Select Committee on Treasury Thirteenth Report

5  Operating basic bank accounts


62. Providing access to bank accounts will not ensure financial inclusion, unless those accounts are used appropriately and do not subject users to unsuitable terms and conditions. Which? suspected that there was "a significant difference between the headline figures quoted and the number of accounts that are actually being actively used by consumers who were previously excluded".[114] Derbyloans told us that

Possibly as many as 30% to 40% of our applicants will withdraw all but a few pence of their wage or benefit on the day it is credited and carry on using cash as before. All the ownership of a bank account has done is to add an additional step to getting access to their money and has produced no change in their financial behaviour or aspirations.[115]

Ms Whyley of the NCC argued that

the basic bank account model is not quite appropriate for people who have been financially excluded. It does not offer the benefits of financial inclusion which are going to attract people to start changing their money management style … I think the bit that has been missed out is talking to people who are financially excluded about what banking services they need, how they would like them to be delivered and how that would offer them the sorts of benefits that would attract them into banks to take those accounts out.[116]

Mr Crosby of HBOS told us that "in one sense" such comments were

valid criticism because basic bank accounts are derived from current accounts that were developed over many years. In another sense, I do not think it is because the core aspect of the basic bank account … is the lack of access to credit but with access to the money transmission system. That was never an original part of current accounts. In fact, a lot of investment had to go on to make that money transmission work. So I think the answer is yes and no, but hopefully, as the years go by, we will get better at tailoring basic bank accounts to the needs of those customers.[117]

63. The NCC suggested a number of areas where current terms and conditions were posing problems for low-income people operating basic bank accounts. These included problems with the direct debit system over the lack of access to weekly payments and disproportionate penalty charges; lack of counter access and longer cheque clearing cycles and banks appropriating money in basic bank accounts to pay other debts.[118] The NCC believed that "basic bank accounts need to be redesigned to meet the needs of the financially excluded".[119] They suggested that basic bank accounts should offer counter access at branches, a small penalty-free buffer zone to guard against unpaid direct debits, systems that recognise and fit with the weekly budgeting cycle, including statements and payment mechanisms; and automated payments that are triggered by money entering the account so that payments cannot be made without money to cover them.[120] Other improvements suggested by research conducted with low-income consumers were mechanisms that would help those on low-incomes to manage and control their tight budgets and provide clear information on the amount of money in the account and impending direct debits and warning consumers if they are about to go into the red.[121]

64. There remain questions about what will trigger changes to the terms and conditions of basic bank accounts to make them easier to operate and more appropriate for people on low-incomes. Mr Hoffman believed that there was some advantage in consistency of some basic features, but beyond that there are competitive features that some banks would add.[122] Mr Crosby believed that

a lot of the basic features will be common, [but] how do we in the end best serve these universal customers with products that are most tailored to their needs—it is to let market forces do it. I think it is about competition driving innovation, both in terms of the service [banks] provide and the features.[123]

65. The Treasury had previously consulted on whether there should be minimum standards for basic bank accounts, but this option was not pursued.[124] Financial inclusion will require more than the achievement of numerical targets for numbers of accounts opened. Survey evidence indicates that a significant proportion of basic bank account holders withdraw all their money in cash on the day it is credited and gain little benefit from operating a basic bank account. There needs to be a greater focus on ensuring that the terms and conditions of basic bank accounts are appropriate and useful for those on low incomes. We make a number of recommendations below and expect the Treasury, the Financial Inclusion Taskforce and the banks to discuss and take forward appropriate measures for their implementation.

Default charges and a buffer zone

66. Penalty charges applied by banks when funds are not available to meet a direct debit can result in serious short-term pressures on tight household finances. Table 4 shows the charges levied for failed direct debits and whether the basic bank account offers a buffer zone to prevent charges being incurred. The average charge levied is £34.

Table 4: Level of default charges and whether the basic bank account offers a buffer zone
Buffer Zone
Charge for unpaid direct debits
Abbey: Basic Account
Alliance & Leicester: Basic Cash Account
Bank of Ireland: Basic Cash Account
Bank of Scotland: Easycash
Barclays: Cash Card Account
Clydesdale: Cashmaster
Co-operative Bank: Cashminder
First Trust Bank: Basic Bank Account
Halifax: Easycash
HSBC: Basic Bank Account
Lloyds TSB: Basic Bank Account
Nationwide Building Society: Flex Cash Card
NatWest: Step Account
Northern Bank: Cashmaster - Basic
The Royal Bank of Scotland: Key Account
Ulster Bank: Basic Bank Account
Yorkshire Bank: Readycash

Source: FSA, Basic Bank Accounts - Your questions answered, p 7

Many witnesses compared the level of default charges with benefit levels.[125] For example:

  • Basic State Pension: £84.25 per week;
  • Personal allowance for income support for a person who is 25 or over: £57.45 per week;
  • Long-term incapacity benefit: £76.45 per week.

The average charge can therefore represent a large proportion of a low-income household's weekly income. Such charges could result in serious short-term financial pressures on tight family budgets, forcing them to cut back on necessities. NCC research had indicated that penalty charges were more likely to be incurred in low-income households with children, and especially single parents on benefit. They told us that

people on low incomes cannot afford these charges and they act as a disincentive to being financially included … Levying high charges on those customers who are least able to pay is clearly inappropriate given that the account is supposed to meet the needs of people on low incomes.[126]

Mr Barry told us that one of his clients "had £140 a month being taken from her account in bank charges" for non-payment of direct debits.[127] There is also an issue as to whether the level of such charges would meet the general test of fairness set out in the Unfair Terms in Consumer Contracts Regulations 1999. In assessing whether the charge would meet this test, the OFT would take a view of whether the charge reflected a reasonable pre-estimate of the net limited additional administrative cost which occur as a result of the specific breaches of contract.[128] In September 2006, the OFT announced that it was conducting an initial fact-finding exercise to examine the level of default charges on bank accounts and whether they meet the OFT's definition of fairness.[129]

67. Only one bank has cut its charge in the past year: Barclays recently reduced the default charges on basic bank accounts, from £30 to £15, to reflect the fact that "these customers have very low income or are on benefits".[130] Mr Hoffman explained that Barclays "took a pragmatic decision that because of the limited means of the typical cash card account customer we would reduce the fee to £15. We did the same for students because it is an entry level account, too. It was just a pragmatic decision recognising that it would increase the amount that we lose on these accounts."[131] Two banks—HSBC and Lloyds TSB—do not levy penalty charges on their basic bank accounts. Mr John of HSBC told us that

if you have three returned direct debits or standing orders we would have a conversation with the individual and see what the fundamental problem is. If we believe that there is really—if I use the word "abuse" I do not mean it in a threatening sort of way, but I think people have a responsibility to look after the funds they have available, and if I add on to it the ten pound buffer zone which we also give them, so there is a little bit of leeway there, then we have a conversation with them and we ask them to close their account.[132]

Other banks defended their level of penalty charges on their accounts. Sir Fred Goodwin told us that the charge was "Based on the costs we incur and an estimate of the number of such items there are likely to be over time … in common with a great many goods and services in the country, they have an individual price and the impact they have is relative to the wealth of the people paying them".[133] Unreasonable and excessive penalty charges are detrimental to those on low incomes and do not promote financial inclusion. We are not convinced that penalty charges of up to £39 are reasonable and accurately reflect the costs incurred by the banks. We welcome the actions of Barclays in cutting its penalty charge, and the approach taken by HSBC and Lloyds TSB, that do not levy penalty charges on basic bank accounts. We encourage other banks to explore these approaches or apply similar leeway such as not imposing charges for the first three times that direct debits are unpaid. We would expect the OFT to ensure that the level of default charges on basic bank accounts is examined as part of its fact-finding exercise into the fairness of bank default charges.

68. Several witnesses recommended the introduction of a small penalty-free overdraft for basic bank accounts to act as a buffer zone. This would allow for a small element of leeway and prevent charges being incurred unnecessarily. HSBC and Lloyds TSB currently offer a buffer zone of £10.[134] Nationwide told us that they offered a buffer zone of £30 and that this meant that "if a customer has £25 in their account and a £50 direct debit is being processed the payment will be honoured and no fee charged".[135] Mr Pomeroy told us that discussions with people on low incomes had indicated that such a buffer zone would be useful.[136] This position was also supported by the Economic Secretary to the Treasury and the Banking Code Standards Board.[137] There is broad agreement that a small penalty free buffer zone of £10 can help low-income households manage their commitments and avoid the charges and hassle associated with failed direct debits. We recommend that all basic bank accounts should incorporate such a buffer zone.

Direct debits

69. The NCC believed that "monthly direct debits, which require payment to be made on a set date do not meet the needs of many people on low incomes. Weekly, rather than monthly, budgeting remains their preferred option."[138] We put to the banks the proposition that basic bank accounts might offer weekly direct debits. They told us that the timing of direct debits was controlled by the originator (for example the utility company) that was billing the consumer. In effect, basic bank accounts offered the facility to pay weekly direct debits already, but it was in the hands of the utility companies as to whether direct debits were taken out weekly or monthly. Consumer groups and Professor Kempson have put forward the idea that banks could provide a system of automated payments, that were triggered by the receipt of money into the account.[139] This could ensure that payments would not be made without the money to cover them. It could also provide customers with a mechanism for improving access to affordable credit and to help low income households to budget properly. However, banks believed that such an approach could be impractical because the bank would have to tell a utility company that the money was not in the account before the direct debit was triggered and then store the direct debit instruction until the money was in the account.[140] A simpler method might be to allow greater flexibility of the direct debit date to coincide with an incoming credit, but again responsibility for changing any date would normally lie with the utility company. There is a compelling case for establishing a formal dialogue between the banks and utility companies to consider the extent of demand for weekly direct debits and how such demand might be met. We expect the banks to agree proposals for improvements to the direct debit system so that payments could be triggered by money coming into the account, although we note the complexities of the issues involved.

Counter services

70. We received evidence that some banks had begun to restrict counter access to basic bank accounts. The Treasury told us that they were

aware of recent moves by some of the banks to restrict over-the-counter access to basic bank accounts. The Government would be concerned if changes to the terms and conditions of basic bank accounts were such that the benefits of holding an account were eroded.[141]

Current information indicates that Lloyds TSB, Halifax, Abbey National and Alliance and Leicester do not allow basic bank account holders to use the counter.[142] This has the effect of providing a second class service to basic bank account holders, removes access to counter staff support and reduces opportunities to gain access to other financial services. Help the Aged have pointed out that lack of counter access can pose difficulties for the elderly and those who have trouble remembering PIN numbers.[143] We reproduce extracts from the terms and conditions from the two major banks that do not permit counter access below:

  • The Lloyds TSB basic bank account doesn't include: withdrawals from branch counters for less than £200 in any one day.
  • With [HBOS] Easycash, you won't be able to: Access the branch counter service when withdrawing less than £300.

71. Three banks that gave evidence, RBS, Barclays and HSBC, allowed counter access to basic bank accounts. Sir Fred Goodwin told us that it was "pretty basic stuff here, that if you give somebody an account then they should be able to use your facilities."[144] Mr Hoffman was clear that Barclays' basic bank account holders were not regarded as "second-class citizens" and were offered the same access to branch counters and ATMs as normal current account holders.[145] The two other banks we questioned on counter access suggested that, although the terms and conditions of their basic bank accounts did not allow counter access, in practice customers were not denied access to the branch network. Mr Fairey of Lloyds TSB told us that "At the moment our literature states that we do not encourage encashment at the counter under £200. In practicality, we do and we provide that service to customers."[146] Mr Crosby told us that HBOS's "cash card product is a card-based product … rather than counter-based, but having said that our social banking customers do enjoy access, in practice, to our branch counters because all our management have local discretion. So it is a mix-and-match situation."[147] Treating basic bank account holders like second class citizens by denying access to branch counters causes exclusion and reduces the opportunities for holders to become further integrated with the financial services sector. We welcome the policy of RBS, Barclays, HSBC and other banks that provide full counter access for their basic bank account customers. HBOS and Lloyds TSB told us that in practice they do not deny counter access to basic bank account customers. We recommend that they amend their terms and conditions to make it clear that they will provide counter access to such customers, although we would expect banks to continue to advise customers on the different ways of accessing their money and to provide practical assistance to customers in using ATMs or other automated services.

Cheque clearing

72. In the light of criticisms expressed in the Cruickshank report, the OFT payments systems taskforce is currently examining whether there is sufficient demand from and benefits for consumers and businesses in speeding up cheque clearance times.[148] Some banks currently require longer clearance times for cheques paid into basic bank accounts than their current accounts.[149] The BCSB found that five banks applied longer clearing periods for paying cheques into their basic bank account compared with their standard current accounts. However, the BCSB noted that staff were not providing a clear explanation of cheque clearing times and practical advice on what this actually meant in terms of when money would be available for withdrawal.[150] Mr Crosby said that HBOS had lengthened the cheque clearance time for basic bank account customers from four days to six days due to very significant levels of cheque fraud that were being suffered, and informed us that, by increasing the clearance time, HBOS had "reduced fraud levels by 80%".[151] We note that five banks currently apply longer cheque clearing times to basic bank accounts and that there is some evidence that such an approach has been successful in reducing fraud. However, longer cheque clearing times represent a significant disadvantage to customers and we recommend that the OFT payment systems taskforce specifically consider the issue of longer clearing times for basic bank accounts as part of its report on the cheque clearing system. That report should lay out a clear timetable to reduce the clearing times for cheques paid into basic bank accounts.

The right of set-off

73. Banks are able to take money out of a customer's bank account to pay other debts owed to the bank. For example, a bank could transfer money from a current account to pay a loan taken out by the same person. This is called the right of set-off, and there is no limit on the amount a bank can take, although the Financial Ombudsman Service has stated that banks should not exercise their right of set-off before giving a customer a reasonable opportunity to pay the debt.[152] Citizens Advice provided evidence to suggest that banks were using their right of set-off to remove money from basic bank accounts, even when a debt management plan has been agreed with creditors.[153] Mr Fortescue told us that the Banking Code guidance stated that "banks should leave the customer with sufficient money for day-to-day expenses, taking account of an individual circumstances. [The BCSB] is aware of instances where that has not happened; where the bank has grabbed all the money when it is paid in after the salary date … we have taken them up with the bank concerned and been able to rectify the situation."[154] We consider that banks should not exercise their right of set-off from basic bank accounts in cases where an individual repayment plan has been agreed. In other cases, banks should always leave consumers with sufficient money for day-to-day expenses. We recommend that the BCSB investigate this issue further and propose any appropriate changes to the Banking Code. We also consider that the fact that banks may exercise the right of set-off needs to be made much clearer to consumers in the literature issued by the banks and when consumers open bank accounts.

Cash budgeting

74. Mr Pomeroy observed that many people had an apprehension about opening bank accounts due to a fear that they would lose control of their budget. He told us that it was very clear that

someone who has been used to working in cash—seeing the cash there on the mantelpiece or in a jar or wherever it happens to be—is daunted by having the money go into an account. You cannot actually see it physically [so] how will you control it? The sort of features that these accounts need to have are features which assist in reassuring [customers] over control.[155]

The NCC noted that basic bank accounts can undermine previously successful cash management strategies.[156] Basic bank accounts should contain features that help people monitor their day-to-day expenses. These could include regular statements or the ability to check balances at Post Offices. We recommend that research be undertaken by the Financial Inclusion Taskforce into methods of helping communicate to basic bank account users the amount of money left in their account and any impending direct debits. We further recommend that the banks investigate innovative ways of accomplishing this through mechanisms such as text message banking.

Access to free cash withdrawals

75. In the previous Parliament, our predecessor Committee conducted an inquiry into cash machine charges. The Report arising from this inquiry noted that, as part of the agenda of promoting financial inclusion, it was important that those on low incomes had access to free cash withdrawals from their bank account.[157] Since that Report was published, a number of banks have made announcements to expand their provision of free cash machines into low-income areas. A working group, chaired by the Rt Hon John McFall MP, was established with the support of the Economic Secretary to the Treasury in July 2006 which is currently examining what mechanisms can be used to support the provision of free cash machines in low-income areas.[158] We welcome the action taken by the banks and await the full report from the ATM working group.

Survey information

76. While the BCSB has conducted regular research into the opening of basic bank accounts, they admitted in oral evidence that they had not conducted research into the problems and experiences of customers in operating the accounts. Mr Fortescue, Chief Executive of the BCSB, accepted that such research would be a good idea and later wrote to us accepting the view that more information was needed and promising to propose such research.[159] We recommend that the Banking Code Standards Board conduct research as a high priority into the experience of consumers operating basic bank accounts.

Broader targets

77. A strategy that simply looks at the absolute numbers of accounts opened will not deliver meaningful financial inclusion. The Government and the banks need to take a broader approach and ensure that basic bank accounts are useful and appropriate for those who were previously financially excluded. The Government must ensure that the most vulnerable are considered and given appropriate help and assistance to enable them to open and operate accounts. In the medium term, the Government should establish a more sophisticated goal which should take account of actual usage of bank accounts by those who were previously financially excluded rather than focusing simply on the numbers with access to such accounts.

114   Ev 502 Back

115   Ev 279  Back

116   Q 17 Back

117   Q 806 Back

118   National Consumer Council, Basic Banking, July 2005 Back

119   Ev 397 Back

120   Ibid Back

121   Presentation by Opinion leader research, Financial Inclusion Taskforce conference, 20 April 2006: see Back

122   Q 818 Back

123   Q 819 Back

124   HM Treasury, Standards for Retail Financial Products, January 2001 Back

125   Ev 279, 242, 397; Citizens Advice, Banking Benefits, pp 29-30 Back

126   Ev 397  Back

127   Q 27 Back

128   Office of Fair Trading, Calculating fair default charges in credit card contracts, April 2006 Back

129   Office of Fair Trading, Following success on credit card default charges - OFT turns attention to bank current accounts, September 2006 Back

130   Barclays, Corporate responsibility report 2006, p 11 Back

131   Q 831 Back

132   Q 835 Back

133   Q 833 Back

134   Ev 352, 369 Back

135   Ev 393  Back

136   Q 490 Back

137   Qq 980, 386 Back

138   National Consumer Council, Basic Banking, July 2005 Back

139   Ev 397; Kempson, Collard, Affordable Credit for low-income households, February 2005 Back

140   Qq 811-812 Back

141   Ev 342  Back

142   SAFE, Banking the unbanked: a snapshot, p 34 Back

143   Ev 333  Back

144   Q 816 Back

145   Q 761 Back

146   Q 814 Back

147   Q 813 Back

148   Office of Fair Trading, Second Annual progress report of the Payment Systems Taskforce, May 2006, para 1.7 Back

149   Qq 820-827 Back

150   Banking Code Standards Board, Survey of Subscribers providing Basic Bank Accounts, November 2005, p 14 Back

151   Q 823 Back

152   For further information see Banking: firms right of 'set off', Financial Ombudsman Service, Ombudsman news, Issue 40, September/October 2004 Back

153   Ev 241-242 Back

154   Q 373 Back

155   Q 489 Back

156   National Consumer Council, Basic banking: Getting the first steps right. Back

157   Treasury Committee, Fifth Report of Session 2004-05, Cash Machine Charges, HC 191 Back

158   HC Deb, 13 September 2006, col 2334W; Rt Hon John McFall MP press notice, "New cash machine working group will report to Minister", 4 May 2006 Back

159   Ev 205 Back

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