Insolvency Service - Bank Accounts for Bankrupts
There is great potential, should the Government decide to continue investment in the expansion of the credit union sector, in the role that credit unions can play in the transactional banking market. We hope to see a major expansion of credit unions role in supporting those who might otherwise be excluded from transactional banking, including undischarged bankrupts, as an increasing number of credit unions reach a scale at which they are able to offer current account services. One of the key failings of the current account market in Britain currently, which is fundamental to the problems addressed by this consultation, is the fact that – other than the small share held by credit unions – virtually the entire transactional banking market is concentrated in the hands of a few banks and the largest building society.
The Credit Union Current Account
Since 2007 a number of credit unions have been offering full transactional banking services in a partnership between credit unions, The Co-operative Bank and ABCUL. The product offers two tiers of functionality with the majority of account-holders having access to full debit card functionality but without access to an overdraft facility. For those who are perhaps newer to transactional banking there is also the option of a cash card-only account which has less functionality – only allowing cash to be withdrawn via the ATM network but not allowing point-of-sale or online purchases.
Given credit unions’ role in promoting financial inclusion and their co-operative structure, the key consideration in designing the account system was to ensure that it met the needs of all customers. As such, a research project was undertaken by Liverpool John Moores University to establish how the account system’s administration should be funded.
At present, the current account market in Britain is unique in the funding model most providers employ. The ‘free-when-in-credit’ model operates on the basis that those whose accounts have a positive balance, sufficient to meet payments made against it, no charge is levied on the account holder for its administration despite the fact that the accounts cost the bank’s infrastructure to provide (the cost of funding call centre operations, for example). In order to cover the costs of this, the banks then levy penalty charges on those that miss payments or go into unarranged overdrafts. Similarly, the banks will cross-sell other products and services to their current account holders thus allowing the provision of the accounts as a ‘loss-leader’.
In the majority of other countries around the world this arrangement is unheard of and transactional banking services are paid for through regular, transparent fees. In the UK, the arrangement works well for those who enjoy a reasonable income as they very infrequently incur charges against their accounts and, where they do, they are able to fund the payment of these on an occasional basis. For those on a lower income, however, there are significant difficulties presented in managing accounts in such a way as to avoid charges that they can ill-afford to pay. For example, the direct debit system (which accounts for many of the failed, charge-incurring payments) does not operate such that the date of payments is fixed. Instead the date regularly changes from month to month, making it virtually impossible to have a real-time view of one’s financial position. This results in those on the lowest incomes often self-excluding from transactional banking in favour of operating in cash which, whilst more expensive (often discounts are available for direct debit bill payments or by shopping around online) and less secure, provides certainty that unexpected charges will not be incurred which otherwise would quite quickly wipe out any saving made elsewhere.
In order to address this issue, the Credit Union Current Account – backed by the findings of Liverpool John Moores University – charges a regular, transparent fee to account holders in exchange for reduced penalty charges and extra flexibility when managing the account. For instance, where an account holder looks likely to incur a penalty charge the credit union will often make efforts to repair the situation by – with the member’s consent – transferring funds from elsewhere to meet the payment rather than allowing the account to go into default. This greater flexibility gives, particularly those on a low income, a peace of mind unavailable with other account services.
At the time of writing there were 25 credit unions offering the Credit Union Current Account with around 34,000 active accounts.
In respect of providing accounts to bankrupts, as was reported in the Citizens Advice report Called to Account, credit unions will willingly provide accounts to undischarged bankrupts. As part of the sector’s co-operative, inclusive ethos, credit unions will strive to provide the services that their members need and to be as flexible as possible in helping their members improve their financial position.
The impact of ‘free-when-in-credit’ on access for bankrupts
As the consultation document points out, the potential liability of banks for funds passing through an undischarged bankrupt’s account is largely theoretical. There is little evidence that this has ever caused a bank to have to make payment to a trustee in bankruptcy. None of our member credit unions have ever been affected by this liability and it seems peculiar that two major highstreet banks are able to serve undischarged bankrupts without being concerned with this potential cost. Unless this consultation produces significant evidence that there is a real risk to the banks, we feel that there are no grounds to accept the argument that this theoretical liability realistically acts as a barrier to banks providing accounts to undischarged bankrupts.
Much more of a barrier to bank involvement in servicing this market is the ‘free-when-in-credit’ funding model. Bankrupts, by definition, are unable to take out credit products. Therefore, they must be provided account services where there is no possibility of overdraft credit being extended. Furthermore, there is no space for cross-selling of credit to them. Instead, basic bank accounts are offered which provide no short-term opportunity to profit for the banks and therefore are loss-making since they only incur expense.
Quite apart from the business case around a bankrupt’s potential future financial position and how this might be profitable for the banks, there are serious questions that need to be asked about the role that transactional banking services in the modern world are coming to fulfil. The rapid advance of cashless transactions, and the simple economics of the fact that cashless transactions are so much cheaper to process for business in general, mean that increasingly it is becoming more difficult and more expensive to deal with one’s finances in cash. The increasingly fundamental importance of transactional banking in everyday life, therefore, necessitates a debate about the provision of the service, its funding models and its functionality in order that people who might have less disposable income or who are faced with acute financial difficulties – such as undischarged bankrupts – are not further disadvantaged by inappropriately designed and punitive funding models that act to exclude them from a service that is critical for their financial health.
We appreciate that such fundamental questions are outside of the remit of this consultation however we feel that whilst the consultation makes an attempt to address specific issues of financial exclusion there are more fundamental questions that need to be asked about the role of financial services and banking that would both deal with the question of access for undischarged bankrupts and the wider issues of financial exclusion.
The potential role of credit unions
As cited above, credit unions have been central to the Government’s attempts to address questions of financial exclusion and fair access to financial services since the issue became an area of public policy around the turn of the century. In this, credit unions play a role in providing access to affordable credit and safe, secure savings in addition to a new current account model.
Whilst credit unions remain small, the sector has been growing very healthily over the past decade or so and therefore is becoming increasingly effective in addressing the fundamental questions posed by the issue of financial exclusion. As such, credit unions were the main delivery vehicle for the Department for Work & Pensions’ Financial Inclusion Growth Fund, which closed in March 2011, and the DWP is deliberating presently on the case for whether and how it should invest a further £73 million in the sector’s modernisation and expansion.
There are a number of ways in which this modernisation and expansion might be achieved but principal among these in our view is the creation of a suite of centralised back office services which would see credit unions collaborate behind the scenes in order to address key areas that currently hold the sector’s development back. This includes collective treasury management, access to new payment systems, better, more effective debt collection and a bespoke credit referencing system. A key element would be the development of a shared banking platform for the sector which would enable a much greater consistency of service across credit unions such as the potential for out-of-hours telephone and internet banking and a major expansion in the availability of services like the Credit Union Current Account.
Most excitingly of all, however, are the opportunities this could present for making credit unions services available through the Post Office network. With a banking platform in place, any credit union account could potentially be accessed from any of the 11,500+ Post Office branches around the country, massively increasing the visibility and accessibility of credit union services in Britain as well as potentially creating a new stream of revenue for the Post Office.
A credit union sector expanded in this way could potentially serve several million members with a much more consistent and reliable level of service than is available at present and therefore the improved availability of the Credit Union Current Account could have an increasingly important place in supporting excluded groups such as undischarged bankrupts.
Options for immediate action
We appreciate that, whilst fundamental questions about the structure of banking and support for the role of credit unions are of utmost importance in this debate, there is little amongst what we have set out above which is either within the remit of the Insolvency Service or would allow immediate remedy for the failings of the current system and the detriment this is causing to those undergoing bankruptcy now.
As such, we would recommend as a means of immediately addressing the issues that the Government first introduces guidance for Trustees in bankruptcy cases to clarify that it would not expect a transactional account provider which is providing an account to an undischarged bankrupt to be penalised where funds pass through that account that can neither be reclaimed from the bankrupt nor the funds’ ultimate recipient. This should address the immediate question of the theoretical liability of banks for activity on a bankrupts account.
Second, Government should seek to influence the behaviour of banks through negotiation and bringing to bear influence upon them. It is our understanding, for example, that neither of the two banks that provide accounts to bankrupt individuals routinely are those in which the British taxpayer holds a majority stake. Were the Government to use its influence as owner of Royal Bank of Scotland and Lloyds Banking Group (which between them account for 46% of the personal current account market ) it could enable a situation whereby the great majority of banks (by current account market share) provide accounts to bankrupts and therefore solve the problem. One way to enshrine this expectation might be its inclusion in the Banking Code.
Whilst this consultation is welcome in that it addresses some important specific problems of financial exclusion we are concerned that it does not strike at the heart of the structural failings of the transactional bank account system which result in those on modest incomes or facing acute financial difficulties from accessing what is becoming an increasingly vital service in conducting one’s everyday life.
The flaws of the ‘free-when-in-credit’ model of transactional banking are fundamental to all questions of banking inclusion and this is no different here. The funding model for transactional banking in other parts of the world and as demonstrated by the Credit Union Current Account illustrate a fairer alternative to the British model and fundamental questions need to be asked about whether it is right that some face exclusion and are disadvantaged for the sake of those who live on much more comfortable incomes.
Credit unions have been recognised for the vital role that they can play in providing fair and inclusive financial services and the investment by Government of its earmarked credit union modernisation and expansion fund should consider closely the merits of creating a central system for the sector which could yield very significant benefits including for the fair provision of transactional bank accounts.
Finally, in order to immediately address the acute exclusion being faced by many undischarged bankrupts, the Government should clarify the position of a bank’s liability for money passing through a bank’s account and bring to bear the influence it possesses as ultimate owner of Royal Bank of Scotland and Lloyds Banking Group who, between them, hold 46% of the banking market so that a majority of highstreet banks provide fair access to banking for bankrupt individuals. The Banking Code should be considered as one means of enshrining this expectation.
We would be happy to discuss any of the points raised in this response document or any other related matter with the Insolvency Service or Government more generally.
ABCUL – February 2012
A full pdf of the response is available to download on the right.