CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 804 -ii

HOUSE OF COMMONS

House of lords

ORAL EVIDENCE

TAKEN BEFORE THE

Parliamentary Commission on Banking Standards

sub-committee i

Panel on Scotland

Friday 7 December 2012

Frank McKillop and Gill Mathieson

Yvonne MacDermiD, Keith Dryburgh, Pauline Allan and MIKE HOLMYARD

Evidence heard in Public Questions 57 - 139

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Parliamentary Commission on Banking Standards

Sub-Committee I-Panel on Scotland

on Friday 7 December 2012

Members present:

John Thurso (Chair)

Lord McFall of Alcluith

________________

Examination of Witnesses

Witnesses: Frank McKillop, Policy and Relations Manager (Scotland), Association of British Credit Unions, and Gill Mathieson, Chief Executive, Grampian Credit Union, examined.

Q57 Lord McFall of Alcluith: Good afternoon, and welcome to this session we are having in Scotland. You will know that we are part of the Parliamentary Banking Standards Commission, and we were set up to look at the culture and standards in the industry. At the moment we are also looking at pre-legislative scrutiny in relation to Vickers and ring-fencing, but after the New Year we will be focusing a lot on culture and standards. We have set up a number of panels. In this panel we felt it was important to have a Scottish context, given it has a financial services industry and given the issues that have been involved in the banking crisis, so it is with that Scottish dimension element that we are here to see you. There is a big issue about the size of banks, the need for diversity, the need for engagement with customers, and therefore engagement at the consumer level is desirable for us. That is the reason that we are here today.

Frank, you are with the Association of Credit Unions and, Gill, you are with the Grampian Credit Union. If we could start with you, Gill. Tell us a bit about your organisation and then we will go on to Frank.

Gill Mathieson: We were set up in 1993. At that point we were a credit union for employees of the local authority, which was Grampian Region at that time. Since then we have expanded and we now cover the whole of the north-east of Scotland, as a live and work common bond. We currently have around 4,000 members, including junior accounts as well. We try to cover as many options as we possibly can. The majority of our members are still those in employment, and we are continuing to try to engage with businesses of all types to show people what credit unions can offer in terms of an employee benefit. That is where we are at the moment with our marketing and business vision.

Q58 Lord McFall of Alcluith: Frank, we hear the cry for diversity in the banking sector and the issue of mutuality and whatever else. What is the situation with credit unions at the moment? Is there an opportunity for them to expand or has that level of expansion been reached and it just has to be more professionalised now?

Frank McKillop: At the moment, there are roughly 400 credit unions across England, Scotland and Wales and 109 of them are in Scotland. The actual number of credit unions has been decreasing, and we would expect the number of individual credit unions will probably continue to decrease over the next few years with mergers and consolidation. The actual number of people using credit unions, the number of credit union members, has been increasing quite dramatically. It has increased by 225% in the last decade and we would expect that to continue.

Lord McFall of Alcluith: What is the number?

Frank McKillop: Currently, there is just over 1 million people use credit unions in England, Scotland and Wales; that is 900,000 adults and 125,000 juniors. Scotland accounts for a disproportionately large portion of that-280,000 adults and 40,000 juniors. We would expect that to continue growing. It has more than trebled over the last decade, and we would expect that to continue. At the present time the Department for Work and Pensions is undertaking a credit union expansion project, which has been called for for a number of years with cross-party support, with an investment in some of the back office and technological advances that credit unions would need to offer a better product range. The ambitious intention of that report is to have another million credit union members within seven years. The Credit Union Act was 1979, and the first credit unions in the west of Scotland were just over 40 years ago. It has taken us that long to get to 1 million and the intention is to get another million in seven years. We believe that if you invest in the modern products, which credit unions could offer and that consumers are looking for, then it is not out of the question that we could have another million members within seven years.

Q59 Lord McFall of Alcluith: Is there an image problem with credit unions in that they are seen as being for people who are not engaged in mainstream banking activities? If there is, what can be done about that?

Frank McKillop: I would agree that is the problem. It is often referred to as "the poor man’s bank", and it is the last thing we would want to be. In many ways it is an advantage and strength of credit unions that they are prepared to offer services to people that mainstream banks will not serve. Very simply, it is not profitable to make short-term, low-value loans to people of a few hundred pounds over a few weeks. It does not make you money unless you are one of the payday lenders that is charging thousands of per cent APR. Quite simply, the banks are not interested in serving that market because it does not make them money. Credit unions are prepared to serve that market because we have a co-operative ethos and we have a not-for-profit ethos. In order to do that sustainably we need to also be attracting savers with higher value savings and making higher value, longer-term loans, whether it is car loans, home improvement loans or mortgages. That cross-subsidising is something that credit unions are prepared to do. We do not just say "No" to things that do not make money. We will offer those services to lower income people, the lower value short-term loans, but we need to be in the market, or effectively competing with the same people as banks do, to give the car loans, the home improvement loans and the mortgages, in order to raise the funds and generate the surplus that allows us to make those loans to lower income people.

Q60 Lord McFall of Alcluith: Gill, do you have a problem with that image in your area?

Gill Mathieson: I think because our particular credit union started out within the local authority it was a slightly different state of affairs. We did get involved with the Department for Work and Pensions Growth Fund project as well. As Frank said, that has only been possible because of the cross-subsidy with the people that we already have as members, the people who can afford to repay larger loans. When we go out to visit people in workplaces or wherever it happens to be, we still come up against the problem of people saying, "That is really not for me". Actually, sometimes it is the fact that we are a credit union because people say, "Credit? No, no, do not do credit. Unions? Oh, no, thank you". It has absolutely nothing to do with the credit union but the two words side by side seem to bring fear into people sometimes. We work very hard at putting across the view that credit unions are for everyone, we are all about quality, we are all about inclusivity, but it can be quite difficult at times.

Lord McFall of Alcluith: If you have one problem with a name it is bad enough, but you have two.

Gill Mathieson: Yes, indeed.

Q61 Chair: Can I ask you about interaction with banks? First of all, do you use banks and how do you find the interaction with them? Secondly, are they competition? Do they get in the way? At the moment, what we are trying to do is to work out how to regulate banks, and that is the legislation, but thereafter to look at the culture and ethics of banks. How much are they friend or foe?

Gill Mathieson: Obviously we have to use banks, because we need them to put the deposits into and to get the money out of when we are paying out loans or withdrawals. I suppose we have a reasonably good relationship with the banks that we use, but we find in some instances that their internal regulations or internal systems can cause us problems. For example, as a credit union we do not hold cash in our office, so if people want to come in and take money out of their account, we have to issue them with a cheque, which they can take up to the local branch and cash. But because the local branch are now terribly anxious about things, they want us then to issue a letter saying that this is a credit union member and this is how much the cheque is for. Even though the person has photo ID and can prove who they are, they still need an extra confirmation and an extra signature. A lot of what they are imposing on us, so that we can use their services or give our members a service, is causing a lot of internal admin work for us.

Q62 Chair: Hence cost?

Gill Mathieson: Yes. We also use online banking quite a lot. We have had quite a lot of problems with one of our banks, but it has been their internal processes that have caused that difficulty. Sometimes what we find is that the bank has had a problem, which then creates a problem for us, which then creates a problem for the member, and obviously we are the ones in the middle and it is not really our fault. We try as hard as we can to keep good relations there.

In terms of competing with the banks, I think what Frank said is right. We do not compete directly, because at the moment we do not have the range of services that the banks have. We are currently working towards getting a current account, so that will give us a bigger opportunity. Also, we cannot do mortgages and we do not have credit cards, for example. We have certain people who have been members for years and have been very loyal to the credit union. They obviously recognise the benefits and the value of taking a loan with us or having savings with us, and they will continue to do that when we know they could go and get a loan from the bank as well, although perhaps not at the moment. That is the other side of things. We have found that we are getting more people coming to us for larger loans who are obviously getting offers of poorer rates from the bank, or they just do not fancy taking a loan with the bank.

Q63 Chair: How much of your customer base is composed of people who cannot be looked after by the banking system, and how much of people who are choosing to use your products or do business with you, because that is the way they like to do it, but they could go to a bank if they really wanted to?

Gill Mathieson: We have delineated what we would call financially excluded within the credit union.

Chair: That is what I was aiming at, yes.

Gill Mathieson: At one point, that was defined by the Department for Work and Pensions. Then, at the end of the Growth Fund project, they said, "You can decide what you would call excluded". We were looking at, for example, those who most likely would not be able to go to a bank and get a loan for £1,000. The banks would perhaps give you an overdraft for that or just say, "No, we are not interested" or perhaps offer you a credit card or something like that. If someone was coming along to us and saying, "We would like a loan for £1,000 or £1,500", we knew they would not get that at a reasonable rate from the bank, therefore coming to us makes them not necessarily financially excluded in the true sense but excluded from the banking system for what they wanted to do. Looking at that, probably about a quarter of our membership is in that category-they are using us in preference to the bank because the bank is not offering them what they want.

Q64 Chair: How many of your customers would be unbanked, if any?

Gill Mathieson: Probably in the region of between 5% and 10%.

Q65 Chair: It is a problem of scale but not a massive problem?

Gill Mathieson: The people that we have, who do not have transactional bank accounts, may well have a Post Office current account, which basically they are getting their benefits paid into but then they cannot use it for anything other than withdrawing money. What we have done for them is that we will get their benefit paid into us, and then they can withdraw the money from us because they are using our other services. We can also offer them a prepaid debit card that, although it has charges attached to it, you can still use at ATMs, you can use on the internet, you can buy goods across the counter with it, so it has a more transactional element to it.

Q66 Chair: Frank, is there anything that you know of, in what is happening in banking and the current legislation, which is a threat to you? One of the things we are brilliant at in Parliament is unintended consequences. We do it all the time. Is there anything we should be keeping an eye out for that would have a deleterious effect on what you do?

Frank McKillop: Probably the main concern for credit unions, since they came under the Financial Services Authority, is maintaining proportionality of regulation. Where the banks have misbehaved-or whatever the best phrasing of it is-and the regulator has had to take a harder line on that, credit unions have felt a kick from that. We felt a kick from that, in terms of the Financial Services Compensation Scheme and the pay-out that was required for the Icelandic banks and for Bradford & Bingley’s collapse. In the region of £20 billion had to be borrowed from the Treasury to protect the savings-

Chair: £20 billion?

Frank McKillop: I understood it was £20 billion that was borrowed from the Treasury to cover the Icelandic banks and Bradford & Bingley, just to protect those savings.

Lord McFall of Alcluith: Oh, yes. I understand.

Chair: Sorry, we both misunderstood the same thing. We thought that that was what you had had to stump up.

Frank McKillop: Not quite, but with the £20 billion loan and the interest payments on that, because credit unions were in the same depositors’ pot as the banks and building societies, that had an impact on the FSA levy that credit unions had to pay. Similarly with the FSA cracking down a bit on practice in the financial services industry as a whole, credit unions have felt a bit of a kick from that as well. Especially with the FSA splitting into the two new agencies, the FCA and the PRA, we would be keen to see credit unions treated proportionately, with recognition that there is a unique nature of credit unions. They are governed by unpaid voluntary directors who are elected by the membership. You do not have directors getting stipends and significant payments in that regard. They are governed by volunteers. Many community credit unions are still run by volunteers in operational positions and, of course, credit unions are run on a not-for-profit basis. The surplus that is generated is reinvested in the credit union or paid in a dividend to savers.

We would be keen for credit unions to be regulated proportionately and fairly. We are absolutely for regulation. It reassures consumers that their savings are looked after. It reassures potential members that a credit union is a trustworthy institution. It also raises the standards within credit unions themselves, which is something we very much welcome. We are absolutely for regulation but it has to be proportionate.

Q67 Chair: Do you have somebody who looks after you in the regulatory architecture? There are different market segments. Is there a go-to person or have you been left out of that?

Frank McKillop: Yes. There is a credit union team that deals with credit unions and mutuals.

Q68 Chair: How is the experience there? Are they willing to help?

Frank McKillop: Yes. They are helpful. I do not know if Gill has a different experience from the hands-on perspective. From the policy perspective, as an association the credit union team always have been helpful. There has been a bit of a staff turnover in that team over the last few years and with the splitting of the FSA that is underway at the moment. There are also resource issues with the FSA, as with many institutions, particularly when Northern Irish credit unions were brought under FSA regulation for the first time, back in April this year, given the size of the Northern Irish credit union sector. As I said earlier, in terms of the total number of credit union members in the UK, Scotland accounts for a disproportionate share, but Northern Ireland has an even bigger disproportionate pool, and there is an issue whether the FSA’s credit union team is equipped to deal with that given its staff resources. There is, however, an understanding there of credit unions and the uniqueness of credit unions. I do not know if there is a different hands-on experience, Gill, from your perspective.

Gill Mathieson: Yes. That is right enough. We have always had help when we have asked for it, so that has been good.

Q69 Lord McFall of Alcluith: You mentioned about the credit unions staffed by unpaid volunteers and directors. Is there an issue of professionalism there and do you need to upskill? Is that something you are taking seriously?

Frank McKillop: For the people who come forward to volunteer with credit unions, there is extensive training that is made available through our pool. We take pride in the contribution credit unions make to employability, in terms of helping people who may be out of work and struggle to find work. They can volunteer in a credit union, be trained up and develop skills that are then transferable to the paid jobs market. But we are realistic, we would like to diversify the credit union membership and diversify the pool from which we draw credit union directors. There are skills that we would be looking for on credit union boards. Sometimes even some of the bigger credit unions have had to do advertising in newspapers, trying to get people to come forward who perhaps have a wider skill set. Perhaps especially where a credit union has been built on a public sector common bond, you might have an awful lot of people with similar skills that come forward for the board. It is trying to attract people who have particular accounting skills or any other skills that you are looking for. I think we certainly need to diversify the pool from which we draw directors.

There is a problem if people are looking for stipends or fees. Credit unions do pay expenses to directors, especially where travel and other expenses are incurred, but it is a matter of attracting a high-quality director. I am not saying we do not do so at the moment, but having that diverse range of skills is more of a challenge for a lot of credit unions. It is partly why I think we would expect that consolidation of credit unions. It is a lot more difficult to get 400 high quality credit union boards than a smaller number, which may be part of the influence on that.

Q70 Lord McFall of Alcluith: If you got that, do you think you could engage in a step change with credit unions in terms of attracting more people in? You said you want an extra million members in the next seven years. Is that contingent upon this developing professionalism?

Frank McKillop: I think so, and the product range is a part of that as well. Within that million, the DWP is keen for credit unions to serve the under-served. You mentioned people who are unbanked. The DWP report identified 1.4 million people that they saw as unbanked. They identified about 7 million people who could benefit from credit union membership who currently do not. While a part of that would rightly be serving people who are under-served at the moment, who do not have a transactional bank account, who are perhaps using high-cost lenders at great detriment to their own financial wellbeing, as I said earlier, it is really important that we also attract people to credit unions who might be perfectly able to use banks. At the moment credit unions can compete quite well in that space. That same DWP report commissioned some research by Experian, which found that for loans up to £2,000 credit unions were the best deal on the market. If a credit union can hold the interest at 12.7% APR, then that goes up to £3,000 where credit unions are the best in the market. Glasgow Credit Union, which is the biggest credit union in Britain, did some research recently with their £3,000 loan over 36 months, which they charge at 12.9%. That is actually better than you could get for that loan from any of the banks at all. So credit unions compete quite well. Not only is it a much better deal than the high-cost lenders for the short-term, low-value loans but credit unions can compete in that space as well.

As Gill mentioned, in terms of current accounts and mortgages, currently 24 credit unions out of 400 offer current accounts across Britain, and there are 36,000 people who have a current account with a credit union now, which again is a figure we would expect to increase as that becomes rolled out. At the moment the four biggest credit unions in Britain can do mortgages as well. Out of a pool of 400 credit unions that is a drop in the ocean, but we have to be realistic and in the 21st century members are looking for internet access to their savings and their accounts. They are looking for mobile phone apps so that they can check their balance and do transactions on the move, and credit unions have to offer the product range that people want. We cannot lecture people that savings and loans should be all they are looking for, and a collection point that is open for a few hours a week. We have to move with the times if we are going to compete. If we are going to have 1 million more members, we have to be attractive to people of all income levels and respond to all opportunities and options that they have. They have to see credit unions as an option that is viable and attractive alongside banks, or superior to banks in some products.

Q71 Lord McFall of Alcluith: Gill, your credit union, how do you go about deciding on granting credit and at what price? Could you take us through some of those issues?

Gill Mathieson: Yes. In our loan policy we have eligibility criteria that we have put together, where people can start off by looking at that and seeing whether or not they are eligible for a loan, so you have to be over 18 and so on. Within our credit union we tend to get people phoning in and asking for a loan figure. They will phone in and we will speak to them, find out what they want and give them an idea of how much it is going to cost in terms of a repayment. If that sounds okay to them then they complete loan paperwork and send that in with supporting evidence, which are bank statements and payslips if they are working. We then take that and do a credit reference on it, so we are trying to mitigate all the risks as far as we can. If there is information that is missing on the forms we will go back and speak to the member again. We cover a wide geographical area, so it is quite difficult to get people to come into the office to sit face-to-face with them. We have staff in the office who are trained to assess loans. We do that based on the information the member gives us, the record that the member has with the credit union currently and the credit reference. All these come together and give us the information to make a decision. If we decide to refuse a loan, we will certainly tell the member what the reason is. If we decide we can only partly approve a loan, for example give a reduced amount because it was not going to be affordable at the level of money that they were looking for, then we will offer a reduced level of borrowing, and basically that is it.

We have different loan products. The very low income stuff, which Frank was speaking about-the loans of £250 or whatever-we charge at our maximum rate, which is 26.8% APR, because even at that you are not making any money on it. The cost of putting out a small loan like that is exactly the same as putting out a larger loan, and this is where the cross-subsidising comes in. It is a similar process no matter what the size of the loan is. We look at all the information and then make a decision.

Q72 Lord McFall of Alcluith: Do you have a maximum loan?

Gill Mathieson: £15,000.

Q73 Lord McFall of Alcluith: What is your default ratio like?

Gill Mathieson: Currently we are just above the national average: 5% of our loan book is in default. That changes proportion if you look at the smaller loans. These are particularly the ones where people are paying in on benefits because, as you will understand, some benefits come and go, like Jobseeker’s. They can be on it and off it. That loan book is running at about 15%, which is quite considerably higher.

Q74 Lord McFall of Alcluith: Do you have any concerns about universal benefits coming in?

Gill Mathieson: Yes, absolutely. We are trying to work at the moment with our local housing associations, because if we take people’s benefits in we can then distribute them back out. We are looking at budgeting accounts and those sorts of things with the housing associations to ensure things like housing benefit gets paid back. The big concern we have about universal credit is just the amount of money people are going to be asked to handle once a month, where at the moment they are used to budgeting on a weekly basis. I can see some real disasters waiting to happen there.

Q75 Lord McFall of Alcluith: We were talking to banks earlier and one or two comments were made in that area. I suppose access to the internet as well, which is required, is a big issue.

Gill Mathieson: To apply for things. Yes, that is a huge issue because it is assuming a lot of people’s abilities and knowledge of how to fill out forms. We know how badly people fill out forms sometimes, even well educated people.

Q76 Lord McFall of Alcluith: I was very much involved and instrumental in getting up a local credit union many years ago, and a number of my friends stayed in it. What came across to me from their conversations was the relationship angle, that they had a more intimate relationship with people. Is that realistic or is that perhaps having rose-tinted spectacles looking at that? You have to be professional at the other end.

Gill Mathieson: Yes. That is realistic, because I suppose it is having a small membership or not dealing with millions of people like the banks do. You do know people on a first-name basis, and you do tend to know a bit about their history and what is going on with them. That enables people to come to you and tell you, "Look, I am struggling with this so can I renegotiate my loan?" or whatever it happens to be, "Can I take money out of my savings because I need to pay the car bill?" or whatever it is. They know they are going to speak to somebody and they know they are going to have someone listen to them rather than just say, "No, that is against policy" or whatever. We do try to do things differently, and we do try to take into account people’s circumstances. I have to say that we do put the credit union membership as a whole at the heart of everything, so if it is going to be detrimental to the whole then the individual may not be put at the centre of things.

Q77 Chair: Coming out of all that is one question that is around the relationship between credit unions, money advice and educating people. It seems to me that you are at the front end of dealing with people, whether it is the unbanked or whether it is people who are not used to using large amounts of money in one hit once a month and budgeting through the month. How much is that part of your work, and how much should we be looking to try to reinforce and help what you do to achieve the policy goals that we have?

Gill Mathieson: We would like it to be more a part of what we do but I think, along with a lot of other advice agencies, in terms of having the funds, whether it is to employ someone to act specifically on budgeting advice or that sort of thing, we do not really have the resources. Whereas we try to do it on an individual basis, as and when we can, it does not form a major part of what we do on a day-to-day basis. It is more when it needs to be done we do it. We do have a central referral agency in Aberdeen, which we can refer people through if we think they need debt counselling or other types of benefits, checks and things like that.

Q78 Chair: This may be one for Frank. Credit unions are a wonderful hidden asset in a way that Governments of all complexions really ought to be trying to use to tackle the problems that we have all identified we want to tackle, namely helping people to understand and budget their money better. What could we do? You have John and me onside-there is no problem there-but when we go back what should we be saying to colleagues in our report? Christmas is coming: what is your ask?

Lord McFall of Alcluith: May I add to that, Frank, because next Thursday in the House of Lords there is a debate on credit unions. I will sign up for that if you send me a brief on it, so tell us what to say.

Frank McKillop: Yes. We will certainly get a brief put together for that. I have mentioned the proportionate regulation. A major step that would make credit unions more widely available would be a partnership with the Post Office network. Hopefully, it is something that would come through if the technology is put in place, if it is funded through the Credit Union Expansion Project by the DWP, which is out for tender. Various proposals have come in for that but we will know more in due course.

Q79 Chair: My memory is that the Federation of Postmasters and Mistresses are actively lobbying for that. Are you saying that might be a preferred partner?

Frank McKillop: Yes. There are benefits on all sides there. Hopefully it would increase the footfall in post offices, which is obviously a concern for the federation. It would also make credit unions more widely available. I think the current figure is still 11,500 post offices across Britain, and roughly 1,300 of those are in Scotland. If every single one of those became a credit union collection point, effectively, fully staffed by Post Office staff that would be-

Chair: And that is footfall for the post offices, so it is a win-win.

Frank McKillop: Exactly, and I think that is understood on all sides. Various other stakeholders, like Consumer Focus, have been very keen on the idea as well. That would be a major step forward if that was to come through, in terms of making credit union services more widely available, possibly for Grampian and for the Hi-Scot Credit Union up in the Highlands and Islands that covers the Western Isles, the Highlands and Orkney and Shetland, as you are probably familiar with.

Q80 Chair: We don’t want to include Orkney and Shetland. They are a dodgy lot. Stay on the mainland.

Frank McKillop: As you are probably more than familiar with, it is not easy for everyone in that area to get to the office in Stornoway. There is already a great partnership throughout those regions with the housing associations and local authority offices, which serve as collection points. If the post offices in those rural areas were also credit union collection points, that makes a big difference to how those credit unions could operate, as well as being relevant to credit unions in the more urban areas around the country. That would be a great step forward.

You mentioned the welfare reform challenge. Credit unions are obviously a bit concerned about how this might affect people. There is a major financial education issue there but-as Gill has alluded to-there is an opportunity there for credit unions to offer budgeting accounts, which could help people out. Again, we cannot get painted into a corner where credit union services and resources are being channelled entirely towards people who are on benefits, if we do not also have the opportunity to recruit our membership more widely, which makes serving people on benefits sustainable. When we talk to housing associations, we cannot just take on the tenants who are on benefits. We would like the housing association to sign up everyone who is a tenant, including the ones who are working and doing quite well for themselves, and the staff of the housing association. Let us get them all involved in the credit unions, so that we can serve the people on benefits.

With welfare reform on the horizon, the associations are understandably concerned about losing income in terms of rent payments being in arrears. The credit unions are well placed to offer that sort of budgeting account where the money can come directly and the universal credit payment can come directly to the credit union. They can ring-fence the amount for the housing association, and other utilities and bills can be ring-fenced and withdrawable. Whether through a credit union current account or a credit union prepaid debit card, they could withdraw the amount that is theirs to spend as they see fit, which would be a big help with budgeting. In some ways it might be seen as contrary to the purpose of universal credit, but from research a lot of people are quite happy with that being the case. They are quite happy that money that is not theirs to spend is ring-fenced. In many ways that is a reasonable budgeting decision, "I don’t want to have the option of spending my rent money. I would rather it was kept aside and paid directly by the credit union to my housing association". I would say that is responsible budgeting if you choose to do that.

Credit unions are well placed in that area, and probably besides the bigger diversity of business models in the financial services sector. We very much see credit unions in this country doing what they have been able to do in places, like Australia, Canada and the US where they make up such a big part of the financial services sector. In the USA it is felt that credit unions have helped keep the banks honest. At the present time, the Australian Government regards a stronger credit union sector as something that will put a competitive pressure on the banks in Australia to perhaps change some of the ways that they operate. So we would certainly be keen to see credit unions encouraged in that regard, and would see a bigger credit union sector as having an advantage for the entire financial services sector in that way.

Chair: Thank you very much.

Q81 Lord McFall of Alcluith: Frank, the issue of a step change for credit unions, we really need that and it is how best to go about it. The point that you made about post offices is very good. I think it was just last week that the new Moderator of the Church of Scotland was down at Westminster, and I had dinner with him, along with others, on the evening he was down. Given the economic situation we have now, he is keen to try to come up with initiatives in this area, and that is what our conversation was about that evening. An institution like the church is there for people with less income, but there are a lot of people in the churches who have high disposable income. If you get institutions like that involved in it, then you can have that step change economically but also socially. How could you go about something like that? What I am saying is-I am giving you some homework to do after here-contact the Moderator, Albert Bogle, tell him I spoke to you and then see if he can take it forward, because I think it is in your interest and the interests of the country. Give me your views on that before you contact him.

Frank McKillop: Certainly we will be in touch with him. The Church of Scotland published a report, at last year’s general assembly, that Professor Charles Munn had been heavily involved in.

Lord McFall of Alcluith: I was on that committee.

Frank McKillop: Again, it was very favourable towards credit unions and recognition of what credit unions can offer. In terms of churches being involved in bringing the entire community into a credit union, that very much tallies with the Irish experience through the 1950s, 1960s and 1970s, where the church-especially in that case, the Catholic Church in Ireland-had been very involved in getting members of the parish who were on higher incomes to save, so that the money was there for members of the parish who needed to borrow at more ethical and affordable rates than were available elsewhere. It certainly built that sort of community atmosphere that many of the Irish credit unions have as a great strength. Replicating that in Scotland or in Britain has always been a challenge. It has been tried and it has not always worked, but perhaps the banking crash in 2008 has emphasised the importance of an ethical question. They had the Move Your Money day in the USA that was massively successful, with people moving their accounts from banks to credit unions. There has been a Move Your Money movement in Britain as well. Although, as we mentioned earlier, credit unions in Britain are not quite at the same full service level as credit unions in other countries. I think that ethical element is important to people. The Co-operative Bank has had particular success with its ethical policy. It has attracted a lot of new business, because people do care how their savings are used by the bank that they save with. So, certainly, the ethical argument is there and there is mileage in that. However, when push comes to shove, we also have to have the product range and the professionalism of service that anybody would be looking to.

Q82 Lord McFall of Alcluith: Whoever I have spoken to in the UK Government and the Scottish Government is interested in this. They want to give it a kick start. Isn’t that right, John?

Chair: Yes.

Lord McFall of Alcluith: DWP have been good on that. Everybody I have spoken to in the Scottish Government is keen on that as well. Is there not a way of working, say, with the churches and the Government, and possibly get an economist to look at it and give a plan, so that there could be some way forward in this and that would achieve your step change?

Frank McKillop: Yes. It is getting the message out there. We started off talking about the image problem of credit unions as the poor man’s bank. I think it is getting the message out there that credit unions are genuinely for everyone, that people of all income levels can use a credit union and should be encouraged to. It is certainly something that we would be looking for. We have lobbied the Scottish Government and at local authority level to encourage their employees to join a credit union. Perhaps you need some sort of high profile figure who would be at the top of that saying, "Join a credit union. It is not just for people who are not able to use banks. It is for everyone. There is a service that everyone can benefit from now". It is that sort of publicity that we need. Champions in the media, the press or various workplaces are valuable in that regard, and it is something that would be helpful to get over that image problem.

Q83 Lord McFall of Alcluith: If you contact the Moderator that is a good start.

Frank McKillop: I will do, yes.

Q84 Lord McFall of Alcluith: Gill, before you leave give us a few of the success stories, put a human face on this for us, because it is not impersonal. There is a very personal element here. What have your success stories been and what type of stories are those?

Gill Mathieson: They range from the sort of people who come in desperation looking for money to pay off their rent arrears because the sheriff officers are going to be on the doorstep the next morning to evict them. We have had people in that position where we have been able to take a decision that they obviously would not have had from a bank, saying, "Right, we will pay your rent arrears" that kept the roof over their heads, the children stayed at the same school and that sort of thing. We have had from that to people who have been saving up for years to buy a horse, real wide-ranging things. The best things are when people come back to us and say, "I have been really pleased with what you have done for me, the service that you have given us. I wasn’t expecting it to be as easy and as quick and as friendly as it has been". We give people loans for all sorts of things. People save for Christmas and they came away and say, ‘That has been a great Christmas because I have been able to save with the credit union and it hasn’t cost me an arm and a leg in credit card bills next year". It is all about people. We have people who come and sit in the office and their dogs are barking outside, and we are friendly with the dog as well as with the person, so it is a really nice place to work.

Lord McFall of Alcluith: Do these people stay with you?

Gill Mathieson: Yes. Not literally, thankfully, because the dog would keep barking.

Lord McFall of Alcluith: No, but return customers I mean.

Gill Mathieson: Totally returning customers, yes.

Q85 Chair: Good. Frank, do you see an opportunity for credit unions having a complementary relationship with mainstream banks, rather than just a competitive relationship? Would that be in the interests of both?

Frank McKillop: Again, it is this idea of a diverse financial services sector. There is diversity in the credit union movement even, as we have just heard. I do not think too many Dalmuir Credit Union members would be buying a horse, but we have that diversity across Scotland and across the country in terms of people who use credit unions. I think a diverse credit union movement within a diverse financial sector is beneficial. We spoke earlier about the relationship between banks and credit unions. There are some good relationships there. The Co-operative Bank provides the back office for the credit union current account, which is on a commercial basis. Clydesdale Bank is involved in the back office of the credit union prepaid debit card, which again is on a commercial basis but there is provision there that comes through their services. Similarly, the likes of Barclays and the Co-op Bank and Santander have sponsored various research and events that credit unions have been involved in. So I think there is recognition from the banks that credit unions have a role to play.

Whether they see credit unions as filling a gap where banks are not serving people, whether there is an enthusiasm for a greater diversity in the financial services world, where credit unions would be offering current accounts that are highly competitive, savings that are competitive-as they already are in many cases-even mortgages and lending that is competitive with the banks, whether there is an enthusiasm for that I would not know. From a credit union perspective, we do not want to abolish banks and have credit unions everywhere. We recognise that there is strength and diversity of the movement. In countries like the USA, Canada, Australia, Poland and Ireland, where you have big credit union movements, I think the entire financial services sector in those countries benefits from that. Credit unions have this ethical basis, they have the member focus, the customer focus of the way that we deal with people that perhaps commercial banks could learn a bit from. Similarly, commercial banks have innovation in products and technology that credit unions are perhaps not so quick to have. We can learn from that, and we are learning from that in terms of providing the services people are looking for. If you have a strong mutual sector, a strong credit union sector and a strong commercial banking sector, they can learn the best things from each other and benefit from that, and all consumers would benefit from that were it to happen.

Q86 Lord McFall of Alcluith: You mentioned the Dalmuir Credit Union. That used to be in my constituency and it is a sizeable entity now. Perhaps you can put some facts and figures on it for us. That was largely established because of one woman, the late Rose Dornan, who just kept at it for years. She was a fantastic example of a social entrepreneur, so the opportunity for social entrepreneurship in a credit union is alive and well and I think Rose was a terrific example of that. The Dalmuir Credit Union is sizeable now.

Frank McKillop: Yes. I think they have well over 6,000 members, perhaps even more than that. It did not have the benefit of an employee-based common bond or a local authority common bond. It was purely community-based and word of mouth, going round those communities over the course of a number of years. It has built up to one of the strongest credit unions, with its own premises near Clydebank train station and the shops there. It is one of the best community credit unions in the country, a great example. It is a strength where you have that tremendous leadership in credit unions. It can also be a weakness because we do not have 400 Rose Dornans, unfortunately. Sometimes when you have a credit union that is based around one personality it can be detrimental to that credit union itself, let alone the wider movement. Again, I think it is broadening the pool of people that we can attract to credit unions. Besides Rose, we have a number of great leaders in the credit union movement, including Gill, but we can always do with more. If we can diversify the range of people that we attract to volunteer in credit unions, to come on to credit union boards and to work in credit unions, as the sector expands, the more talent we can attract to the sector the better.

Lord McFall of Alcluith: Gill, I will include you in that social entrepreneurship. It is very important. I do remember when Rose was dying she was in St Margaret’s hospice, but she called me in to tell me what was wrong with the Treasury consultation paper on credit unions just before she died. That is what you call commitment. She was a dear person. We have learned a lot today on that. Hopefully there is a little agenda for yourselves when you get back. We will continue this work and, Frank, I certainly look forward to that briefing before next Thursday. Gill, all the best for your credit union and thanks for giving us your experience.

Gill Mathieson: Thank you.

Chair: Thank you both.

Examination of Witnesses

In the absence of the Chair, Lord McFall of Alcluith took the Chair.

Witnesses: Yvonne MacDermid, Chief Executive, Money Advice Scotland, Keith Dryburgh, Social Policy Officer, Citizens Advice Scotland, Pauline Allan, Money Advice Co-ordinator, Citizens Advice Scotland, and Mike Holmyard, Money Advice Consultant, examined.

Q87 Chair: Good evening, and welcome to this session. John and I are part of the Parliamentary Banking Standards Commission. We were set up to look at the culture and ethics in standards of banking, among other things. We are focused in our work largely at the moment on the pre-legislative scrutiny, the issues relating to Vickers and how banks are to be structurally arranged in the future. We will be emphasising exclusively the standards and culture aspect in banking. In that we want to explore what banks do just now, what they do not do, what they should not do, how they engage with people, those that they have not engaged with, how we can make a more inclusive banking sector, and perhaps fundamentally looking at the question of what are banks for and how they should serve society. Given that you are at the sharp end, working with and serving society every day, we felt it would be good to have your views on that for the record. Sometimes in parliamentary exchanges, parliamentarians focus on the institutions, and we forget about the customers or forget what the consequences are. That is the purpose of this session tonight.

Perhaps I will start with a question. Any of you can come in. It is for you tell us what we should be thinking on here. That aspect is important. You deal with a large number of people who are excluded from the banking sector. Perhaps nowadays you can say that people who are excluded financially are also excluded socially. How do we get more financial and social inclusion? Is it right that banks have to serve interests that are perhaps unprofitable, or is there a way a bank serves the community that does not necessarily need to be unprofitable?

Yvonne MacDermid: First of all, Lord McFall, it is important that everyone in society does have fair access to services. We particularly see issues around undischarged bankrupts, and I am aware of the Insolvency Service’s paper today, which is welcome, but I do think it is really important that that is inherent, and we have legislation going forward in Scotland with regard to bankruptcy that focuses on financial education, and it is so important that that is taken on by the banks. I think it is really about access to the accounts. You will know well the rural and island communities in Scotland, where people are not getting access to choice at all and in some cases they have to travel many, many miles to get to a bank. We have people now who are being encouraged, through the new legislation that is coming, to take responsibility for their affairs. If they cannot get a bank account because they are undischarged bankrupts, what kind of message does that send out to people? If they are not able to do that, how can they be helped then? We are trying to encourage them to be responsible. At present there is one bank that does not have the coverage of many of the banks in Scotland, and people are struggling to try to get a bank account. I think that is a big issue for us.

Q88 Chair: What did you say about one bank, Yvonne?

Yvonne MacDermid: Barclays is the one that does, but unfortunately, as you know, Barclays does not have the branch network in the way that the other banks do, and I think they need to have more encouragement. We used to have far more of the banks. Again, because of the digital divide in Scotland and the digital exclusion of people, if they do not have access to a computer or cannot get into a bank to be assisted to make an application, they are really struggling to get access.

Pauline Allan: The other thing is low income clients at the moment can get a basic bank account from the Post Office. Of course, that does not allow them to do any direct debits or have anything taken off the account. With the new universal credit coming in, there is going to be more need for direct debits coming off. It means that low income people, people on benefits who have a Post Office account, are going to have to try to find a bank account that they can use properly and have direct debits and so on taken off. There is going to be more and more need for access to bank accounts for clients who have only used a basic account previously.

Q89 Chair: What should we be thinking about here and perhaps recommending?

Yvonne MacDermid: Encouraging more of the banks to have products. Of course I am aware that there are cases where people will be over the limit and end up with overdraft charges, which takes us into another discussion. But we certainly need to be trying to encourage the banks to look at the cross-subsidisation of bank accounts for those that are not profitable. That was the point that you were making earlier.

Q90 Chair: At the moment are there limitations on the basic bank accounts for people? You mentioned overdrafts and whatever.

Yvonne MacDermid: Yes.

Pauline Allan: Yes.

Q91 Chair: A few years ago I was encouraging the banks to get into this, and I think I was instrumental in information being made public-because it was previously private-about the progress banks were making. So I think it helped, perhaps, with having it made public. You have the overdraft facilities and now the lack of engagement. I think it is the Royal Bank of Scotland and others that have said those with basic bank accounts cannot use competitors’ ATMs, which is a really sad-

Pauline Allan: Yes. As Yvonne said, particularly if you are in a rural area you might only have one ATM near you and it might not actually be the one that you need to use.

Yvonne MacDermid: Picking up on Pauline’s point, where there are ATMs in some communities they are, of course, charging for facilities, so the poor are indeed paying even more for their facility because they have to pay to get their money out, which often is not very much in the first place.

Q92 Chair: If we can get back to the basic bank accounts, what should we be thinking about?

Keith Dryburgh: I think Citizens Advice in England and Wales called for a universal service obligation, so that banks should be obliged to give you a basic bank account if you meet all the checks: you have not committed a fraud, you have ID. We have seen a lot of big banks turning away people because they have a poor credit history; they have had debt with them in the past. That really impacts on somebody if they have a job and they cannot get their wages paid into their account. Somebody should not be turned away from a bank because they have had a debt with them in the past that has been repaid.

Mike Holmyard: The other issue with that is that when some people approach a bank for a basic bank account, the bank attempts to sell them an inappropriate account, a current account that carries a standing charge for example. We have had instances of that. When they do not actually meet the criteria or do not pass the credit check, then they are just told they cannot be helped. They are not given a basic account. As Keith was saying, a universal application would be useful.

Q93 Chair: What else would you like to see involved in basic bank accounts? What other provisions of services would you like to see there?

Yvonne MacDermid: I would like to see better working relationships with the credit unions. There is a good example in Glasgow at the Pollok Credit Unit, where the Post Office and the credit union co-exist with each other. I would like to see more partnerships with the banks and credit unions. I know there are some working relationships, particularly around the financial education. I would like to see more of that so that they actually work closer together. At the end of the day you are trying to get people into mainstream banking, and credit unions provide a means to get people on that route. If they work closer together then that is going to give people better opportunity in the future.

Pauline Allan: The other thing is if you do have a bank account, the charges are quite excessive if you happen to have unplanned borrowing. We have an example of a £15 charge from Nationwide going into the overdrawn facility.

Chair: Is this for basic bank accounts?

Pauline Allan: No. This was for an ordinary bank account for fees and charges. We are thinking again people who perhaps have only had this very basic Post Office account are going to have to go into a proper bank account, they are going to have to manage it, but perhaps not realise the amount of fees and charges that can arise if they happen to go into unplanned borrowing. The example we have is the balance was £15. The bank allowed a withdrawal of £20 and then charged £15 for the convenience of being £5 overdrawn. It was corrected within 24 hours, but the charge worked out at 114,000% for that short period. Again, looking forward to bank accounts working a bit better, particularly for those who have not managed a bank account properly before, sometimes there is going to be quite excessive charges if they go over. Once you are in a bank account, fees and charges can be a problem as well if you do not manage your account properly.

Q94 Chair: Of course, yes. We have heard about the lack of trust in banks, trust and confidence has gone down. Have you noted that, or have the people that you speak with largely not engaged in the banking sector itself?

Yvonne MacDermid: Yes. I would say that that comes through. We recently attended a seminar that was hosted by the Financial Ombudsman Service. There were people who come along to that seminar-in some cases it was businesses-to express real concern about the lack of finance. They had banked with the same banks for a long time, and really felt quite let down by the banks. They had never owed and they had always paid everything back and, at a time when they needed the banks, they felt that they were being failed by them because they were not being treated in the way that they had expected. They felt extremely let down and they felt a lack of respect for them, and these were business people. It was direct from the horse’s mouth, and they did feel quite aggrieved about their situation. All they were looking for was for the bank to say, "Sorry". They were not looking for compensation. It was just for the bank to say, "We got it wrong. We are sorry".

Q95 Chair: What would a first-class banking service look like to you? What should we be striving for?

Keith Dryburgh: I think an element of compassion. There are lots of rules and regulations that get applied no matter what. When a person is in financial difficulty, this is a £15 charge. It does not matter how you entered it, you have to pay this back. I think there should be the flexibility to take somebody’s finances and position into account.

Pauline Allan: The lending codes and the banking codes just now say that banks should be empathetic to clients when they get into financial difficulties, and in fairness we have noticed a difference. In fairness, banks have been getting better. In particular, when it comes to banks shutting down accounts when they hear that people are having difficulties, just closing down an account and taking their cards off them isn’t going to help, so a little bit of empathy when it comes to things like that would be good. The other thing is if there is money going into one account and there is an under on the other side, there is the right of set-off, and they use right of set-off quite a lot. Again, there is guidance as to what they should do with that but we find that does not always happen. The client suddenly turns up the bank and there is nothing there and they cannot get access to anything, and the bank has used right of set-off. So, while the banks are getting better, there are still problems arising with these types of things that go on in the background with the banks.

Yvonne MacDermid: To add to that, one of the issues that has come to the fore has been the use of continuing payment authorities, and that is used for a lot of the payday loans. It is sometimes with extreme difficulty that advisers manage to get the banks to stop the continuing payment authority.

Q96 Chair: But the bank does not have the responsibility for that, largely because the customer has engaged with an outsider with a debit card or whatever. It is different from a direct debit.

Yvonne MacDermid: Under the European Payment R egulations they can cancel it. There has been a directive from the FSA and it is not always being adhered to.

Q97 Chair: I moved an amendment in the House of Lords in the Finance Bill just last week on it and put it to a vote. I lost by 44 votes on it, but it has arisen and quite a number of people did not know anything about the continuous payment authority element. In fact, a former Lord Chancellor approached me afterwards and said, "That was very interesting. Perhaps there is something we should do about it". So there is a case for you articulating that a wee bit more and getting into the faces of politicians.

Pauline Allan: Definitely.

Q98 Chair: Give me an example of that continuous payment authority? It is good to have this on the record.

Keith Dryburgh: We recently did a report on payday loans and ran a campaign to make sure that consumers are aware of their rights, including their right to cancel a continuous payment authority. Off the top of my head, it can literally run into hundreds of pounds that people have taken out of their account without any warning whatsoever by a payday lender. If you have multiple loans to multiple payday lenders, you can have all of them coming into your account on the same day without any warning whatsoever. It has a pretty devastating impact and then you could get bank charges on top of that.

Q99 Chair: Could you send me information on that? Send it to the Parliamentary Banking Commission. As a result of the amendment I moved, I will send it to the Government, to the Treasury to highlight this problem. As I say, there has not been enough articulation publicly on that issue. If I could go over the basic bank accounts again, what should we do to improve standards? Give me a couple of points so that we have it for the record here.

Yvonne MacDermid: I think flexibility, which is what Keith mentioned earlier, and continuity and consistency as well. It seems to depend on which branch of the bank that you go to. As you will know, we have some really high deprivation areas in Scotland where people do not have passports, they do not have the necessary ID requirements, and they are being debarred from even thinking about being part of civic society in Scotland for the fact that they do not possess these particular items of identification. So I think a bit more flexibility. We realise the money laundering requirements are there for a purpose, but sometimes we feel that when someone comes for debt advice that could be used as a way of identifying someone. We do not find that we get people turning up at the agencies and they are not who they say they are, because they do not want to pay off somebody else’s debt. They only want to pay their own off. It is important that we get that kind of flexibility as well, and understand that there are lot of people there who do not have the same means of ID. Also, as was mentioned earlier, we must make sure that people do not go in for one product and come out with another, because that really is mis-selling.

Q100 Chair: Yes. The issue of ATMs and basic bank accounts is still a very important for you.

Yvonne MacDermid: Yes.

Mike Holmyard: Also the charges on a basic bank account are still quite heavy for somebody who is on basic benefits. If you are getting £69 a week, £15 is an awful lot of money. They do not seem to have any automatic process that recognises, "Hang on, this person is receiving benefits. Should we be applying this charge?" It is still possible to appeal to a bank on the basis of somebody being in financial hardship-being vulnerable-to refund bank charges, but it is a process that somebody actually has to go through and do themselves. The banks are not doing that automatically and saying, "Hang on, are we not going to cause more hardship here?"

Q101 Chair: In terms of increasing levels of debt, Pauline, give us an idea of the profile of people getting into debt, say, over the past five years. Has it worsened in the past year or two?

Pauline Allan: It is fairly steady. Perhaps what has changed is the type of debt and perhaps the kind of debtor we are getting. Previously people who were working and usually managing their finances quite well, because of the employment situation might lose their job or might lose hours, and they then get into difficulty, so they come to debt advice to get some assistance. The debt numbers themselves are steadily rising. Keith has done some research into numbers. I do not think they have massively risen. They are constantly steady going up, but it is perhaps a different type of debtor we are getting. We are getting older people coming to us now, where previously old people really did not get themselves into debt.

Q102 Chair: What age are you talking about for older people?

Pauline Allan: Over 65s.

Chair: Talking about me.

Pauline Allan: We were looking at figures from the Accountant in Bankruptcy and the DAS figures, and they have a number of clients who are over 65 entering into a DAS, so we have a different type of debtor.

Q103 Chair: How would they get themselves into that problem? I remember seeing a horrendous case of a 74-year-old woman having £60,000 worth of debt, because she ran it up on her credit card and she got loans from the bank and whatever else.

Pauline Allan: Sometimes the older people are doing it for their family, trying to help their family out, and they are left with the paying of it. Most of our clients who get into debt they come because of a circumstance. They are not trying to get out of paying their debt. They come because of a circumstance, and just now a lot of the circumstances are because of either losing their job, lack of overtime, or people who perhaps have one or two part-time jobs and the employers becoming a bit harder and saying, "Okay, you can have 16 hours but they are to my times". Instead of saying, "Your 16 hours are Monday, Tuesday, Wednesday", they will say, "You will have 16 hours in a week", but the other employer says, "I will give you 16 hours but I want them done on a Monday, Tuesday and Wednesday". As a result, the person who has two part-time jobs might have to give up one part-time job because they cannot keep to their contract.

Q104 Chair: The Government’s number of hours imposed for a couple is 24 hours. Do you think that is a problem, that combined they cannot get-

Pauline Allan: Yes.

Chair: Is it an increasing problem?

Pauline Allan: Yes, it is.

Yvonne MacDermid: Could I add something to what Pauline said about the changing trends? Our members are right across the piece: we have members in local authorities; we have insolvency practitioners and so on, credit unions too. What we are hearing is more and more young people-and that is coming through in the DAS scheme as well-are opting for solutions to get out of their debt, including debt management through the Debt Arrangement Scheme. Bankruptcies are coming down, as opposed to going up, and people are paying back their debts. At both ends of the spectrum, we are finding more and more older people and more and more younger people. The younger people seem to be quite savvy in some ways and they seem to get advice quicker. Younger people seem to come sooner, so that is an attitudinal thing and I think with all the technology as well. But Pauline is right, with the older people a lot of it is down to helping families and then very often ending up in a situation where they perhaps have secured loans on their property. Then their property is at risk, and they do not have the same lifetime to make up to pay their debts as younger people do. That is a really big issue. The strain and stress of debt for older people manifests itself in mental health issues, depression, and all sorts of problems that they might not have had to face.

Pauline Allan: That is another type of debtor that we get quite a lot of, a debtor who has mental health problems. For whatever reason, they have got themselves into difficulties. Sometimes they do not always stick to the plan that has been agreed, and that is when you find that there are difficulties with the creditors and the banks are a bit less sympathetic.

Q105 Chair: Do you find at the branch level that there is more of an understanding or are they constrained with what they can do at branch level?

Pauline Allan: Sometimes you get more help when you are getting it from the people higher up in the bank who are making the policies. They will say, "No, you can do this or you can do that", but when you get the people on the front line, sometimes they do not quite understand what the policies are within the organisations. Sometimes a client going into a bank can get quite a hard time of it from a face-to-face person that they are speaking with, while they have all the backing of the policy of the bank that they should be calling on. The banks do a lot of training for their staff, particularly on mental health, but it does not always filter through to everybody on the front line.

Yvonne MacDermid: Collectively we have good relationships with the banks at the highest level but, as Pauline said, it is getting it down at the grass-roots level. There has been a recent move away from the commission-based type of selling. There is a move away from that and looking more at the individual.

Q106 Chair: Yes. In terms of access to bank accounts, we have had some evidence that it is difficult for people to open bank accounts. Is that something that you recognise and, if it is, what are the hurdles that people face in that respect?

Pauline Allan: The biggest hurdle for getting a bank account, for us anyway, for the inquiries that come to us, are those clients who are undischarged bankrupts. Their bank that they did work with has closed their accounts and stopped their accounts, so they have to find another bank account to function. We have already covered that and said so far Barclays are the main one. We used to have the Co-operative Bank and they just withdrew a few months back. We could give them the options. It is very difficult for an undischarged bankrupt.

Q107 Chair: They withdrew?

Pauline Allan: They withdrew the service.

Q108 Chair: For what reason?

Mike Holmyard: They felt they were taking too much of that sector and I think it was also a political move to try to force the other banks, effectively, to show their hand and take their share.

Pauline Allan: To try to take their share.

Mike Holmyard: Anecdotally, from some of the training that we have done recently, we have been hearing from advisers that it is now into January before people can actually get into Barclays to open a basic bank account, because now they are being overwhelmed by these debtors who are bankrupt, who need a bank account before they go into the bankruptcy. The likes of the Royal Bank of Scotland, Clydesdale Bank, Lloyds Group will shut down the bank account when they become aware that the person has gone bankrupt, so the very first bit of advice the debtor gets is, "You need to go and open an account with Barclays". That takes a couple of months to open one, because Barclays do not have the staff and the number of branches to cope with the demand.

Q109 Chair: Is it really a social duty you are asking the banks to undertake here for undischarged bankrupts?

Yvonne MacDermid: Yes. It is what I said about allowing people to participate in civic society, giving people the option. I know some people may choose not to have a bank account and want to be in the cash economy, but there are many people who do. You have situations there where, in fact, the people are removing the bank account and the individuals do not even owe the bank any money. It is not as if they are actually in deficit.

Pauline Allan: It is difficult to open a basic bank account even if you are not an undischarged bankrupt, just for someone who wants to open a basic bank account.

Q110 Chair: With ID and stuff?

Pauline Allan: With ID, as Yvonne said earlier on. There is also a leaflet. The banks have produced a leaflet that you can go through, and sometimes it is just a walking exercise going round the town centre seeing if you can open a bank account and finding somewhere. It is slightly easier if you are going to get a wage paid in. That is slightly easier, but if you are on benefits and you want a bank account, at the moment anyway, the Post Office is the one we have been advising. As I said, that might have to change with the change in universal credit.

Mike Holmyard: A lot of it depends on the confidence of the client as well. If you give them a leaflet and say, "This is an account that this bank should offer you", and if they walk in and they have the brass neck to say, "This leaflet says you should offer it", then they are probably going to get it. Clients who are not pushy, who do not demand their way, effectively, could be pushed away.

Q111 Chair: You talk about leaflets. You implied in your conversation that perhaps the leaflets are not lying in the banks and advertised for people to pick up.

Mike Holmyard: No. This is a leaflet produced by the Money Advice Service and it was Money Made Clear before.

Q112 Chair: The banks have a duty to advertise these. Do you think they think it is in their best interests not to advertise it?

Pauline Allan: Yes.

Mike Holmyard: They do not appear to be.

Q113 Chair: Perhaps it is a hard question for you, but is it banks’ responsibility to provide a social service? Are they not there to make money themselves?

Yvonne MacDermid: Of course they are there to make profits, but I think they do have a social duty. There is cross-subsidisation. You see it in other aspects of life, so why would it not happen within the banking world? It is important that we do assist people who do not have the same access, and do not have the same opportunities that we do, and to be able to give them that helping hand. Who knows, one day they may become millionaires. Who knows, they might win the lottery. They could well become people that will bring the bank business, but if the banks do not help them at this point they are never going to find that out.

Q114 Chair: What alternatives are open to people who cannot open bank accounts? Are there any we know about?

Yvonne MacDermid: They are operating in a cash economy or they are operating with credit unions or the like.

Pauline Allan: Just the Post Office, because they will take very, very-

Yvonne MacDermid: Yes. They will take them, or using some of the community finance initiatives.

Pauline Allan: Or someone else’s bank account, because that happens in families. Again, you are using your mother’s account or a brother’s account or something like that. Of course, that can then cause problems ultimately if the family falls out. Yes, they are perhaps using somebody else’s account.

Q115 Chair: Fees and charges, Which? and others have argued for greater transparency in fees and charges for bank accounts. The people you meet, do they understand what the charge regime is for them?

Keith Dryburgh: We have seen more transparent charges in the way that a lot of banks charge £1 a day for authorised overdrafts and £5 a day for unauthorised and so on. Being transparent does not mean that people can pay it back. If you have gone over and you really do not have that £5, then you keep going over. I think one bank can charge that 20 times in a month, so that is £100 you could be over for being £1 over in the first place. I think transparency is good, but it would help if banks said, "This person clearly cannot afford to repay it. We are going to stop charges and help them repay what they owe". That is fair because the person repays what they owe, the bank gets the money back, and they do not get into a huge spiral of charges.

Mike Holmyard: It is possible to get into the situation where the spiral of charges gets out of hand, where eventually the customer has to go away and open an account somewhere else. As a debt adviser, that would be the first thing you would be telling them if their bank account was out of control, "Look, you are no longer in control of your money. If we are going to set up a debt solution for you, you need to have a clean bank account that is operating well". That bank effectively is going to lose that person’s business in the long run, if they do not take the sympathetic approach that Keith was talking about. It does happen, unfortunately.

Pauline Allan: They then become a creditor, and it depends whether they then get paid back or not.

Mike Holmyard: Yes.

Q116 Chair: Alerts by text and emails is quite a common feature for people with bank accounts now. Could that be used for lower income people, do you think?

Pauline Allan: Yes.

Mike Holmyard: Yes, for sure.

Chair: Have you seen it used?

Pauline Allan: Yes, I have seen it used. Yes, I have. It could be used for a reminder, to let them know that they are at the stage where they should be doing something about it.

Q117 Chair: Another aspect is the asymmetry of knowledge that customers have and that banks have. A lot of the mis-selling that has taken place is because of that asymmetry of knowledge, customers having much less knowledge than the bank that is selling them the product. What standards should we expect banks to meet in the information they provide to customers? Implied in that is the question: are they providing enough information just now?

Yvonne MacDermid: Sometimes there could be-and there is-consumer bafflement, because there is too much information. It is about keeping it clear and simple sometimes. Some of the products are very complicated. For example, some of these premier accounts, people do not realise what they have actually signed up for.

Q118 Chair: Are you getting problems with those?

Yvonne MacDermid: Some people are. They do it as part of their banking. They do not actually stop to think about the fact it is costing them £12 a month, £144 a year. If you ask them, "What do you get for that?", "What do I get for that? I am not very sure. Oh, perhaps I get travel insurance". It is a bundled product.

Chair: I got caught with that as well, by the way.

Yvonne MacDermid: It is so easily done. But for people that do not have a lot of money, as we were saying earlier, everything is relative. It is so important that the banks ensure, especially, that what are supposed to be simple products are kept simple, and that the person knows that they are transparent. They know exactly what is going to happen. Your point, Keith, about you could have all the transparent products in the world, but if someone does not have a lot of money, and they are getting charged, all that happens is they know they are being charged a lot of money and they are still in the same position. They are going to find it hard to get out of.

Q119 Chair: Any other comments on that? Is there a role for banks in providing advice to the type of consumers you see? Some would say, "Yes", but others would say, "Wait a minute, is there anything in this for the banks on that?"

Pauline Allan: In giving debt advice do you mean?

Chair: Yes, whatever. Just to keep people solvent.

Yvonne MacDermid: The banks have done this over the years. Some are still doing it and still doing it quite successfully, where they will send out some of their people to meet on a one-to-one basis, particularly where it is perhaps secured loans, whatever. The value of the work of the agencies within CAB and local authorities and others, is that it is independent. There is no link to debt collection, so there is independence about it. Also it is going to look at what we all refer to as a holistic approach. We are going to look at the debt situation because people do not just come with their debts. They usually come with some issues, social problems, whatever you like to say; as Pauline said, change in circumstances, whatever. The value of having someone independent is that they are looking at it from the point of the consumer. They are looking at it in a way that is not going to prefer one creditor over another. They are going to look at it in a fair way, and look at it on a pro rata basis or look at it from the position: is it bankruptcy that is an option? Is it a debt arrangement scheme? Is it a protected trust deed? Going to your creditor, while it is obviously good to have that dialogue, going to one creditor I would ask the question, "Who are they going to prefer?" They are going to look out for their money, which is understandable, but the Money Advice approach actually looks at everything. There is a far better chance then of everybody getting something, rather than one person getting the lion’s share and other people not getting anything, and in the end you could end up with a situation where the person ends up bankrupt or worse off because it has not been looked at holistically.

Q120 Chair: When you get clients coming to you who have problems, do you get access to the bank staff themselves, and is that relationship regularly satisfactory for you?

Pauline Allan: Normally we do everything in writing. We do not normally do a lot over the telephone, because that can lead to a lot of misunderstandings. With the telephone systems, you quite often do not get the same person answering the phone. They do not give out their extension. Most of what we deal with is through written contact or email-more so email now, but letters usually. Everything is done as a third party. In most instances, the banks will get back to you and deal with you as a third party. The banks and all the finance companies now accept the common financial statement. We mostly all work to the BBA trigger figures, which are figures that have been agreed by banks that, if clients are working within these figures, they will not question anything on their financial statement. Because we have that agreement-and most money advisers and finance companies will work to these-nowadays there is less controversy over a financial statement or an item on the financial statement. If your client has excessive spending or, indeed, under-spending, then you might get the creditor coming back to you and saying, "Why are they spending this much?" For example, that could be in a rural area where you are spending a lot on your car, because you need your car to get back and forward to work and we know how much the petrol is up there. So there could be excessive spending on your travel costs. If you put in an explanation that that is what it is, again most of the finance companies nowadays will accept that, but most of everything that is done on behalf of a client is done in writing.

Q121 Chair: Yes. Is there a case for, say, having a hotline to make it face-to-face, voice-to-voice or whatever?

Pauline Allan: Possibly. What the main creditors do is they have a list of people who you can escalate your complaint to. Perhaps if you are not getting a lot of success from your normal contact with a creditor, you can then escalate. The banks are quite good at giving out names and addresses if you want to escalate something.

Yvonne MacDermid: It is fair to say, Lord McFall, that things have changed quite a lot over time, and a lot of the-

Q122 Chair: What time are you talking about here, Yvonne? Five years?

Yvonne MacDermid: Yes. I would say that in the last five years there has certainly been a stepping up and a recognition. I think probably of the banking code, first of all, but in the lending code and the sector actually taking it seriously but, of course, there is still quite a lot to get done. They have looked at the whole side of hardship cases. They have looked at setting up sometimes what they refer to as like CAB units, within the different banks and within the different credit card companies, so that there is a point of contact that if you do have a client then you can make that call or, indeed, certainly through the debt arrangement scheme, there is a lot of stuff now being done by email. The response time is a lot quicker than it was before when you were sending all these letters through the post.

Keith Dryburgh: I would second that and the five-year thing. I have worked here for five years and when I first came here there were shocking problems with the banks. It was definitely the number one issue, especially in terms of irresponsible lending. That does not happen now. It does seem to have swung slightly the other way, in that banks do not lend to the same people. Those same people still need credit in a lot of cases, so I think that has caused a push towards the payday loans. The decrease in the bank cases we have seen has coincided with the increase in payday loans, so it is the same clients but they have shifted over to another form of credit.

Q123 Chair: It would be good to get them back into the banking environment rather than that.

Pauline Allan: Yes.

Keith Dryburgh: Yes, the banks are missing a product that captures those people.

Yvonne MacDermid: Absolutely.

Keith Dryburgh: I think people choose payday loans not just because they are desperate, although-

Q124 Chair: You say the banks are missing a product. Could they establish that product and make a return on it?

Yvonne MacDermid: I am sure they could but I do not think the will is there, in terms that the banks tend to go down the tramlines with personal loans only being over a year to five years. Their short-term lending would be the overdraft type of thing.

Keith Dryburgh: Which can be more expensive than payday loans.

Yvonne MacDermid: That could be more expensive than the payday loans. I think, yes, they are missing a trick there and there is a gap to be filled. Let us face it, the payday loans have filled that gap for many people. The issue with the payday loans is it is a short-term product that is being used for longer-term solutions, and that is where the problems are arising. What starts out as fixing one short-term problem is being pulled on right down the line, and it is becoming part of a longer-term solution. That is why there is such an issue with it because, let’s face it, it works for a lot of people and it works well, but for a lot of people it is also an issue.

Q125 Chair: Do you think that there is a phenomenon of increased debt and overstretched budgets now that is perhaps a bit worse than it was few years ago, and going into the future it could be even worse, or is it going to get better? What do you feel, Pauline, from your perspective?

Pauline Allan: I think exactly what you said. I agree completely with what you have said: overstretched budgets, people making do. We all do the same thing. We say, "Next month it will be better. We will try to keep it going" and the budget does only stretch so far. Incomes have not gone up. If you have been getting tax credits or something, perhaps you have moved out of getting tax credits. Perhaps your child benefit has stopped, so your family circumstances might be pretty similar but, because of things that might have happened to your budget, it is getting further and further stretched, a piece of elastic. Fuel costs have gone up. All the costs for your household have gone up, but your income might have remained the same, so you are making it thinner and thinner. We are seeing more and more families now who just cannot get to the end of the month, and we have also done some work on this where people are having to go to food banks.

Q126 Chair: Yes. You see, the thing is we can all agree that times are tough and it could get tougher, but as a Commission we cannot go and say to banks, "Look, you have a social obligation", which they do have, but you do not have a social obligation, you are not there to provide a social safety net, but you are there to provide a social obligation. What type of social obligation should banks have, mindful that they are commercial organisations? We have to be realistic here, that is really what I am saying to you.

Keith Dryburgh: The banks should be obliged to provide a basic bank account or basic banking facilities, even if somebody has a poor credit history or previous debt. I do not think those are good reasons for denying an account. That definitely does happen. They have to make sure if somebody does have a legitimate ID, even if it is not the number one kind of ID they would want, like a passport, then that should be okay as well because the FSA recommend a list that banks-

Q127 Chair: It is hard to get around that, though, Keith. You need to have a utility bill and you need to have a record of where you have stayed for quite a bit of time. If we start reducing standards in that area that would cause problems. I think you need a bit more thought in that.

Keith Dryburgh: I guess mainly then the credit history and the previous debt.

Q128 Chair: What do we need to do in that area of financial capability? There is an equation here, there are lenders and there are borrowers. You have to be prudent borrowers as well as prudent lenders. What do we do in the financial capability area?

Yvonne MacDermid: I mentioned earlier about the new bankruptcy legislation for which there is going to be financial education. Pauline and I and others are working on standards for financial education, in terms of getting that out within the Scottish national standard framework. I think it is really, really important, but what we also know is that for many of the people that our agencies deal with, it is not a case of not being financially capable. It is that they do not have enough money. They are very capable financially, and they can manage their money extremely well, far better than possibly the people in this room, simply because they have to to be able to get by. It is just that they do not have enough of it, and it just needs a real emergency to tip them over the iceberg. That is the first thing to say, that we should not make assumptions that because people are in that situation that they are not financially capable.

Pauline Allan: That they are feckless.

Yvonne MacDermid: Developing it a bit further-

Q129 Chair: I am talking about the population as a whole here rather than just as a-

Yvonne MacDermid: Yes, the population as a whole. I appreciate that, but if we accept that there are people who do not quite understand, let us say, APRs-but even the best of people sometimes do not understand APRs-they need to think through how they manage their money to make the books balance. Of course, it does begin in the schools. We know that. There is a lot of work that is getting done outside of schools. To be fair, the banks do a lot of stuff. For example, the Royal Bank of Scotland with the MoneySense programme. There are various initiatives, but to my mind it needs to be far better co-ordinated. There are all these different initiatives. There is the Money Advice Service, obviously, the work that they are doing, but it needs to be all held together because resources are scarce. Let us not reinvent wheels. Let us have common standards, and then adhere to those standards and then roll that out and work with people. The idea that the Scottish Government has, about people having to wait to get a discharge from their bankruptcy until they have actually done a financial module, presupposes that that person has not been financially capable. We need to be careful to ensure we do not treat everyone the same way.

Q130 Chair: We have spoken about banks’ obligations here, but give me an example of good practice by banks, because there are examples out there.

Yvonne MacDermid: Yes, there is good practice. A few of the banks donate to the Money Advice Trust. They donate to organisations like ours to help deliver training. I could name a few who donate substantial sums and, of course, they also have the financial levy to the FSA as well, but they do that in addition to the financial levy. There are models of good practice, and we work closely with the banks in trying to improve the practice. We have a good working relationship. Where there are cases that come up, we are able to go to the contacts that we have to say, "Here are some issues. You might want to know about this to be able to try to address it". They are working hard at it, but I think there still needs to be more work on the ground in the way that we have said, with regard to access to bank accounts in particular.

Q131 Chair: Do you think there is a role for a complementary relationship between banks, say, and credit unions, rather than just a competitive relationship? In other words, an arrangement that could be in the interests of both entities, rather than just one.

Yvonne MacDermid: We mentioned that earlier on, I think. There definitely should be. They should not be seen as being in competition with each other. They could be mutually exclusive, in terms of the work that they are doing, because effectively they could be having the same people coming through their doors.

Q132 Chair: Yes. In terms of the future, the issue of universal credit and tax credits, what are your feelings about the situation that will affect people? We are trying to think a wee bit ahead here as well.

Pauline Allan: As I said earlier, our concern in debt advice is the fact that a lot of people who have not managed a bank account properly before are going to get a huge amount of money with the one payment from universal credit paid into their account once a month. That huge amount is lying there for them to manage it.

Q133 Chair: If they do not have a bank account, what happens to them?

Pauline Allan: They will have to find a bank account to get that. One way or another, they are going to have to have a bank account that this money can go into. When they have this huge amount of money-

Q134 Chair: Do you think the Post Office will get a lot of them?

Pauline Allan: You see the difficulty with the Post Office is that the Post Office accounts do not allow direct debits coming off. This is where housing associations are terribly concerned about universal credit, because how is their rent going to be paid? If this huge amount of money goes into the bank, it is getting paid to one person in the family. Let us say-for the sake of making it Job’s comforter-that that person happens to be an alcoholic or a gambler. That person will spend the money. Again, for the sake of argument, it is the man, so where are the wife and the children going to get their money from, because the main amount of money is going to be spent by the gambler or whoever? As I say, this is the darkest side of it.

The other thing about that is the banks have a protected amount of balance in the accounts just now. If you have a bank account just now and, for whatever reason, your bank account is arrested, there will be £415 left in your bank account that cannot be touched. That is for you to live off until you sort out the problem with the creditor that has put the arrestment on. If you are working and if you have other means to cope, then the £415 will be a hiccup for you but you will perhaps get through it. But for people on universal credit, people on benefits, although theoretically your benefit cannot be arrested, your bank account can be arrested with all that amount of money in it, and there is only £415 that you can get access to. We have a concern about that, in that if you take some time in getting your accounts cleared, your balance cleared, you have missed your rent, you have missed your payment for your fuel, you have missed your utilities, so in actual fact you are digging a hole further and further down the line for yourself. It is great to have a protected balance, but we have also had many concerns about that and have discussions as to whether that protected balance amount could be raised in any way.

Mike Holmyard: The current thing with the protected balance, as well, is that certain people on certain benefits just now are actually effectively bullet-proof from having the bank account arrested, because they get less than £415. They will have a balance of less than £415 throughout the month on the account, so they are okay. They are not going to suffer from having a bank account arrestment. When universal credit comes in, the rent payment goes in as well, they are way over £415; suddenly the creditor has a way of getting money back after they have taken them to court. That is a concern that we do not think they have really picked up on.

Q135 Chair: Have you done any written research on this?

Mike Holmyard: I have not. We have advised people.

Pauline Allan: Yes.

Chair: If you could provide us with a written research submission that would be really good.

Pauline Allan: Yes.

Mike Holmyard: Yes.

Q136 Chair: We are here to listen to you. We have done it hopefully very fruitfully for the past hour. What parting message do you want to leave with us? You came here to tell a story, didn’t you?

Pauline Allan: Yes.

Mike Holmyard: Yes. I think things are getting better.

Chair: In?

Mike Holmyard: In the way that the banks are treating customers, but there is more work to be done.

Yvonne MacDermid: Yes, I agree. The whole thing about treating customers fairly, it is a bit like justice not only being done but being seen to be done, and having evidence of it and to have more satisfied customers. To conceptualise it is to say, when the sun is shining the banks were there but when it started to rain people did not have the umbrella shown to them. I think it is important that the umbrella is there for them.

Q137 Chair: You are like St Thomas the Doubter then?

Yvonne MacDermid: No, I am not. I am Pollyanna, I am the happy one. But I want to see more umbrellas there to assist people.

Pauline Allan: Our main thing is that the banks should look at their products and try to bring out a product that will allow everybody to have a bank account, to have access to a bank account, however basic that might be. It might be that they are only allowing direct debits to pay essentials, such as rent or fuel, but there certainly needs to be more banks offering a basic bank account. We cannot rely on Barclays forever allowing the basic bank account, so to look at products and bring one out that they can manage.

Q138 Chair: And products that are simple.

Pauline Allan: Yes.

Yvonne MacDermid: Yes, simple products. To go back to Pauline’s point, from a competition point of view, at the moment Barclays basically have the whole scope for everything and that really surely cannot-

Chair: By default?

Yvonne MacDermid: By default. That surely cannot be a good situation, where there is no competition, because that is unhealthy in and of itself.

Q139 Chair: I do not want to prompt you but the ATMs issue as well, that is an important one.

Pauline Allan: Yes.

Yvonne MacDermid: Yes, absolutely.

Chair: Thank you very much. That was very helpful to us. It will form the basis of the evidence that we will be assessing when we come to make our report, hopefully by the end of February or March. Anything that you can send to us in writing will be valuable. Thank you for your attendance.

Pauline Allan: Yes, thank you.

Yvonne MacDermid: Thank you.

Chair: Thank you for hosting us.