§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Gerald Malone.]9.35 am
§ Mr. Greville Janner (Leicester, West)
I am grateful for the opportunity to raise in this House the problems that arise for those who borrow money from banks when the banks are not required to inform them of the rates of interest that will be charged.
Today, there are millions of people with bank accounts. That number is growing, largely because of the repeal of the Truck Acts and the removal of the requirement that a manual worker can be paid other than in cash only with his or her written consent.
There were times when bank accounts were the preserve of the wealthy and the elite — those times have gone. There were times perhaps when bank borrowers did not need to be protected because they were on equal terms with those from whom they borrowed—likewise, those times have gone.
The sad legal position is that, although most other borrowers are protected because the Consumer Credit Act 1974 laid down requirements governing the form and content of regulated agreements which, in effect, required borrowers — whether from banks, building societies, moneylenders or anyone else who lends in the course of business — to be told how much interest is being charged, unfortunately an exception applies to current account overdrafts. I believe that that wide exception was wrongly introduced by the Director General of Fair Trading. How are the banks dealing with this problem? What can be done to put matters right, not least in a debate in which legislation cannot be recommended?
I start with the importance of this matter to ordinary folk. There is a wonderful story that I hope will appeal to the Minister about an occasion in the early 1970s when merchant banks were collapsing largely as a result of major loans to those who should not have received them. One bank that did not succumb was Lazard Freres and apparently Lord Cowdray asked Lord Poole, then chairman of that bank, how it was that he had avoided making those unsatisfactory loans. Lord Poole replied, "I only lend money to people who have been to Eton."
I am sure that that would appeal enormously to the Minister, who I believe had the good fortune to have such an education, but it is an education which I believe has been denied to almost all of my 63,000 constituents and their children. Therefore, they would not have obtained a loan from Lazard Freres. However, even if the Minister had received an overdraft, for which I am sure he would qualify, I doubt whether he would know how much interest he would be charged.
572 This morning I spoke to a most distinguished financial journalist. I asked him, "Do you have an overdraft?" He said, "Yes, I have always had an overdraft." I asked, "How much interest are you being charged on your overdraft?" He said, "I don't know. Somewhere I have a letter from the bank showing the percentage that I am being charged above base rate, but I don't know what it is." If that applies to a distinguished financial journalist, whom I shall not name unless under the greatest provocation from him, how much more does it apply to the ordinary bank borrower?
I am sure, Mr. Speaker, that in your position you would not need an overdraft. I hope not. I cannot claim to be in the same position. I am sure that the Minister has many overdrafts. If he has, I venture to hope that with his distinguished schooling, which I have now laid bare for the House, he would know how to handle that overdraft, what he is being charged and that if he shopped around in the market place, he could probably knock down the interest rate to the lowest available to him. For a Minister educated at Eton, I think that it would be a very low rate of interest. If it were the Government, I should take a different view.
However, the ordinary bank borrower is not in that happy position. He is not used to handling complicated transactions. He does not know the questions to ask. If you, Mr. Speaker, do not know what questions to ask, you will not get the answers that one should and that the banks would be prepared to give.
I am reminded of the wonderful remark by a judge recently in court when somebody was talking about the average person. He said, "We should bear it in mind that about 50 per cent. of the population is below average intelligence." That was a monumental thought. The fact is that even if one is above average intelligence, which one would presume for anyone who obtains admittance to Eton. never mind getting out of it without having been expelled. that is likely to mean that one does not know what the banks will do and how one is likely to be ripped off if one does not know one's rights.
With ordinary authorised overdrafts, most people believe that there is a standard charge. Where there is not, most people believe that there is no point in asking for a lower rate, whereas if they asked, they would get it. Most people do not know that the banks are under no obligation to tell them what they are charging and that if they ask, they could get a reduction.
The matter gets worse when the banks produce what they choose to call unauthorised overdrafts. One can get an unauthorised overdraft by the simple process of overdrawing more than one should, probably inadvertently. Then the whole overdraft becomes unauthorised. Certainly, the part of the overdraft that is over the top would, but I suspect that it would be the lot. If one's overdraft comes to the end of its term and one does not renew it, and the bank writes and believes that one has not replied, the bank will treat the overdraft as unauthorised. At that stage, I regret to say that one can be charged almost anything that the bank manager wants to charge.
I have asked about that at various clearing banks and should like to inform the House of the replies that I have received. For example, Lloyds bank explained the situation as follows :Interest rates for borrowing without arrangement will vary depending on our Manager's knowledge of the customer and his assessment of the risk. Unarranged overdrafts are 573 costly to us in administration and Managers have discretion to charge interest up to a maximum rate of 2 per cent. per month".To most people of average intelligence, that would work out at 24 per cent. per annum, but it does not. The figure that I was given was APR 26.8 per cent. People may think that that means that in the month of April the charge is 26.8 per cent., but APR means something different.
I am pleased to say that a further journalist, a very intelligent man, whom I met this morning—but not a financial journalist—did not know what an APR was, and he had a degree. That makes it difficult for those who have neither an education at Eton nor a degree to understand, even when they are told what the position is. It gets worse. The banks tell me that they advertise. I salute the Royal Bank of Scotland for this. Apart from conveying to me the compliments of the season, the bank said that it was actively considering wider advertisement of the interest rates payable on unauthorised borrowing. In effect, as some banks do, the Royal Bank of Scotland will put on the bank's walls notices saying how the rates are charged, and it may do so in the national press.
I venture to suggest that those without adequate knowledge and perhaps even without a degree in economics, or those who are non-financial journalists, would not understand the advertisements either. If the advertisements start talking about standard rates and APR, that is beyond the ken of the ordinary average person whom I am seeking to protect—my constituents who are being ripped off by banks charging them exorbitant rates up to 26.8 per cent. per annum without telling them what the charge will be. In many cases people do not know that with the law in the ludicrous state that it is in, in the absence of agreements to the contrary, overdrafts are repayable on demand. The demand is often made in ways that ruin business.
The small business of a constituent of mine was ruined recently by precisely that method. I wrote to the banking ombudsman in the hope that he would be able to help. I received a courteous reply, enclosing a copy of his annual report for 1985–86, which contains a paragraph headed, "Disclosure of the cost of borrowing." It contains the wordsWhile not the subject of any large number of complaints in our first nine months".I emphasise that people do not complain, because they do not know. One complains only if one realises that one has a right and if one believes that one is not getting it. People have no idea that they are being ripped off and that the banks are charging them higher rates than even moneylenders would be expected to charge.
The report continues:several correspondents have complained that insufficient information is offered by banks. This subject has been covered by the National Consumer Council, and in their report on 'Banking Services and the Consumer' they recommended that banks 'should give their customers better information about the costs of overdraft'.Indeed. At a time when computers are used to tell us what we owe, surely those same computers should be brought into action to tell us what we are being charged on that which we owe.
The report states :The lack of information can cause confusion,"—indeed it can— 574For example, one bank customer complained to the Ombudsman that his bank statement on his loan account made him an offer of personal loans at a 'new lower APR'.Here we are again. The report continues:The bank intended to convey only that personal loans were on offer at a lower rate than previously applied to that type of loan. But the complainant naturally assumed it referred to his existing overdraft, and was justifiably annoyed to discover that the 'new lower APR' was actually higher than the rate he was paying!So on the one hand the bank was saying that it would provide a lower rate and at the same time it was charging the man at a higher rate.
The ombudsman goes on to say :We recognise the difficulties of informing customers of the APR on overdrafts when the amount outstanding and the interest rate, may vary from day to day, and when the date of repayment is undefined. Nevertheless, we suggest that banks should give some indication of the interest rate charged on an overdraft — even if only that it is at a certain percentage above base rate.Thus, the first request that I make to the Minister is that he informs the banks that the Government are concerned, and recognise that ordinary people, and some extraordinary people, even financial journalists, cannot understand the implications of bank borrowing and the interest rate, and that the banks should now give an indication of the interest rate charged on an overdraft.
I took the matter up with the Government and received a courteous reply from the Department of Trade and Industry from the Under-Secretary of State for Trade and Industry, the Minister responsible for corporate and consumer affairs, who is now, I believe, re-arranging the banks in Japan. I drew his attention to matters occuring here and he replied that the exemption for banks and overdrafts from the unusual rulesreflects the fact that overdrafts are in general…a flexible and informal facility which offers considerable benefits to bank customers, in particular the ability to overdraw without a prior arrangement.The Minister stated later in his letter :it would not be obviously unreasonable for banks to provide information, retrospectively, on the rate of interest that has been charged in respect of an overdraft.The Minister has agreed, by saying, with his usual hyperbole, "not obviously unreasonable", that banks should provide information. I believe that it would be entirely reasonable and right that the Government should lean on the banks, as only the Government can, to provide that information when that information could and should be given.
If the Government do not give the information to the banks that people are concerned, if the banks do not give information to their borrowers and if the present situation remains, in some future debate when it is within the rules of order, I shall seek to introduce legislation. Meanwhile, I refer yet again to the third port of call— that most distinguished Director General of Fair Trading, Sir Gordon Borrie, with whom I have had correspondence on this matter—who said in a letter that hewould prefer that consumers make better use of the Quotations regulationsalthough he is not proposing at the moment to remove the exemption for banks.
At the end of his letter, Sir Gordon Borrie states:This is an area that my Office will continue to monitor, particularly since building societies are now able to provide current account overdrafts and to benefit from the Determination.In other words, the determination that there should be an exemption for overdrafts obtainable from banks, has now 575 been extended to other lenders to whom it was not originally intended to apply — in other words, to building societies. As the number of moneylenders— by whatever name — grows, so the exemption extends its scope and as it extends, so the Government should move in to narrow that scope.
The law in the Consumer Credit Act 1974 gives the Director General of Fair Trading the power that he has exercised. He has exercised it in the belief that in so doing he would be helping the consumer to obtain overdrafts under a system that he believed should be flexible. The system is not working properly. It is not protecting individuals.
There used to be a saying: "Neither a borrower nor a lender be." Few of my constituents are not borrowers. Anyone who owns his own house, borrows. People with mortgages and bank overdrafts are borrowers. People who use credit cards and those who borrow privately, as many are forced to when they are short of money, are borrowers and affected by that area of law. People are therefore outside that worthy old proverb. It cannot be avoided. Therefore, in the old days the Government were free to stand by and allow people to deal with each other, business man to business man, Lord Poole to Eton graduates. Today, ordinary people require protection from the law.
When the overdraft comes to an end and the time for the advance comes to be repaid, banks should do far more than at present to inform people. It is not enough, for example, for a bank to write a letter to a customer saying, "Your limit was agreed for the year ending on such a date; do you wish it to be renewed?" If the bank receives no reply, it should not treat the matter as an unauthorised overdraft and charge up to 26.8 per cent. interest without even informing the customer that the rate is to shoot up in that totally unconscionable way.
Nor is it enough, in my view, for ordinary people to be protected by the law as it stands without Government intervention to warn them about the end of overdrafts. People do not generally realise the power that lies in the hands of the bank manager where an overdraft, in the absense of agreement to the contrary, is repayable on demand. Happily, most bank managers exercise their great power with discretion most of the time. However, there are exceptions, and when the exception arises, the law protects the bank, not the individual. The Government protect the bank and not the individual.
Before the Minister leaves for his well-earned Easter recess, I want him to look at this problem with some care from the point of view of ordinary borrowers who do not understand the law, who do not know what banks can do to them or what interest they are being charged. I want him to consider the problem with regard to those who do not know that they can shop around for lower interest rates and get them and who do not understand that, even if there is an advertisement advertising a standard rate, that will not protect them.
Those people will not know their rights. It is the Government's duty to inform them of their rights. It is also the Government's duty to require the banks to behave decently, honourably and well towards the ordinary borrower. If that does not work, it will be the duty of the House to ensure that the Director General of Fair Trading removes the exemption for banks. If he does not do that, the law should be changed.
§ The Minister for Trade (Mr. Alan Clark)
I must admit that I have some sympathy with the case that has been argued by the hon. and learned Member for Leicester, West (Mr. Janner), in spite of the intermittent undertones of the class war with which he laced his discourse. Even Etonians suffer from time to time from the bad manners, incompetence and arrogance of banks. Perhaps Lord Poole's restriction was unduly restrictive. I would have preferred to stand it on its head; had I been in his position, I would have lent freely other than to those who had been to Harrow.
We must all remember that, although there may be an element of, as the hon. and learned Gentleman termed it, "rip-off — I would not echo that — or financial inconvenience attached to those who make feckless use of intermittent overdraft facilities that are not clearly or closely agreed, the alternative might be that the cheque was returned without being met. People would have to ask themselves whether they would welcome a position in which banks returned cheques more often and caused the embarrasment and dislocation that might arise as a result.
In general, I agree with the hon. and learned Gentleman. It is desirable that all those who borrow money should be fully aware of the cost of any credit that is made available. That is one of the main purposes of the Consumer Credit Act 1974. It requires, among several other things, that the annual percentage rate of charge — the APR — should be given in most credit arrangements and advertisements. That is intended to ensure that not only is the customer aware of the cost of the credit agreement, but that he has a means of comparison between one source of credit and another. That is the shopping around which the hon. and learned Gentleman said was desirable. I agree with him.
The hon. and learned Gentleman said that those provisions of the Consumer Credit Act do not apply to bank overdrafts. Overdrafts are not totally exempt from the Act, but section 74 provides that agreements which permit a consumer to overdraw on a bank account may be exempt from Part V of the Act, where the Director General of Fair Trading so determines. The exemption means that the lender need not comply with most of the documentation requirements of the Act, although other important provisions of the Act, such as the right to early termination, rebate and protection against extortionate credit, are still available to the borrower. Of course, advertisements by banks will have to quote the APR.
Section 74 provides that the Director General may exempt such agreements subject to such conditions as he sees fit to impose, but only if he believes that it would not be against the interest of debtors for him to do so. It is perhaps worth pointing out that the original exemption in the Act was slightly narrower than at present, in that exemption would not have applied when any term of the agreement was expressed in writing. It was the Labour Government in the Banking Act 1979 who broadened the scope of the exemption by repealing this requirement, in recognition of the need to provide lenders with a clear and unambiguous exemption.
In November 1983, the Director General issued a determination which exempted bank overdrafts from part V. The view taken by Parliament in providing for this exemption and, no doubt, the view taken by the Director General in granting such an exemption was that, far from 577 harming consumers, it would be to their advantage. That is because a bank overdraft is a flexible and informal facility which offers considerable benefits to the customer, especially the ability to overdraw without prior arrangement with the bank. The House will be aware that, typically, a personal overdraft represents an anticipation of salary by a customer and lasts—or so he hopes—for only a very short time, often no more than a day or two.
That has not applied to any of my overdrafts; perhaps the hon. and learned Gentleman shares that experience, but ideally, the overdraft lasts for no more than a day or two until the next pay cheque is received. Of course, sometimes the customer, unless he keeps a very close track of his affairs—I suspect that this applies to most hon. Members—may be unaware that an overdraft has been created until he receives his next bank statement. Indeed, someone who shares my apprehension at my bank statement, and flinches to such an extent that he does not open it, may be unaware of the overdraft until much later.
§ Mr. Clark
That is exactly the solution that I adopted some years ago, but it is sometimes easier to resist the reproaches of one's bank manager than the wrath of one's spouse.
Notwithstanding the arguments of the hon. and learned Gentleman, I believe that it would be wrong to remove the exemption and thus require banks to document all overdrafts in line with the provisions of the Consumer Credit Act. To start with, it would impose extra costs on the banks, for which the customer would no doubt pay, in the end, through higher charges. More importantly, it could seriously inhibit the present flexible arrangements which offer considerable benefits to bank customers.
That is the convenience which many people, sometimes unwittingly, enjoy when they issue a cheque, not knowing precisely how much money is in the account, but confident —or, at any rate, optimistic—that the bank will meet it. If those flexible arrangements suffered from administrative intrusion, there would be a danger that they would contract.
The hon. and learned Gentleman said that all his constituents were borrowers—
§ Mr. Clark
The majority of his constituents are borrowers. I do not know whether they would thank him if, being random, casual borrowers, they discovered that, due to his powerful advocacy, arrangements were put in place which greatly restricted the facility with which they could borrow. If a bank had to comply with all the requirements of the Consumer Credit Act every time an overdraft was entered into, it would involve the drawing up of a written agreement that would have to be sent to the customer for signature and returned to the bank.
As all of us would agree, the issuing of a cheque is often spontaneous. It must then go through a process which, regrettably, seems to take a short time, and if this procedure was followed, there would be a somewhat accelerated process in which the bank would have to 578 contact the customer and quickly draw him into a written agreement before it met the cheque. The only alternative might be not to meet the chewue, which would create embarrassment and inconvenience to the customer and to the person to whom he had issued the cheque, who could be another constituent of the hon. and learned Gentleman.
Given the way in which the existing arrangements operate, such a procedure would not be practicable, since a customer may often be unaware that a transaction gives rise to an overdraft, and there is no contact between a bank and the customer, or it is difficult to make contact, which would cause delays. The result would be that banks might decide to cease to make overdraft facilities so widely available. In some circumstances, they might decide to refuse to honour cheques. I am sure that the majority of bank customers would not want that.
None the less, I do not suggest that the present provisions should be regarded as set in concrete. My Department has been reviewing the working of the Consumer Credit Act, and my hon. Friend the Under-Secretary of State with responsibility for corporate and consumer affairs will wish to consider whether section 74 is working as intended, taking into account the views expressed by the hon. and learned Gentleman, similar comments that were made by hon. Members during the passage of the Banking Bill and the views of the banking ombudsman in his first annual report.
My Department already has it in mind to make one change to the treatment of overdrafts under the Consumer Credit Act. It will affect the treatment not of the inadvertent overdraft, but of those overdrafts which are agreed in advance between a bank and a customer. In that case, the overdraft is more akin to a bank loan, which would be fully regulated by the Act. We agree that it is reasonable that customers who enter into such agreements should be fully informed of the main terms of the agreement, including the cost of credit. That is why we are prepared to agree to provisions in the consumer credit directive, which was formally adopted on 22 December last year, which will require information in respect of such agreements, including the cost of credit, to be notified in writing to consumers. It is likely that the requirements will be effected by a variation in the terms of the Director General's determination; my Department and the Office of Fair Trading are currently considering that. [Interruption.]
I am glad to hear the hon. and learned Gentleman indicate his assent, as I consider this a sensible move. He says that it is a start. Whether it will be possible to go all the way in the direction for which he argues — and whether that would even be desirable—I cannot say at this stage. However, to do as much as we propose will bring the arrangements into line with the aims of the Consumer Credit Act.
I hope that the hon. and learned Gentleman will find that helpful. However, for the reasons that I have given at length, I cannot consider amending section 74 of the Act to remove the present exemption, or indeed asking the Director General of Fair Trading significantly to alter the scope of the exemption available under his determination. There are strong arguments, which I have outlined, in support of the present arrangements; nor is my Department aware of serious consumer disadvantages in relation to overdrafts.
The hon. and learned Gentleman cited a number of cases, but he was not particularly specific. As I do not have 579 the advantage of having engaged in correspondence with him or of having seen copies of his correspondence with my hon. and learned Friend the Under-Secretary of State for Trade and Industry, I do not know the extent to which he has illustrated his arguments with particular cases of hardship or—as he seemed to imply—the exploitation of those who unwittingly become involved in over-extended commitments. The more of such material that can be produced, the more momentum there will be behind the arguments.
I accept that it might not be unreasonable for banks to provide retrospectively some information on the rate of interest applying to an overdraft. I understand that, at present, information on the rate of interest charged by a bank is displayed in its branches, and that it is also made available to individual customers on request. It is possible that, following the report of the banking ombudsman, the banks will see fit to go further, and perhaps to provide information on the rate of interest applying to an overdraft in regular statements.
I should regard that as a very welcome development, and I shall ask my officials to discuss the possibility with the Committee of London and Scottish Bankers. Certainly some foreign banks operate the practice. I do not know whether any of the hon. and learned Gentleman's constituents have hank accounts in Switzerland, but it is possible that some of his clients do. If so, they will know that Swiss banks display on a daily basis the level of interest charged and the amount involved. The hon. and learned Gentleman can draw from that whatever inference he chooses.
The scope of the exemption granted by the Director General of Fair Trading under section 74 of the Act is very much a matter for him to decide. I know that he has been approached by the hon. and learned Gentleman, and that he is considering, together with the office of the banking ombudsman, whether there is a case for revising the determination that he granted in 1983. It is open to the Director General to vary the terms of his determination, perhaps to require certain minimum information to be provided to customers, and my Department will be keeping in close touch with his office. We share the objective of ensuring that the provisions of the Act operate in a way that is ultimately beneficial to consumers, while also recognising the risk that detailed regulation may be counter-productive.
§ Mr. Janner
Let me first thank the Minister for his statement, and for the two positive steps that it takes in the direction that I have recommended. Meanwhile, will he be good enough to tell the banks that the Government will keep a keen and beady eye on the advertising of interest rates and the way in which it is done, to ensure that the meaning of such advertising is clear?