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Basic Bank Accounts (Scotland)

Volume 521: debated on Wednesday 19 January 2011

It is a great pleasure to serve under your chairmanship, Mr Hood.

I am extremely grateful for the opportunity to introduce this debate. The stimulus for requesting it came from a report published in November 2010 by Citizens Advice Scotland—the umbrella group for citizens advice bureaux in Scotland—called, “Banking on the basics”. It was based on a survey that it carried out and the experiences of the many bureaux in the country. Many of the points and recommendations in the report are echoed in the report of the Financial Inclusion Taskforce, “Banking services and poorer households”, which was published in December 2010. It addressed the subject on a UK-wide level. Clearly, the issues are similar north and south of the border.

One of the relatively unsung but important pieces of work done by the Labour Government after 1997 was the detailed research, analysis and, most important, development of action plans to tackle poverty, deprivation and social exclusion. Outwith some of the political knockabout that sometimes takes place, I hope that we can all agree that it is only long-term, painstaking work of that kind that will make a real difference. It has to be sustained over a long period—we will not necessarily get instant results.

One of the strengths of the work was how it was spread across Government Departments, including the Treasury. It was not simply sidelined into the kind of Department that normally deals with poverty and deprivation. In 1999, Treasury policy action team 14 made its report on access to financial services, and from that flowed, among many other things, the basic bank account proposal.

Why is access to banking so important in this context? First, it helps people to manage their budgets more effectively and cheaply. Operating in cash is extremely expensive; for example, those who cannot pay fuel bills by direct debit pay a higher tariff, especially if they use prepayment meters. Buying essential household goods through catalogues, and mechanisms such as rent to buy are also extremely expensive. A useful report which highlights some of the issues for poorer families came out just this week from Save the Children.

Basic bank accounts also serve as a gateway to other mainstream financial services, including savings, insurance and credit, so people can make the journey from the basic bank account to other elements of financial inclusion in due course. Increasingly, many employers want to pay wages into a bank account. A number of bureaux survey respondents in the CAS report had encountered difficulties entering employment because of that. They could not get a bank account, or, if they got cheques, they encountered high bank charges to have them cashed.

Clearly, becoming “banked” will not in itself overcome poverty and deprivation, but it forms an important part of the jigsaw of policies and actions that are needed. There has been considerable progress. The goal of halving the number of the “unbanked” was met by 2009. Treasury figures for the UK in December 2010 show that the proportion of adults living in a household without access to a current, basic or savings account reduced from 4% in 2002-03 to 2% in 2008-09. The corresponding figures for Scotland show a fall from 6% to 3% over the same period.

The unbanked remain largely concentrated in the most deprived areas, and among certain groups: the retired, those who are of working age but in poor health and lone parents. Fairly significantly, in terms of access routes, 54% of the unbanked were council or housing association tenants. Only 16% of those with bank accounts fall into that category. I mention that partly because I think that that is a way in which some of the access routes could be enabled.

That still leaves a substantial number of unbanked adults. The CAS survey showed that two thirds of those who did not have access to a bank account had tried to open one. It is sometimes argued that the remaining unbanked do not want bank accounts.

I have listened to my hon. Friend. From my experience working in a bank—I worked for a bank 10 years ago, when the basic bank account was introduced—I have to say that the attitude of some bank workers was appalling. The basic bank account does not credit score, so they could not sell products, and they treated many people with basic bank accounts as second-class citizens. Does she agree that that is an absolute scandal in this day and age?

I certainly agree. I shall speak later about how we can move this forward, and one way is by improving the practices of some banks in that regard.

There are several main reasons why people cannot access basic bank accounts, of which that may well be one. Another is having a poor credit history or, indeed, no credit history. I shall quote one example from the CAS survey:

“I had a full driving licence but never had a bill in my name as I live with my mum and dad. I am 28 years old and can’t get a bank account.”

There are people who have not taken any credit in the past and do not have a record.

I congratulate my hon. Friend on securing this debate. I was a dentist in a previous life—I am a glutton for punishment, perhaps. I have a similar story. We employed a new dental nurse who had no credit history at all. She did not have a driving licence—she was straight out of school—or her birth certificate, which had been lost in her parents’ messy separation, so she was not able to open a bank account. Instead, every week she had to take her cheques to one of the local pawnshops and pay £3.50 to get her money. That is a simple story, but the situation affects thousands of people across the UK.

I thank my hon. Friend for that example. It is important to understand that these things do still happen in this day and age, although it might be surprising to some people.

On the inability to meet some of the identity requirements, the Financial Services Authority permits use of a wide range of identification, but local advice agencies in my constituency have told me that meeting the requirements can be problematic. Not all banks operate to the FSA guidelines. They demand either a passport or a driving licence, which not everyone has. Such things as a letter from a housing association or benefit entitlement documents are not accepted, so the whole process takes a long time.

Other people are in a situation where they owe money to a bank. Sometimes it is appropriate that they open up a basic bank account elsewhere to enable them to function while they are dealing with previous debts. There is a growing difficulty with the consolidation of banks, in that there are too few banks in many places. In some small towns in Scotland, there is very little choice.

My hon. Friend will be aware that an increasing number of people are being made bankrupt in Scotland because of the operation of legislation that allows people to be made voluntarily bankrupt because of their financial situation. That group in particular has a great deal of difficulty in opening bank accounts. Does she think that that issue also needs to be addressed?

I very much do. At present, only two of the mainstream banks allow undischarged bankrupts to open a basic bank account, and that creates a difficulty in Scotland in particular. One is the Co-operative bank, but it has few branches in Scotland, even with the merger with Britannia; the other is Barclays, which does not operate in many places in Scotland. In Edinburgh, there are only two Barclays branches. They are near each other in the centre of the city, so it is difficult for people to access any bank in Edinburgh that would enable them to have a basic bank account if they are an undischarged bankrupt.

There are also issues around high bank charges, which can lead people to abandon their bank accounts. For instance, a direct debit comes in at a time when there is no money in the account. They are unaware of that, and a bank charge is levied. Ironically, some people found that doorstep lenders who would be more expensive in the long term were more sympathetic and easier to use. They would allow a payment to be missed occasionally. We know that that is an expensive way of working, but the inflexibility of banks and an automatic bank charge when one is on a marginal income anyway put people off.

Recent research has found that 60% of people go to the high-cost pay-day lenders to consolidate their borrowing. Does my hon. Friend agree that access to a bank account may prevent some of that from happening?

I agree that we need to stop that happening, and bank accounts are one way of doing so, although we must also take other measures.

How can we make further progress? My submission is that banks should be legally required to offer a basic bank account when an application for a current account has been refused. That was proposed in the March 2010 Budget and was a commitment in Labour’s 2010 election manifesto.

The Government also have a role in encouraging mainstream banks to use all the best practice and not to introduce obstacles such as those that several of my hon. Friends and I have discussed. That includes ensuring that undischarged bankrupts are allowed to open bank accounts and that people with no credit history are given access. Banks should market such basic accounts fully, and staff should be trained and encouraged to do so. The ID requirement should be reviewed and, again, staff should be clear about what is necessary; they should not over-ask, which puts people off. If, even with such changes, banks have to or feel that they have to refuse an application, they should at least be obliged to give people information about alternatives.

The Government need to support alternative providers for people on low incomes, including credit unions and community development financial institutions such as Scotcash in Glasgow, which not only offers loans but has been giving people assistance with basic bank accounts. In its second year of operation, Scotcash assisted 553 individuals to open a basic bank account. However, such organisations depend on a relatively high degree of public support, and it is important to consider ways of helping those institutions to grow further. Many were able to get started because of the previous Government’s £100 million growth fund. If that fund does not continue, many will have to reduce their operations in future years. Reforming community interest tax relief would assist them, as would keeping mainstream banks to their previous commitment to help such community financial institutions—most have not kept that commitment. The debate is not primarily about savings or credit, but such points illustrate how all the issues are linked and how the Government need to have an overall financial inclusion strategy and to act upon it.

I have some specific questions for the Minister. First, will the Government commit to establishing a universal right to a basic bank account? Secondly, will they continue the work of the Treasury’s Financial Inclusion Taskforce after the end of the current financial year, because it has been behind so many measures? Thirdly, how will they encourage banks to remove current obstacles to securing a basic bank account, as outlined? Fourthly, how will they support alternative mechanisms for those for whom a bank account may still be impossible or undesirable?

I have a couple of specific proposals for the Minister. What practical and financial support can be given to enable post offices and credit unions to enter partnerships? In the short time that I have been in the House, there has been much discussion but no specific action allowing that to happen. If post offices do that, there is a cost, which the post office network perhaps feels is difficult to meet at this stage in its operations, but the Government could assist.

I apologise for missing the beginning of my hon. Friend’s contribution.

Has my hon. Friend shared my experience of young people in particular having difficulties? In my constituency, Save the Children has given compelling evidence about young people who have left the family home—they are put out of it—being denied the means to get a bank account and, therefore, the means to set up proper financial arrangements, further pushing them into poverty. The issue is a key plank in tackling poverty and helping people back on to their feet.

I thank my hon. Friend for making that point. The issue is important for young people. Many people talk about financial education being important—indeed, it is—but if someone does not even have the mechanisms in place to act on such financial information, which was perhaps got through school, participating fully in society, getting employment, having wages paid into banks and so on will be difficult. Many young people in that situation are setting up home for the first time, so it would be helpful if they could access facilities that, for example, allow them to make fuel payments cheaply.

Finally, and specifically, I am interested in the Government’s view on reforming the community investment tax relief to assist community development financial institutions, so that they can expand their business without necessarily being wholly dependent on grant assistance. That would enable such an important strand of financial inclusion to continue.

I congratulate the hon. Member for Edinburgh East (Sheila Gilmore) on securing this important debate tracking progress on basic bank accounts and on what more needs to be done to encourage financial inclusion.

I confirm the coalition Government’s commitment to improving levels of financial inclusion. I have been involved and interested in the issue for some time. We believe that banks should serve the economy and that they should be committed to improving access to banking and the transparency of financial products for consumers.

Tackling unnecessary exclusion from banking services can help to alleviate some of the problems faced by low-income families who are currently unable to access mainstream banking services. As the hon. Lady has said, the benefits include being able to receive payments through different channels, having a more secure place to keep money and reducing the cost of household bills.

That is why the Government are committed to improving access to basic banking services and to helping people to use those services responsibly. That can only be achieved through collaboration between a number of parties, including the Government and the financial services industry, as well as a range of local partners, such as the devolved Governments, local authorities, social landlords, advice agencies, credit unions and others.

It is important to acknowledge, as the hon. Lady did, the real progress towards financial inclusion in recent years, and to note that such progress is due to the openness and support of many in the financial services sector. In her speech, the hon. Lady highlighted the reduction in the unbanked over the course of the past few years. Since 2002-03, the number of adults living in households without a transactional bank account has decreased from 3.57 million to 1.54 million in 2008-09. That number continued to fall in the last year for which we have information, with 200,000 fewer adults living in households without access to a transactional bank account. However, we cannot afford to be complacent. There is still scope to bring more households into banking services and to encourage the banks to maintain strong standards of customer service for poorer households.

I want to say a little more about the project to which the hon. Lady has referred to improve access to basic bank accounts.

Before the Minister moves on, what does he believe that banks can do to manage people who are currently running their basic bank accounts very well on to mainstream banking, so that they can have credit facilities? What action can move people on to mainstream banking?

That is an important point. Banks should see the opportunity to encourage and enable people to get greater access to mainstream services, moving them from a basic bank account to a more fully functioning current account.

I will touch on the issue later, but we need to go with the grain of how people want to live their lives. Many people are comfortable with access to a bank account without an overdraft facility, for example. A challenge for policy makers is that we think of things that we might like as a function, even though sections of the community might not want such functionality in their accounts. We need to think carefully about that, although we should be clear that moving to a fully functioning current account ought to be open to those with basic bank accounts. Banks need to look at credit histories and how people manage their accounts as part of that process.

At the request of the financial inclusion taskforce, eight of the major retail bank account providers have collaborated to provide management data on their basic bank accounts. That allows us to look at levels of take-up in different local authority areas and wards across the country. At local level, there are financial inclusion champions, such as the group in Scotland funded by the Department for Work and Pensions. They are looking at how best to work in deprived areas to raise awareness and encourage more people to open bank accounts. We can continue to make effective use of up-to-date regional data to help tackle the issue in areas of financial exclusion.

The hon. Lady referred to the financial inclusion taskforce report that was published in December. That is a timely piece of work that gives us the opportunity to take stock of where we are. It raises a number of issues referred to by the hon. Lady and her colleagues, and I encourage hon. Members to read the report on the Treasury website.

The taskforce found that the experience of banking services for poorer households has been mixed. Many households have made savings on services and retail purchases, but some have lost money through bank charges. The taskforce found that the remaining unbanked are generally the poorest and most deprived people, and it recommended a number of minor changes to existing basic bank accounts to make them more accessible and easier for poorer households to use. It also highlighted the scale of the challenge of extending bank accounts to those who currently do not have them.

The research found significant indicators of relative disadvantage among the unbanked: eight out of 10 of the unbanked are in receipt of income-related benefits; more than a third have major health conditions; and a quarter have numeracy or literacy problems. As more people open bank accounts, we see the unbanked becoming concentrated in hard-to-reach, more deprived groups. We must think carefully about how to work closely with those groups to get people to open bank accounts and access the benefits that they bring.

Interestingly, we should not assume that those who do not have a bank account have not previously held one. Six out of 10 unbanked people have previously held a bank account. The research does not give reasons why those people do not currently have a bank account, but some may have had issues with managing their account and decided not to keep it open, or the account may have been closed. We are not necessarily talking about people with no experience of bank accounts. Some people may have opted not to have an account for a particular reason.

Let me reiterate the point about going with the grain of how people run their lives. Many unbanked consumers express a preference for managing their finances in cash. Some low-income households employ a number of strategies to ensure that money is available for essential living expenses, which include not withdrawing all their benefit payments at once, leaving a small amount of money as a buffer, or perhaps putting cash towards a particular purpose. We are well aware of the number of people who join holiday clubs or Christmas clubs to try to keep money in a defined account that is kept for a specific purpose, and a lot of people on low incomes find that to be a more effective way of having control over their money. They want direct control over their spending and feel that a bank account takes that away from them. Unbanked people are more concentrated in particular groups, but not having a bank account could be a conscious decision as much as a matter of exclusion, and we must therefore have a more flexible approach.

In the long term, the taskforce believes that the introduction of new models and channels for the delivery of financial services may be necessary to address the difficulties that poorer households can experience with banking. It has called on the Government to engage further with banks, e-money service providers, bill payment organisations, retailers and post offices to pursue new ways to improve the opportunities for low-income households to make the most of their money. We are in danger of getting stuck by thinking about a model of banking based around bank accounts. Increasingly, people are turning to prepayment cards or e-money as a way of controlling their finances or paying bills online.

The Minister has correctly identified one concern of the financial inclusion taskforce—that of bank charges that are very high in relation to the sums of money that people are dealing with. Does the Minister have any proposals to address the banks on that issue, given that by definition, people cannot run up unnecessary debt on those accounts? Perhaps bank charges should be reduced for that customer group.

The coalition agreement commits us to tackling the issue of bank charges, and we are working closely with colleagues in the Department for Business, Innovation and Skills.

I want to respond to a couple of specific points. Hon. Members have discussed bankrupts not being able to open bank accounts, and the hon. Lady was right to say that Barclays and the Co-operative bank allow undischarged bankrupts to open accounts. A number of banks are currently reviewing their policies and, in response to a call by the Government in July for banks to reconsider the issue and recognise the problem, the Insolvency Service is working with the British Bankers Association to decide how to address the issue.

The guidelines in law on identification are high level, and banks and financial services institutions have a great deal of flexibility in deciding how to prove someone’s identity. It is not only about having a driving licence or a passport, because there are other ways of doing it. In one of my constituency cases, a letter from the local council addressed to the person who was seeking to open a bank account was deemed to be sufficient proof of identity. I encourage banks to make their staff more aware of the rules and flexibility, and we will continue to raise that matter with the banks and the BBA.

The hon. Member for Islwyn (Chris Evans) asked whether banks are open to people opening basic bank accounts. The work of the financial inclusion taskforce, which sent mystery shoppers into banks, demonstrated that 80% of bank managers are much more open to people opening basic bank accounts. That issue has been a problem in the past, and we must maintain pressure on the banks to ensure that they offer basic bank accounts and do not turn customers away. We must tackle the barriers to people opening bank accounts.

Community investment tax relief is an important way of providing support. That tax is due for review shortly, and we will work with a full range of stakeholders to consider the options available for reform.

Thank you, Mr Hood. I will get used to the conventions of this place eventually. The Minister has responded to my hon. Friend the Member for Edinburgh East (Sheila Gilmore) on the subject of basic bank accounts. One point that I regularly heard from the BBA, the Royal Bank of Scotland and HBOS, as it was at the time, was that if the staff in local branches were not able to offer a full bank account to potential customers, they did not then offer a basic bank account. Will the Government consider issuing guidance on that through the BBA to ensure that people who do not meet the criteria for a full bank account are automatically offered a basic bank account?

I do not want to get bogged down in what banks should or should not do. Through its mystery shopping exercise, the taskforce looked at the offering of basic bank accounts, and it will publish a more detailed report this year that will help inform those processes. Obviously, the Banking Code Standards Board will also have an interest in how such accounts are offered.

The hon. Member for Edinburgh East also asked about support for credit unions and post offices working together. There has been much discussion about that in recent months, and there is already a lot of co-operation between post offices and credit unions. For example, credit union current account holders can access their accounts through the post office, and more thought is being applied to that area.

We take financial inclusion seriously, and we want to ensure that more people have access to a bank account and the benefits that that brings. It is important to ensure that bank accounts and financial services work with the grain of how people live their lives. We must look at new technological approaches and the barriers to opening bank accounts. Together, we will take forward the work of the financial inclusion taskforce in conjunction with our partners not only in government but in the financial services sector. If I have not replied to any of the hon. Lady’s points I will happily respond to them by letter.

It appears from the Minister’s words that the financial inclusion taskforce will be continuing.

The previous Government committed the financial inclusion taskforce to a five-year life. The problem is ensuring that inclusion becomes a mainstream financial services issue and is not seen as something on the margins. That is why I will work closely with the financial services sector and other interested parties to see how we can best take forward the work of the financial inclusion taskforce. It is not an issue for those on the margins; it is an issue that should be taken seriously from bank boards to bank branches.

Sitting adjourned without Question put (Standing Order No. 10(11)).