Between the Lines: Vulnerable need hardship laws to end huge overdraft charges

Published on Wednesday 25 November 2009 20:13

YESTERDAY'S Supreme Court ruling scuppered, for now, the Office of Fair Trading's bid to cap overdraft charges, adding to a perception that just months after Scotland's banks stood on the brink, they will be allowed to go back to "business as usual".

But while bankers and politicians may hanker for Scotland's proud banking tradition to be restored, the credibility of the nation's high street banks is already beyond repair in the eyes of many customers.

Citizens Advice Scotland (CAS), yesterday told the Scottish affairs committee hearing on banking in Scotland consumers deserve more than a return to "business as usual". It called on high street banks to establish a stronger sense of social responsibility, arguing that the difficulties that many people are experiencing now are not only a consequence of the credit crunch, but of poor banking practices that were in place well before the crunch and remain in place today.

Almost 90 per cent of cases seen by CAS are people who owe money to their bank. And the way in which those banks are seeking to recover debts is causing massive anxiety for people who have been plunged into financial difficulties by circumstances beyond their control, such as redundancy.

While many lenders have provided valuable breathing space to customers in arrears, they have been less sympathetic to customers with relatively small debts, such as loans and overdrafts.

In many cases, excessive charges on overdrafts have pushed customers with manageable overdrafts into more crippling debt. One west of Scotland woman who incurred an overdraft of 70p after a company failed to cancel a direct debit on time now faces overdraft charges of nearly 200, with 20 being added every day.

Then there's the lone parent in the north of Scotland being asked to make overdraft repayments four times higher than she had done previously. The agreed 66 monthly repayment was hiked to more than 300 a month after her bank began insisting on it being cleared within six months.

Like many people in a similar predicament, her choice boils down to either making the payments demanded by the bank at the expense of other debt or bill repayments, or failing to make them and being whacked with default charges that send her debts soaring further.

This isn't an isolated case, according to CAS, with branches across Scotland reporting cases of banks insisting on ramping up repayment rates in order for debts to be cleared quicker.

Of course, banks behaving irresponsibly at the expense of the most vulnerable in society is hardly a new phenomenon. But CAS is right to ask why, when so much has been done to ensure the stability of the UK banking system, precious little has been done to help those hit hardest by the crunch. Beyond the various repossession initiatives, some of which have proved effective, government and the banking industry have singularly failed to tackle financial hardship. It would seem the opportunity to pressurise the taxpayer-supported banks into taking the lead on this appears to have already passed, sadly.

As it stands, banks are "asked" by the British Bankers' Association to act sympathetically towards those suffering financial hardship.

As with most voluntary approaches, this produces little other than lip-service.

The Financial Ombudsman Service reports that banks are failing to tackle customer complaints fairly and there's little doubt that it would like to see more clearly defined rules governing the fair treatment of hardship cases. As the banks have shown little inclination to adhere to voluntary fairness codes, they must be subject to specific hardship guidelines with effective safeguards for vulnerable customers. These would need to address practices including unfair overdraft charges (in the wake of yesterday's ruling); aggressive debt recovery tactics; the "set-off" method in which banks use money from a customer's other accounts to pay off debts; and excessive loan repayment rates.

The MPs on the Scottish affairs committee in Westminster will next week hear from the other side of the fence, with Royal Bank of Scotland among those due to give evidence. It's their responsibility to ask the questions that have so far been ducked and find out how the banks intend to ease pressure on their most vulnerable customers.