Minimum standards for basic bank accounts are to be welcomed, but consumers may also need legal protection to ensure these accounts continue to promote financial inclusion and offer a simple banking solution for those wary of overdrafts and credit cards, writes Florence Iveson.
With all the banking scandals that have emerged since the UK was hit by recession, much has been said about the behaviour of banks and their role in society. Long overdue discussion has been generated about the huge risks taken by investment bankers, the dangers of self regulation and the need to protect the public from future bank collapses. However, amongst all the negatives, one triumph of the banks has until recently received scant coverage and is now reported to be under threat. That triumph is known as the Basic Bank Account, or BBA.
The UK was one of the first nations to realise the importance of financial inclusion – getting those who had never had bank accounts or who could no longer get them due to poor credit history – into the banking fold. The Financial Inclusion Taskforce, a panel set up to advise HM Treasury, initiated BBAs in 2003 and according to the chief executive of the quango Consumer Focus, these BBAs ‘have brought the benefits of bank accounts to millions’. This is seen by many as a laudable achievement and one which Consumer Focus, a statutory body set up to champion the rights of consumers, say banks should be proud of.
Many commentators have pointed out that the poorest in our society have in recent years faced derision from the tabloid press, often labelled as benefit cheats and scroungers. Ironically however, those on the lowest incomes, including those on benefits, actually face a ‘poverty premium’ and can frequently end up paying significantly more than wealthier sections of society for basic services. This is sometimes linked to individuals being ‘unbanked’, as well as having poor credit ratings and being less financially savvy. Save the Children estimated in 2011 that the poorest pay on average £1,300 more per year for basic services as a result of these factors. BBAs are an important part of tackling this.
BBAs are often simply referred to by users as current accounts or are branded individually by banks. They all share two common features – no cheque books and no overdraft facilities – but apart from that banks are able to design basic accounts as they wish. On top of those two features, most BBAs originally allowed access to all ATM machines and Post Office cash withdrawal facilities, as well as allowing users to make standing orders and have their wages paid into the account. The availability of BBAs is thought to be an important factor in tackling the poverty premium, increasing financial inclusion and raising the financial savvy of people on low incomes.
Race to the bottom
The difficulty with BBAs, from the perspective of banks, is that they are not profitable and often cost banks money. The reason they have made the news recently is because Royal Bank of Scotland Group, which includes RBS, Natwest and Ulster Group, has joined Lloyds Banking Group in restricting BBA customers to using the banks own cash points only. According to a report by Consumer Focus, Lloyds has the greatest market share in the unprofitable BBAs, which may account for its decision to withdraw access to all Link ATMs, as it makes the accounts less attractive to would be users. However, Consumer Focus fears a ‘race to the bottom’, with other banks following suit so as to avoid having the most comprehensive BBAs. Access to ATMs is very important to BBA users, with 75% stating the withdrawal of cash from cash points is the thing they use their accounts for most. As the chair of the Treasury Select Committee has pointed out, the link ATM system only works with the participation of all banks. Further, there is a risk banks will start reducing other services to force people to go for more complex accounts.
Consumer Focus therefore not only sounds a warning about the reduction in services being offered on BBAs but also calls for some minimum standards for these accounts to encourage greater uptake of BBAs. Despite the prevalence of these accounts in the UK, there remains a large number of people who are ‘unbanked’. Even for those already participating in the banking system, it would seem important that accounts are available where there is no possibility of running up debt, if users take the sensible step of seeking them. Meanwhile, increasing the number of people with bank accounts could also have the beneficial effect of reducing reliance on pay day loans and cheque cashing services.
Consumer Focus proposes the following minimum standards:
- Full cash machine and Post Office counter access;
- Free electronic payments and debit card use;
- Buffer zones to cover small overdrafts;
- No large fees for unpaid charges.
They suggest that the most effective way of achieving these would be by agreement. Director of Financial Services at Consumer Focus, Sarah Brooks has stated that self-regulation can ‘bring a number of benefits to consumers’ including a system that will ‘be tailored to reflect the needs and problems of that particular sector’.
This suggestion from Consumer Focus is to be welcomed, as is the extensive research they have completed about BBAs and their current usage – see HERE. However, the current prospect of a race to the bottom may suggest that even if an agreement can be reached between all banks now, at a time when the cynical might say that banks really need to be on their best behaviour, that does not guarantee the agreement will be kept in the future. Banks are after all businesses, and when the time comes that banks are under less public scrutiny, as it inevitably will in the not too distant future, some of them may take the opportunity to cut costs by departing from the minimum standards.
The chair of the Treasury Select Committee has received confirmation from some banks that they do not intend to restrict ATM services currently, but that this may change if other banks continue to pull out. Which begs the question, will voluntary agreements be enough to maintain minimum standards for basic accounts? The current government is already looking at improving consumer rights and the enforcement powers of bodies like Trading Standards, as part of it’s ‘Civil Enforcement Remedies’ consultation, which ends on 31st December 2012. A natural corollary would be to consider legislating to protect this very vulnerable group in society and continue with the good work on financial inclusion that has already taken place. Equally, Consumer Focus confirm that if agreement over minimum standards cannot be reached or there is a lack of will amongst banks to self-regulate in this respect, they would push for legislation as they have with pay-day loans companies.
What is clear, is that an agreement between banks, as put forward by Consumer Focus, is better than nothing. These accounts are critical if the poverty premium and the numbers of people remaining unbanked are to be successfully tackled. However it is important that some further mechanism is put forward to ensure that once the spotlight is turned away from these unprofitable accounts, banks cannot simply reduce services quietly, leaving those banks that take their social responsibility seriously with an unfair burden.
Florence is a barrister at 36 Bedford Row and a member of the consumer law team.