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Bank Penalty Charges

Volume 455: debated on Tuesday 16 January 2007

I think that everyone will be familiar with banks’ charging system. I do not know whether the Minister has been subject to any penalty charges, but the fines are incurred when there is a lack of funds in the account to cover payments out, such as direct debits, bounced cheques and exceeding the overdraft limit. What may not be realised is that every year about one in four bank customers suffers penalty charges, that a single charge can be anything up to £38—they average about £30—and that the charges can be applied on every occasion when someone goes over the overdraft limit, for every cheque or direct debit at that point. Last year the top six high street banks therefore pulled in an estimated £4.5 billion in such charges.

I am raising the matter today because I believe that it is a major contributor to the UK’s debt crisis and to social exclusion. Perhaps most important of all, those bank penalty charges are more than inconvenient and unfair—they are illegal. The fact that they continue to be levied in such large sums leads one to conclude that the Office of Fair Trading is failing and the Government are turning a blind eye. What may be a minor inconvenience to a person on a good regular income becomes a spiral of debt to the bank for those who are less well-off.

At my travelling surgery this year, as I was researching the issue and becoming more aware of it, I started to ask constituents who came to me with other problems—such problems were often, I might add, caused by government, and delayed payment of pensions, tax credits or benefits, or delays with the Child Support Agency—about the bank charges that they might be facing. I have yet to find a single case of somebody in such circumstances who does not tell me that they had been hit by bank charges. The problems are often caused through no fault of their own, and result from Government inefficiency and late or non-existent benefit payments, which are payable to the people in question only because they are already hard up. They are then mugged by their bank not with just one charge, but with numerous charges, since one penalty causes another and another. The people involved, who are at the bottom of the income scale and who depend on support for one or another reason—it may be a pension or disability benefit—find it impossible to extricate themselves from the excess on the overdraft limit. They continue, therefore, to be hit by penalty charges.

Numerous constituents have experienced that snowball effect. They are hit by hundreds or thousands of pounds of bank penalty charges, either because of someone else’s mistake or because they have made a small error themselves, such as assuming that a cheque has been processed by the bank more quickly than it has. The worst hit are low-income families, single parents, the elderly, the disabled, people who are out of work, students and young people who are starting out—the very people whom the Government say they were elected to defend and whom they want to prioritise.

An example is when a late pension payment leads to a charge for a bounced direct debit. The pension payment finally arrives, but the pensioner is still over the limit because of the previous penalty charge, so another penalty charge is levied, and then another—charge after charge. A real example concerned Miss R., a student from St. Austell, who had an account with the Alliance and Leicester, but moved most of the money into another bank account, leaving just a few pounds behind, and instructing all the organisations with which she had a direct debit mandate to use the new account. An insurance company mistakenly issued a direct debit request on her old account and the Alliance and Leicester bounced it and charged Miss R. a penalty charge. She went overdrawn, which meant she then incurred another charge. In three months she had received £300 in penalties. Despite the fact that she wrote three times to explain that it was not her fault, Alliance and Leicester refused to refund her anything.

What of cases in which people are considered at fault? When I raise this issue I am often told that people should be more careful with their accounts. An example of such a person is Mrs. V., a working mum in Truro, whose husband paid a cheque into her account but did not realise that because of the bank’s clearing cycle it would take a few days to clear. Direct debits bounced, and in one month she was charged £380. As a result, she was over the limit the next month. More direct debits bounced: that was another £405. That comes to nearly £1,000 in just two months. In the end she was charged well over £1,000.

Victims of the punitive charges system are also made to feel that they have done something wrong. The partner of a nursery worker, Miss W., from Grampound in my constituency, came to my travelling surgery to tell me about their problems with tax credits. I looked into the matter and helped to sort out the tax credit problem, but in the meantime I asked whether they had been hit by bank charges. It turned out that the problem with bank charges was bigger than the tax credit problem that it resulted from. The couple accrued £500 in charges. We helped Miss W. to take the matter to court. As a result, Nationwide paid out in a matter of weeks, to pre-empt a court case. However, in an act of retribution, despite the repayment, Nationwide issued a letter giving Miss W. 30 days to close her account. It has now been closed, and that of course has caused her even greater stress and inconvenience.

Not everyone is willing or able to take their bank to court about such matters, or even knows that they can. The volunteers who help, such as the one who helped with Miss W.’s case, cannot help everyone. Since the announcement of the debate my phone has been ringing constantly and my e-mail inbox has been full with messages of support and information about other cases from around the UK.

This problem arises from the banks using poverty as a source of profit—a great deal of profit. The bank commission of BBC 2’s “The Money Programme”, which included eminent business academics and a former senior NatWest executive, concluded that the absolute maximum administrative cost to a bank of processing a bounced cheque—the most labour-intensive of the processes in question—is £4.50. For all other items, such as unauthorised overdrafts or bounced direct debits, the commission concluded that the absolute maximum, in this electronic age where everything is done automatically through a computer, is £2.50. However, the average charge is approximately £30. Some are as high as £38, and they are charged every time people make what the banks consider to be an unauthorised transaction. That is a substantial profit for the banks, which rake in some £4.5 billion, without even taking account of the similar examples that the Federation of Small Businesses found in business banking accounts.

Almost all of what is charged is profit, not costs. It is profit at the expense of hard-up customers. It is the biggest bank robbery in Britain, and it involves the banks robbing their own customers, especially their poorest ones. A common response when the practice is described is that there should be a law against it; but there is a law, or there are laws. First, under common law, disproportionate and punitive charges have always been illegal. In layman’s terms, if a consumer breaks the contract the other party—the bank, in this case—cannot impose a charge greater than the reasonable estimate of its loss. That common law has been unchanged for 100 years, and numerous cases in the higher courts have confirmed it. However, we can go further. The rights in question are protected by statutory instrument. The Unfair Terms in Consumer Contracts Regulations 1999 made that clear.

I am no lawyer, and it might be argued that my interpretation is wrong. I hope that the Minister can tell us what he believes Parliament intended the law to provide on this matter. However, it appears that the banks know perfectly well that they are acting against the law, contrary to what they told the Office of Fair Trading. Why do I say that they know? Because I have helped constituents to regain thousands of pounds by threatening to take the matter to court. So have others. My former constituency researcher, Bob Egerton, has helped dozens more on a voluntary basis, which has made him famous in The Sun as “Bob the Bankbuster”. If people want more information on that, they should go to, but there are similar sites that advise people on how to get their money back.

Every time court action is threatened, the banks refuse to defend themselves, and there is only one possible reason for that. They know that they will lose and that if they lose a test case they will forfeit this multi-billion pound source of illegal profit for ever. Millions of people still pay illegal charges because they believe that if the banks say that they are legitimate and show tariffs of what they intend to charge, they must be legitimate. The banks claim that the charges are legal, but they will not face the courts. They know that it is an illegal rip-off of trusting and often impoverished customers. They are mugging their customers, and the OFT and the Government are letting them get away with it. If a backstreet lender were doing the same, the OFT would close it down within weeks, so what is being done?

The OFT looked into penalty charges on credit cards, but that took two years. It decided that £12 is a fair charge, although I argue that that is still way in excess of what is fair, but it then took what it described as a “novel approach” to this issue. It got no undertakings, but issued a statement calling on the industry to comply as a matter of priority. In its letter to me of 3 January, it could say only:

“Most credit card companies have since reduced their charges by at least half”.

There has been no action to force repayments to people who have been ripped off in the past. Despite what the OFT says, given that it has the power to threaten sanctions against its consumer credit licences, I believe that it has the power to make banks do that.

When the OFT said that the same principles that apply to credit card charges apply to bank charges, the banks simply said that they did not agree. Instead of enforcing its view, the OFT is to review the issue for up to another six months before deciding whether to launch an investigation. Given that it took the OFT two years to investigate credit card charges, which are worth only £300 million a year compared with £4.5 billion in bank charges for the top six high street banks, it seems that the banks will be able to make even more illegal penal charges, worth almost £10 billion, before there is any likelihood of an outcome from the OFT. That is a novel approach indeed, especially given that it has taken firm action against at least three commercial companies regarding penalty charges in their contracts, all of which were reported in its 2002 case bulletin. Why not take the same approach with the big banks? What is the OFT afraid of?

For at least 18 months, consumers have been asking the OFT to look into this issue, and there is no reason why it could not have been investigated at the same time as credit cards. Even the OFT has said how similar the issues are. Given that the Government are effectively forcing people into the hands of big banks by encouraging them to receive benefit and pension payments through banks, and by closing post offices, there is an even bigger impetus and moral duty on the Government to make banking responsible and to ensure that those to whom they pay benefits are not landed with outrageous charges.

The first thing that I hope will come out this debate is that the OFT speeds up its investigation and moves from simply reviewing the matter to conducting a full investigation. I hope that it will then produce a fair maximum charge according to law.

I congratulate the hon. Gentleman on securing the debate. I am often contacted by constituents who are distressed at the level of bank charges levied on them. The worst cases are those in which multiple charges stem from one mistake. People try to cover the bank charge, end up missing other direct debits and go into a spiral of debt. Does he agree that we should at the very least be looking for banks to charge a maximum of one charge a month, rather than multiple charges, so that bank charges are not a cause of debt?

I share the hon. Gentleman’s concern and agree that his proposal would be a step in the right direction. The truth is that with modern electronic banking, there is basically no cost to banks because it is their decision whether to allow money to be drawn, and they can do that automatically.

The key issue is that banks should not make unreasonable charges. It is clearly unreasonable that charges can mount up to hundreds of pounds in a month, as in some of the examples I gave, possibly before customers are even aware that they are being charged. If the Minister or I called our banks in such circumstances and moaned at them, they would probably waive the charges, but most people do not know that they can do that. Also, they are customers whom the bank is not as keen to keep as they might be to keep a Member of Parliament or someone on a good salary. I have no doubt that if the Minister rang up—he has some responsibility for the banks—he could get his charges waived without a problem, but that is not the case for people at the lowest end of the scale. Also, people assume, not unreasonably, that the bank charges are legitimate. Why would they not do so, given that the banks tell them that they are?

Most importantly, if it is to take such a long time for the OFT to resolve the matter, and if the Government are to allow it to take so long, they ought to make it clear to the banks that now that the OFT has made a ruling—it has said that the same principle applies to bank charges as to credit card charges—they will expect banks to repay customers for any charges in excess of what is reasonable that have been levied since then. If that were made clear, these charges would end overnight, because the banks know that they will lose. Meanwhile, Ministers should step in.

In 2000, the Cruickshank report, which was a Government report, established that banks are fundamentally different from other companies because of their social responsibilities, to which I have referred, and called for them to be treated as such, particularly regarding their high excess profits. Yet the Government have singularly sat on the report and failed to implement it. Will the Minister clarify the position and what he believes the intention of Parliament to have been? Will he publicise the issue so that people know not to pay the charges?

The Government should start providing more consumer advice on how people can get these charges back rather than them having to rely on individuals such as Mr. Egerton. The Government could also chase the OFT for action, particularly to ensure that people get unfair charges back if the OFT concludes, as it should, that they should be stopped.

I reiterate that the penalty charges are crippling people on low incomes. I believe that they are clearly illegal, and that if there was any doubt about that the banks would have the courage to fight a single case in the courts, which they do not. The banks are dodging the courts and the Government appear to be turning a blind eye. I hope that the Minister can reassure me otherwise.

I congratulate the hon. Member for Truro and St. Austell (Matthew Taylor) on securing the debate, and thank him and his office for their courtesy in giving me advance notice of the issues that he intended to raise. He has raised important matters, and it is important that there is proper transparency and profile in those issues. I was pleased to be able to read, before the debate, the comments that he made on “The Westminster Hour”. His appearance on that programme gave publicity to today’s debate and gave some of these issues a wider profile. That information has enabled me to prepare to respond in detail to the points raised in his powerful speech.

As well as raising specific issues about bank charges, the hon. Gentleman makes a broad point with which I, and most people, agree. While banks play a fundamentally important role in the workings of our economy, and while it is important for the working of our economy to have a strong, healthy and profitable banking sector, banks also play an integral role in our society and lives. Banks are among our biggest companies, and like any company—perhaps more so—they have social obligations and responsibilities within society. Given their important role in the economy and society, they should be leaders in corporate social responsibility.

In recent years, we have worked closely with the banking industry and the British Bankers Association on a range of different policy issues that all pertain to that wider social role of the banking industry. A key Government priority in tackling financial inclusion has been to try to reduce the number of people in our society who have no bank account. When we established our financial inclusion taskforce, we calculated that 2.8 million people in our society have no bank account. The hon. Gentleman will know that not having a bank account can impose real costs, such as not being able to access affordable sources of credit or take advantage of discounted utility bills by using direct debits.

Our wider agenda is to tackle illegal lending and loan sharks. Our pilot schemes in Birmingham and Glasgow, which are about to be extended across the country, are all about trying to ensure that we tackle the problem of people being ripped off outside the mainstream banking industry. An important part of our broader work on financial inclusion has been encouraging the third sector credit unions to play a wider role in providing bank accounts for the lowest-income customers, and cracking down on illegal lending.

We have also worked closely with the banks to try to ensure that we tackle customers’ inability to access banking services in the poorest communities. Just before Christmas, my right hon. Friend the Member for West Dunbartonshire (John McFall), who is Chair of the Treasury Committee, and I announced an agreement with the banks to provide automatic teller machines—ATMs—in the poorest communities of our country, where it is often hard for people to access banking services.

We have been working hard on other areas. As part of the implementation of the Cruickshank review, the payments system task force was established in 2004 to try to speed up the provision of banking services for customers. The length of time that it has taken to clear cheques has been an important and characteristic feature of my ministerial postbag—I am sure that the same applies in respect of the hon. Gentleman’s postbag. We announced an agreement on those areas before Christmas.

I am aware that penalty charges in the mainstream banking system, particularly current account charges, such as overdraft fees, and the problems they can pose to those in financial difficulty have received significant attention. The Treasury Committee also raised that issue in its recent report on financial inclusion.

The hon. Gentleman noted that the Office of Fair Trading has been closely engaged in this area, and he will know that we established an independent regime for competition inquiries—the OFT and the new Competition Commission. The banking industry often makes points to me that are directly opposed to the ones he has made about the scrutiny role that the OFT plays in its affairs, although I listened carefully to what he said.

The OFT carried out an investigation into penalty charges in the credit card sector and set a £12 administrative threshold for intervention by the competition authorities. As a result, credit card issuers have agreed to reduce their default charges, the majority agreeing to do so by almost half. That investigation was conducted under the principle of the Unfair Terms in Consumer Contracts Regulations 1999, which specify that financial service companies should recoup only the administrative costs of dealing with default. That was the basis upon which the OFT made that ruling, which was not popular in some circles in the industry but has been broadly welcomed.

The OFT recently said it believes that the same principles of fairness and transparency that it applied to credit card default charges are likely to be applicable to bank account default charges. Following the credit card investigation in which it acted, it has instigated an exercise to determine the facts in respect of the banking sector and then to decide what proportionate and appropriate action it should take.

The OFT is independent of Government; we do not direct it in or set the pace of its inquiries. In many cases, it is for the OFT to propose and implement remedies. The fact that those individual, case-by-case decisions are being made at arm’s length from Ministers is one of the strengths in terms of protecting consumers. In my experience of contact with the banking industry, the OFT inquiry is very serious—it is certainly being taken seriously by the banks. The OFT has collected the information and it has an established track record of acting when it believes that actions are being taken that are potentially outside the law. It would be wrong for me to comment on this particular case, because it is a matter for the OFT. If I were to second-guess an inquiry—the inquiry of an independent competition agency—when it is being conducted, it would be an error on my part. I would like to express my strong support, and that of the Government, for the principles of fairness and transparency, which the OFT applies in general. It applied such principles to credit cards and is now planning to apply them to banks.

The hon. Gentleman also mentioned that some customers are challenging default charges in the courts. It is up to individuals whether they challenge the decisions of a private institution in the courts. The OFT is holding a more general inquiry into the particular kind of cases that he mentioned. It would not be appropriate for me to comment on the particulars of those legal cases, especially while the OFT inquiry is ongoing. As I said, we are very supportive of the general principles that the OFT is seeking to apply.

The penalty charges that result from late payments by Government agencies and cause people to go overdrawn through no fault of their own have been mentioned. In 2006, the Department for Work and Pensions made more than 680 million payments, of which fewer than 21,000—or 0.0003 per cent.—were reported as late or missing by recipients. In the negligible minority of cases where payments are late because of an error on the part of the Department, the Government’s policy is to refund any penalty charges that might arise to the individual concerned.

I want to press the Minister a little further, because, as he will know, the intentions of Parliament can be interpreted partly by the comments that are made in it. While he cannot comment on specific legal cases, it is evident that banks are avoiding court cases, presumably because they feel that they would lose them. Will he confirm that the intention behind the regulations was, as the OFT has stated, the same as the principle that applies to credit cards: only the administrative costs should be charged?

I am happy to confirm, as the hon. Gentleman says, that the principles that apply to credit cards apply equally to the banking industry. It is for the OFT to get the facts and to judge whether it thinks those principles and the law require it to act. It is not for me to do so. It is clear that the principles that applied to credit cards also apply to the banking industry.

I have a short amount of time left, so I should like to make one further point to the hon. Gentleman. As a result of the Cruickshank report, there is now a regular review of the banking code—the voluntary, good practice code for UK financial institutions, to which all the major banks signed up and which was first established in 1991.

Mike Young, a former senior Bank of England official, is conducting the triennial review of the banking code this year. As part of that, he has written to stakeholders to seek views on possible changes to the code. He has asked stakeholders to consider the following:

“Are the requirements about how lenders deal with people who get into financial difficulties clear enough?”

He is examining whether or not the banking code requirements, to which banks sign up voluntarily, are sufficiently clear and onerous to ensure proper protection for some of the people the hon. Gentleman mentioned.

The Treasury will make a submission to the review, as it always has done on such matters, part of which will address those issues. I encourage the hon. Gentleman, and all other hon. Members who have concerns, to make a contribution to that ongoing review of the banking code. I am sure that Mike Young would be happy to meet the hon. Gentleman as part of his independent review. I would be happy to write to Mr. Young about this debate and to send him a copy of Hansard.

Whether we are talking about the work of the OFT, our response to the Treasury Committee, the work of the payments task force or the review of the banking code, we are determined to ensure a fair deal for customers, particularly those who are potentially most disadvantaged by financial exclusion and the problems of late payment, which the hon. Gentleman has raised today. The OFT is examining charging, so I cannot comment further on that, but I am grateful to him for having raised this debate and for bringing transparency to these issues.