other solutions put forward in Committee. But the only fair solution, in view of the position in Northern Ireland, seemed to be to exempt from tax all existing dividends of members of credit unions.
§ Mr. Peter Rees
I understand the Minister's proposition on the past and future surpluses of a credit union. But what about that part of the surplus that is income from some other source, such as a building society or bank? Has there been any distinction between that income when distributed to members and the internal profits of a credit union? If there has been any distinction, does the right hon. Gentleman propose that that distinction should be carried forward when taxing profits of new credit unions? Is it to be treated as franked investment income, and can a member claim his personal allowances against such dividend income?
§ Mr. Davies
Perhaps we should leave such intricacies for the Committee stage. There is a distinction between internal profits and outside investment income. The latter is taxed at 40 per cent., but when it comes into the credit union that is the end of it. But I shall look into this point.
I have tried to explain to the House the difficulties that we have faced with these taxation proposals, and we shall look forward with interest to see what solutions are put forward in Committee. We are prepared to look at other amendments in order to get as much justice and uniformity as possible. But I certainly do not believe that these proposals will inhibit the growth of credit unions in Northern Ireland or anywhere else. I do not believe that people will be deterred from setting up credit unions because they must pay tax on their dividends.
Finally, I welcome the general agreement in the House that this is a desirable Bill. Credit unions provide individuals with a reasonably cheap form of credit, an ability to save and to use their savings when the money is needed. I hope to see them grow, though I do not want to see them grow to the size of the Pentagon Credit Union or the Navy League Credit Union in the United States, and I do not 847 think that is likely. On the other hand, one wants to see them grow, and, with the statutory backing provided in this legislation, I hope that we shall see considerable growth over the next few years in the credit union movement.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Standing Committee pursuant to Standing Order No. 40 (Committal of Bills).