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Bank Penalty Charges and Social Exclusion
The CAB service is the largest independent network of free advice centres in Europe, providing advice from over 3,200 outlets, including GPs’ surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups. The service has two equal aims: firstly to ensure that individuals do not suffer through lack of knowledge of their rights and responsibilities or of the services available to them, or through an inability to express their needs effectively; and secondly, to exercise a responsible influence on the development of social policies and services, both locally and nationally.
In 2005/6, Citizens Advice Bureaux in England and Wales dealt with 5.2 million enquiries, including 1.4 million relating to debt problems, 157,000 relating to consumer problems and 101,000 relating to problems with financial services. CAB clients are likely to be on low incomes, are predominantly in social groups DE and are more likely to be tenants of social housing than the population as a whole (Unmet need for Citizens Advice Bureaux, MORI, September 2004).
Basic bank accounts
Access to bank accounts is crucial if financial exclusion is to be tackled successfully, yet about one in twelve households in the UK currently have no bank account of any kind. Having a bank account helps to make people ‘job ready’ since almost all employers now insist on paying people directly into bank accounts. It also enables people to obtain cheaper deals on fuel, insurance and credit.
The banking industry was encouraged to develop basic bank accounts to support the government policy of paying benefits direct into accounts. Since April 2003 over 2 million basic accounts have been opened, and 96 per cent of claimants now receive their benefit by payment into an account of some type. However, people who have little experience of using banking products or those who find themselves in financial difficulties can find themselves penalized by banks through a succession of high charges.
Charges imposed and their impact on CAB clients
Charges levied by banks for items such as failed direct debits, standing orders, unauthorised overdrafts and bounced cheques can cause considerable hardship. This is a growing problem: research by Egg highlights the substantial 71 per cent increase over the last five years in the use of direct debits as a means of paying household bills and nearly a third of all UK current account holders claim to have been hit by a charge for going over their agreed overdraft limit.
Although basic bank accounts have a direct debit facility, the majority do not allow for an overdraft facility. Therefore if one or more direct debits fail because there are insufficient funds the consumer will be penalised for failing to honour a direct debit and may then be charged for having an unauthorized overdraft.
The Banking Code stipulates that banks should exercise consideration when applying charges, especially if a client is in financial difficulty. The code states that ‘subscribers may consider agreeing with such customers appropriate concessions relating to charges and interest payable by the customer. This may mean suspending or reducing interest, default charges and annual fees where agreed repayments do not cover them’.
The charges levied by banks for missed direct debits on their basic bank accounts vary widely, with some banks charging basic bank account holders as much as £39 for each unpaid direct debit or standing order.
Comparing the levels of charges for failed direct debits with rates of benefits gives an insight into how such charges can often lead to greater debt problems:
The level and repeated application of such charges can therefore have implications for an individual’s overall financial stability. Customers who open basic bank accounts for the receipt of their benefits are unlikely to have the financial resources to cope with these charges, so even a relatively small debt can rapidly spiral out of control, leaving them with very little or nothing to live on.
On an additional point, bureaux have recently begun to see evidence of a worrying trend in which companies are offering to help clients recover their bank charges with rates of commission up to 25%
CAB Case Studies
The following cases show the effect that unreasonable charges can have on the vulnerable:
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David Tinline, David Tinline
26-01-2007
Westminster Hall Debate, Tuesday 16 January 2007The CAB service is the largest independent network of free advice centres in Europe, providing advice from over 3,200 outlets, including GPs’ surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups. The service has two equal aims: firstly to ensure that individuals do not suffer through lack of knowledge of their rights and responsibilities or of the services available to them, or through an inability to express their needs effectively; and secondly, to exercise a responsible influence on the development of social policies and services, both locally and nationally.
In 2005/6, Citizens Advice Bureaux in England and Wales dealt with 5.2 million enquiries, including 1.4 million relating to debt problems, 157,000 relating to consumer problems and 101,000 relating to problems with financial services. CAB clients are likely to be on low incomes, are predominantly in social groups DE and are more likely to be tenants of social housing than the population as a whole (Unmet need for Citizens Advice Bureaux, MORI, September 2004).
Basic bank accounts
Access to bank accounts is crucial if financial exclusion is to be tackled successfully, yet about one in twelve households in the UK currently have no bank account of any kind. Having a bank account helps to make people ‘job ready’ since almost all employers now insist on paying people directly into bank accounts. It also enables people to obtain cheaper deals on fuel, insurance and credit.
The banking industry was encouraged to develop basic bank accounts to support the government policy of paying benefits direct into accounts. Since April 2003 over 2 million basic accounts have been opened, and 96 per cent of claimants now receive their benefit by payment into an account of some type. However, people who have little experience of using banking products or those who find themselves in financial difficulties can find themselves penalized by banks through a succession of high charges.
Charges imposed and their impact on CAB clients
Charges levied by banks for items such as failed direct debits, standing orders, unauthorised overdrafts and bounced cheques can cause considerable hardship. This is a growing problem: research by Egg highlights the substantial 71 per cent increase over the last five years in the use of direct debits as a means of paying household bills and nearly a third of all UK current account holders claim to have been hit by a charge for going over their agreed overdraft limit.
Although basic bank accounts have a direct debit facility, the majority do not allow for an overdraft facility. Therefore if one or more direct debits fail because there are insufficient funds the consumer will be penalised for failing to honour a direct debit and may then be charged for having an unauthorized overdraft.
The Banking Code stipulates that banks should exercise consideration when applying charges, especially if a client is in financial difficulty. The code states that ‘subscribers may consider agreeing with such customers appropriate concessions relating to charges and interest payable by the customer. This may mean suspending or reducing interest, default charges and annual fees where agreed repayments do not cover them’.
The charges levied by banks for missed direct debits on their basic bank accounts vary widely, with some banks charging basic bank account holders as much as £39 for each unpaid direct debit or standing order.
Comparing the levels of charges for failed direct debits with rates of benefits gives an insight into how such charges can often lead to greater debt problems:
- The personal allowance for income support for an individual who is 25 or over is £57.45 per week.
- Incapacity benefit for an adult dependent at the long-term rate is £46.95 per week.
- Child benefit for an only or eldest child is £17.45 per week.
The level and repeated application of such charges can therefore have implications for an individual’s overall financial stability. Customers who open basic bank accounts for the receipt of their benefits are unlikely to have the financial resources to cope with these charges, so even a relatively small debt can rapidly spiral out of control, leaving them with very little or nothing to live on.
On an additional point, bureaux have recently begun to see evidence of a worrying trend in which companies are offering to help clients recover their bank charges with rates of commission up to 25%
CAB Case Studies
The following cases show the effect that unreasonable charges can have on the vulnerable:
A Hertfordshire CAB’s client, an 82 year old man living on a low income, came for assistance as he was being charged large bank fees. The client pays for most of his bills by standing order and direct debit. In July 2006 his account became overdrawn for a short time and he was charged £110.00 (£20.00 for being overdrawn and £90.00 for three direct debits not being paid whilst his account was overdrawn). These charges had a cumulative effect as in subsequent months his account went further into overdraft and he was charged £275.00 in August, £140.00 in September, £320.00 in October and £250.00 in November. Since the client survives on a low income these excessive bank charges are affecting his ability to pay his essential bills.
Leicestershire CAB reported that their client had been subjected to hefty fees for unpaid direct debits. Their client, a 67 year old woman who lives alone and who has an income of £114 per week, is generally careful with her money but has incurred several bank charges for unpaid direct debits. Sometimes the bank has taken the whole of her pension to pay the charges they levy, leaving the client with nothing to live on. The bank has refused to waive the charges so the client has cancelled all her direct debits and now pays all her bills weekly via payment cards.
A Surrey CAB’s client, a widow who suffered a mental breakdown following the death of her husband, came to the CAB for help paying for bank charges that had been levied on her account. The client went overdrawn in October and £100 bank charges were imposed. As the client is in receipt of benefit payments only the loss of £100 in a month clearly leaves her without the means to pay normal bills and feed herself. When she went into the bank to try to resolve this matter they refused to help and referred her to the CAB.
A Somerset CAB report that their client, a single parent with children aged ten and four who relies on income support, experienced severe financial difficulty due to the imposition of excessive bank charges. The client had been charged £1642 in bank charges over the last 12 months. The client is now £1000 in arrears with her rent and is under threat of eviction from her private landlady.
A CAB in Essex saw a 67 year old man who had learning disabilities (a mental age of seven). His bank gave him a personal loan and an authorised overdraft following a face to face interview. He had difficulty managing his financial affairs. The bank then made multiple charges in respect of unauthorised overdrafts.
For further information, please contact Tony Herbert, Tony Herbert or
David Tinline, David Tinline
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