Tuesday, 7 May 2013

Hyndburn Savings & Loan Company - an impossible idea?

Since Labour came to power in Hyndburn in 2011 we have been looking at ways to assist businesses. It is important the Labour Party and your Labour Council helps small businesses. Recently we have been looking at a Hyndburn Savings and Loan Company similar to 'Bank on Dave' which has featured on Channel 4.

Providing access to funds for local businesses to invest and use to expand as well as providing suitable loans to local people at affordable interest rates would clearly be of financial benefit to the local economy. It should also reduce some of the worst aspects of lending practice centred around other non-traditional lenders and therefore has potential other socio-economic benefits.

The programme makes light of the simplicity of such a 'bank' and the difficulties entailed in setting one up, notably that all the problems encountered are surmounted by the 'Bank on Dave' by Dave Fishwick's personal guarantee's backed by his personal wealth.

Following a discussion between the Council leader and myself, the Council has undertaken some initial research into setting up a similar bank to “Bank on Dave” which is officially known as Burnley, Savings and Loans Ltd.

As you can see with various options there are real difficulties and at this stage the barriers to Council are involvement are considerable.

Direct Council Funding

The Council would be prohibited from depositing funds with Hyndburn, Savings and Loans Ltd (or any other Savings and Loans Company) as they are only allowed to lend money to organisations with appropriate credit ratings. Savings and Loans Companies have no prospects of achieving such a rating.


Further enquiries are being made as to a Council's legal parameters.


Promote any Savings and Loans Company as deposit taker

A Savings and Loans Company clearly needs people to invest their money so that it can use these funds to lend to others.

The Council promoting Savings and Loans Company as a deposit taker would be a high risk strategy. If the company failed financially and depositors lost their money, there would be reputational damage to the Council for associating and promoting such a company. Depositors of a failed Savings and Loans Company may drag the Council into their legal action claiming the Council backed the scheme.

Promote a Savings and Loans Company as a source of borrowing

Savings and Loans Companies essentially have two products lending to small businesses and individuals who cannot obtain the finance they require from traditional sources.

In Hyndburn it is likely that many small businesses and individuals who could make use of Savings and Loans Company and many may simply unaware of the benefits or such national Savings and Loans Companies  such as Zopa, Ratesetter and Funding Circle. One option is to promote its services within Hyndburn might be the most significant action that we can take.

In most cases the Council does not directly deal with at all (in any form) with Companies and individuals requiring a loan and therefore The Council's key activity would be to promote Savings and Loans Companies to these organisations that would in turn pass the details to small businesses and individuals.

This could be done through Regenerations Services and relevant organisations that deal with small businesses. Chamber of Commerce, Hyndburn Enterprise Trust, the Town Centre Regeneration Board, the Market Traders Association etc might all benefit from a full briefing on how Savings and Loans Companies operate.

Any promotion of Savings and Loans Companies to individuals would also need to be via the Council's partners who typically deal with debt problems. This would include the Citizen Advice Bureau, Lancashire County Council’s Welfare Rights, Hyndburn Homes as well as other church and community groups.

Your Labour Council is considering sponsoring a presentation or an event at which national Savings and Loans Companies - should they wish to participate could promote itself to these groups. However this would currently negate the option of a local company being involved though.

Attempt to woo Burnley Savings and Loans Company into Hyndburn

Burnley Savings and Loans Limited ('Bank on Dave'), are currently located in Burnley. There requirement for additional premises is likely to be minimal.

Burnley, Savings and Loans Company may not wish to expand into Hyndburn as it is not a bank in the sense of a bank that manages risks but a company personally underwritten by Dave Fishwicks own wealth where he is personally liable for all losses allowing 'Bank on Dave' to offer a guarantee to savers over their deposits. No other savings 'bank' could do that as Savings and Loans Companies are not backed by FSA guarantee's. David Fishwick would not only have to can continue to guarantee all the loans made by Burnley Savings and Loans Company including increased lending to a wider area.

Further

Any Council involvement would have to ensure that the Council was not contravening any EU State Aid rules or any regulations around procurement or competition.



Bank on Dave – Background Note
The Company
Burnley, Savings and Loans Ltd (BS&L) is the registered name of ‘Bank on Dave’ and was created and is managed by David Fishwick, a local entrepreneur and businessman.
BS&L acts as a link between savers and borrowers. Under a Consumer Credit Licence it operates as an ‘innovative’ peer-to-peer lending scheme that enables people who have struggled to obtain finance from high street banks to obtain affordable loans.
BS&L set up loan agreements between the borrower and the lender (saver). The principal of all loans are personally guaranteed by David Fishwick so if the borrower defaults the lender will get their money back. In the event that BS&L went out of business, the loan agreements would continue.
BS&L charge an administration fee equal to the difference between the lending rate and the borrowing rate – currently borrowers pay a flat rate of 8.9% (typical 17.4% APR) or a flat rate of 14.9% (typical 29% APR), and lenders receive 5% aer.
Peer-to-Peer Schemes
Peer-to-Peer lending schemes have now been in operation in Britain for almost 10 years. Zopa, Ratesetter and Funding Circle are currently the biggest peer-to-peer lenders in Britain. This year the lenders operating in this market are expected to arrange some £500m of lending business. The Bank of England has suggested that Peer-to-Peer lending schemes could become a major force in the financial market over the next decade.
Although each works in a slightly different way, the basic premise is the same. The lender acts as an introducer between the saver and the borrower, and takes a fee for this service. But in most cases the fee is significantly less than the margin charged by banks, as peer-to-peer lenders do not have to guarantee savers’ deposits nor take on the risk that borrowers will not pay back their loans. If the borrower defaults, it is the savers who will lose, not the peer-to-peer lender sat in the middle (see earlier comment about David Fishwick’s personal guarantee).
This enables peer-to-peer lenders to lower their operating costs and as a result offer cheaper loans and pay higher interest rates to savers, than traditional banks can do.
Peer-to-Peer schemes are not covered by the Financial Services Compensation Scheme so savers have no recourse for compensation if they lose their money. However, the various peer-to-peer lenders use a number of ways to reduce the risk of an individual saver losing all their money for example by splitting a saver’s risk across a large number of borrowers. Peer-to-Peer Lenders also argue that stringent credit checks on borrowers mean that to date their default rates are lower than most high street banks.
Consumer Credit Licence
BS&L operates under a consumer credit licence with the Office of Fair Trading (OFT) (Licence No. 646136). The licence covers the following categories:
·         A - Consumer credit
·         B - Consumer hire
·         C- Credit Brokerage
·         H - Provision of credit information services, excluding credit repair
BS&L is not regulated by the Financial Services Authority (FSA) as its activities do not fall within the regulatory framework although BS&L were prevented from taking new deposits for a period of time whilst under review by the FSA. The FSA have now lifted this restriction.
The cost of a consumer credit licence varies depending on the organisational structure. For sole traders it currently costs £670.00 and for partnerships, companies and other organisations the current cost is £1466.00.
The majority of licences granted after 6th April 2008 are indefinite, BS&L hold an indefinite licence. Holders of indefinite licences are required to pay a maintenance charge every 5 years. For a sole trader the current cost of the maintenance charge is £208.00 and for other types of organisations it is £505.00.
There are additional costs associated with changing the details on a credit consumer licence. For a change of name or adding or deleting licence categories (see above) the current cost is £80.00. Since obtaining its original credit licence in September 2011, BS&L have amended the categories covered by the licence.

The OFT aim to process 90 per cent of low risk applications within 25 working days and 75 per cent of high risk applications within 50 working days. The following licence categories are considered high-risk:
·         D - debt adjusting (if you or an associate charge for any credit activities)
·         E - debt counselling (if you or an associate charge for any credit activities)
·         F - debt collection
·         H1 - credit information services (including credit repair).
As BS&L licence doesn’t include credit repair services none of the categories covered by their licence would be classed as high risk.
Businesses applying to undertake some credit activities are also required to fill in a credit risk profile form. If you are applying for Category A, C, G licence and you are supplying:
·         secured/sub-prime lending
·         secured/sub-prime broking 
·         secured/sub-prime debt administration 
·         lending and broking in the home 
·         credit reference agency
BS&L Savers (Lending)
BS&L Savers become members of the BS&L Lending Club which  works via a peer-to-peer certificate document.
Savers can lend between £500 and £15,000. There is no maximum period over how long they can lend the money but there are minimum periods specified of one, two, or three years.
Following a face-to-face interview at BS & L offices savers enter into an agreement with BS&L relating to the membership of the BS&L Lending circle. This agreement includes details of the amount of money that is being lent and the term over which it is being lent. BS&L will then match the saver with a suitable member of the Borrowers’ Club (See BS&L Borrowers).
Until a saver’s money is lent out the money is held in a bank account in BS&L’s name with HSBC. This is a normal business client’s current account.
The principal of all loans are personally guaranteed by David Fishwick so if your borrower defaults BS&L can recover from the borrower but David will personally ensure you get your money back.
BS & L Borrowers
Personal loan borrowers can borrow between £100 and £500 over a maximum period of 3 years. Hire purchase borrowers can borrow between £1000 and £7500 over a maximum period of 4 years.
Depending on credit status borrowers will pay a rate of interest from 8.9% flat (typical 17.4% apr) to 14.9% flat (typical 29% apr).
People with a bad credit history can still become a member of the BS&L borrowing circle but they will need to satisfy BS&L on how they will repay the loan.  BS&L do not credit score, they manually underwrite every application.