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Bank Penalty Charges

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 www.bankbuster.co.uk, 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 that 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.