§ Standing Order No. 43 having been suspended pursuant to Resolution:
§ 5.32 p.m.
§ Lord JACQUES
My Lords, I beg to move that this Bill be now read a second time. I think that the House is fully aware of my long association with the Co-operative movement and will readily appreciate the pleasure with which I move this Second Reading.
A credit union is a specialist form of co-operative society which is concerned with savings and loans. This Bill has as its purpose to give a legal framework for the operation and supervision of credit unions. A peculiar feature of credit unions is that their members have a common bond: that is to say, they must already have something in common. For example, they may work at the same factory, they may live in the same community, they may have the same interests in that they are all farmers, for example, or they may all go to the same church or chapel. But 1762 they must have a common bond, which should already exist before they become members of the credit union.
There are flourishing credit union movements in many countries throughout the world, particularly in Canada, the United States, the West Indies, Latin America, New Zealand and Ireland. Indeed, this Bill that we have before us owes much to the experience we have had in Northern Ireland. When in 1969 the Northern Ireland Parliament passed its Industrial and Provident Societies Bill it included a special part in the Bill dealing with the registration and supervision of the operations of credit unions. This Bill owes much to the experience gained in administering the Northern Ireland legislation.
In Northern Ireland there are 97 credit unions with 85,000 members. They have £16 million-worth of assets and, to the best of our knowledge and belief, there have never been any losses or defalcations. In Great Britain the movement has become significant only in recent years. There are only about 50 credit unions. Ten are registered under the Companies Act, four are registered under the Industrial and Provident Societies Act, and the rest are unregistered. I think that spells out at least one reason why we should try to regulate this kind of activity.
I would remind the House that the Crowther Committee on Consumer Credit strongly recommended that credit unions should be encouraged to take root here. I would also remind the House that both the bodies which are concerned with the sponsoring of credit unions want this legislation and, in their wish to have it, they are supported by the National Consumer Council.
This Bill is in effect an extension of the Industrial and Provident Societies Act. Presumably we could have got the same result by having an amending Act which would have added an entirely new part to the Industrial and Provident Societies Act 1965. The Bill provides that a credit union can register under the 1965 Act—that is the Industrial and Provident Societies Act 1965—providing its rules comply with this Bill; providing it has at least 21 members and normally a maximum of 5,000 members; providing its objects comply with the Bill and, finally, providing its members have a common bond such as 1763 I referred to earlier. The Bill provides for the re-registration of those credit unions which are already registered under the Industrial and Provident Societies Acts. It also provides for the conversion to Co-operative societies of those who, in the absence of special legislation, have registered under the Companies Act.
Membership of a credit union to qualify for registration must consist only of individuals and those individuals must have the common bond to which I have referred, or they must be living with a relative who has the common bond: for example, husband and wife. A member must hold at least one share of £1. A society cannot insist that a member shall hold more than £5 in shares, and the maximum that can be held by a member is £2,000. Of course, with the long tradition of the co-operative movement, the practice is one member one vote, regardless of the amount of the shareholding.
There are occasions when the common bond, which must exist before membership, is broken. A person may change his employment. His common bond may have been that he worked with fellow members at a particular factory. That is one example, but of course there can be many others. The Bill provides that if the rules of the credit union permit, then he may carry on his membership, but such members shall not exceed 10 per cent. of the total. So the idea of the common bond is amply protected.
A £1 share shall, in accordance with the tradition of the co-operative movement, be withdrawable, but because of the special functions of the credit unions they must issue shares on terms which enable them to require 60 days' notice, if necessary. That, of course, is to safeguard their liquidity. Normally, a credit union will be able to take deposits only on share account; that is to say, the members will be able to take shares and make deposits increasing their shares, but that is the end of it. They will not be able, in addition, to make loans.
There is, however, one exception. Persons under the age of 16 cannot be members of a co-operative society, and they may wish to be associated with a credit union. The Bill provides that a credit union may take deposits from such 1764 youngsters up to a maximum of £250 from each, that the money shall go into a trust fund, that it shall be invested in trustee securities and that the income from those securities shall go to those who have invested in the way in which I have explained. So there are, again, ample safeguards.
There is also provision for a credit union to be able to borrow money. First, it can borrow money from a recognised bank, in accordance with the Banking Act 1979; secondly, it can borrow money from a municipal bank—and I was astonished by this, as I did not think that we had any municipal banks; I thought that when Birmingham joined up with the TSB that was the end of it, but we have eight municipal banks; seven in Scotland and one in England; thirdly, it can borrow money from the TSB; and, fourthly, it can borrow money from another credit union or association of credit unions. But the amounts that it borrows in total must not exceed one half of its share capital, except that a temporary loan from a bank can be disregarded for this purpose, with the consent of the registrar.
A credit union will be able under this Bill to make loans to a member up to £2,000 in excess of his shares, so that if a member has £500 in shares he can, with the consent of the committee of the credit union, get a loan of £2,500. If the loan is unsecured, it must be repaid within two years; but if it is secured, it can be repaid within a period of five years. The rate of interest charged must not exceed 1 per cent. per month of the balance outstanding.
Of course, a credit union will have surplus funds. According to the Bill, those surplus funds will have to be, first, in cash; or, secondly, in an authorised bank or, thirdly, in investments authorised by the registrar. Also, we hope that a credit union will have profits. So long as the general reserve of the credit union is less than 10 per cent. of the assets, then 20 per cent. of the profits must be put to general reserve. That, I think, is an excellent provision. Subject to that, a dividend upon shares may be paid out of profits, but it must not exceed 8 per cent. of the paid-up shares, or the profits could be used to give a rebate on the loans—that would be a rebate on the interest 1765 paid by those who had received loans—or, subject to a dividend of 3 per cent. on shares, a credit union can, if it wishes, devote 10 per cent. of its profits to cultural, social and charitable objectives.
The Bill makes specific provision for the taxation of credit unions. Broadly speaking, the position will be that the income of a credit union derived from its members—that is, the interest paid by borrowing members to the credit union—will be free of tax. This will form the bulk of the credit union's income. Income from outside sources, by way of investment and so on, will be subject to corporation tax at 40 per cent., which is the standard rate for all industrial and provident societies. Dividends in the hands of members will be exempt for six years and then will be taxed in the normal way.
I think that an explanation is due here. For Northern Ireland there is a provision so that dividends in the hands of members are exempt from tax. We have two problems here. First, we cannot suddenly end the provision in Northern Ireland and, secondly, we cannot treat the credit unions in Britain differently from those in Northern Ireland. So we have to have a compromise and we say, "All right. You can all have it for six years, but then it comes to an end".
The Bill makes it a condition of registration that a credit union must take out and maintain in force insurance against fraud and dishonesty on the part of its employees and its officers. This provision was introduced on Report in another place. It is intended that the provision will not be brought into effect until discussions have been completed with insurers and the credit unions' representative bodies on the amount and extent of the cover to be compulsorily required. For this reason, the Bill enables different provisions to be brought into operation on different dates. Of course, the registrar under this Bill has certain powers. I think it is sufficient to say that those powers are very similar to what he has under the Building Societies Act 1962 and the Friendly Societies Act 1974. They are the usual powers of a registrar.
I have covered the salient points of this Bill and I hope that that has been helpful to the House. The Bill received very full consideration in the other place. It was 1766 fully debated on Second Reading, three days were spent upon it in Committee where a total of 61 Amendments was put down—not necessarily carried, I should say—and on Report a further 40 or so Amendments were put down. The Bill has not been treated as being in any sense political. It has received support from members of all political parties in the other place who have been concerned with it. I hope that it will receive the same kind of support in this House. My Lords, I have pleasure in moving that this Bill be now read a second time.
§ Moved, That the Bill be now read 2a.—(Lord Jacques.)
§ 5.49 p.m.
§ Lord REDESDALE
My Lords, we are most grateful to the noble Lord, Lord Jacques, for so comprehensively covering this Credit Unions Bill which, as he said, is a Bill which is not really controversial. There were a number of points that people wished to improve upon, and there are certain points that are probably still outstanding. But, as he said, a compromise has to be reached and overall I think that this has been very satisfactorily accomplished.
We on these Benches welcome the Bill. We are glad that at last a legal framework has been provided for credit unions. It is important that the credit unions want this legislation. It is also important that a number of interested organisations have recommended that this legislation should be enacted. It fills a gap which existed in the legislation relating to financial institutions, and it is appropriate that it should follow so promptly on the heels of the Banking Bill, especially as it refers in places to the "Banking Act".
The noble Lord covered the question of tax. I was going to say a few words on that subject, but the noble Lord's remarks were comprehensive. It seems to be a compromise which has worked out reasonably well for everybody, although for some better than for others. Some are losing it in the end, but others are getting it for a while, and that seems to be reasonably fair.
May I sound one note of warning about the Bill. I believe that credit unions could become very large. Certain safeguards are provided, but, like Topsy, 1767 credit unions may grow. I think, therefore, that consideration will have to be given to ensuring that the size of credit unions remains within reasonable limits. I have spoken for only two minutes, which is quite long enough for me to say that we welcome the Bill and hope that it will have a speedy passage.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.