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My fear about the way in which the new clause is drafted is that, as a former banker, I could provide someone with such an account, but it would unfortunately not be accompanied by a cheque book; the holder would not be able to use a cheque card; there would be no arrangements for direct debits or standing orders; it would probably require a minimum credit balance of £100, but the holder would not have to do anything with it. It would yield minimum interest and, although the holder might not be charged for holding it, they might be charged for setting it up. The likelihood of anyone's holding one is therefore nil. We would have to be very detailed and prescriptive about the operation of such a
bank account. It would therefore be almost a recipe for price regulation, which one would nail to the wall, and everyone would have to follow it. That would destroy the whole concept of competition.
Yet I believe that there needs to be a basic bank account for people with low balances-those who have their wages paid in, and almost all the money goes out again during the month. They need a bank account, otherwise they cannot get paid. We need to find a way in which to implement if not a free account, a low cost account for those people.
There has never been free banking-there is no such thing as a free lunch. However, since the Supreme Court decision, my fear is that the concept of people not being charged-which is not quite the same thing as free banking-will diminish and that many more charges will be levied on accounts.
Mr. Tyrie: Does the hon. Gentleman agree that the key piece of information is not only the charge that will be levied, but the difference between the interest earned on base rates and the interest paid on that account to the customer? Until the customer has that information, he will always in a position whereby he can be taken to the cleaners' by his bank as it varies that rate of interest.
Mr. Breed: I agree. In a sense it has been allowed to happen because, for many decades, there was a feeling that the relationship between the account holder and the bank was one of good faith; an inherent feeling that the bank would be fair and act in good faith on the customer's behalf-perhaps even give them some good advice occasionally-and would not take people to the cleaners' every time they transgressed. When banks did the latter, it came as a great shock.
I suspect that many Members of Parliament have been approached by account holders who complained because they had miscalculated the day on which they would get their salary and drawn a cheque, thereby overdrawing their accounts by £10, £15 or £20. They then found that for that £20 transgression, they were fined £30 and another £20 for the letter informing them of that. In a day or three or four, a transgression of £20 had become £100, which was directly debited from an account. People were not advised that it would be debited; it was done automatically-the money was gone. By the time the letter arrived, the account holder was substantially more overdrawn than they ever anticipated, mainly because of the charges.
That compounding of the problem led to the complaints about charges on top of charges. The banks suddenly found that they could make all sorts of other charges for unauthorised things. Even two or three years ago, I know of someone who complained to a bank after banking with it for 25 years, and was told, "Very sorry, we don't want you banking with us any more. Would you kindly arrange to close your account in three weeks?" It was amazing. All the person had done was complain, and the bank had written a letter saying, "Hard luck if you don't like it. If you don't close your account, we'll close it for you." Banks' behaviour reached the height of arrogance, and people collectively said, "Enough is enough."
It suddenly became clear that such behaviour was happening everywhere, and the complaints meant that some people were refunded-sometimes after going to
the bank and thumping the desk, sometimes with the help of hon. Members. Then the refunding stopped because the complaints were so numerous that it was felt that the matter had to go to court. Many people waited for the verdict, but the case lasted for a long time. At first, the court's decision appeared to be in the complainants' favour, but now we know that it was not.
Many people feel that they have been cheated not only once, but twice. They feel cheated because they paid enormously high charges for unauthorised overdrafts-there is a difference between charging people legitimately for the work entailed and penalising them for unauthorised actions-and cheated again because the court ultimately decided for the banks, which were in pretty bad favour anyway.
We have got to a situation in which such good faith as there may have been has been totally dissipated-the public relations for the banks has been a disaster-and we must now get back to a transparent and obvious means of charging.
Mr. Breed: I have been banking with what is now HSBC since 1964. It is easy for me to say that it has been good to me because I worked for it for a long time, but I know many who feel the same as the hon. Gentleman's mother. They feel not only let down, but much worse. The relationship of understanding, good faith and everything else has completely and utterly gone. As I said, people feel cheated. They have paid out money that they should not have paid out. The fact that it was simply taken from them is also a problem. Back in the so-called good old days, we used to advise people that we were going to charge their accounts on a certain date. If they were terribly upset, they could at least come in to the bank before it happened. Now, people are told after their accounts are charged, which is the wrong way round. Some got refunds, but many did not.
Obviously, I support new clause 15, which was tabled by the hon. Member for Edmonton (Mr. Love), because it mirrors a proposal I made in Committee. I have reflected on what the Minister said in Committee. Of course, in some respects, he is right that new clause 15 is slightly more widely drawn, but that is not a bad thing, because it would send exactly the right message. It would mean that unfair charges are not sanctioned whatever they are levied by, be it a bank, insurance company or anything else. If charges are inherently unfair, they should not be sanctioned, and if the measure is widely drawn and captures products other than just bank accounts, that is all well and good. I see no reason whatever why we should allow unfair charges.
It seems that the OFT has put the white flag up, which means that unless something is done in the House, things are not going to change. As I said in Committee, I suspect that even if we passed new clause 15, it would be unlikely to be retrospective, which I think is sad, because people feel hurt and upset. The banks have got some real fence-mending to do. They must do an awful lot more for those people who feel they have abused their position in charging unfairly-extortionate amounts in some cases. The banks must review that, but
we cannot make them do so. New clause 15 would at least put the situation back to what we all understood it was, and to what would appear fair to most reasonable people, which is right.
I would like to support some aspects of new clause 9, tabled by the right hon. Member for Birkenhead (Mr. Field), who is temporarily not in the Chamber, but unfortunately, it would be completely circumvented by the banks. If they were asked to do what the clause asks them to do, they would circumvent it, so it would be a complete waste of time. However, as the banks are providing a service which is more of a utility now-having a bank account is a necessity in the daily lives of many who would not normally have had one-we must have a clearly understood, basic bank account, perhaps involving a minimum number of cheques or direct debits or whatever, so that people know that as long as they stay within a certain regime, they will not be charged. The account will not be free, but people will not be charged. There is a necessity for that. The terms and conditions of so many accounts these days run to three or four tightly printed pages, which is unnecessary, and we need them to be clear. We could have a much more basic tariff and a clear description of what an account will provide and what charges people would be expected to pay.
Finally, the real problem has been unauthorised overdrafts. People will ask, "Why should people who properly look after their accounts, make certain that they do not create an unauthorised overdraft and operate their account perfectly satisfactorily, be penalised or pay charges to cover people who do not have a sense of discipline in the operation of their accounts?" I have some sympathy for that. The banks need to be clear what they are going to charge, but customers must recognise that they have a responsibility for ensuring that their account stays within the tariff or agreement, and that should they go outside that, they leave themselves open to charges.
Mr. Hoban: The debates on new clause 9 and new clause 15, which was tabled by the hon. Member for Edmonton (Mr. Love), have been thoughtful. I do not wish to speak for too long, because much that needs to be said about the proposals has been said.
There is a superficial appeal to new clause 9, and to guaranteeing that there will be a free bank account for those who keep their account in credit and those who have a savings account that is in credit. However, the reality is that such accounts would not be free-there is a cost, as the hon. Member for South-East Cornwall (Mr. Breed) has indicated, and the question is who will bear it. In recent years, the cost has been borne by people who have been charged for having an unauthorised overdraft, perhaps with a significant penalty attached, but banks have also sought to build their margins on the sale of other products. All that happened because people use services in relation to their bank accounts that incur costs, which must be met from somewhere.
There is a need to be open and for people to recognise that there are many ways to skin a cat-an account may appear to be free, but the bank will earn income from the account holder to cover the cost from other sources.
For example, the interest that a person earns when their current account is in credit might be collected and retained by the bank-the interest that most people get on credit balances is fairly small, even when interest rates are higher than they are now.
The challenge that we face is ensuring that there is transparency about the cost of people's bank accounts-my hon. Friend the Member for Chichester (Mr. Tyrie) made some important points on that. If we are much clearer about the cost of bank accounts, we will move closer to genuine competition between banks for current accounts. In that case, people would move away from the false perception that their account is free and begin to look at what charges they might incur if, for example, they were to move their account from Lloyds to HSBC. That is a helpful position. We want increased competition in the banking market, as we said in proposals published in July last year. However, we recognise that for there to be competition, people need to be prepared to switch suppliers. The barriers to switching suppliers need to be reduced, and people need to know just how much they are paying in charges. If the right hon. Member for Birkenhead had tabled an amendment that would have increased transparency, I might have been tempted to support it, but I cannot support new clause 9, despite its superficial appeal.
As the hon. Members for Edmonton and for South-East Cornwall have suggested, we have been around the track on new clause 15 before. The Supreme Court's decision on the case brought by the OFT against some representative banks left us in an uncertain position. It did not really resolve the question whether the charges were unfair. There were three routes available to the OFT-to pursue another court case on some different grounds, as suggested in the judgment; to change statute, which the new clause would provide an opportunity to do; and to reach a voluntary agreement with the banks about the future level of bank charges, which appears to be the one that the OFT has opted for.
No one should be in any doubt that if the voluntary agreement does not work, legislation is an available route. I am not as sceptical as the hon. Member for Edmonton about the prospect of voluntary agreement on this issue-perhaps I am by nature an optimist, or perhaps he is more pessimistic or cynical. It is interesting to note that in the run-up to the Supreme Court judgment at least one bank started to shift its position on bank charges and proposed some lower charges for unauthorised overdrafts, and it also differentiated between cases in which someone had received a service-if a cheque presented had been honoured-and those in which the bank rejected a cheque, which incurred a lower fee because no service had been received. That suggests that the banks may be interested in reaching a voluntary agreement, and we should maintain the pressure on them.
Mr. Love: I agree with the hon. Gentleman that there is interest on both sides in reaching agreement. My point is that the two sides are so far apart and their interpretations are so different-and the commercial interests are so palpable-that reaching agreement may prove more difficult.
That is a reasonable view to take. The OFT and the banks will discuss the matter, and both sides need to recognise the pressure to reach a settlement.
It is in the interests of banks and consumers to reach that point and to avoid the continuation of the uncertainty that we have seen in the past few years.
Dr. John Pugh (Southport) (LD): The advantage of a voluntary code of conduct is that it allows for an appeal to the banking ombudsman. In general, banks pay attention to that authority, so it would take matters a little further on.
Mr. Hoban: Several people who complained about their charges referred the matter to the Financial Ombudsman Service, but the problem with the judgment reached by the Supreme Court is that the many complaints outstanding with the ombudsman and the county court system were left in limbo. The expectation, or the hope, was that if the OFT had won the case, it would have provided a framework for resolving the backlog of cases.
Mr. Tyrie: One concern, which may lead us to conclude that voluntary regulation would not be effective, is that if the market were functioning well, the most competitive banks would have worked out the numbers and would be telling the public that they were more cost-competitive than other banks that might appear to be charging less but that are in fact charging x plus y. The market is not transparent enough, and the incentive on the banks is not strong enough to provide it.
Mr. Hoban: My hon. Friend is right. This is part of the problem that relates to the point that I made on new clause 9. Until there is greater awareness in the market of the charges being imposed by banks and it is easier for customers to swap between banks, it is likely that the charging structure will remain uncompetitive. As part of enhancing competition in the banking market, we need more transparency and more competition. In our White Paper, "From crisis to confidence: plan for sound banking", we talk about some of the mechanisms that we could use to increase transparency and consider some of the initiatives taken in the US, where mortgage companies are required to produce information on charges in a standardised form that can be uploaded into a website to enable people to compare mortgage providers. A similar remedy might be appropriate in this market.
More work needs to be done in this area. A better functioning market would be an aid to reaching a voluntary agreement, but we should make it clear to participants that legislative solutions are a possibility if they do not make progress. We have also proposed that responsibility for consumer credit should shift from the OFT to a new consumer protection agency, which would bring the regulation of bank accounts within one home-at the moment, there is a split depending on whether an account is in credit or overdrawn. Our reforms would make it easier to bring the control of bank accounts within the remit of one body rather than two, which might make it easier to resolve this issue. Work is needed on both how to achieve a satisfactory resolution of the issue of unfair overdraft charges and how to increase transparency in the market and obtain a better deal for consumers.
New clauses 9 and 15 both touch on aspects of the charges payable by consumers for operating personal current accounts and savings accounts, and
indeed for financial services contracts in general. We have had a useful debate with some good comments, especially on the issue of transparency.
New clause 9 would require banks and building societies to offer at least one personal current account and one savings account free of charge for holding the account. New clause 15 would amend the Unfair Terms in Consumer Contracts Regulations 1999, which would allow for the assessment of the fairness of certain charges in financial services contracts. As has been mentioned, we discussed that point in Committee.
As regards free accounts, I understand the desire to preserve the current model of so-called free banking, which suits many customers well. But I question the merits of mandating by putting into legislation "free banking" practices that are already widely available in the market. I am also concerned by the good governance aspect-we should not lightly act to compel any firm to provide free services that may not cover its costs.
Mr. Tyrie: I was surprised that the Minister said that free banking suits many customers well. Is not the truth that there is no such thing as free banking? Those people who think that they are getting free banking are getting nothing of the sort and are not being served very well. The real gainers from free banking are, of course, the banks themselves.
There are currently 17 basic bank accounts available from the major banking providers. They are popular with low-income households, because there is no cost for everyday transactions, and they are all accessible at post office counters. I am proud of the fact that this Labour Government have made a great deal of progress in assisting low-income households and the financially excluded. The work that we have done on basic bank accounts is a major step forward.
I am concerned that forcing banks and building societies to offer so-called free services more generally could create a lot of unintended consequences and potentially have anti-competitive effects. If we restrict the ability to impose charges, incumbent firms will tend to generate revenue through lower interest rates or extra-cost voluntary options that were previously free. They might also restrict associated services and other mechanisms, which would cause consumer detriment. There may be elements of cross-subsidy in the current banking system, but most customers basically pay for the service in one way or another-I agree with the hon. Member for Chichester (Mr. Tyrie) on this point-such as through interest forgone or charges for ancillary services. Some pay currently through withdrawal penalties, overdraft charges, charges for bouncing a payment and so on.
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