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Official Report (Hansard)

Session: 2008/2009

Date: 10 December 2008

COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT

(Hansard)

Role of Local Banks in Economic Downturn

10 December 2008

Members present for all or part of the proceedings:

Mr Mitchel McLaughlin (Chairperson) 
Dr Stephen Farry 
Mr Fra McCann 
Ms Jennifer McCann
Mr Adrian McQuillan 
Mr Declan O’Loan 
Mr Ian Paisley Jnr 
Ms Dawn Purvis 
Mr Peter Weir

Witnesses:

Ms Alison Donnelly ) Consumer Council 
Ms Julie Megrath )

The Chairperson (Mr McLaughlin):

The Committee will hear evidence from the Consumer Council on the role of the local banks in Northern Ireland’s economic downturn. Joining us today is Julie Megrath, head of money affairs, and Alison Donnelly, senior consumer affairs officer for financial inclusion. I welcome you both.

Ms Julie Megrath (Consumer Council):

I thank the Committee for inviting us to give evidence. I will take the Committee through some context and background, and then Alison will go through some of our more detailed findings on banks.

Since June 2008, the Consumer Council has closely monitored the cost of living, which it has compared with the cost of living last year. In August 2008, the cost of living for an average family of four peaked at £64 more a week being spent on essentials compared to the figure for August 2007. Since then, the amount of additional weekly spending has fallen to £28 a week because reductions in the price of petrol and home-heating oil have been passed on to consumers. We feel that there is still some way to go, because cost reductions in electricity and mortgages must be passed on to consumers.

The Consumer Council feels that it is unacceptable that some banks have not passed on the full Bank of England interest rate cuts from 6 November and 4 December. In fact, our initial research seems to show that some banks are using those cuts to their advantage. We are surprised to hear that local banks did not take the opportunity to give evidence directly to the Committee. We are appalled that the British Bankers’ Association, as the chosen representative of the banks, is unable to meet the Committee until 28 January. We fully support the Committee’s efforts to contact the banks, as we need action now for consumers and the economy.

The Consumer Council is taking a three-pronged approach to the situation. First, we want to empower consumers to make the best decisions about their money, and we are doing that by trying to raise the levels of financial capability through the financial capability partnership, which was set up by the Consumer Council and the Financial Services Authority.

Second, we want to provide information to consumers so that they are able to make the best decisions about their money. Consumers need clear, accessible and comparable information on financial products and support mechanisms, and they need advice to inform any decisions that they make. There has been much consumer confusion recently over mortgage rates and other financial products.

The third role of the Consumer Council is to apply pressure to businesses and Government so that they help consumers to carry the load. Consumers are doing their bit by trying to make the best decisions and by shopping around and comparing products. We feel that there is a role for businesses and Governments to help consumers. The Consumer Council believes that the Government should put pressure on banks and other lenders here to do the right thing by their customers and take action.

Ms Alison Donnelly (Consumer Council):

The Committee asked the Consumer Council a number of questions on financial products, and I will deal with mortgages first. When the Bank of England cut interest rates in November, we worked out how much that might save a household. A household with a £100,000 mortgage could save as much as £125 a month, which I am sure members will agree is a significant amount.

Only four of the banks that we looked at passed on the November cut in full to their standard variable rate (SVR) customers. Thus far, only three banks have indicated that they will pass on the full December interest rate cut to their SVR customers, while three banks have said that they will cut the SVR rate, but not by the full amount. We have yet to hear from five or six banks and building societies as to their intentions.

Setting aside the issue of overdraft default charges, which is being tackled at the High Court, it seems that a number of banks are taking advantage of the Bank of England rate cuts to line their own pockets by cutting the in-credit interest rate — the amount of money that people make if they have money in their current account — but not the overdraft rate for borrowers. Only two banks have passed on the interest-rate cut to customers who use overdraft facilities. Our advice to consumers is to keep an eye on the interest rates on their current accounts and switch banks if they can find a better deal elsewhere.

Borrowing on authorized overdrafts is expensive. Often, consumers do not realise that overdrafts can be demanded back by the bank, with consumers having to pay the money to the bank immediately. Obviously, that could be a huge amount of money.

Only one bank has passed the cut on to unsecured loan customers. On the whole, there does not appear to have been much change to date. Also, only one bank seems to have dropped the interest rate on some of its credit cards. One bank, indeed, has increased the interest rate on one of its credit cards. Therefore, again, it does not seem to have made much difference for credit-card borrowers.

Mr O’Loan:

I have heard evidence that, in fact, the banks do not instigate many repossessions and work earnestly to make that a last resort. They much prefer to work with customers in order to accommodate them. In fact, when repossessions occur, it is often because there is a second charge on a property, on top of the primary charge that relates to purchase of the property. How persuaded are you by that, if at all?

Does the homeowner mortgage support scheme that was announced by the Chancellor apply here, absolutely and simply, or are there separate issues for Northern Ireland?

Ms Megrath:

The Consumer Council has been working with the Housing Rights Service on a new scheme that it has set up to help to prevent repossessions. The evidence that it has provided to us in a series of meetings suggests that banks are willing to work with the Housing Rights Service and consumers in order to avoid repossessions. However, more could be done. The Housing Rights Service has a series of policy items that it would like to take forward as part of that programme with Government and lenders. It has employed staff to take that project forward.

Ms Donnelly:

The Treasury has confirmed that the homeowner mortgage support scheme that it announced last week will be applicable in Northern Ireland. We have spoken to local banks and, so far, only Ulster Bank has said that it is already signed up to the scheme — obviously, it is part of the Royal Bank of Scotland. The rest of the four big banks have said that they will await further details from the Treasury before they consider their position.

Mr O’Loan:

Do you consider that to be adequate?

Ms Donnelly:

It is disappointing.

Mr O’Loan:

I would have thought so, too. People need reassurance on the matter, and rapidly.

The banks have put the case that it is not as simple as passing on base-rate cuts: they are in business and must consider rates for savers, as well as for borrowers. If they cut rates for borrowers, they must also cut them for savers. They exist in a competitive market. That issue must be considered. There is also an issue of inter-bank lending; banks must have the funds, and the London inter-bank offer rate (LIBOR) comes into play, not just the base rate. How persuaded are you by any of that?

Ms Megrath:

Interest rates were cut so that banks would pass them to consumers and thereby stimulate the economy. By the British Bankers’ Association’s admission, banks will not pass cuts in the full extent to savers because they want to keep money in savings. It is unacceptable that banks have not passed rate cuts to consumers.

Mr O’Loan:

Are Northern Ireland’s banks being less responsive in passing on rate cuts than GB banks?

Ms Donnelly:

For local banks, there is always the opportunity to keep their heads down and to stay under the radar. That is why we are appreciative of the Committee’s work in putting the spotlight on them. Ulster Bank was the only local bank to pass on the November cut in full. Northern Bank, First Trust and the Bank of Ireland passed it on partially.

So far, we do not know whether Northern Bank and First Trust will pass on the December cut. The Bank of Ireland will pass it on in full, and Ulster Bank will pass it on partially. There is a mixed bag. Obviously, the banks are taking their time to tell us what they will do.

Mr O’Loan:

However, there is every indication that the banks have been very slow to pass on anything like the full rate.

Ms Donnelly:

Yes.

Ms J McCann:

Is anyone collating information on repossessions? Representatives of a number of different housing rights groups told me last night that there has been a definite increase in the numbers of repossessions and people asking for advice about debts.

Ms Megrath:

The Northern Ireland Court Service has statistics on the number of repossessions.

The Chairperson:

It is quite a dramatic increase.

Ms J McCann:

I want to know whether that information is being collated centrally.

Ms Megrath:

Yes; it is being collated by the Court Service.

Ms J McCann:

I also wanted to ask you about the dormant bank account scheme. I know that legislation was enacted here not so long ago. People are in difficulties at the moment, and could be using the money that is available. Where is that scheme sitting now? Has it made any progress, and are people seeing the benefits of that legislation?

Ms Megrath:

With regard to people’s access to their own accounts, or the —

Ms J McCann:

To the dormant accounts.

Ms Megrath:

The Consumer Council ran a campaign to raise awareness about forgotten accounts and how to search for them. That process is under way, and many consumers have contacted us and used the information that we provide in order to try to find their lost accounts. That is a key element of being financially capable — ensuring that consumers have all the money that they can possibly have in their pockets, including benefits, but also money that might lie in dormant bank accounts.

The legislation was more in relation to using money in dormant accounts for good causes.

Ms Donnelly:

The Department of Finance and Personnel has not yet decided how it will use that money, as far as we are aware. However, the Department is holding £6 million of Ulster savings certificates that belong solely to consumers in Northern Ireland. We have raised that issue with the Department, and we have put information on our website that will help people to get in touch with the Department in order to determine whether they own any of that money. It is worthwhile letting people know that £6 million is sitting there. We have encouraged the Department to speak to ‘mylostaccount.org.uk’ and ask to be included in that search, in order to make it easier for consumers to use.

The Chairperson:

That would be helpful, but the money may not be immediately available. That legislation was enacted at Westminster, and I am not sure that we are in a position to apply any resources that might be identified.

Ms J McCann:

You said that the Department of Finance and Personnel have not used the money that is available and which can be used at the moment. What is the hold-up? Is it with the Department or the Assembly?

Ms Donnelly:

There are a few things to consider. First, there is the money that is to be put into the Big Lottery Fund. The legislation to allow that to happen has not yet been passed at Westminster. The Department of Finance and Personnel will then have to decide how that money will be used. That consultation is ongoing, as far as we are aware. The pot of money from the Ulster savings certificates could go back to the people who own it.

Ms J McCann:

Is it just sitting there until someone moves things along?

The Chairperson:

Yes.

Mr Paisley Jnr:

I wish to put on record my thanks to the representatives of the Consumer Council for appearing before the Committee so promptly after being asked. That is welcome.

The paper that you have submitted is a very helpful piece of research. Have you had any input from owners of small businesses about how the banks are treating them? I know that you are primarily concerned with consumers.

Ms Megrath:

Our research is confined to consumer products.

Mr Paisley Jnr:

Do you get any grief from small businesses?

Ms Megrath:

Not really; they would go to their representative bodies rather than the Consumer Council. However, we are aware that their concerns are equally valid.

Mr Paisley Jnr:

When the Presbyterian Mutual Society ran into difficulties, did anyone come to you and say that they were being encouraged to remove their savings from that society?

Ms Megrath:

No. Our contacts with consumers were mainly about accessing their money. When they realised that they might have trouble doing that, they contacted us to try to find out how to make a complaint.

Mr McQuillan:

You said that the Ulster Bank partially passed on the December base rate cut. To what extent did they pass it on?

Ms Donnelly:

The Ulster Bank passed on 0∙75%.

Mr McQuillan:

Did you say that the Northern Bank passed it on in full?

Ms Donnelly:

The Northern Bank has not passed on the December cuts yet; it is reviewing that.

Mr McQuillan:

You mentioned another bank that has passed on the December cut in full.

Ms Donnelly:

The banks that passed on that cut in full were: the Bank of Ireland, HSBC, Barclays and Woolwich.

Mr McQuillan:

What excuse does the Ulster Bank give for passing on only 0∙75%, rather than the full 1%?

Ms Donnelly:

Ulster Bank has been unable to explain that to us.

Mr McQuillan:

That is ridiculous. I appreciate the work that the Consumer Council is doing for people. Were it not for that, the banks would be getting away scot-free. The Consumer Council has to reel them in all the time. This Committee should do anything it can to help.

Ms Megrath:

Thank you. That is why we support the work that the Committee is doing on the banks. As Ms Donnelly says, much of the work is at a UK level, and sometimes Northern Ireland banks are not doing as much as they could. That is why we support the Committee’s work.

Dr Farry:

I encourage you, if you have more up-to-date information as time goes on, to send that to us in writing. Unfortunately, we are working on the assumption that it will be the end of January before we see the banks’ representatives. It would be useful for us to have any more advice that you can give us before that evidence session.

Many Northern Ireland banks have parent banks elsewhere in the UK or in the Republic of Ireland. It is more self-evident with building societies, which operate on a UK-wide basis. Is there any evidence that in Northern Ireland they offer rates different to those they offer in the rest of the UK, or are they consistent?

Ms Donnelly:

The only one to which that might apply is the Ulster Bank, which is owned by the Royal Bank of Scotland. I do not have that information with me. I will look into that.

Dr Farry:

I assume that building societies have been fairly consistent in the rates they offer?

Ms Donnelly:

Yes. They offer the same rates across the UK.

Dr Farry:

My second question relates to the LIBOR. I imagine that, if representatives of the banks were present, they would tell us that they do not necessarily follow the base rate; they use the LIBOR. To what extent should the LIBOR mirror changes in the base rate? Does the LIBOR essentially follow the base rate, or do other factors operate so that it does not change as rapidly as the base rate?

Ms Donnelly:

We know that the banks claimed initially that they could not reduce their interest rates because of the LIBOR. However, the LIBOR, which had been high, came down.

Dr Farry:

So the changes in the LIBOR should have been passed on in any event.

Mr F McCann:

I have a couple of questions about repossessions, and the speed at which building societies and banks move to repossess properties. After only a short period, they will take people to court rather than try to deal with the situation sympathetically. What is the role of advice in preventing people’s houses from being repossessed? We have been told by many organisations that the first line of defence is the obtaining of proper advice. Perhaps you could elaborate on that.

My second question is whether there is any indication from building societies or banks that they will extend the period before they consider taking people to court in the North. I know that that period has until now been fairly short.

Ms Megrath:

We feel that the advice to consumers is a vital element. We give information to signpost community advice organisations and the Housing Rights Service at the earliest possible stage, when some solutions may be found that can be worked through with the banks.

Ms Donnelly:

The Royal Bank of Scotland said that it would let customers go into arrears for six months before it would start repossession proceedings. The Ulster Bank is part of the Royal Bank of Scotland, and it has also signed up to that. As far as we are aware, the three other banks work on a different basis.

Mr F McCann:

So those banks have not taken into consideration the fact that people may need additional time.

Mr Weir:

Thank you for your evidence. I join with others in saying that it is refreshing that you are here so promptly, which is in sharp contrast with other organisations.

I may be asking an impossible question, but has any work been done in the Consumer Council, or any expertise sought — you have given a list of the banks that have either partially failed or failed completely to pass on interest-rate cuts — to get an estimate of the total financial gain made by the banks in their failure to pass on those interest-rate cuts? Have you any idea of the amount of money that customers have been deprived of, or the additional profit that the banks have made as a result of their tardiness in passing on part of the cut or, alternatively, their failure to pass it on altogether?

Ms Megrath:

The Consumer Council does not have those figures. However, the banks and the BBA could provide that information.

Mr Weir:

I suspect that we may be met with the same level of stonewalling as we experienced when trying to arrange a meeting. I suspect that it is not in their interests to give those figures. Apart from the banks, is there any other independent way in which to obtain those figures, or to at least make a ballpark estimate?

Ms Donnelly:

We will try to do that. We have contacts with the Office of Fair Trading and other consumer groups throughout the UK.

Mr Weir:

That would be helpful. Stephen Farry made similar remarks earlier, and the Committee would be grateful if that information could be provided. If we were able to show the banks the impact of their not passing on those interest rate cuts — even if the figures were not 100% accurate — they may be challenged to refute that and come up with figures of their own. I suspect that we would get more mileage out of that type of approach, as opposed to asking them directly, because they might just dodge the question.

Ms Megrath:

The Consumer Council has carried out similar calculations on the level of consumer detriment, working back from the consumer and what he or she is losing, rather than the banks. We could have a go at that.

Mr Weir:

That would be very helpful.

Ms Purvis:

I had to leave the Committee for a minute, so I apologise if my question has been asked already.

You said that you are compiling data on unsecured loans. I have anecdotal evidence that, increasingly, small businesses are applying for unsecured loans in order get cash flow, but that those loans are at exorbitant rates of interest, such as 22%. I know that the Consumer Council is initially compiling the data, but does it have any information on that?

Ms Donnelly:

Unsecured loans for consumers — as opposed to small businesses, which may work on a different model — range from 7·9% up to 29·3%, which is expensive.

The Chairperson:

Is the Consumer Council receiving any evidence that the banks are increasing their mortgage arrangement fees, even in circumstances where the banks may reduce the interest rates?

Ms Megrath:

The Consumer Council carried out some work on that previously, and I can forward that information to the Committee. It has not been compiled for today’s meeting.

The Chairperson:

The Committee requires updated information on a number of issues.

In your submission, there is a health warning about the banks having the right to cancel overdraft arrangements and, basically, demand that any outstanding moneys owed to them are repaid. Do you have any evidence to suggest that that type of activity is an increasing line on the graph?

Ms Megrath:

We have no evidence yet. We have not had many consumers complain about that matter; however, we are monitoring the situation.

Ms Donnelly:

We have not received any evidence to suggest that. However, previously, the banks have taken a very harsh line against people who applied to have any default charges that they had paid refunded. As you know, some banks threatened to close peoples’ accounts and cancel their overdraft facilities, which caused much concern among those consumers.

The Chairperson:

You will be aware of the Committee’s ongoing work on the matter. Therefore, any updates that the Consumer Council can provide to the Committee on the continuing process will be clearly helpful.

Mr Paisley Jnr:

On the back of that point, has the Consumer Council received any information about the banks trying to make their good customers pay for their customers who are in crisis?

Ms Donnelly:

In what way?

Mr Paisley Jnr:

Are you aware of any banks changing their customers’ individual interest and contractual arrangements?

Ms Donnelly:

We do not have any evidence to suggest that based on an individual’s personal circumstances. However, as I said before, some banks cut their credit interest rates, but not their overdraft borrowing rates.

The Chairperson:

Thank you. That has been very helpful, and the paper that you provided is particularly informative. Thank you for responding to our questions. We will correspond with the Consumer Council.

Ms Megrath:

We will send the Committee any information that we receive as soon as we get it. Thank you.

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