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With your permission, Mr. Speaker, I will now present a few of the questions that I asked the OFT then. Where is the fairness for consumers who will now have to wait until the High Court decision before being reimbursed? What financial protection measures are in place to safeguard consumers, as that court action means that the banks will be able to hold on to consumers’ money even longer? Among the many questions that I asked the FSA were these. Was there any consultation with an appropriate parliamentary Committee before
proceeding to grant a waiver? Why was a decision taken to allow banks that waiver while still allowing the contested charges to remain in place? Can the FSA confirm that the waiver will not affect charges being taken from account holders whose income comprises social security benefits? Finally, what protection is available to consumers who are exempt from arrestment in terms of section 187 of the Social Security Administration Act 1992 and section 45 of the Tax Credits Act 2002?
Since then, the banks have been levying excessive lending charges of up to and including £38 on customers who exceed their limit. That is probably 10 times the actual cost, which may be less than £3, and the practice has caused untold financial hardship to many people in my constituency and, I have no doubt, those in other constituencies.
Nia Griffith (Llanelli) (Lab): Does my right hon. Friend agree that the banks’ attitude to people such as my constituent, Alun Richards, who has been developing Tycroes business park very successfully, but now finds the banks determined to impose unrealistic conditions on him—in spite of complimenting him on his business plan—is very damaging to the local economy and is not helping the local area out of the recession in any way? Does he agree that as the Government have given money to these banks, we should see it coming through to help viable businesses to thrive as we all want them to in our areas and help us out of the recession?
Mr. Clarke: I very much welcome my hon. Friend’s remarks, and I assure her that in my constituency, many small businesses in particular take the same view.
Meanwhile, there is no moratorium preventing the banks from continuing to levy the charges I have mentioned, which I find completely unfair and also unnecessary. I have been very critical of the banks on this subject, as is evident on my website and my annual reports. My criticisms have also been covered in excellent local newspapers such as the Airdrie & Coatbridge Advertiser, the Kirkintilloch Herald and the Bellshill Speaker. These newspapers take a very keen interest in my activities on the issue of bank lending charges because they know how cruel, punitive and grossly unfair they are to our local people.
I am on record as saying, back in 2007, that this legal battle with banks
“has all the potential to become stuck in a judicial quagmire where Banks appear to have deep pockets to fund legal fees in an attempt to delay justice to hard pressed consumers”.
I note that the personal finance campaigner, Martin Lewis, agrees with me and is quoted as saying:
“The banks have used lawyers as a calculated weapon deliberately to delay claims. The High Court and the Court of Appeal have both ruled against the banks and the Court of Appeal did not want the banks to be able to appeal to the Law Lords.”
The law is very clear that bank lending charges are governed by unfair regulations; yet, he said that
“the regulator has put on hold consumers’ ability to reclaim charges.”
Peter Vicary-Smith, the chief executive of Which? said:
“It’s disappointing that nearly two years since this saga began, little has changed for the millions of consumers being hit with these charges.”
My concern at the time that this legal process was initiated by the OFT was that it could drag on endlessly—certainly beyond what is reasonable—and end up with the Law Lords.
Mark Durkan (Foyle) (SDLP): Will the right hon. Gentleman give way?
Mr. Clarke: I will but I hope my hon. Friend will be brief because I am under a time limit.
Mark Durkan: I thank the right hon. Gentleman for giving way. He has clearly reflected the very significant changes taking place in banking over the past couple of years, but one thing that has not changed is how this House deals with the issue of banking. Given the considerable degree of intervention and public ownership in the sector and despite the Trojan work of the Treasury Select Committee, this House surely needs to come up with some better device for dealing with banks in the current situation; perhaps having a specific Select Committee on banking would put manners on some of these proceedings.
Mr. Clarke: My hon. Friend has made an excellent point, and I am very glad that he has put his views on the record.
It seems to me eminently sensible to take appropriate action and prevent more customers from being overcharged. No other company would get away with imposing massive penalty charges, and the banking institutions must be pressurised into stopping this malpractice, as it is crippling the personal finances of so many hard-working people.
I have no intention of trying to influence the outcome of the Law Lords’ test case, but let me spell out the consequences for the banks if they lose. It will mean repaying millions of customers billions of pounds because the ruling must be retrospective; it will go back at least six years, and perhaps more. The Court of Appeal confirmed on 26 February 2009 the OFT’s view that unarranged overdraft charging terms can be assessed for fairness. The court found that those terms were not part of the core or essential bargain between consumers and their banks, and that therefore consumers had protection under the Unfair Terms in Consumer Contracts Regulations 1999. That is the judgment against which the banks are appealing.
For the past two years, the banks have enjoyed a bank-charges bonanza in that they need not deal with complaints. The banks have benefited; the losers are consumers and my constituents. I want to present the case for thoroughly decent people who, as a result of circumstances beyond their control, find themselves in a very difficult financial position.
One woman in Coatbridge has three children, is a single parent, and worked hard until recently she unfortunately lost her job. Within weeks she was hit by three £35 bank charges. She depends on state benefits, and however much she tries to obtain a remedy from the bank, it is likely that she will be banging her head against a brick wall. Another of my constituents was recently widowed. She experienced a difficult time as she made the adjustment. She lives alone, surviving on a meagre state pension. Last month, she inadvertently
became overdrawn by a few pounds when a direct debit—for house insurance—was returned unpaid.
On 13 May, the woman received a penalty of £35 for having the direct debit returned, and a further charge for an unplanned borrowing facility of £25 was added to her account. The bank requested that she return her account to credit, which she did by paying £72 on 21 May. After that financially punitive experience, she was advised by a friend to open an account with another bank, and she arranged to have her pension paid into the new account. However, the bank that she was leaving applied a further £60 in charges to her account. On 1 June, the bank refused to close that account until she paid the additional £60. That is indefensible; it is quite disgraceful. However, such cases of hardship—and there are many more—are all too familiar to Members, and to organisations that are active in helping people to deal with bank charges.
This is how financial hardship is defined by the Financial Services Authority:
“A complaint is considered when his or her income is insufficient to cover reasonable living expenses and meet financial commitments as they become due”.
When my constituents contact their local bank, the person at the other end is simply not interested. Banks may tell civil servants that that is not true, and advisers may try to persuade Ministers that it is not true, but I am implacably on the side of my constituents who are suffering hardship, and I believe their experience to be only too true. However, I accept that it is not enough to flag up the problem, so I want to recommend a solution.
I should like every bank to set up a special dedicated hotline so that customers in hardship can be dealt with immediately. In the present economic climate, although the Government are taking special measures to help people into employment or with their mortgages, banks too have a duty to provide a more responsive service for people suffering real hardship, particularly while the “waiver” is in place. I intend, with the support of other Members, to pursue the issue with the Financial Services Authority. However, I invite my colleagues in the Government to accept that the status quo is unacceptable, and to establish a better system for dealing with complaints about unfair bank lending charges for people suffering hardship.
The banks have dug themselves into a deep hole. So far, nearly 1 million people have claimed for the return of their unauthorised overdraft charges, but their cases are on hold. If the banks lose, the legal arguments should proceed to a key stage: a case to determine whether the charges were fair or not. It could cost the banks billions of pounds¸ so we can be in no doubt about their motivation to continue with the status quo.
On 26 February, an appeal by eight banks against a High Court ruling that a regulator could investigate the fairness of overdraft charges was thrown out. Sir Anthony Clarke, Master of the Rolls, dismissed the banks’ appeal, and told them that they should allow the Office of Fair Trading to decide whether their charges were fair or not. Four High Court judges had now reached the same conclusion on the issue of the OFT’s jurisdiction.
“We have unanimously concluded that the application should be refused,”
“The issues should now be resolved by an OFT assessment of fairness”.
He refused the banks leave to appeal further, but they decided any way to apply directly to the Law Lords for permission to appeal. Marc Gander of the Consumer Action Group said the banks’ decision to appeal further was “amazing”, and he added that, “They know no shame”. He also said:
“You’d have thought they would choose to come quietly and join the rest of society—it is astonishingly arrogant of these people”.
It is time the Government stepped in and said enough is enough. After all, when the banks went bust they were rescued by public money—substantial public money. The Government have rightly ploughed countless billions into saving the banks from collapse and helping to protect savers. The Government not only have the moral authority but also the financial leverage to leave the banks in no doubt that when the Law Lords announce their decision this must end.
I shall conclude by saying in all candour that hon. Members of all parties have much work to do if we are to regain the trust of the electorate following months of negative publicity. This evening, I hope that we will wish to analyse the bank lending charges scandal, and we will find that this punishes the poor in a manner that should make us all feel ashamed. It is time that we remedied this blatant unfairness.
8.56 pm
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): I congratulate my right hon. Friend the Member for Coatbridge, Chryston and Bellshill (Mr. Clarke) on securing the debate and bringing these important matters to our attention. I recognise the difficulties that can be caused by unexpected bank charges, especially for the most vulnerable and those on low incomes who are least able to bear them. The examples my right hon. Friend cited are characteristic of similar cases in my constituency, and we all have sympathy for those affected.
Members will appreciate that the question of bank charges is linked to wider issues about the banking system and the regulatory regime. I do not want to pre-empt any statements that may be made in the Treasury’s forthcoming paper on regulatory reform, but I will say something in general terms about what the Government want from the banking and regulatory systems in the future, before I come on to bank charges specifically, and the treatment of customers who may suffer hardship.
There has been a fundamental breakdown of trust in the global financial system. All of us—Governments, regulators and the industry itself—need to work together to rebuild that trust. That process will take time. There are no instant remedies or overnight solutions; it starts with an acceptance that mistakes have been made in the past, and a willingness to learn the lessons. Although I recognise the need to reform the financial system, we must also be careful to retain what works. We need to walk a fine line: there must be sufficient regulation to safeguard the public interest, but not so much that we stem the flow of credit and stifle the very innovation that can benefit us all.
Banking is, by its nature, about taking risks. The task is to manage that risk and ensure that the public interest is safeguarded. There is an unwritten compact between
the banks and the public. This relationship is important, and it is important that we get it right. The answer for today’s problems lies partly in the deregulation of global banking in the 1980s, which was followed by huge financial innovation in the 1990s. This, combined with low interest rates around the world—particularly in the last 10 years—set the scene for one of the biggest expansions, and one of the biggest crashes, of global credit in history.
I do not believe the answer is to divide investment banking from “core” deposit taking and lending. This creates a “narrow” versus “broad” banks divide. Some have suggested limiting the scale and complexity of banks; others have proposed a simple utility bank model. I will say more about this in a moment, but let me first come on to the narrower question of bank charges.
The Government are taking action on bank charges. The Office of Fair Trading is pursuing its test case against a group of banks about charges for unauthorised overdrafts and items that are returned unpaid. As my right hon. Friend pointed out, in April 2008 the High Court ruled that certain terms in the contract governing personal current accounts could be assessed for fairness under the unfair terms in consumer contracts regulations. That was upheld by the Appeal Court on 26 February 2009, and a further appeal was heard recently by the House of Lords between 22 and 24 June—a ruling is expected in the autumn. Subject to the House of Lords decision, the OFT has written to the banks with a preliminary view on the fairness of the charges and embarked on a data-gathering exercise to provide the material on which to base a final decision.
On 3 April, the OFT announced that it would streamline its investigation by focusing on the terms of three banks in particular. The aim is to progress the case in the shortest and most efficient way possible. The OFT believes that the terms of the three selected banks provide the best representative selection of all the banks’ unarranged overdraft charging terms, and therefore the outcome of this more focused investigation will be relevant to the assessment of other banks’ terms. The investigation will concentrate initially on the charging terms of Lloyds TSB, HSBC and Clydesdale, and the OFT has written to all the banks under investigation to outline that decision.
It should not be assumed that the OFT is more or less likely to find those banks’ terms unfair. The investigation into the other banks’ terms is merely on hold and the OFT has stressed that no bank’s terms have been given a clean bill of health. The OFT expects to reach final conclusions on fairness later this year, subject to any further legal challenges. Once the application of the regulations is clarified, customers will be able to pursue their complaints against the banks if the outcome of the case is in their favour.
I am concerned, however, that confidence in the retail banks cannot be restored while large numbers of complaints are on hold pending a resolution of the test case. One way to determine the fairness of the bank charges is for litigation to continue until it reaches a conclusion, which may take some years. An alternative negotiated solution could be in the interests of customers, the banks and the regulators. As we have heard, until there is a resolution the Financial Services Authority and the courts have decided that complaints about bank charges should be put on hold. The FSA has granted banks a
waiver from its rules about complaints handling in respect of charges, subject to a number of conditions. One is that complaints from customers suffering hardship will continue to be heard. The banking code commits the banks to identify and resolve situations involving a customer experiencing financial difficulty. The waiver is a matter for the independent regulator and it is subject to a number of conditions. For example, the FSA may revoke it if the duration of the test case is likely to cause undue risk to consumers or if no material progress is made in the test case without good reason.
Looking ahead, I believe there should be a new compact between the people and the banks. Put simply, people need to have confidence that when they open an account they will be treated fairly, their savings will be safe and they will not be overcharged. Opening an account should not expose customers to the risk that they will suffer detriment. It is a compact built on responsibility, fairness and choice, and it involves shared responsibility between the banks, the regulators, and bank customers themselves; fairness, whereby banks and financial institutions operate to benefit consumers, businesses and the wider economy, not just their shareholders or their employees; and choice, in properly regulated banking markets that are founded on competition, openness and efficiency.
Banks provide an essential service, but they are commercial organisations. Governments should intervene in the market only as a last resort, as intervention may trigger unwelcome and unexpected consequences, but Governments must none the less act to protect people when excessive charges or risk taking threatens them. Banks, and in particular their boards, need to recognise that their duty to shareholders is best fulfilled by acting in the interests of their customers and in the interests of not only some but all their employees. Banks’ boards need to focus not on short-term profits but on long-term wealth creation, which is best served by meeting the service needs of all their customers.
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