Summary country report United Kingdom

Legal And Political Conditions For Credit Extension For Social Purposes In The United Kingdom

In the United Kingdom (UK), there is a wide variety of organisations which provide credit for social purposes, such as support for housing, small businesses and the unemployed in under-invested communities. Banks have been criticised for closing branches in deprived areas and for over-charging small business customers. Co-operative societies and associations which engage in social lending have developed to better meet the needs of disadvantaged communities. Examples include community development finance institutions (which provide flexible loans, support and encouragement to the unemployed and small businesses which are excluded from mainstream finance) and credit unions.

Credit unions are co-operative savings and loan organisations whose members share a common qualification, such as residence in a particular area. They benefit from a transitional exemption to the Banking Directives and are subject to a lighter regulatory regime than regulated credit institutions, with a lower capital adequacy threshold. They have created competition in the provision of financial services to the socially excluded and consideration should be given to making their transitional exemption permanent.

The activities of accepting deposits from the public and extending credit are regulated separately in the UK. Deposit-taking is regulated by the Financial Services Authority whilst credit extension is the responsibility of the Office of Fair Trading. Deposit-taking is defined as a regulated activity under the Financial Services and Markets Act 2000, under which the Financial Services Authority will operate a single regulatory regime for banks, investment businesses, insurance companies, credit unions and co-operative societies. However, credit extension, whether in the form of overdrafts, term loans, credit cards, hire purchase or leasing agreements, is licensed by the Office of Fair Trading under the Consumer Credit Act 1974. Unlike the position in other EU member states, the UK system provides protection for some small businesses.

Lenders are hampered by a number of regulatory obstacles. Credit unions are constrained by tight restrictions on the size of loans and the length of repayment periods, and are prevented from borrowing money from external sources and from charging fees for providing ancillary services. The Treasury has threatened to prevent co-operative societies which raise money by issuing withdrawable shares from engaging in the business of lending. The burdens imposed by the Consumer Credit Act may discourage the provision of small loans to unincorporated businesses. The development of mutual guarantee societies has been prevented by the operation of the Insurance Companies Act 1982.

The New Labour Government has introduced several initiatives to promote social inclusion in financial services and has recognised the valuable role of CDFIs. To guarantee the success of these initiatives, regulators should remove unnecessary obstacles from the path of social lenders, whilst retaining enough control to ensure quality.