Bonkers banks
I鈥檝e spent a disproportionate amount of time recently talking to the chaps who run our biggest banks. And in their relationship with government, they are going through a very interesting phase. Having for years been persuaded (correctly) that the chancellor, Gordon Brown, was out to get them, they now believe (more-or-less correctly) that he 鈥 and his minister for the City, Ed Balls 鈥 have fallen in love with them.
Yup, the new Brown/Balls consensus is that the banks are exemplars of Britain鈥檚 economic future, a 鈥渒nowledge鈥 industry where the UK has a competitive advantage. They have shed their angst that the banks might be operating a cosy oligopoly in those bits of their businesses which serve individuals like you and me and also small businesses (or what鈥檚 known as retail banking). For the Chancellor and his brainy consigliere, the banks are to be charmed not harmed.
But here鈥檚 what irks the banks. Just when that lot in the Treasury have become chums, another part of the public sector 鈥 the regulatory side 鈥 is devoting all its energy and resources to biffing them. And it鈥檚 true that over the past few months there has been a baffling number of competition enquiries into various aspect of banking, not to mention a probe into whether specific banks and other financial institutions have been mis-selling payment protection insurance (policies that provide cover against an inability to repay a personal loan).
So here鈥檚 where I verge on acquiring some sympathy for the banks: the banking market in the UK is more competitive than it is in much of the rest of Europe; yet it鈥檚 the UK where the regulators are most aggressive in promoting more competition. For someone like me, there鈥檚 no such thing as 鈥渢oo much competition鈥. But there is a significant cost for the banks in complying with the non-stop requests for information and evidence from assorted watchdogs.
That said, the banks always succeed in alienating me at the last by the sheer silliness of their main arguments against the competition probes.
To remind you, there are two particularly resonant investigations: one by the into whether there is a proper transparent competitive market in payment protection insurance (PPI), which is additional to the FSA enquiries; and an initial information gathering exercise by the into whether the banks levy excessive penalty charges on current account customers who borrow beyond agreed overdraft limits.
The banks鈥 contention in both cases is that these issues are sideshows: that the big and relevant facts are that current account services in the UK are relatively good value (in fact notionally free to most of us) and that personal loan rates are very attractive.
As it happens, I think they are probably right about what most of us pay for current accounts and loans. By international standards, British consumers typically receive their personal banking services (current accounts and loans) at a pretty good price.
But here鈥檚 where the banks鈥 defence goes a bit bonkers. They say (in private) that the sine qua non of free banking is the right to levy steep charges on the fools, knaves and unfortunates who breach their agreed banking limits. And the underpinning of relatively low personal lending rates is the right to stitch up customers on the insurance policies that often accompany the loans. Now, they don鈥檛 put it quite like that 鈥 but, believe me, this is the inescapable implication of their representations.
Their apparent conviction is that they can only make a decent return on capital from retail banking through muddying the water when it comes to precisely how they generate revenue.
They seem to believe that most of us would never pay them a fair price 鈥 whatever that means 鈥 for the current account services we use or for the loans we take out. So we鈥檝e got to be subsidised by those who breach overdraft limits or by those who don鈥檛 mind paying too much for loan insurance.
Now obviously none of us would volunteer to pay more for any services. But standing back from our personal preferences, a market that functions with this degree of hidden cross-subsidy feels profoundly unhealthy to me.
It鈥檚 vital to all our prosperity that the banks make a proper financial return. But for that to depend on the ignorance, misfortune or negligence of a sizeable proportion of their clients can鈥檛 be satisfactory, sensible or sustainable. What do you think?
By the way, the FSA is running the banks a close second for its sheer silliness. Yesterday it fined GE Capital Bank 拢610,000 for PPI sales breaches. But that鈥檚 probably a fraction of what its parent company, the mighty General Electric of the US, spends in just a few days on flowers in its offices. In terms of overall group profits ($20.7bn after tax in 2006 from revenues of $163.4bn), it鈥檚 not even a rounding error, it鈥檚 the equivalent of that 20p piece that dropped down the back of the sofa which nobody can be bothered to fish out.
Of course, GE doesn鈥檛 like being ticked off in public. But guess what? I think it鈥檚 already over it.
I'm 
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Doesn't the government depend on the "ignorance, misfortune or negligence of a sizeable proportion of their" population for revenues? Think of tax on cigarettes, alcohol, speeding fines, gambling taxes etc.
interesting point...whilst i as a relatively financially astute person (degree in economics and work for a bank) enjoy the fact I dont get charged for my banking in this country, it has struck me that the people who pay for my bankiing are those who are poor (i.e. going overdrawn, incurring charges etc) or financially illiterate. This doesnt really seem right that the poorer / less well educated are subsidising the richer / better educated amongst us. I suppose in some ways it draws a parallel with fee paying cash machines in run down areas where banks no longer deem it economical to have a branch
The Chancellor has plundered pensions which have affected hundreds of thousands. Banks have plundered the same number through the sale of near worthless payment protection insurance and the levy of punative penalty charges. Increasing numbers of bank clients are going through the FOS or others to get these "fines" back. The Chancellor will also never be forgiven by those who have had their pension "robbed", he can smile now but it will not be smiles when the votes come in.
I am still waiting for the banks to clearly justify a 拢 28 "administrative" charge for an letter and yet when they have the same charge requested for a reply the response is a worthless apology. Banks are seeing larger numbers voting with their feet to avoid or reduce potential charges and the Chancellor will see election voters doing the same. The unfortunate conclusion for "joe" public is that neither will give a 4x, the banks will find ways of parting us from our money and the ex-Chancellor will live on, still a well paid politician and due a healthy pension.
The points raised about the way banks charge retail customers are all absolutely correct. The vast majority of us paying nothing for banking is a false market, which is never a good thing.
Where the article fails totally however is that it lacks any form of proposal or suggestion as to what SHOULD happen. I would be very interested to hear some editorial opinion from Mr Preston on this.
In the absence of this, my own opinion is that individual banks have tried and failed to end "free banking" by bringing in accounts that charge a monthly fee; I have a very close relative who headed up one such project. This will only succeed with some POSITIVE government intervention, or even instruction, not the negative rule-book regulation of the FSA.
Whilst I do not support any underhand practice (including the persistent practice of our media to be economical with the truth to sell their wares or to promote their agenda) it should be remebered that people who exceed their agreed overdraft limit (something which is illegal in many European states) are spending someone elses money without permission. You would not expect a CEO of a bank to help himself to the banks funds without proper consent and neither should customers and the media think it right to spend money that isn't theirs. We need also to appreciate the risk banks take with customers who have difficulty in managing their finaces or in some cases are 'Negligent' (your word Robert). Having said that banks etc should be clear about what and how they make their charges abd customers should devote the time such an important matter deserves to understanding their finances.
I wonder whether more comments will be forthcoming once the major banks start publishing their results again? I think this result-season is due soon & we can expect to see grotesque amounts of profits being owned up to, whilst claiming that they need it all & more to cover their bad debts. Bad debts, conversely, seem to be a source of lots of profits as all costs are recovered (largely thanks due to an over-heated property market), and vast fees are charged for the priviledge of being fore-closed upon.
Why is it the poor, hard-up & generally slow to cotton on are bashed with fees for arrears, administration, 拢30 per letter etc etc, This does seem to me too great a price for "free-banking" Time for Gordon & Ed to dust off their 'windfall tax' file?
v interesting articles - I'll come back again for insights into the weird UK market!
cheers
David Hardman
Financial administrator & ex-banker
Robert,
This is obviously an issue with a lot of mileage.
A lot of the comments already posted pose interesting points that the banks need to answer.
The banks, certainly Nationwide Building Society, argue that compete when it comes to current account charges by looking at the market and adjusting their charges accordingly.
Now that's never made sense to me - whichever bank is brave enough to carry higher charges is unlikely to face any significant downward pressure as:
a)Banks and Building Societies don't generally make a big deal of their charges when they advertise their wares to the public - so they are unlikely to become a major criteria when a person chooses where to do their banking;
and b) since most of us assume that any charges will be only a one-off, 'blue moon' occurance, we are likely to value other criteria more.
The problem comes in when vulnerable and (as one other commenter has highlighted) somewhat financially uneducated individuals find themselves in positions where their charges become almost self-generating.
Have a look at a website like consumeractiongroup.co.uk and read the case studies of people who have paid hundreds and thousands in penalty charges - they are the ones funding the 'free banking' of those who have sufficient financial stability so as not to be caught out by charges.
If the retail finance industry got rid of free banking and started charging for their services they would have to be clearer about the value of those services, it would mean they would ahve to properly defend their profits (and their pay packets).
So a minority are paying dear for the rest of us. No wonder those in these situations are taking their banks and building societies to small claims court to fight back.
I'm a bank customer. I'm a good chap and keep my account in credit. As a reward for that, I get free banking. When people go overdrawn without agreeing a limit, or overshoot their limit, that's my money they are borrowing! Yours too, possibly, if you keep your account in credit. Do these people think that this comes for free? If you borrow money by agreement you may end up paying an arrangement fee or something similar. Why do the people who overdraw think that they should be entitled to something they would not get (no fee) if they did all that by agreement with the banks.
Every other country in Europe charges fees for every transaction they process, and they charge interest rates which are in comparison, eye-watering. The end result of this orchestrated push by debtors will be that all of us end up paying fees as they do in the rest of Europe. And thus another benefit for the majority of people who don't exceed their credit or go overdrawn will be scuppered by the selfish and noisy minority who do.
Where is the consumer organisation which is supposed to be looking out for the majority of us when this is going on, or will the whole thing go by default.
Some deeper analysis required by Mr. Peston here, please.
Government and banks:
The government thinks the banks are operating competitively in an "efficient market", and are the jewel in the crown of British Industry.
That's not quite the whole story.
The last thing the any government wants is a banking crisis. So, banks operate in a protected environment that no other kind of business enjoys. If a banking crisis were to loom, any government would step in and bail them out. No government could stand by and watch any major British bank fail, because all other banks would be dragged down due to the many cross-bank money deposits.
An economy can operate without a car manufacturing industry, or any other kind of industry, but no economy can function without a banking system. In other words, if you are a major British bank, you can't go bust - the government would bail you out.
From the banks' point of view, this is a no-loose business proposition, all underwritten by government money - ie. our money.
The continental alternative is high government regulation for the banks to ensure a) that they don't do anything so stupid that they risk going bust b) that they provide reasonable retail services at reasonable prices and no rip-offs.
But high regulation is out of fashion, and "regulation by market forces" is in. This relieves the government of the tedious chore of more regulation, and enables it to stand back from anything the banks do - it's not the government's fault, gov!
So, the banks are allowed to operate on a relatively long leash compared with those on the continent of Europe. The almost total lack of controls on lending allows the banks to make tons of money, and remain financially solvent (to put it mildly!). Both the government and the banks think this is a good deal.
And bank chairmen can strut around pretending that they operate in the rough, tough world of big business, when in fact they operate in a government-protected environment underwritten by tax-payers' money.
But what about consumers?
The banks realise that they can get away with almost anything, so they do. Hence the deluge of junk mail offering to lend me money secured on my house; the extortionate (and probably illegal) charges for going over your limit; the "payment protection insurance" (PPI) that earns huge rates of commission.
Even this government cannot stand idly by while such blatant rip-offs go on. The banks have gone too far - hence the regulatory concerns that so trouble the banks. They thought they could operate without any restrains at all - that was the deal, wasn't it?
The banks think their rip-off behaviour is consistent with good market capitalism. Matt Barratt, the chairman of Barclays, "doesn't recognise the concept of excess profits". That's because he doesn't recognise the imperfection of the market-place within which he operates, nor the government protected, tax-payer funded umbrella, under which his business runs.
They also point out that it subsidises "free" banking for the masses, who don't want to pay for their banking services. As the article points out, this syphons money out of the pockets of the poor and financially uneducated, into the pockets of the banks and the the better off.
A better way?
Banks are not like other business: the government guarantees they can't go bust, and this is underwritten by our taxes. In exchange, the banks must accept much tougher regulation.
They must not be allowed to push people into huge credit agreements based solely on their ability to repay by having their homes reposessed. Lending decisons would have to be based on the customer's total financial situation, not just on whether the bank thinks they can squeeze the money out by any means. Nor should they be allowed to push their dodgy PPI or other insurance products, or grossly overcharge for overdraughts.
If this means explicit charges for normal banking, then so much the better. If we had to pay, explicitly, we might be a bit more choosy about who we bank with and the level of nonsense we have to put up with. Of course, the banks wouldn't like that at all.
The government's primary responsibility is to represent the interests of normal people, not the special interests of big business.
But no government will take this course. It would mean an end to easy credit; an end to the vast ocean of debt upon which current over-inflated asset prices now float - particularly house prices. That would mean an end to growth in prosperity until the present imbalances had worked their way out of the system.
And it would be the government who took the blame.
Would Mr J Islip please stand for Prime Minister? or President?
I vote for him/her
"When people go overdrawn without agreeing a limit, or overshoot their limit, that's my money they are borrowing! .. Do these people think that this comes for free?"
It is bizarre that someone would think that just by keeping some money in the bank, you are doing the it such a big favour that everything else should be free, and if you reverse the situation, even for a few days, it is such a big cost to the bank that you deserve to be hit with what is, in relative terms, an enourmous charge.
"It should be remebered that people who exceed their agreed overdraft limit (something which is illegal in many European states) are spending someone elses money without permission.."
This displays a very naive view of the service that banks operate, and it would only be true if the bank didn't implicitly consent to it, and only matters if you didn't pay the money back. The fact is they do consent to you going overdrawn, and it costs them virtually nothing, if you pay it back soon.
The bank manages its overall holdings on a daily basis, and it makes absolutely no difference to them, cost-wise, whether your individual account has a small positive or small negative balance, as long as it is sporadic, short-term occurances. It is a myth that the bank spends time and resources on carefully considering whether to allow you to go 拢20 over the limit, and then generously let you do so, as long as you "cover their cost".
The process for letting you go overdrawn is automatic, it takes a microsecond for a computer to make the "decision", it spews out your overdraft letter without any human intervention, and this is supposed to cost them 拢30. I reality it's an automatic loan with over 10,000% interest, if it's paid back within a few days (which mine always have been).
If this was a great inconvenience to the bank, why don't they simply prevent you from going overdrawn? They know your balance, they decide whether to accept transactions or not. The simple answer is that each time, it costs them pennies, but they make 20-30 pounds from the customer.
"You would not expect a CEO of a bank to help himself to the banks funds without proper consent.. "
Perhaps not the banks funds, but you clearly have not run a small business and tried to get a bank to pay their invoices on time. Banks and large companies routinely pay small companies late, with sometimes dire consequences for these cash-flows, simply to earn the extra interest or because their paperwork is not in order, and because they know they are in a strong commercial position vis-a-vis small suppliers. Try to ask the bank for a 拢30 pound late payment charge, and you are directed to its T&Cs, which they will not vary, simply because they are big enough not to have to. Same transgression, different rules. It's a one way street.
It appears I am in a minority in this forum, having actually incurred overdraft charges. I recently asked my bank to pay back these illegal charges for the last six years, and although they refused to accept any wrong-doing, they could not accommodate me quickly enough, and paid it back in full. I interpret this as a desparate eagerness to ensure that the public light is not focussed on these charges in earnest, i.e. through the courts.
Rather trying to ban the innocent three day, 拢20 "unagreed" loan that an overdraft often is, it is the disproportionate 拢30 charge that HAS been deemed illegal, and rightly so. The crying shame is that individuals still have to fight it out with the banks alone, rather than the OFT simply ordering a stop to this, and ask the banks to pay back the money they have stolen over the last half decade. That would be regulation with real teeth.
SO Mr. Peston.. If this is illegal, why is it not stopped? Why is the money not returned? What is the OFT waiting for?
In 1907 it took 5 days for a cheque to clear, in 2007 it takes 4/5 days (Lloyds TSB) for a cheque to clear. How much longer can we allow pompus bankers to look down on the working class while they compair annual bonus's deciding whether to buy an Aston Martin or a flat in Southwold.
The banks deserve absolutely compassion at all, they abuse their customers at every turn through excessive charges and low interest paymets. Then spend millions trying to suggest they understand their customers.
This government has shown it is bankrupt of ideas and will leave the country a legacy of debt that will kill generations to come.
The similarities between both sides are remarkable in that they all are managed by folk who only care ablut themselves and not for their clients or voters. Both work on short term spin and then expouse shock horror when they are rumbled flaring out blaming everyoneelse for their own greed and sad ego's.
Where justice should prevail regulators are now showing gross incompetance in addressing issues properly.
One can only suggest the FSA has failed abysmally when an industry deemed earning 拢3.5- 4.5 billionm pounds from payment protection insurance will only be fined in total perhaps 拢10 maybe 拢20 million
If that is an example of showing that crime doesn't pay then we should all now be able to walk on water.
Lets have serious regulation where no one is above treating customers fairly. It's not any more about the underlying cost of the product, much as is always suggested to the contrary. Its now all about what you are actually buying for your money, be it bank accounts, credit cards, payment protection insurance politicians or regulators.
The sooner we get back to a lifestyle where we all know what is right and wrong and how to be honest the better we will all be nfortunately Labour has killed all honesty and the banks have used that as chance to do the same.
The weakness of economic management experience has shown itself so much with this governnment, is it any wonder they are now seeking solace from a group who they previously detested, one can only sospect that is so they can get a nice cushy number in place for when they are desimated at the next polls. The banks and this government deserve each other but the public deserves substantially better.
Let ius never feel sorryt for the banks or politicians they certainly do not deserve anything credit for the damage they have caused us all.
Banking isn't free. Very little, if any, interest is paid on credit balances in current accounts and fairly hefty interest is charged on overdrafts and loans.
Personally I feel very much agrieved at the prospect of paying for running a current account. As virtually everything now has to be paid by direct debit, not having a current account is not really an option.
I am not a wealthy person and I have occasionally found myself charged for going overdrawn. Although I do think the banks overcharge for this, and are much quicker taking money off you than repaying it should they make an error, I also think that if you are borrowing someone else's money you should pay for it.
To sum up, the banks make their money from investing the money we pay into our accounts. Having just received the Nationwide's Director's remuneration details, the people in charge of investing our money make a lot of money out of it. For that reason I see no excuse for any bank to charge for a standard current account.
There is such a lot of rubbish in the above posts that it is difficult to know where to start.
Why is it in todays society people are unable to take personal responsibility for anything? People moan about the 'nanny state' and then complain that there isnt enough regulation.
Look guys, banks are businesses - not charities, not government run institutions and they are there to make profits which, incidently, expressed as a percentage return on capital are lower than many other industries...its the sheer scale that makes them look big.
They publish what they do and what they charge in freely available leaflets. If you go in and ask what they charge and when, they will tell you. They dont force you to have the payment insurance you have a choice.....gosh...you have a choice!
If you choose to go overdrawn/exceed your limit without arrangement what do you expect to happen? whatever anyone says there is a cost. It may not be as high as what the banks cgarge but they are also entitled to a profit margin.
Personally i prefer to take the effort to manage my account properly, transfer excess funds into a savings account and transfer them back when i want to spend them(it doesnt take very long). If i want to borrow money it is very easy to pick up the phone and speak to the bank and ask first.
Its just that some people cant be bothered. Yes we all make mistakes and you know what...if you run a normally good account the banks will usually recognise that an error is out of character and refund with no problem. (incidentally some banks allow , or at least used to,a small no cost overdraft facility, 拢50 or so for small oversights)
So forget regulation, forget windfall taxes, certainly forget about paying for every cheque, direct debit and standing order that goes out of your account like you used to have to. Just sit down and keep your finances order.
dont tell me that poor people cant manage their finances..that is simply no excuse..it might be harder but it still comes down to not spending money you havent got,(or before you get it) with out asking first.
It amazes me to hear people comlain about banks abusing their customers which is only after the customer has abused them by doing what their account opening literature clearly counsels them not to...take money out that they havent got.
There are some lengthy posts on this topic which clearly reflects the level of feeling. Bottom line is if you take personal responsiblity you wont pay excess charges.