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Bank Penalty Charges

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 unfair terms in the 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.