People excluded from financial services now have a legal right to a basic bank account under legislation that took effect last week.
There’s just one complication – the banks required to offer the accounts do very little to promote their existence, making it easier for them to continue rejecting people struggling with their finances.
Nearly two million people in the UK are without a bank account, according to research last year by the Financial Inclusion Commission, even though one is essential for access to financial services, receiving welfare support, being paid wages and even securing employment.
The majority of those excluded are denied banking services because of serious debt issues (including bankruptcy), they’re unable to prove their identity or are for some other reason ineligible for a bank’s main current account.
But legislation that took effect on 18 September, arising from the European Parliament’s Payments Accounts Directive, forces an obligation on the UK’s major banks to offer basic bank accounts to eligible customers.
The accounts can be a lifeline for many people, said James Stewart, public affairs officer of StepChange Debt Charity Scotland.
“Not having a bank account means that you are locked out of the best deals that are only available via direct debits. Being outside the banking system contributes to the poverty premium where the poor pay up to 10 per cent more for basic services.”
People excluded from financial services pay a “poverty premium” of £1,300 a year, the Financial Inclusion Commission estimated. It found that in 2012 some two million people took on high-cost borrowing because their exclusion from banking barred them from affordable sources of credit.
Until recently, banks have had a chequered history when it comes to making basic banking services available. State-backed Lloyds Banking Group and Royal Bank of Scotland came under fire in 2011 for preventing basic bank account users from accessing Link machines. The move put around 80 per cent of the UK’s cash machines out of reach of their basic bank account customers. Access was only restored two years ago.
“The experience of our clients is that basic bank accounts are sporadic across the sector, and things like high charges and limited access to cash machines can cause real problems day to day,” said Stewart. “Many people fall into debt through unexpected life events, and it should not be that they are then hit with disproportionate charges that risk turning a temporary financial struggle into a more serious cycle of debt.”
It was only in January this year that banks were made to offer the accounts free of charge, even when standing orders or direct debits are unpaid. Basic bank account users previously faced charges of up to £35 for failed transactions, leaving some overdrawn and even deeper in financial difficulties.
The nine banks legally obliged as of last week to provide basic bank accounts include Lloyds Banking Group (including Bank of Scotland and Halifax), Barclays, Clydesdale, HSBC, Nationwide, RBS (including NatWest), Santander and the Co-operative.
David Black, director of DJB Research, said: “Because basic bank accounts don’t permit overdrafts, you don’t need a credit check to get one, just basic proof of ID.”
The accounts must be free of all charges, under changes that took effect in January, but while they provide ATM access, direct debits and standing orders and most offer debit cards, they don’t have overdraft facilities or cheque books.
There are other complications too, such as the brand names that some banks insist on using for their basic banking products.
“They’re fee-free so the banks don’t make profits out of them, so it’s sometimes easier to ask for the basic bank account by name,” said Black.
The Clydesdale and Yorkshire Bank basic product is called Readycash, for instance, while the Co-operative’s is referred to as Cashminder and the RBS version is the Foundation account.
Customers can’t always apply for a basic bank account directly. Bank of Scotland and RBS are among those that ask people to apply for a bank account and then decide which account is most suitable for the applicant. That increases the chances that applicants won’t know about the existence of a basic banking option, even if it meets their needs.
But perhaps the biggest issue is the lack of obligation on the part of banks to raise awareness of the accounts. Most say the relevant information is provided online, but it can be difficult to find, particularly on the Barclays and Bank of Scotland websites.
Experts are concerned that the legislation doesn’t go far enough. The requirement is that a basic bank account should be made available if a customer expresses a “genuine interest” in opening one. If people aren’t made aware of the accounts, however, they won’t be able to inquire about them.
Charities have called for banks to raise awareness of the accounts and train staff to deal with applications for them. One, the Christians Against Poverty debt counselling service, said bank staff had been directing applicants with patchy financial records to normal fee-charging accounts, for which they are usually turned down.
But with no profits to be made from basic bank accounts, there’s no incentive for banks to promote them or to compete. That could mean people are still turned away even under the new legislation.
So with the right to a basic bank account finally enshrined in legislation, the focus should now be on ensuring people who need the accounts know about them, according to David Hilferty, policy executive at Money Advice Scotland.
“Introducing these accounts is only the first step towards bringing basic banking services to the estimated one million people in the UK still without access to a bank account,” he said. “All of us – including the advice sector, banks and government – must now work together to raise awareness and ensure that those eligible for the basic bank accounts know where to find them and how to access them.”
Fraser Sutherland, consumer spokesperson at Citizens Advice Scotland, agreed. “If more consumers are now able to get truly fee-free accounts with no hidden charges lurking below the surface, that is to be welcomed,” he said.
“However, many of these consumers will need support in how to manage their accounts, given many will have not used banking facilities for a long time.”