CP 10/15: Quarterly consultation proposed changes to the Banking Conduct of Business sourcebook

Transcription

1 CP 10/15: Quarterly consultation proposed changes to the Banking Conduct of Business sourcebook Response by Citizens Advice and Citizens Advice Scotland to the Financial Services Authority August 2010 Myddelton House Pentonville Road London N1 9LZ Tel: Fax:

2 Introduction Citizens Advice and Citizens Advice Scotland welcomes the opportunity to respond to the FSA s Quarterly Consultation CP10/15. The Citizens Advice service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination. The service aims: To provide the advice people need for the problems they face; and To improve the policies and practices that affect people s lives. The Citizens Advice service is a network of over 400 independent advice centres that provide free, impartial advice from more than 3,000 locations in England and Wales, including GPs surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups. In 2009/10, the Citizens Advice service in England and Wales helped over two million people with over seven million problems, including 2.3 million enquiries about personal debt. Citizens Advice Scotland (CAS) is the umbrella organisation for Scotland s network of 83 Citizens Advice Bureau (CAB) offices, the largest advice network in Scotland. These bureaux deliver frontline advice services through more than 200 service points across the country, from the city centres of Glasgow and Edinburgh to the Highlands, Islands and rural Borders communities. Bureaux in Scotland dealt with a total of 976,989 issues in 2008/09, 28 per cent of which related to consumer, debt and finance issues. We are restricting our response on the Quarterly Consultation Paper to the questions on revising the Banking Conduct of Business sourcebook in relation to use of right of set off. General comments on use of right of set off As the consultation paper acknowledges, Citizens Advice Bureaux in England and Wales have noticed an increase in the use of right of set off by banks and building societies. In 2006/7, bureaux dealt with 387 enquiries about this issue. By 2009/10, this had grown by over 80 per cent to 713 enquiries. We would, however, point out that this is likely to be an underestimate of the problem, as non-specialist bureau advisers may not necessarily recognise and record such activities as a bank exercising its right of set off. In this context we would point out that last year bureaux dealt with nearly 178,000 enquiries about bank and building society overdrafts and nearly 423,000 enquiries about credit and storecard debts in 2009/10. Analysis of the profile of 671 CAB clients who sought advice about right of set off from bureaux in England and Wales in 2009/10 showed that: 20 per cent considered themselves disabled or had a long-term health problem 52 per cent were women 2

3 33 per cent had dependent children and 15 per cent were lone parents Ten per cent were aged under 25 and seven per cent were aged 65 or over 63 per cent had total household incomes of less than 1,000 per month. We believe that the one of the main drivers for the increase in the number of cases dealt with by bureaux featuring banks using their right of set off is Government policy to pay state benefits and housing benefit for private tenancies into bank accounts. Whilst it may seem to the bank that substantial sums are being paid into the account, the reality can often be that these are earmarked for other purposes. The following cases show the consequences: A CAB in Essex saw a lone parent with debt problems, including rent arrears. Her housing benefit was paid directly into her bank account. The bank was appropriating the money to pay off a personal loan and credit card debt to themselves. The client s landlord issued a notice for possession, following the expiry of which court proceedings would follow.. A CAB in Oxfordshire saw a woman who had been made redundant in August 2009 and was now in receipt of jobseekers allowance. After experiencing problems with bank charges after exceeding her overdraft limit, she was keen to ensure that she could withdraw all her housing benefit from her account to pay her rent. The bank assured her that her money would remain secure and she would have no problem. However, the bank s credit card company took almost 600 from her current account. This represented two thirds of the rent she owed her landlord. Although the client was able to persuade the credit card company to transfer all the money back, it took a week for them to do so. In the meantime, the client had been extremely worried about losing her home. She had also spent a lot of money making repeated phone calls and travelling to the bank branch to sort out the problem. A Surrey CAB was helping a lone parent who owed 17,000 including an overdraft and a credit card debt to her bank. Her sole income was benefits and some maintenance from the children's father. So that she could manage her money effectively, she had set up a transfer of 250 from her current account to her savings account to pay the shortfall on her rent due after payment of housing benefit. Her bank used 230 of this to pay off some of the balance on her credit card, without consulting her first. Banks use of the right of set off also undermines efforts made by customers in financial difficulties to get their financial situation under control. By unilaterally using the right of set off, banks prioritise payment of a credit card debt above more important commitments, where non-payment results in loss of home, liberty or disconnection of supply. For example: A CAB in Yorkshire saw a man who had got behind with his financial commitments when his working hours were cut. He had a current account, credit cards, personal loan, and a mortgage all with the same bank. The bank used its right of set off to take monies from his personal current account to bring his credit cards up to date. The client only found out this had been done when he checked his online banking. As a result he could not afford to pay his mortgage and other priority debts. He had 3

4 to borrow money from his parents to pay his priority commitments. At the point when the monies where taken, other direct debits were due to be made. Although these were honoured by the bank, his account went overdrawn and incurrred over 150 in charges.. This is clearly illustrated not only by the cases we have cited above, but also by cases where the bank uses its right of set off to pay unsecured debts over payment of mortgage arrears to the bank: An Essex CAB saw a man who had been laid off from his job as a car mechanic, and had had to claim jobseekers allowance. He had a mortgage, two current accounts and a credit card account all with the same bank. Before he was laid off, the client surrendered a life insurance policy in case he needed funds urgently and paid the proceeds, 8,600 into his account. Without the client s knowledge, he had built up mortgage arrears totalling 1,500, but was not aware of this until he called into the local bank branch about another issue. When told about the arrears, the client asked the bank to take money out of the 8,600 in his account. The bank, however, had already used this to pay off an unsecured loan the client had to a subsidiary company with a completely different name and had closed the current account. Subsequently, the bank began possession proceedings in court for mortgage arrears. In other cases, use of the right of set-off means that the customer s overall indebtedness spirals out of control. Banks do not seem to check whether amounts taken from current accounts will leave the customer overdrawn, thus incurring additional overdraft charges: A West of Scotland CAB reports of a client whose bank took two payments totalling over 1,000 from her current account to put towards loan arrears without her permission. The client was originally in credit in her account, but the two payments left her over 1,000 into her overdraft. The client has no funds to live on and is now stuck in a cycle of overdraft charges Another West of Scotland CAB reports of client who fell into arrears on a bank loan after becoming unemployed. He borrowed money from his family to clear his overdraft and negotiated a repayment arrangement with the bank to clear the arrears on the loan. However, he recently paid money into his account, after which the bank withdrew 600 of this money through their right of set off to put towards the client s personal loan, despite the client keeping to the repayment agreement. This action has put the client s current account back into overdraft thereby putting the client back in a cycle of charges. A CAB in Nottinghamshire saw a woman who was unable to work due to health problems. Her benefits were paid into her current account. She also had credit cards with the same bank who were taking money from the account to pay the credit card debt. As a result, the client was going overdrawn. 4

5 General comments on the measures proposed by the consultation Whilst it is welcome that the FSA is taking action on this issue, we are disappointed that the proposals for change are weak: We believe that they will do little to address the detriment we have outlined in the cases above. The proposed rules have the status of guidance (G), which allows firms flexibility, but are harder for the FSA to enforce. In our experience, some of the guidance in previous editions of ICOB and MCOB on sales of payment protection insurance, mortgage lending and arrears collection have led to considerable detriment for consumers as they allowed too much leeway to the firms. Since we brought these issues to the FSA s attention, the FSA have turned the guidance into rules. The proposals require less of firms than the guidance recently issued by the Lending Standards Board on the right of set off. Unlike the proposed changes to BCOBS, the Lending Code guidance is enforceable against subscribers to the Lending Code. As we highlighted in our article about right of set off in the September 2009 issue of Evidence journal, we believe that as other policy initiatives are inadequate to deal with the problem, there should be an outright ban on banks right of set off. As this will require primary legislation, we believe that BCOBS should provide better protection by limiting when firms can apply the right of set off. These provisions should have the status of evidential requirements (E) or rules (R), if they are to be effective. We have set out suggestions for an improved regulatory regime in our responses to the specific questions posed by the consultation. We also note that the proposed changes do not make it any easier for consumers to apply their common law right of first appropriation to income in their current account, an important tool which enables consumers to shield their income from a bank and use it for other purposes. During 2009/10, bureaux in England and Wales dealt with 1,112 enquiries about this issue. We are concerned that knowledge amongst bank branch staff is extremely variable, with many counter staff seemingly unaware of its existence. Central support functions provided by banks also often appear to provide little information about this right to assist counter staff. More worryingly, we understand that some banks appear to have made changes to their terms and conditions of current accounts in an attempt to remove even the possibility of exercising this right. The following case shows the difficulties experienced by consumers faced with use of the right of set off against the their current account to persuade bank staff to implement this right: A Devon CAB reported that a woman on jobseekers allowance visited her bank to ask them to implement her first right of appropriation as the bank were taking her benefits to pay credit card and loan debts. The member of staff she spoke to dismissed the client s request out of hand, saying that the first right of appropriation did not apply to them and that they could take money for her banking and credit card debts. 5

6 Responses to specific questions Q21. Do you agree with our proposal that information about set-off should be provided in the account terms and conditions? No. We are concerned that the proposals to provide information in terms and conditions will do little or nothing to make consumers aware of the firm s right of set off or the impact that use of the right can have. It is worth noting that the consultation paper admits this. We would point out that terms and conditions can be lengthy and in small print, so there would be nothing to draw the consumer s attention to the firm s right of set off. The proposals will not help situations where the bank has subsidiary companies with completely different names. In the Essex case quoted overleaf, the client was completely unaware that his bank owned the subsidiary company with whom he had a personal loan. We highlight that banks who use the right of set off own many subsidiary companies, and that these have increased with the recent contraction of the number of banks as a result of the financial crisis. Q22. Do you see a need for further information, beyond that set out in our proposal, to be provided about set-off when a customer opens an account? Yes. We believe that BCOBS should not only require information about the right of set off to be included in the terms and conditions, but should also require the information to be in a prominent position in the terms and conditions and in plain English, so that the information stands out. BCOBS should also require firms to include in the terms and conditions the fact that right of set off can be applied to repay debts with subsidiary companies, and tell consumers where they can find a list of the subsidiary companies that this applies to. As we pointed out in our general comments on this consultation, these changes need to have the status of rules or at least evidential requirements to be effective in tackling detriment. Q23. Do you agree with our proposal for firms informing customers of the right of set off when they are beginning or continuing to experience difficulty in meeting their payment obligations? No. Whilst we agree that firms should inform customers in financial difficulties about the right of set off and when they might use it, we are concerned that the proposal will not necessarily provide sufficient warning and protection for consumers. It is particularly worrying that the consultation does not require the communication to encourage the consumer to contact the firm to discuss what could be done to address the problems they are experiencing. For example: A West of Scotland CAB reports of client who fell into arrears on a bank loan after becoming unemployed. He borrowed money from his family to clear his overdraft and negotiated a repayment arrangement with the bank to clear the arrears on the 6

7 loan. However, he recently paid money into his account, after which the bank withdrew 600 of this money through their right of set off to put towards the client s personal loan, despite the client keeping to the repayment agreement. This action has put the client s current account back into overdraft thereby putting the client back in a cycle of charges. A CAB in South-East Wales reported that a man owed 450 to a credit card company and had a current account with the same bank that owned the credit card company. He had agreed with the credit card company to repay the debt by instalments of 30 per month. He missed a payment in December 2009 but had written to the credit card company to say that he intended to make double payments in January 2010.In the meantime the credit card company wrote to him saying that as they were unable to contact him, they would be taking 391 from his current account and that legally they had the right to do this. Before the client could contact them again, they had already taken the money from his account. As a result of the bank s action, the client had rent arrears, couldn t pay maintenance for his daughter that month and couldn t afford to repair his car, which he needed for work. The CAB felt that this was a very drastic course of action for the bank to take for one missed payment and a total debt of only 450. We are also concerned that the consultation indicates that it would be acceptable for firms to incorporate the information in other communications with the customer. We believe that the proposals should be changed to require firms to provide information in plain English about use of the right of set off in a separate communication. This should not only include the information suggested in the consultation, but also the following: State clearly which of the customer s accounts the right of set off can apply Encourage the customer to contact them to discuss financial difficulties Encourage the customer to seek free and impartial debt advice. Again, we believe that these changes need to have the status of rules or at least evidential requirements to be effective in tackling detriment. Q24. Do you agree with our proposal that customers should be promptly notified about the use of set-off on their account? Yes but to a limited extent. Whilst we agree that customers need to know as soon as possible that the right of set off has been applied to their account, we are disappointed that the word promptly has not been defined in the proposed BCOBS rules. We believe that BCOBS should require firms to send written notification to the customer within one working day of using the right of set off by first class post. This should not be guidance, but should be rules or evidential requirements. Q25. Do you agree with our proposals for exercising the right of set off fairly? No. Whilst the FSA has laudably attempted to set out how banks can exercise the right of set off fairly by ensuring that customers have enough money for their essential expenditure, we do not think the suggested approach is practical for firms to implement. Although detailed guidance on expenditure levels is available via the British Bankers Association/Money Advice Trust Common Financial Statement initiative, it would still 7

8 require firms to have some information about the customer s personal and financial situation, such as the make-up of the household, to work out a subsistence amount. Whilst we are aware from our discussions with one bank that they implement right of set off cases manually, we do not think that they will have this level of detail to hand to work this out. We therefore believe that the FSA s proposals will not improve the situation for people on low incomes who are subject to the right of set off. Q26. Do you have any suggestions of other ways of exercising the right of set off fairly? Yes. We have a number of suggestions on alternative ways firms could be required to exercise their right of set off fairly, but in a way which is practicable for them. Firstly we believe that firms should not exercise their right of set off where they have already agreed reduced repayments on the debt with customers in financial difficulties or have agreed not to pursue the debt: Bureaux often report that banks impose the right of set off in these circumstances: A North of Scotland CAB reports of a lone parent whose bank took 400 from her account to repay debts without her permission. The client has credit card and overdraft debts with her bank, with whom the bureau has been in contact with to negotiate repayments. The bank took 400 from her current account after her wages had been paid in, leaving the client with no money with which to live. The client contacted her branch who denied having any contact with the bureau, and who stated that if the client moved her account to another bank they would take her to court. A CAB in East London reported that the credit card subsidiary of a high street bank had written to a 77 year old woman in receipt of guarantee pension credit who was terminally ill to say that they would not be pursuing the debt. Subsequently, they exercised their right of set off against the funds in her current account, causing the woman great stress and financial hardship. Secondly, we believe that firms exercising their right of set off should only be allowed to use it on funds in an account over an agreed buffer amount. We suggest that this buffer figure is set at around 1,000, which would help most of the cases bureaux have reported. For example, firms would not be able to use right of set off in cases like the following: A CAB in the West Midlands saw a lone parent who had tried to set up affordable payments to pay debts to her bank, but without success. On the day when payments to her other creditors were due, the bank took 940, an amount that was more than her wages, from her account to pay a credit card debt: The bank left her with 17p to buy food, pay rent, council tax or utilities. After the CAB called the bank, they agreed to refund 890 to her account but this would take three days. A North of Scotland CAB reports of a client whose pay was transferred by her bank to put towards credit card arrears. A client had her wages from her new job paid into her current account. The bank subsequently transferred the money into her savings account and then paid a credit card from this leaving her with 100 for the whole month. 8

9 We appreciate that a buffer amount will not help everyone facing the right of set off. So thirdly, we believe that firms should be required to refund monies taken via use of the right of set off above the buffer amount where the customer provides proof that it is causing financial difficulties in paying essential bills such as rent/mortgage, social care, fuel or water, council tax and hire purchase. Any refund should be credited immediately, or as soon as practically possible, and should also reimburse any charges incurred as a result of the bank exercising their right of set off (e.g. bank charges for going into an unauthorised overdraft or penalty fees imposed by other creditors such as mortgage companies and utility companies). Finally, BCOBS should require firms to allow customers facing the right of set off to exercise their first right of appropriation. Q27. Do you agree with our proposal that firms should not use set off in the types of scenario listed in paragraph 7.19 of the consultation paper? Yes. Q28. Do you agree with our proposal to apply the guidance in the information requirements to credit unions, but exempt them from our post-sale guidance on set-off? No. We do not agree that just because there is a reference to credit unions having a right of set off in statute rather than relying on a common law right of set off that the FSA should exempt them completely from the post-sale guidance on use of the right of set-off. In particular, some credit unions now provide current accounts in association with the Cooperative Bank. We feel strongly that the full regime should apply to credit union current accounts. Q29. Do you agree that our proposed guidance should take effect immediately? Yes, but only if the issues we have identified in our response have been addressed adequately. 9

10 Citizens Advice is an operating name of The National Association of Citizens Advice Bureaux. Registered charity number