link to the Scottish Poverty Information Unit



Scottish Poverty Information Unit

Banking the unbanked - where are we now?

Conference contribution from GLC's Mike Dailly
22 January 2008, Glasgow

Deeprose Lecture Theatre, Govan Mbeki Building, 
Glasgow Caledonian University


The credibility of banks is at an all time low. 

The shoddy lending practices of "sub-prime" lenders in the US witnessed a historic crash last year with consequential instability in the UK's financial market.   Instability is going to get worse.  Last night £77 billion pounds was wiped off the London's FTSE 100 with mounting fears of a US recession.

Back in the UK with our own banking crisis in full swing and the Northern Rock enjoying a £25 billion pound bail out from the UK taxpayer, a journalist - posing as a first-time buyer - was offered a mortgage six times his salary from the Rock a couple of months ago

Irresponsibile lending in East Colorado reasonates in Easterhouse. 


















The FSA has estimated that as many as 1.5 million people in the UK will be coming off fixed rate mortgages this year.   Many of these homeowners will be unable to secure cheap deals exposing them to higher monthly payments and the risk of mortgage repossession.  

This factor has prompted the UK Council of Mortgage Lenders to predict a 50% increase in mortgage repossessions across the country this year.   

That's a jump from 30,000 to 45,000 repossessions - figures we have not seen since the early 1990s.   Less than 20% of households have mortgage indemnity insurance - and even those that do often discover their policy is declined on the back of some small print, legal loophole.  

Govan Law Centre has been working with York University's Centre for Housing, who've worked up a model for a new form of low cost social insurance to protect homeowners from mortgage repossession.   There is no doubt that the current insurance market is failing to meet the needs of homeowners.  Urgent strategic intervention from Government is needed.

But financial irresponsibility doesn't stop with mortgages.   

Banks have been generating huge profits from the widespread mis-selling of Payment Protection Insurance.   This month we learned that the FSA had fined HFC (part of the HSBC Group) £1 million pounds for mis-selling PPI.     Many banks have now been fined including GE Capital Bank and Capital One.

We also learned last year that banks may face a £1bn bill to compensation customers scammed by mortgage exit fees.  

How many people now trust their high-street bank for financial advice? 

Without charges there will be no free banking, say the banks. 

Having set up the false premise, they pose a divisive question: should free banking be subsidised by fees charged to those who default?

Who says UK banking is free?    Consider the evidence. 

A UK consumer backlash, led by free online internet communities has seen banks forced to repay more than £1 billion pounds in unfair bank charge refunds. The banks were haemorrhaging so much cash they needed the Office of Fair Trading (OFT) to sue them as an excuse to put a stay on consumer claims across the UK.

The British Bankers' Association (BBA) chief, Angela Knight, has justified bank charges by announcing that "people don't like parking tickets either, or speeding fines". True, but it was a democratically-elected parliament that introduced traffic fines for public health and safety reasons. Who gave the banks the power to fine people?

When the bank charges campaign first gained momentum in 2006, the BBA argued that charges reflected actual cost.

I debated this issue with the BBA's former chief, Ian Mullen, on BBC Radio 4's MoneyBox in 2006. Mr Mullen claimed that every time a transaction was declined there was a bank employee sitting in an office somewhere in the UK, on a 24/7 basis, looking through a customer's file and deciding what to do - in other words it really did cost £39 to send a letter. As most charges were automated computer-generated letters, this argument was nonsense.

Last year, the banks embraced a new defence: the "service fee". Many banks have now changed their contractual terms and conditions so that "charges" are replaced with "fees" for a "service". This is the banks' core defence to the OFT's test case which has heard preliminary legal argument at the High Court in London this month.

But consider what happens when someone goes over their overdraft limit. You have a direct debit due to come off tomorrow. It will come off at midnight or thereby. If you have insufficient funds the bill will not be paid and this will be handled by the bank's computer system.

Yet with the substitution of a few words, the banks now say any transaction exceeding an agreed limit is an "informal request for a new overdraft". In considering whether to grant this request they will charge a fee. The typical fee for a nanosecond of computer time to reject your payment is £39.

Can duplicity and doublespeak sink any lower?

UK banking has never been free. 

Most ordinary citizens will have paid for banking services a thousand times over in rip-off scams and charges.

"Fees" charged to those in default are not designed to pay for the "costs" of universal banking. They are designed to generate obscene profits - a mark-up of over 1500% per transaction to the bank (based on a conservative baseline cost of £2.50 for a charge levied at £39 per item).

The banks have treated the British public with contempt.  Who pays the most bank charges in our society and who gets the most expensive credit?

Low-paid, hard-working families and individuals, citizens on welfare benefits, and people who have fallen ill or are going through painful relationship breakdowns.

Why is this important?   Try getting your salary, tax credits or welfare benefits paid without a bank account.

Banking is now an essential service - like water and electricity - and the banks have a monopoly.    Monopolies need to be regulated.

It's not right to exploit the vulnerable to generate ever increasing profits.

We need UK law reform to protect vulnerable citizens and the Financial Services Authority must lift its claims waiver as a matter of urgency so that bank-charge complaints can be processed and people can obtain refunds.

To conclude I would like to endorse the findings of the recent Poverty in Scotland Inquiry, published by the House of Commons' Scottish Affairs Committee.  

After taking evidence from a wide range of organisations and experts, it has called for more action on irresponsible lending, and for the courts to be empowered to impose a cap on interest rates where someone is facing severe poverty.   

We need strategic intervention to ensure that the poorest people in our society stop getting the most expensive credit.   

And we will never tackle financial exclusion if we allow the financial services sector to rip citizens off through the mass mis-selling of products, and a charging system that fines a low paid customer a week's wages just for a few direct debits being bounced.

Mike Dailly
Principal Solicitor
Govan Law Centre


Conference hosted by
SPIU & the
Legal Services Agency
 Glasgow, UK.