Banking Standards

Written evidence submitted by Citizens Advice (S036)

The Citizens Advice service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination.

The service aims:

§ to provide the advice people need for the problems they face

§ to improve the policies and practices that affect people’s lives.

The Citizens Advice service is a network of nearly 400 independent advice centres that provide free, impartial advice from more than 3,500 locations in England and Wales, including GPs’ surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups.

In 2011/12 the Citizens Advice service in England and Wales advised 2 million people on nearly 7 million problems. Debt and welfare benefits were the two largest topics on which advice was given.

Bureau evidence on consumer issues in banking

Citizens Advice Bureaux advise a significant number of clients who are experiencing problems with their banks, with issues ranging from difficulty opening a basic bank account to refusal to cancel a continuous payment authority. The impact of these issues on people who are often on a very low income can be severe, leading to debt, financial difficulty and bankruptcy. For some people it means difficulty paying priority debts, which can lead to the disconnection of utilities or even homelessness.

In this document we provide evidence of the impact of a range of issues clients report difficulties with relating to banks.

In 2011/12 Citizens Advice clients reported 129, 092 issues relating to financial products. These included:

§ 20,001 about bank and building society accounts, including issues such as opening and operating accounts, terms and conditions and accessing cash.

§ 3,397 issues related to credit, store and charge cards, including issues such as contract terms and conditions, fraudulent use and equal liability under Section 75 of the Consumer Credit Act.

§ 5580 about unsecured personal loans

§ 14763 about payment protection insurance

Because of the way our statistics are collated, financial product issues involving debt are categorised separately. In 2011/12 we dealt with 2,137,860 problems about debt including:

§ 138,523 issues regarding bank and building society overdraft debts. These issues include problems with dealing with debt repayments, overdraft charges, enforcement by bailiffs, creditor harassment and court action.

§ 295,536 issues regarding credit, store and charge card debts,

§ 279,192 problems about unsecured personal loan debts

One of the most widespread underlying causes of these issues are staff incentives to sell products which make a profit for the bank, rather than considering which product is best for the customer’s needs and circumstances. The case of payment protection insurance offers an apt illustration of how these incentives can not only lead to consumer detriment but have sizeable financial consequences for banks themselves. The sheer scale of payment protection insurance mis-selling and resultant refunds has also been opportunistically taken advantage of by a claims management industry which has caused further consumer detriment. Following the 2005 super-complaint by Citizens Advice to the OFT regarding payment protection insurance, over £1bn has been paid back to consumers with banks anticipating that this will eventually rise to £6bn.

While the FSA’s investigative work on PPI is concluded, we await with interest the outcome of their wider investigation into financial incentives in the financial services industry.

Below we have summarised some of the problems clients bring to us regarding their experience of banks as well as some of the key issues affecting the retail market which are a cause for concern for us.

The basic bank account market

Many of the banking issues we receive evidence about fall within the broad category of access to basic banking. Simply being able to open an account is an ordeal for many people and an impossibility for others.

In addition, the difficulty in access to basic banking has side-effects which go beyond the immediate effect on those who are excluded. Our understanding is that the current policies and practices of the banks and building societies who offer basic bank accounts is leading to a disproportionate concentration of such accounts with two banks in particular. This is primarily because those two banks are more likely than other banks to offer an account to people in financial difficulties, but also because they will usually allow undischarged bankrupts to open accounts.

Given that basic bank accounts at best make very little money for banks and often incur a net loss in the short-term, a disproportionate concentration of the market in a small number of banks is unsustainable in the medium to long-term.

In effect, banks with more reasonable access policies end up losing money as a result of being a socially responsible corporate citizen. This leads to an incentive to make such accounts less attractive or to restrict access, an incentive which will only grow if current trends continue and which would be regressive and lead to additional detriment for consumers.

While there are potential new innovations in the pipeline, such as de-facto accounts, pre-paid cards and the proposition being developed by ABCUL for a basic account accessible through the Post Office, the question of how to ensure everyone has access to an account is missing from discussions at present.

Ensuring access is paramount since the direction of travel in payments and benefits is very much towards services which require access to a transactional banking account. Unless every consumer is able to open such an account, the consequences of being financially excluded will become more pronounced as time goes on and alternative ways to pay bills and receive payments disappear and the additional costs of using them increases (i.e. the poverty premium). In one very important aspect this runs counter to the Government’s aspirations to make work pay: quite simply, if an individual is unable to open a basic banking account it is already very difficult to receive their pay and will become even more so in future.

We want to see a universal service obligation which would mean that anyone can open a basic bank account regardless of their financial history or existing debts, and particularly undischarged bankrupts. We also want to see banks following the FSA’s guidance on acceptable forms of ID, so people without a passport or driving licence can open an account using other forms of identification such as award letters from the DWP.

We note that the European Commission appears minded to take action on providing universal access to a basic banking product with suggestions that the recent recommendation that member states ensure universal action could be put on a more formal footing. Citizens Advice believes that it would be eminently possible to ensure universal access to a basic bank account without recourse to legislation but given the persistent failure of the UK banks to provide it we would be supportive of a Directive on the subject.

Access to cash

An issue which both Citizens Advice and the Treasury Select Committee have investigated recently is the decision by RBS Group to restrict access to non-RBS Group ATMs for their basic bank account customers. Parts of Lloyds Banking Group (namely Lloyds TSB and Bank of Scotland) already operated the same restrictions.

Citizens Advice carried out an extensive survey online and in bureaux and found that while the majority of respondents (96 per cent) found it easy to access their cash for free, 12 per cent of basic bank account customers who held an account with one of the banks that restrict ATM access found it difficult. We also received a large number of case studies from individuals who found it difficult to access their cash following the decision. While RBS did make an extensive effort to ensure customers who had a problem could be moved to an account which allowed access via the LINK network, this put the onus on the customer, many of whom are reluctant to challenge their bank or sceptical that it will achieve anything.

Our report also identified a concern that the effect on the flow of interchange fees may lead to a tit-for-tat situation whereby an increasing number of banks remove access to the LINK network for their basic bank account customers, as well as an extant threat to the sustainability of some of the most socially important free ATMs in deprived areas.

The report concluded that RBS Group and Lloyds Banking Group should restore access to the LINK network for basic banking customers and that all banks should ensure customers have access to counter services in branch – something which other banks do not provide.

The full report is available online: http://www.citizensadvice.org.uk/access_to_cash

Difficulty opening a bank account

While the difficulties that clients experience in opening a bank account often relate to basic banking products, they do extend to other banking products as well. Generally speaking the barriers to opening a bank account fall into the categories of insufficient proof of identity, existing debts or poor financial history, bankruptcy or a criminal conviction. We also consider clients who try to open a basic bank account but are told they must open a packaged account instead to be experiencing difficulty opening a bank account.

Insufficient proof of identity

Legislation aimed at tackling money laundering requires prospective customers to have photo ID in order to open an account. However, many low income consumers do not have a passport or driving licence and some do not have documents to prove their address. They often find that banks are unwilling to accept the alternative forms of identification which the FSA recommends they can accept instead.

A CAB in the East Midlands reported a case in which a 22 year old Belorussian client was having difficulty opening a bank account due to a lack of acceptable identification. The client moved to the UK with his mother and step-father in 2002 and received indefinite leave to remain in 2011. His Belorussian passport expired in 2005 and he was not yet eligible to apply for a British passport, and he did not have a driving licence. As a result he could not open a bank account putting him at financial disadvantage, particularly as he was due to begin a university degree. The adviser felt that if UKBA was satisfied with the identification documents the client had , there should be a way of satisfying the bank whilst still complying with anti-money laundering legislation.

A CAB in the South West reported a case in which an unbanked client had been unable to open a basic bank account because he did not have a passport or driving licence . The bank refused to accept alternative forms of ID. The client had a refund cheque from his fuel supplier for over £1 , 000 but was unable to cash it without a bank account, or paying significant commission to a cheque cashing company. The client was particularly stressed as his partner was expecting a baby in the coming weeks and they were keen to buy heating oil for their central heating before the baby was born. The client also needed the money to buy a car seat for the baby in order to bring his wife and child home from hospital in a taxi.

A CAB in the East of England reported a case in which a client needed to open a bank account in order to accept a job offer. However, the client had no forms of ID except his birth certificate and no proof of address as he was living rent free with a friend and as such no banks would let him open an account. The client was very distressed and felt trapped, as he would be able to find himself permanent accommodation – and proof of address – if he was able to accept the job but the prospective employer would not pay him by any means other than bank transfer. The client was keen to move off benefits and into work and was concerned that his friend would not be happy with him living there for anything beyond the short term.

A CAB in the South East reported a case in which an unemployed client living in temporary accommodation was struggling to reintegrate himself into society following a prison sentence for drink driving. He was unable to open a bank account due a lack of ID, and none of the banks in his town would accept letters from the Job c entre or DWP as proof of identity. The client was concerned that not being able to open a bank account w ould prevent him getting a job.

Bankruptcy

Only two UK banks will offer accounts to undischarged bankrupts, with the other banks explicitly excluding them. This is based on an extremely narrow interpretation of the Insolvency Act 1986 which some banks claim could see them held liable for money that is paid into a bankrupt’s account and disposed of without notifying the Trustee. There is no evidence that this has ever happened and the policy of those banks puts some of the most financially vulnerable people at risk of further detriment, including potentially losing their job.

A CAB in the North West reported a case in which an undischarged bankrupt was struggling to gain access to banking products. His application for a basic bank account was turned down by nine banks and building societies before he was able to open a basic account with a tenth bank. However, as he could not set up direct debits with his account he ha d had to make alternative arrangements, including asking a family member to set up direct debits using her account. This caused the client worry and stress, as well as placing the family member in an invidious position.

A CAB in the North West reported a case where a 31 year old client was declared bankrupt and found his existing account frozen as a result, although he was keen to note that he was not in any debt to his bank. The client tried to open a basic bank account with another bank but was refused on the basis of his bankruptcy. This has left the client with difficulty in paying his household bills.

A CAB in the South East reported a case where a 52 year old undischarged bankrupt had not been able to open a basic bank account despite making several enquiries. The client wished to open a basic bank account to pay in his navy pension cheques. Although his salary was paid into his wife’s bank account he was having to cash the pension cheques on the high street and paying a commission of 5 per cent, costing him an extra £10 a month. Although discharged, the client was still required to pay the Trustee in Bankruptcy an Income Payment Order of £700 per month, meaning the additional £10 a month was an expense he and his wife could ill afford.

A CAB in the West Midlands reported a case in which a 52 year old undischarged bankrupt wanted to open a basic bank account but was struggling to do so due to his debt to one of the two banks which offer accounts to people in such circumstances. The CAB advised him to try the other bank but the client was concerned that he would be rejected and felt he was being left with no choice of provider.

A CAB in the East of England reported a case in which a couple in their 30s with dependent children were jointly declared bankrupt after their income reduced and costs increased on the birth of their first child. They both had banked individually with the same bank and their accounts had been in credit when they were declared bankrupt. Midway through their bankruptcy the bank reopened one of the accounts without conditions. However, they refused to reopen the other partner’s account and would not offer a reason why. The couple had also attempted to open individual basic bank accounts with another bank and one had been refused, both before and after discharge. An application to open a joint basic bank account was also refused before and after discharge. There was nothing on the client’s credit reference files to explain their treatment and they were not offered any explanation. Meanwhile, the husband was using his wife’s account and they ha d to plan their cash withdrawals in advance to make sure each has enough money when required. Although they stressed they did not have any relationship problems, they did note that the husband would face severe difficulties if the marriage broke down.

A CAB in the South East reported a case in which a 56 year old client who was discharged from bankruptcy three years previously had not been able to open a basic bank account despite repeated attempts with various banks. The client was annoyed as she wanted to pay her bills by direct debit to save money. Upon application to one of the banks which does offer basic bank accounts to both undischarged and discharged bankrupts she was told she had to have been discharged for six years.

Existing debts/poor credit history

Clients who wish to open a basic bank account to take control of their finances regularly find themselves turned away. Similarly, people with poor credit history can find themselves excluded even if they do not currently have any debts.

A CAB in the North West reported a case where a 39 year old client working full-time and living with her two children and husband was struggling to gain control of her finances. The client had got into financial difficulty when her husband had gone onto statutory sick pay following back problems. They had a joint mortgage and a number of non-priority debts, including a debt she owed to her bank. The CAB advised that she should open a new basic bank account to avoid her bank unilaterally using the right of set off to pay off her debt and to ensure an affordable repayment plan could be agreed. She tried to open a basic bank account with the building society her husband uses but was denied because of her poor credit score. The client was worried that another rejection would make her credit score deteriorate further so she instead began banking using her husband’s account. The client was worried that her husband’s back problems would lead to further banking problems if he needed to go to the branch since the account was in his name only and staff would not be able to speak to her about it.

A CAB in the South East reported a case where a 29 year old client had built up an overdraft debt after her bank gave her an account with an overdraft she felt she should not have been given. The client had a basic bank account with the same bank but had had her debit card withdrawn and was only able to access her cash by going into the branch. Given the risk that her bank would use the right of set off to pay off her overdraft debt on her second account she attempted to take control of her finances by opening a basic bank account with another bank. However, because her credit history shows the debt to her original bank she was turned down by several banks.

A CAB in the North East reported a case where a 50 year old client with non-priority debts who was working in three part time jobs was unable to open a basic bank account. She had been advised by the CAB debt specialist adviser to open a new bank account since she owed money to her existing bank, but when she told the new bank why she was applying for the account she was immediately rejected.

A CAB in London reported a case where a client with learning difficulties who had a debt to his bank was advised to open a basic bank account with a new bank in order to take control of his finances. The client told the CAB that he had tried three banks, each of which had claimed not to have basic bank accounts despite the fact that they do. A fourth bank told him to go online and download the application form, despite the likelihood that he would require assistance to fill out the form. The client was highly distressed and felt his confidence had taken a knock after being turned down three times and given no help on the fourth occasion. In the meantime the client was worried about his current bank using the right of set off and putting him in financial difficulty.

A CAB in the East Midlands reported a case where a 51 year old client with a poor credit history was not able to open a basic bank account. As the client was in full time employment and not receiving and benefits he was also unable to open a Post Office Card Account. The client was frustrated as he was adamant that he would repay all his debts but needed access to a bank account to keep control of his finances.

Sold an inappropriate account

There is evidence that some banks inappropriately ‘up-sell’ packaged accounts to customers who want to open a basic banking product. For consumers on low incomes or in financial difficulties these accounts are often unaffordable and the benefits they offer unusable. Some bureaux have reported that banks have sold packaged accounts to people who have specifically asked for a basic bank account to manage their money better.

There is also another issue with packaged accounts, where banks have been selling them to customers who could not possibly hope to make a claim under the insurance products included, or who have no use for the other services provided as part of the account. The FSA is taking action to require banks to address this issue but it will not prevent banks trying to sell packaged accounts to people who would be better off with a basic or current account. We believe that the FSA should require banks to undertake affordability checks for customers before opening fee-charging packaged accounts.

A CAB in the South West reported a case where a 50 year old single client on benefits with a poor credit rating could not open a basic bank account. He eventually found one bank which was willing to offer him a packaged account with a monthly charge of £13 that he felt he had no option but to accept despite his financial predicament. As a result the client found himself paying for the services included in the packaged account that he didn’t want, didn’t need and couldn’t afford.

A CAB in the East Midlands reported a case in which a 47 year old client had attempted to open a bank account was told the only option open to him was a £13 per month packaged account. Believing the advice, the client had opened the account but due to being on a low income and having only a small sum of money in the account the monthly fee had put him into overdraft, incurring charges and fees.

A CAB in Yorkshire and the Humber reported a case in which a 70 year old client had been sold a packaged account which included insurance that did not address his needs and which he was unlikely to be eligible for. The client was on a low income and with little disposable income and felt he had been pressured into taking the packaged account when he took out a loan from his bank. The £12 a month packaged account included worldwide travel insurance despite his age likely excluding him from eligibility and the fact that he was extremely unlikely to travel abroad.

A CAB in the East Midlands helped a client with debt problems who had been advised by his bank to open a packaged account costing £10 a month despite being in debt and the account offering facilities he didn’t need and had never used. As his debt problems had mounted, the £10 a month fee had contributed to his financial problems.

Criminal convictions/fraud

We understand that all of the banks who offer basic bank accounts explicitly exclude people who have a record of fraud but in practice many exclude people with other convictions as well. People who are about to be released from prison often face challenges, although some banks have specific schemes to help people in these circumstances.

A CAB in Yorkshire and the Humber reported a case where a client who had been imprisoned for fraud committed following the loss of his job was struggling to pay back £10,000 of non-priority debts and could not access a bank account. He had attempted to negotiate with his creditors but met with refusal, at which point he attended the CAB. He had been unable to open a basic bank account as a result of his fraud conviction, however this was creating difficulty for him in managing his finances and continuing his rehabilitation.

A CAB in the East Midlands reported a case where a 17 year old student with a part time job had his existing bank account closed when two fraudulent cheques were paid into it. The client insisted he was the victim of the fraud but his bank insinuated he was implicated. The client was advised by his bank to open an account with another bank, which he did, only to find this account suddenly closed without explanation two weeks later. He had provided his employer with his new bank details and has been unable to access his wages which were paid into his new account before it was closed. In the meantime the client was using his mother’s bank account and had not received any pay for some time, leaving him reliant on the generosity of family and friends.

A CAB in the West Midlands reported a case where a 29 year old client currently serving a prison sentence attempted to apply for a basic bank account under a bank’s scheme for prisoners. He met the bank’s criteria (namely having under two years remaining on his sentence, a release address and three year address history) but was turned down without explanation. The CAB adviser noted that being able to open a bank account is recognised as an important part of preparing prisoners for release and can help their rehabilitation and reintegration into society.

Transparency and level of bank account fees

There are significant issues created by both the level and transparency of bank account fees, particularly around overdraft charges and returned transaction fees. Our evidence from bureaux strongly suggests that our clients do not find the information provided to them to be transparent or easy to understand, which may contribute to the financial impact of becoming overdrawn or having insufficient funds in their accounts. We believe that the changes made by banks to their charging structures following the test case brought by the Office of Fair Trading have not ushered in a fair charging regime for the poorest and most vulnerable consumers for three reasons:

§ Firstly, bank accounts are essential to function within modern society. They are required for almost all jobs, for the receipt of many benefit payments and to obtain the best deals on utilities. People have no choice but to have an account and yet there are remarkably few safeguards to protect them from potentially toxic charges, or even to limit the amount charged.

§ Secondly, once people encounter financial difficulties – caused or exacerbated by charges applied to their bank account – it can be difficult or even impossible for them to open another bank account.

§ Thirdly, banks are still too slow to take action to stop people in financial difficulties from building up a large debt due to multiple charges.

Recent research by Which? backs this up, finding that a combination of complicated fee structures and unclear or difficult to find information made calculating and comparing overdraft fees next to impossible for consumers [1] .

Which? also found wide variation in the amount charged by different banks for various examples of overdrawn accounts and went as far as to call some of the fees "exorbitant", observing that one bank was effectively charging over 2000% APR on a £100 overdraft.

Citizens Advice Bureaux regularly see cases of small overdrafts or failed payments quickly becoming unmanageable debts, examples of which are below.

A CAB in the East of England saw a 32 year old client who had been briefly overdrawn and incurred significant charges as a result. The client’s account had become £30 overdrawn, but was returned to credit within hours. The same day the client was charged a £20 daily overdraft fee in addition to a £5 usage fee. These charges put the client’s account back into overdraft, meaning he was charged further fees: this time a £30 daily fee and £5 usage fee. In total, the client faced charges of £60 as a result of being overdrawn by £30 for a number of hours, with more than half of the value of those charges incurred by the bank’s own actions.

A CAB in the South East reported a case in which a 20 year old client with partner and young child was charged excessive fees for a small overdraft. The client, who believed she had a basic bank account without any overdraft facility, became overdrawn by £11 when a direct debit exceeded her balance. She paid back the overdrawn amount as soon as she was aware but then received a demand for £200 of fees from a debt collection agency acting on behalf of her bank.

A CAB in London advised a client whose bank statement regarding overdraft fees was baffling to both the client and adviser. The client had briefly gone into an unplanned overdraft but had repaid the money in full and was now struggling to understand the charges she had received. It was very unclear what time period the various fees and charges covered and when they would be deducted from the client’s account, with a combination of ‘instant overdraft request fees’, ‘daily unarranged overdraft fees’ and ‘paid item fees’ amounting to several hundred pounds. As a single parent in temporary accommodation with two young children the client could ill afford to pay these fees, meaning they would likely put her bank into overdraft when they were levied, thus incurring further charges and fees.

In November 2011, the Government announced that it had persuaded the banks to sign up to a voluntary agreement on bank charges which will apply to all full-facility current accounts offered by the major banks. By March 2013, banks will:

§ Provide annual statements so that customers can see how much their account costs over the year;

§ Provide consumers with alerts when their balance is low so that they can take action to avoid a charge;

§ Consumers will no longer be charged for going over their limit by a small amount.

Whilst we welcome banks’ moves to provide better information services and a short grace period for customers who are about to go overdrawn, we do not think this is enough to deal with the problems CAB advisers are seeing. Citizens Advice believes that more fundamental reform of bank charges are urgently required, possibly including limits on the level and frequency of such charges.

Continuous payment authorities

Citizens Advice remains concerned about the reluctance of banks to follow the FSA’s latest guidance on implementing the Payment Services Regulations 2009 on cancelling continuous payment authorities (CPAs - a series of payment transactions using a credit or debit card) a pattern of behaviour which is putting many of our clients into serious financial difficulty if the company who holds the CPA refuses to cancel it. This legislation gives consumers great control over how their cards are used. Consumers can withdraw their consent to any payment transaction or series of payment transactions up to the close of business on the working day before the payment is due. Once consent is withdrawn, the payment service provider should not allow any further payments to be made. If any payments are taken, they are deemed unauthorised and the consumer should get a refund.

In particular we receive a great deal of evidence from bureaux about CPAs with payday lenders which illustrates the difficulties clients are having in getting their banks to cancel the arrangements. In particular some bank staff and advisers still believe that continuous payment authorities cannot be cancelled and that you must ask the organisation taking the payment to stop taking money.

The evidence below represents a snapshot of cases, covering a number of banks, from 2012, most of which have occurred in the last 3 months.

In July 2012 a CAB in the North West saw a client with both priority and non-priority debts, including a payday loan. The CAB advised the client to stop the payday loan payment which was due so that they could work out a more equitable distribution or even insolvency. The bureau gave the client copies of the FSA leaflet on consumer rights with regard to continuous payment authorities. He took one to his bank and one to the payday lender. He returned later to say that both organisations said they couldn’t help and the payments would still be requested and paid.

In April 2012 a CAB in the North West saw a client with mental health issues who had multiple non-priority debts, including payday loans. The client had continuous payment authorities set up to pay the payday loan companies. As the client had insufficient money to cover the payments he was becoming overdrawn and incurring regular charges from his bank. The b ureau directed the client and his support worker to his bank with an extract from the FSA leaflet concerning continuous payment authorities. The bank said they were unable to do this.

In July 2012 a CAB in the South West saw a client who had two payday loans but was unable to afford the repayments. The CAB rang the bank asking for the payments to be stopped and later confirmed this in writing. The bank wrote back to say this was not possible as they had to take the Visa International rules over the FSA guidance. As a result the client had her bank account cleared out by the payday lenders and so had no money for essential expenditure and had to borrow from her family.

A CAB in the West Midlands reported a case in which a client was being helped to restructure her finances and begin paying off her outstanding debts but had to close her bank account down following her bank’s refusal to cancel a CPA. This created significant additional hassle for the client at a time of great stress.

A CAB in the South West advised an unemployed client with a young baby who was unable to cancel a CPA set up to repay a mobile phone debt. Both his bank and mobile company incorrectly informed him it was not possible to cancel a CPA, putting him into further debt at a time when he and his partner needed maximum income.

Helping people in financial difficulties

Although we advise clients on a large number of issues regarding debts to banks, they are less problematic creditors than we see in other sectors and in our experience they usually try to do the right thing.

However, there are exceptions, and a lack of clarity on individual banks’ different processes can cause problems. This may manifest itself in customer confusion about who to speak to about their debt if it has been passed on to a debt collection agency or ambiguity about under what circumstances interest will continue to be charged. Clients who have had their debt passed on to a collection agency may in some cases experience aggressive or intimidating collection practices.

While some banks will stop charging interest and refer the matter to their debt team as soon as it becomes clear a customer is in financial difficulty – which does have implications for customers’ credit records – others engage in more convoluted processes which some consumers struggle to understand, thus contributing to stress and sometimes further debt if they misunderstand the expectations placed upon them.

We also continue to see issues with inappropriate lending, where a bank has not considered an individual’s ability to repay the loan. In particular this issue arises with debt consolidation loans being offered even when a customer is already struggling to meet their existing debt repayment commitments.

A CAB in the South East advised a client who had run up a £400 debt with her bank as a result of being mis-sold a packaged account which incurred a monthly charge. The client had never used the account and the debt consisted solely of the monthly charge. The client had offered to pay back the debt at £30 per month but this was rejected out of hand by her bank, who demanded that she make full payment immediately or face formal default notices. At this stage she sought advice from her local CAB, who advised her to write to her bank to let them know she was seeking advice and to ask for a week’s grace in any proceedings. Upon receipt of the letter the bank phoned the client and offered to accept her original payment offer, before then suggesting £20 a month when the client expressed a wish to speak to the bureau first. At this point the bank representative spoke to a more senior colleague and announced that they would write the debt off entirely. The CAB adviser noted that it was only the good sense of the client in refusing to agree a payment plan with the bank until she had received advice which prevented her needlessly paying back hundreds of pounds, and it was only the mention of Citizens Advice involvement which prompted the bank to negotiate with the client in the first place.

A CAB in the South East reported a case where a single parent who had given up work to care for his child, who had severe behavioural issues, following the breakup of his marriage had his bank debt passed on to two different debt collection agencies. The client had both an overdraft and loan debt to his bank and had attended a local branch to try to agree repayment only to be told it had been passed to a "debt management plan". It transpired that the debt had in fact been passed to two different debt collection agencies, both of whom aggressively pursued him to agree repayment terms he could not afford. The client found it extremely difficult to make arrangements with two agencies as he had to revise his offers according to what the other was demanding.

A CAB in the West Midlands advised a client who had taken out a loan with her bank 12 years previously and had increased the amount over the years to the point where it stood at nearly £12,000. Six years before the client sought advice she was made redundant and her payments were met through a payment protection plan. When this expired the client had an offer to repay £150 per month rejected and the matter was passed to the debt department. At this point the client was assured interest would not be charged, but several years after agreeing a £30 per week repayment the client was suddenly notified that interest had continued to be charged and that her bank intended to pursue the debt by obtaining a c ounty c ourt j udgment.

A CAB in Wales reported a case where a 20 year old client was given an inappropriate debt consolidation loan by her bank. She had run up a debt of £800 on a store card but bega n missing payments when she lost her job. The client then transferred the balance on to a credit card from her bank but quickly ran into problems making payments with that card and so transferred some of the balance onto another credit card from another provider. Having recently begun a new full time job the client met with her bank manager to discuss her debt problems, at which point it was suggested she take out a loan of £16,000 even though the loan would have far exceeded her debts and she had only just started her new job. Unfortunately the client left the job after one week following problems with the employer and when she approached the CAB for advice she had only been able to find work one day a week. As such her debts were spiralling further out of control.

A CAB in Wales advised a 68 year old client who cared for her 47 year old disabled son and had been given a personal loan for £25,000, repayable over five years. The client has limited financial capability and understanding and mistakenly believed the repayments would be £6.60 per month rather than the actual £611 per month in r eality. The client had not spent any of the money she borrowed and asked the bank to take it back. However, they refused and after adding charges and interest the loan had grown to over £35,000. The client was accompanied to the CAB by a support worker from Age UK who reported that the client’s son’s carer had accompanied her to the bank and noted that the client was confused and vague during the discussions about the loan and that the bank staff themselves seemed unsure as to the wisdom of approving the loan. However, as the contractual cooling off period had expired, the bank refused to cancel the loan and accept the return of the money.

A CAB in the South East reported a case in which a 66 year old widow was offered a loan by her bank to pay off an existing loan with the same bank on which she was already struggling to meet repayments. The adviser reported that the client was bamboozled with jargon and complicated terminology and so did not fully understand the implications of what she was agreeing to, nor did she have the right to cancel highlighted to her. The client was struggling to cope with the recent death of her husband and found the numerous calls from her bank extremely stressful.

The right of set off

Citizens Advice is concerned that banks’ use of the right of set off undermines efforts made by customers in financial difficulties and on very low incomes to manage their money. By unilaterally using the right of set off, banks prioritise payment of a credit card debt above more important commitments, where non-payment results in loss of home, liberty or disconnection of supply.

Whilst the FSA’s new rules introduced in June 2011 requiring banks to leave customers will sufficient resources to pay their bills and essential living costs are welcome and, along with the new Lending Code guidance, have had a positive impact, bureaux are still seeing people who cannot pay for food or essential household bills because their bank has exercised their right of set off.

The impact of the new rules and guidance is reflected in the decline in the number of issues regarding the right of set off reported to bureaux, with 713 in 2009/10 falling to 542 in 2010/11 and 488 in 2011/12 (this includes instances where banks have used the right of set off and situations where it is likely). Nevertheless, bureaux still record a significant number of clients reporting issues with the right of set off.

A CAB in the North East of England reported a case in which a 70 year old client on state benefits found his bank had used the right of set off to pay a non-priority debt he owed to them. This left him with in financial hardship with difficulty paying utility bills and other essential living expenditure. His bank only refunded the money it had appropriated following the intervention of the CAB adviser on his behalf.

A CAB in Wales reported a case where a 59 year old client had two current accounts and a loan with the same bank, with loan payments deducted from the first of his current accounts. When one month the client did not have enough money in his first current account, his bank used the right of set off to deduct the money from his second current account. As the second account was used to pay bills, this put the client into overdraft on the account and he incurred fees and charges as a result.

A CAB in the South East of England reported a case in which a client who lived in private rented accommodation and had her housing benefit paid into her bank account ended up in rent arrears when her bank used the right of set off to set her housing benefit against charges on a loan she held with them.

A CAB in the North West of England reported a case where a 57 year old client reliant on income support and carers allowance was repaying a credit card debt at £10 a month but found his bank had used the right of set off to appropriate his benefits payments to settle a monthly repayment it claimed he had missed. It transpired to have been an error and the money was eventually refunded but the client complained that opening an account with a different bank was problematic for him and as such was at risk of his bank using the right of set off again in future.

3 September 2012