UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 70 - iHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFORESCOTTISH AFFAIRS COMMITTEE
BANKING IN
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This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935
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Oral Evidence
Taken before the Scottish Affairs Committee
on
Members present
Mr Mohammad Sarwar, in the Chair
Mr Ian Davidson
Mr Jim Devine
Mr Jim McGovern
Lindsay Roy
Pete Wishart
________________
Memoranda submitted by Federation of Small Businesses and Law Society of Scotland
Examination of Witnesses
Witnesses: Mr Colin Borland, Public Affairs Manager, Federation of Small Businesses and Mr Norman Banski, Law Society of Scotland, gave evidence.
Q1 Chairman: Good afternoon. I would like to welcome our witnesses to today's evidence session. Can you please introduce yourself for the record?
Mr Borland: I am Colin Borland from the
Federation of Small Businesses in
Mr Banski: I am Norman Banski representing the Law Society of Scotland as a Council member and a member of the Professional Practice Committee of the Economic Impact Group.
Q2 Chairman: Before we start asking detailed questions would you like to say anything by way of opening remarks?
Mr Borland: I am happy to go to questions.
Mr Banski: Perhaps just to state the
statutory function of the Law Society, Mr Chairman. Section 1 of the Solicitors (
Q3 Chairman:
From
your members' experience could you give us a broad outline of the impact of the
banking crisis in
Mr Borland: In terms of where we are at the moment, we are in a far better position than we were at this time last year. I think that if you look at some of the evidence which came out yesterday it served to drag us back a little bit and remind us exactly how serious the situation was a year, 13 months ago. That said there are still some serious problems that very good businesses are facing through absolutely no fault of their own. A year ago the question was access to finance; of somebody wanting a loan for a perfectly valid business or a perfectly valid proposition, which is going to make money for themselves, the bank and the company, but not being able to access it. The most recent data we have from members - the November 2009 data - is that about 12% have been refused by banks in terms of funding. The questions now are around the cost of finance. We are seeing about 30% of members reporting a cost increase of existing finance, including their overdrafts; and about 26% - just over a quarter, and fortunately it has stayed about a quarter - reporting an increase in cost of new finance. Some of the practical effect of this has been that people have used more of their own money to pay into the business. They have also experienced cash flow difficulties, which makes it more difficult to pay their own customers and which damages their credit rating. We have also found that simple things like buying stock are very, very difficult. For example, a florist who could not buy any extra stock because she had Valentine's Day and Mother's Day coming up because the florist could not get the credit extended to buy the stock and to do their business. We have had numbers of practical effects like that. Always when things are difficult and cash flow is reduced the first things to go are the marketing budget, the training budget and all those sorts of things. What our members tend to tell us is that they want to try to avoid job losses. That is for basic human being reasons because they know who their staff are - they know who the fathers are, they know what the kids want for Christmas - but it is also for good business reasons as well because you invest a lot of money in your staff and replacing them is expensive. So it is the last thing that we want them to do. We also do not want them to irrevocably damage the business, so that when the upturn does come they will then be ready to take advantage of it. So that is very quickly a rough idea of what our members are telling us about what they have seen in the last year or so.
Q4 Chairman:
Is
the impact of this recession the same in
Mr Borland: I did look out some figures
about lending rates - Scottish figures versus UK-wide. We actually do a lot better in terms of
lending rates. As I said, 12% rejected
in
Q5 Lindsay Roy: Has Government intervention through the fiscal stimulus been broadly welcomed? Do you have feedback on positive outcomes for small businesses?
Mr Borland: One of the things that we
argued quite strongly for ahead of last year's Pre-Budget Report was some sort
of enterprise finance fund and that was delivered in as the Enterprise Finance
Guarantee Scheme. As I said, I think it
serves us well to remember where we were this time last year, with nothing
actually happening and with no decision-making and with this rabbit caught in
the headlights impression from some very senior bankers working in
Q6 Chairman: Mr Banski, from your point of view, from your clients' point of view what is the impact on the profession?
Mr Banski: I think that the Society has
taken a more proactive than reactive approach to this. There has undoubtedly been a hit on the
business and in the submissions there is a clear reduction in income of the
firms from this time last year. The Cost
of Time Survey is showing a reduction on a median figure of about 30% and that
is quite an impact, and there is no doubt that there have been some cases of
unemployment. However, the Society is
trying to encourage the members to adopt a commonsense approach to the running
of their businesses. They are giving
guidance on their websites and issuing bulletins. The Society is consciously engaging with the
banks in an effort to try to provide the proper tools to assist the
members. The Professional Practice
Committee, for example, is resuming contact on a regular basis with the banks;
officials are making contact with the banks with bases in
Q7 Chairman: Colin, could you tell us what your position at the FSB is doing to help your members in difficult circumstances?
Mr Borland: It falls under two broad
headings in terms of the direct support that we provide to our members. We have lodged a financial advice helpline,
which is effectively a brokerage service which gives people advisers to get in
touch with who can help them, but also, crucially, to make sure that you are ready
to make that application and that it is not going to be rejected and thus make
it more difficult if you have reapply.
We also have a free legal advice helpline for people who are having
difficulties in getting paid where maybe they have not been paid and so they
need legal advice. We also provide
things like a free financial health check to members. We are not credit brokers but we do deals
whereby we can purchase in bulk or do deals with service providers to provide
services at discounted rates to our members; for example, to make it cheaper to
take credit card payments. Those sorts
of things on a day-to-day basis are the sort of practical help that we provide
for the members. The second front of
that is that the FSB is obviously an organisation that lobbies for the
interests of small businesses and that is still a core function. I have mentioned the EFG and we lobbied for
them. The most welcome change is to the
HMRC flexible payments system. We
lobbied hard on late payment, which again causes completely unnecessary cash
flow problems for perfectly good businesses.
We have asked the public sector to take a lead in this and have been,
from our point of view, specifically lobbying Scottish public bodies in
Scotland and the Scottish Executive and Scottish Parliament, with the specific
focus on subcontractors because there is no point in the public body paying the
large prime contractor within ten working days - which is great, and absolutely
has to be welcomed - if that subcontractor then holds on to the money and the
small subcontractors are paid when it for suits him. The other point I should mention is that we
are also lobbying over the dominance of the two big banks, RBS and Lloyds Bank
in
Q8 Lindsay Roy: It is quite clear that the FSB is a self-help organisation and you are trying to be proactive. To what extent have you had success or to what extent have you had to engage with government and local government in trying to put plans into place to address the problems? How much success have you had yourselves as opposed to bringing in a higher authority, as it were?
Mr Borland: You mean in terms of lobbying success?
Q9 Lindsay Roy: In terms of issues with banks.
Mr Borland: In terms of issues with banks we have a branch and regional structure whereby our members can go straight to the regional organiser and the regional organiser will take that case and they will make their representations directly to banks. We have developed, I would say, quite good relationships with the banks in terms of helping people.
Q10 Lindsay Roy: Have you had a high degree of success?
Mr Borland: It varies. I think in some cases we have been able to do something and they have looked back and said, "Yes, we will look at this again," and in other cases they have set their face against it and said no.
Q11 Lindsay Roy: When you have gone for external support has that brought an added dimension to help, or not?
Mr Borland: In terms of?
Q12 Lindsay Roy: Government, for example; the Treasury?
Mr Borland: I think if we are seen as
being active in the debate and arguing for members on the Scottish stage or on
a UK stage, if you have the FSB representing you and the FSB in your corner
then people may think about it just a little bit more. Also the fact is that we have the contacts
that people can lift up the phone and call, and I think that that helps as
well, and for them to say, "Let us get to the heart of the matter here and find
out exactly where the areas of dispute are."
An interesting point, if you will forgive me, a side point to that,
south of the border we have the Financial Intermediary Scheme. The Financial Intermediary Scheme does
exactly that; it gets in between the lender and the borrower and finds which
points are in issue and then tries to come to some arrangement. On both sides there will be versions of the
truth being presented, and let us get it sorted out - that is one aspect of
what it does. This is something that we
have actually extended in
Q13 Mr Davidson: You mentioned earlier about small businesses having problems of access to and the cost of money and you also mentioned about the lack of competition. Is one of the banks worse than the other one?
Mr Borland: I would not like to back one bank over another. In terms of the lending rates, they tend to have access to information to which we do not have access. What I would say is that interestingly, talking about the Financial Intermediary Scheme, the other aspects of what that does is that it provides some sort of reporting function. It does look at the moment, south of the border, at other problems with particular lenders - their problems with particular sectors of the economy from all areas of the country - and it tries to find patterns and then reports that back. The problem we have is to get those members reporting back who can talk to us if there is a problem or to ask people to participate and give an example.
Q14 Mr Davidson: I understand that, but do you have any impressions then? If you cannot give us categorical evidence, is there from your anecdotal evidence any particular evidence that you have a sector of the economy or one lender or regions of the country? Is it uniformly not particularly good or are there bright spots and poor spots?
Mr Borland: There is no doubt that people, for example who are in manufacturing, find things difficult; but whether or not that is the fault of the bank versus the general state of the economy and the general state of the manufacturing sector, I am not in a position to say. I think that there is a genuine lack of information about what the true picture is out there. We tend not to break our information down sector by sector. Beyond that, I think you are right; we do need to access that sort of information quickly and have it on an impartial basis, so that we can access that information, rather than on the basis of what we are getting and what the banks are giving in terms of their lending figures. The truth is probably in the middle of it somewhere.
Q15 Lindsay Roy: Both RBS and the Lloyds Banking Group have said that they have increased the amount of lending available to viable businesses. Is that generally your experience?
Mr Borland: I would make two points in response. First of all, you have to remember that the lending base has contracted. If you sat still you would expect the lending rates to go up. I do not think that we are going to get to the heart of this issue simply relying on what business organisation surveys tell us and what bank lending surveys tell us. We need to get to the heart of the issue impartially. I accept that I am not an impartial observer in this; I am arguing a particular point. Neither, I have to accept, are the banks impartial observers, so that is why we would like something like the Financial Intermediary Scheme to report back on this quickly.
Q16 Mr McGovern: The question that Colin has just answered about RBS and Lloyds, they have said that they have increased lending to viable businesses. I do not know if viability is an exact science, but I would be surprised if they said they were minded to lend to businesses that were not viable. So is that a rather blasé statement? If a business is viable they will increase the lending but overall they will probably decrease the lending to businesses?
Mr Borland: I would not be surprised if they go up because there are fewer players in the market. However, you are absolutely right; the question is viability and what is meant by viability. One of the issues a couple of weeks ago was that they were saying that they will not refuse a viable lending proposition from any business. Who in the business of banking would? Who would turn round and say, "No, I am not going to lend to a business because I will make money on it and I am going to get a return on my investment"?
Q17 Mr McGovern: And the converse is true. Banks will not lend to a business that is not viable.
Mr Borland: Precisely, and we have never argued that they should be throwing good money after bad. I think that the crux of this issue comes down to what you regard as a viable business. The evidence which has come back to us is that they are being risk averse. Or at least they may be taking a risk but they are hedging against it by lending at a prohibitive rate. One of the points they will make is that they are not going to meet their lending targets and they cannot give the money away because there is no demand for it. But that is possibly because they are packaging the money in the wrong way - not so much that they are not making it available; they say, "Yes, of course it is available but it is available on terms that you do not find attractive; it is available on terms where we are going to secure it on your house and it is not going to be flexible - we are going to have a fixed repayable loan and not an overdraft, for example." They are hedging the risk. So it is rather like selling bottles of fresh air for £20. You cannot complain and it is not the public's fault that they will not buy it; it is the fact that the product on offer is not what people want. I think that is the issue.
Q18 Mr McGovern: I suppose the point I am trying to get to - and I hope you will indulge me here, Chairman - is that misleading statement, to say, "We have increased the amount of money we are lending to viable businesses."
Mr Borland: I have no doubt that it is probably factually correct.
Q19 Mr McGovern: I know, but is it misleading? Is it designed to make the public think that they are actually lending more money per se?
Mr Borland: It depends on the intention, does it not? I suppose that that would be for them to answer rather than me. What I can say is that the money which is being lent is on less advantageous terms and on terms on which people may prefer not to take that money and perhaps rely on their own savings or money from elsewhere; or, indeed, not to do the business.
Q20 Lindsay Roy: We have received some evidence, both as a Committee and as individual MPs in the recent past, presenting a picture of arbitrary and significant increases in fees for finance applications and renewals. Is that still the case and, if so, how big a problem is it?
Mr Banski: The anecdotal evidence which we have is, yes, there are certainly increased fees. My colleague in his submission has clearly stated that the risk profile had not altered, but the terms on which they were asked to renew were substantially different and less advantageous. I have had clients in the same scenario. At a relatively early stage the Society was warning their members to be aware of this, that there may be different constraints put upon the firms when it came to renewal and that basically they should ensure that the belt and braces were there so that their facility was properly renewed.
Q21 Chairman: The businesses in my constituency tell me that the overall burden on the businesses has increased rather than decreased because this base rate is now 0.5%; because they are charging in terms of a commitment fee, if they were charging them 0.1% or they were charging 1%. Is this your experience? That is a question to both.
Mr Borland: Yes, is the short answer. Interest rates are lower but people do not see those being reflected in the price that they are paying on the finance. If the purpose of having low interest rates is economic stimulus then that is not going to feed through because the business has no more money in the business because it is going to go into the bank. However, you are absolutely right, the whole question is about the arrangement fees, the re-arrangement fees, the service charges and if you want to take business by credit card they want large deposits to cover bad payments, and where before that had maybe been £1,000 a year it is now £10,000 on a turnover of about £250,000 in credit card sales - increases of that magnitude. It is not simply the lending figure we need to look at.
Mr Banski: We are seeing the situation where historically, particularly with secured lending, businesses have been able to arrange overdrafts of base plus 2% and base plus 2.5%, but they are now looking at base plus 4%, which is substantially higher, where there is no change in situations. That is where the legal businesses seem to be getting charged perhaps £17.50 in effect to renew a security which is already secured and no difference to the risk or scenario whatsoever. Going back again to my colleague's submissions, it is clear that they felt that this was just not a step that they were willing to take and they refinanced completely. I think that we as a profession are trying to provide the pastoral care to the members to try to help the firms to sustain their viability because on top of everything else if legal businesses are affected it does affect the public to have access to legal services and access to justice. So it is quite a wide effect that it can have upon the general public and in terms of the Act we do have a duty to the public to try to help.
Q22 Lindsay Roy: Is there a perception that banks are trying to build up their reserves on the back of this hike? Is that how people feel that they are being penalised?
Mr Borland: I think that is exactly how people feel. I think the phrase that is used is that, "They are rebuilding their own balance sheets at the expense of mine." Whether that is true or not, that is the perception.
Q23 Mr McGovern: A question for both really. Do you feel that Government measures to date, such as the Small Business Finance Scheme, are having an impact in helping your members and clients get through the crisis? If so, which measures are working and which would you feel are perhaps not working?
Mr Borland: The Enterprise Finance Guarantee is certainly something that was needed at the time to get lending moving and it was something that we in the FSB had called for. Curiously one of the things that really made a difference - and I do not know how much it cost, I do not imagine that it was particularly expensive in government terms - was the flexible payments system from HMRC. That is the sort of thing that was a very sensible practical measure because we had people lying awake at night thinking, "How am I going to pay my VAT bill because that is what is coming up and if I miss it I am going to be in trouble; I am going to be paying a penalty. I have a big customer who owes me and I am waiting for a big cheque from this big customer and I do not know what I am going to do. I need to go and extend my overdraft as I do in other situations, but I cannot do that because it is going to cost me a fortune to do it." What that allowed people to do was to speak to HMRC and actually explain the difficulties in the business, and the HMRC would come to the decision, "No, we are not propping up a bad business here; we are going to get our money back because you pay interest on it. We are going to get our money back, and this makes sense to do it." I think that out of all the measures this is the one about which we have had the most positive feedback.
Q24 Mr McGovern: Schemes such as PACE, to try and get people who are made redundant back into work, with your members or clients do you have a perception that the Government has concentrated more on getting people back into work than saving the businesses that currently employ them?
Mr Borland: I think that is a point that came out in a report that we published last Thursday regarding the scale of job losses in small businesses and the government support that is available. Traditionally people saw it as they are there to help a large employer; one large employer on the one site with a large number of job losses. Actually I think it was in Mr Devine's constituency. Is it appropriate at the moment? It has been re-defined and the FSB is a member of the PACE partnership, which is looking at how we make sure that small and medium-sized companies get access to that help. The second point about PACE is in terms of when it intervenes. The report we published last week does identify that there is a need for earlier intervention because it is too late for PACE to come in as soon as it is the final nail in the coffin or mitigating the damage or moving people on to somewhere else, rather than actually assisting them to focus that support on the business itself, to see how can we avoid job losses, how can we ameliorate the effect of this, how can we tell you how we can get you back to work. There is a question that the report brings up - and it is an interesting one and I am not entirely sure of half the answers, and something I think it would have to be debated - as to whether or not that would be a role for PACE or whether it would be the role of another business support function. At the moment I think it would maybe sit neater with something like Business Gateway than PACE, but I am not wedded to the idea; I think it is something that we could debate and actually work out how it happens. The point remains that we do need that intervention earlier if we are going to keep these companies and these skills in the Scottish economy.
Q25 Mr
McGovern: On the same point, an observation on my own
experience of PACE has been restricted to fairly large-scale redundancies in
Mr Borland: I think it is fair to say
that there is a gap. The small business
community by definition is diverse; it is spread out and it is difficult to
communicate with. There is a job to be
done there to let them know exactly what support is there. We can do as much as we can - and we are the
largest business organisation in
Q26 Mr McGovern: On that same point, when you say that there is a serious job of work to do and we have to be more effective, do you have any suggestions as to how that can be improved?
Mr Borland: I think the first place we have to start is to find out where small businesses - not necessarily FSB members - in general turn for information and advice. If you have a problem where do you go and look? Do you talk to your lawyer because lawyers always come top of the list (and I am not saying that because I am sitting next to one!) of people that they trust? Or accountants?
Q27 Mr McGovern: Surprisingly enough!
Mr Borland: And bank managers come further down than that. We need to find out where people get that information. We are doing something at the moment. Nothing has been signed and agreed yet, but there is a piece of work that we are in the process of trying to commission and finance, which will answer exactly these questions. It is not just impressions of business support, questions about PACE and questions about finance; it is across the board how you do that communications job.
Q28 Mr McGovern: Do you have any suggestions on information about what help is available to be more effectively dispersed?
Mr Banski: In our case we are very lucky
that we have, in effect, a closed membership and we can disseminate it through
the job losses and so forth. I think
there has to be a way that even we as a profession can probably help, as Mr
Borland says. One thing that I have
noticed - and this is possibly the fourth crisis and perhaps the worst
recession I have seen in my years of practice - is that what we are missing
this time around is a level of input from the banks which was provided by the
old fashioned managers, who knew people and who were able to assess; who would
know if Mr Borland was a risk or not, or if he was viable or not. And he would say to him, "I will give you
70%. I will not give you 80% but I will
give you 70%." That is what is
missing. I get the feeling that we have
this grass roots problem in providing financial assistance and
information. The bank managers that I
have known knew if you were viable; they would give you a kick to do
something. We were not faced with the
anonymity that we are faced with now. I
think that is what we, as a Society, are trying to do for our members; we are
trying to bridge that gap, we are trying to get in there and show people that
it is not all doom and gloom and that there are solutions and we need to get
around those solutions and show them to people.
I do not know if there is some general website, some advertising or
something like that which could be done through the general aspect, but people
are simply unaware of what is out there to help them. We have seen some quite substantial
redundancies, even in
Q29 Mr Devine: You have talked about that you have been around with three or four recessions. Are both your organisations supportive of the Government's policies in all areas, and we have read today about the recapitalisation in banks and the money that went into Scottish banks would clearly not have been affordable if it was independent; and we have another strategy that says we should not be getting involved, we should be stepping back, as what happened in the early 1980s is that the Government stepped out of any involvement and let the markets decide. Are you comfortable, both your organisations, with the thrust of the Government's policies in all these areas at the moment?
Mr Borland: We have welcomed the Government intervention in terms of recapitalising the banks and their most recent announcement as well. The prospect of what could have happened and how close we were to the brink - some of the information we heard yesterday shows just how close we were to the brink. This is a serious situation but how much worse could it have been if that action had not been taken? It had to be taken at that time. Knowing what I know, I do not see that they had a choice. I think the question now is: we are where we are and how do we move forward?
Q30 Mr Devine: So that is a yes?
Mr Borland: What the Government has done in terms of stabilising the situation and introducing measures such as the EFG and the HMRC are all measures that the FSB agrees with.
Mr Banski: My personal view is ---
Q31 Mr Devine: You are not here as a person!
Mr Banski: I would say that the profession would support that something had to be done. There was clearly a gaping hole which everybody was going to fall into had there not been some move made. I think that the measures were essential from that point of view. Touching on something else that was mentioned before - and this is reinforcing what Colin said - the Revenue have proved to be very helpful at this time which - and I do not want to be too blasé about it - is very helpful.
Q32 Mr Devine: So all the policy initiatives that the Government has taken, by and large both your organisations support?
Mr Borland: I think the one we would
maybe quarrel with would be the VAT cut.
I think the timing was unfortunate because it came in just before
Christmas and you remember walking down
Q33 Chairman:
The
FSB has previously suggested that there ought to be a corporate mediator to
solve problems and the facility for dialogue in the banking and business
community. Do you think that
Mr Borland: Yes, absolutely. It is something we have argued for for some
time. The idea of the corporate mediator
was suggested by the FSB on a
Q34 Chairman:
The
Royal Bank of
Mr Borland: I have not had any feedback from members who have used it; no one has contacted me and said that they would. But, to be fair, people would only phone me to contact me if they had used it and it had gone wrong. I suppose like MPs, we are contacted with complaints more than with stories of success. In principle the initiative that RBS has introduced is something that we supported and we went on record at the time as backing it. However, with the caveat that RBS is not exactly a disinterested player; and also that it performs one half of the corporate mediator function in terms of getting to the heart of the matter, which is very important, it does not do across the board reporting functions, which, as I explained, we think are extremely important.
Q35 Mr
Devine: Both RBS and Unite, the union, have expressed
concern about the impact of mergers upon banking competition in
Mr Borland: As we have stated, we have
some quite serious concerns about the consolidation of the small business
banking market into the hands of two very big players. The best that we have in terms of
authoritative data on it is the Scottish Executive's study from July 2009, and
it stated that 75% of the small business banking market in
Q36 Chairman:
What
assessment have you made of the effect of the banking crisis on jobs in
Mr Banski: I think that from the point of view of the Society we have seen an increase in the opening of small firms as a result of the crisis. People who are being made redundant are perhaps taking the step of opening their own business - however, often with their own funding. The statistics are showing - the latest figures which we have are that practising certificates are 10,304 compared to 10,089, so there is an uptake there. The Solicitors' roll has increased by 350 roughly, and the firm closures since November 2008 were 30 but 38 have opened. So it is heading in the right direction. Going back to the redundancies, 291 members were made redundant since May 2008 and unfortunately only 41 found employment. Trainees - 55 were made redundant since May 2008 and 26 have resumed training; and there is a fall in the number of training contracts. That is the downside. However, there are green shoots.
Q37 Mr
McGovern: Gentlemen, apart from banking itself, other
sectors, such as construction and property have been particularly badly hit as
a consequence of the banking crisis. In
fact recently we as a Committee visited
Mr Banski: I think that there has been a
substantial effect. A lot of solicitors
firms, especially in the last 20 years or so, have hung their hat on the estate
agency peg and for people in the construction industry I think it is fair to
say that most of the redundancies have come in the sector of those firms
dealing with that particular field, where the downturn in the construction
sector has clearly impacted upon our members.
It is perhaps an area which could be looked at, where assistance could
be given to both the construction industry and the first time buyers. There is a recent scheme introduced in
Q38 Mr McGovern: Do you feel that construction and property are possibly the worst hit sectors, apart from banking itself?
Mr Banski: I think they are very badly hit, yes; absolutely. People want more houses but people cannot buy them and the construction industry can only absorb so many unsold properties and the profession has to look at that.
Q39 Mr McGovern: You mentioned about government help. Am I right in assuming that you mean Scottish Executive help?
Mr Banski: Sorry, Scottish Executive help.
Q40 Mr McGovern: Obviously we are members of the UK Parliament and is there anything of which you are aware that you feel the UK Parliament could do to help? Prior to becoming the Scottish Executive the SNP promised every first-time buyer a £2,000 endowment and that has never ever happened and it is not likely to happen now. But there are other measures we might introduce to help business, and is there something that the UK Government could do of which you are aware?
Mr Banski: If they were able to look at the affordable market, yes, in some way, in the provision of grant aid perhaps, or secured lending. It seems that the schemes which are out there are to effectively provide a deposit which is secured and there is no risk to the authority, whether it be the local authority or the government or the Scottish Executive.
Q41 Mr
Devine: One of the problems is that the
property market has collapsed, and we are building far too many houses per
year, and we are sitting on about three years of housing. How many houses do we need to build in
Mr Banski:
Q42 Mr Devine: Would you be able to get those figures?
Mr Banski: Yes.
Q43 Mr Devine: It would be helpful if we could get what we need to stand still, what we have been building for the last maybe four or five years and what is happening at the moment.
Mr Banski: We will get those figures and submit them to you.
Q44 Chairman: Can I thank the witnesses for their attendance. Before I declare the meeting closed, would you like to say anything in conclusion, perhaps on areas we have not covered in our questions?
Mr Banski: Can I just thank you for inviting us to be witnesses. The Law Society of Scotland would wish to be proactive in assisting the public. We do not want to lose sight of the fact that we are here to assist the public as well as our profession. We are not exclusively after the protection of lawyers.
Mr Borland: Can I just echo that and thank you for the opportunity to contribute. If there are any issues that you want more information on or for us to follow up with you, we will be more than happy to do so. Get in touch with us and, again, if you do have issues that come through your constituency post bag and you think "That doesn't sound right," we are more than happy to assist in any way we can.
Chairman: Thank you once again for your attendance.
Memorandum submitted by Citizens Advice
Witnesses:
Mr Keith Dryburgh, Social Policy Officer, and Miss Vida Gow,
Money Advice Coordinator, Citizens Advice
Q45 Chairman: Good afternoon and welcome. Can you please introduce yourselves for the record?
Miss Gow: Hello. My name is Vida Gow
and I am the Money Advice Coordinator at Citizens Advice
Mr Dryburgh: My name is Keith Dryburgh and I am the Social Policy Officer also
at Citizens Advice
Q46 Chairman: What is your general impression of the way banks and other lenders
in
Mr Dryburgh: I think from the point of view of our clients, sir, who are generally low-income, quite vulnerable consumers, we are seeing the same sort of problems that we have seen for a number of years now in terms of irresponsible lending, the bank charges issue of course, and aggressive debt collection practices, and generally their attitudes to people who are falling into arrears and financial problems.
Miss Gow: I do not know if "responsible" is the word. They have withdrawn a lot of the personal lending that they were doing. People are not getting the same access to loans. Whether that is to do with being responsible or not is questionable.
Q47 Chairman: They are not lending big sums of money because they cannot borrow from the banks.
Miss Gow: People certainly are not getting the same access to credit. Indeed, they are not getting access to bank accounts in many cases.
Q48 Mr Devine: You have given us some case studies of particular problems faced by the Bureau's debt clients. Which is the most common issue that debt clients seek your advice on? One in particular that I am interested in is this one from the West of Scotland, where basically they were getting phone calls all the time, morning, noon and night, silent calls as well, which the individuals concerned thought were from the bank. Is that correct?
Mr Dryburgh: It is certainly an issue we have had reported in anecdotes which suggest it is possibly on the increase. We have heard of quite a few clients who get silent calls, basically because the banks are putting out calls but the person on the other side of the line does not have time to pick up, which is obviously quite worrying for the client if they do not know who the call is from and they have traced it back and it has come from the bank.
Miss Gow: Away from the silent calls, a phone call is their main way of trying to come to some sort of agreement with the clients, and they will make numerous calls to the client. So even though the client may have already spoken to a money adviser and been told that they should advise the bank that we are dealing with it on their behalf and that they will be getting a financial statement, they will still get daily phone calls asking when the payment is going to be made, when is it going to start.
Mr Dryburgh: The worry is that it is almost circumventing the advice process. If you happen to have a Citizens Advice Bureau adviser representing you and somebody calls you at home, you do not have the back-up and advice there, and they can pressure you into making an agreement that you possibly would not have done if you had gone through the adviser.
Q49 Mr Davidson: Can I ask about the phone calls? My understanding is that quite a lot of these calls are coming from foreign call centres, and the people involved are not in a position to actually discuss the individual case. They simply say they will refer it on to somebody else. I have had a number of constituents raising this with me. Language difficulties have been a particular problem. Is that something that has come up a great deal with yourselves?
Mr Dryburgh: I am not sure it has.
Miss Gow: It is not something that I have certainly come across.
Mr Dryburgh: It is sometimes an issue that different departments do not really speak to each other. You may have made an agreement with one department, then you get a call from another department who do not know anything about an agreement having been made. We do have problems with departments not speaking to each other.
Q50 Mr Devine: We did a report on credit unions, and we did one on poverty as well. We got the feeling that basically, the banks were cutting a lot of people out; they did not want them as customers. They did not want to touch them because they were only putting £200 in on a Thursday and £195 of it was out on a Friday. Is that your experience and is that more of a problem at the moment?
Miss Gow: Yes, access to bank accounts is certainly becoming more and more of an issue that we are coming across. With more people having to apply for bankruptcy, there are only two banks we are aware of, Barclays and the Co-op Bank, which will allow an undischarged bankrupt to have an account with them. For people who are employed, who have a wage that they need to pay into a bank account, it then becomes a huge issue for them that they cannot access these banking facilities, because their bank accounts are immediately closed down by the other banks.
Q51 Mr Devine: We have your figures from last year, which show 360,836 encounters, which is a 14% increase on the previous year. Can you send us the figures for the last five years?
Mr Dryburgh: We can. We know that generally, there has been an upward trend in terms of the number of debt clients and in terms of the amount of debt they have come to us with. We did a report earlier this year called Drowning in Debt, in-detail reports of our debt clients, and we found that their average debt was over £20,000, which was an increase of 50% in just the last five years.
Q52 Mr
Devine: Can you also break that down to
which part of
Mr Dryburgh: We have constituency debt profiles that we have just produced for MSPs. We break that down into constituency profiles for MPs as well.
Q53 Lindsay Roy: To what extent have banks been more willing recently to accommodate revised repayment plans and avoid calling in loans or repossessing homes compared to two or three years ago?
Miss Gow: The repossession of homes seems to be a slightly different thing. There definitely does seem to be more lender forbearance that is happening around that. Certainly, with the mainstream lenders, the mainstream banks, that does not seem to be so much of an issue, but we are definitely seeing a more aggressive collection almost with other, non-secured lending.
Q54 Lindsay Roy: With double, triple demands for repayment over a shorter period of time?
Miss Gow: Yes. One of the examples we have given in here was somebody that was being asked to pay so much more than they could afford to pay.
Q55 Lindsay Roy: How have you taken that forward, given that many people would view that as unacceptable practice? Have you been able to lobby on behalf of the people who come to you? Have you been able to use government agencies to support you in that?
Mr Dryburgh: In some circumstances, the Office of Fair Trading is the main agency, and we are in contact with them, especially to do with credit and irresponsible lending and so on. I think it is a constant battle for us to lobby on this issue as well.
Miss Gow: The main thing is to get the client to come back to us if they are asked to pay more, so that if we have provided income and expenditure, come to an agreement for payment, if the bank then try and increase that at some point later on, the client knows to come back to us so that we can ensure it is a reasonable payment that is being made.
Q56 Lindsay Roy: Are you able to build up a database on which to challenge the banks?
Miss Gow: The banks have agreed to adhere to certain figures of expenditure. If they receive a financial statement of income and expenditure that shows that the client is within those limits of expenditure, through the British Banking Association they have agreed to those payments. That is how we would normally go back to them and say, "You have agreed to those figures and now you are saying you won't accept it." Generally, when it goes to somebody slightly higher up the chain, they will accept it.
Q57 Lindsay Roy: So it is whether they are operating within or not within criteria. If they are not, you pursue it further?
Miss Gow: Yes, absolutely.
Q58 Mr McGovern: Could you tell us what you think of the existing measures announced by the UK Government and the Scottish Executive to help customers of banks and if you have an opinion on whether or not you think they have helped in the ways that they were intended to help.
Mr Dryburgh: We have talked a bit about repossession and the Government's Home Owner Mortgage Support Scheme has had some impact on this. It has led to banks showing a little bit more forbearance on repossessions. As you will have seen, the Council of Mortgage Lenders have been taking down their estimate of the number of repossessions this year. There is some worry though that it is just stretching out the process. I have heard in some places the repossession process can take up to 18 months now. That is not unusual. I am just worried that the repossessions are just being spread out. In terms of repossessions, government policy has certainly had some impact. We are of the opinion on other aspects of credit and banking that there has been maybe a lack of focus on the consumer interests. A lot of work has been done on the stability of financial systems but not enough focus on the experience of the customer within the system.
Q59 Mr McGovern: Could I just clarify: when you say government, you mean the UK Government or the Scottish Executive?
Mr Dryburgh: Yes, the
Q60 Chairman: In your view, what do you think lenders should be doing to help those who are in mortgage difficulties?
Mr Dryburgh: It is about, as you say, being responsible. A lot of banks say that when somebody is in financial trouble, they will talk to them and try to get them out of it but our experience is that people get into financial trouble, they get a bank charge of £25, they cannot pay, then they get another bank charge and another bank charge, and before they know it they have hundreds of pounds worth of bank charges on their overdraft. I think banks need to look at the circumstances and income of the customer and assess whether they really can repay these charges and, if they can, work out a repayment schedule for them to get back into the black rather than just adding on these compound interest and charges. It is not taking into account the person's circumstances.
Q61 Chairman: What more, in your view, could the UK Government do to take people out of this difficult time?
Miss Gow: I would like to see certainly the banks being encouraged, shall we say, to open more basic bank accounts for people, not to discriminate against people who have been made bankrupt. With the bankruptcy procedure, people have come to a conclusion, they have reached a level of debt that they cannot sustain, so they need to be able to draw a line under it, but to be able to start afresh they need to have that bank account, they need to be able to get into working a bank account on a proper basis, often for the first time in years. It would be good if there could be work done to encourage the banks to open more accounts for people to have access to.
Q62 Chairman: Will you be able to provide the current level of service to debt clients after the government funding package comes to an end in March 2010?
Mr Dryburgh: We have seen a significant increase in the number of people coming to the service since the recession started, and we have been able to broadly meet that through the government funding that we have received, but we still hear of waiting lists for money advice of six or seven weeks in certain bureaux. It is not because they are not trying hard; it is because there are just so many people. We are of course worried about how when the funding is reduced we are going to meet these extra people, because they are still going to be there next year.
Q63 Mr Devine: Where are the areas with six or seven weeks waiting?
Miss Gow: It is in all kinds of pockets across
Q64 Mr Devine: Could you give us that information as well? It would be helpful to know the length of time people are waiting.
Miss Gow: Various agencies have tried to bring in methods to reduce it, to try and see clients more quickly, but it is just the sheer numbers of them at the moment.
Q65 Mr Davidson: Could I just clarify to what extent you think that the very intensive work that you do sometimes with clients actually contributes to the length of the queues. Clearly, the more work you do with an individual client, the fewer clients you will be able to get through. Is it not possible to consider providing a more basic service for a larger number?
Miss Gow: We have introduced a new system called Cash Flow, which is a joint project between the advice industry and also the financial industry, which is to give that initial assistance to clients, to go over their financial statement with them, to discuss all their options, and if the chosen option of the client is to be making payments to their creditors, they would then take that forward and do all the paperwork themselves from that point onwards. Obviously, that is for those clients who feel able to deal. The problem is that often, by the time clients come to us, their health has suffered terribly because of the situation that they are in, and they feel very unable to deal.
Q66 Mr Davidson: I understand that. I am not unsympathetic to that position. The difficulty is that clients' health will continue to deteriorate if your service is rationed by queuing and people are being held for an interminable time. I know in my constituency there are people who will turn up regularly to try and be seen on a particular day and are not seen. You can just imagine how that builds up, and the fact that you seem as well to have a queuing system by which it deals with people on the day, and at a certain time no more will be seen, the incentive then is to turn up at the crack of dawn. You can see how that pattern develops anxiety amongst people. Surely there must be ways of managing the system other than the one you have at the moment.
Miss Gow: As I say, different bureaux have brought in all kinds of arrangements. The extra money that came in has allowed a number of bureaux to extend their hours, to have extra staff on, to put in telephone access to systems. There has been across all bureaux different initiatives as such to find ways to queue-bust, to try and help people as soon as possible. Yes, it is an awful situation that people cannot access the service.
Mr Dryburgh: One of the effects of the recession has been that it is not just increasing numbers; it is the increasing complexity of the issues that people bring. Often people have employment, housing, and debt problem all rolled into one. It takes a lot of time to go through that. They may have to claim benefits as well. A lot of people come in a crisis situation. You see people who come and say, "I am getting my house repossessed next week. What do I do?" Those people need the help on the day. It is difficult for the bureaux to work through all these complex cases.
Q67 Lindsay Roy: Over the last few months, as MPs individually and as a Committee, we have received concerns about arbitrary and significant increases in fees for financial applications and renewals. Is that a pattern you are still finding? Is it diminishing? What is the current picture?
Miss Gow: Is that renewals of loan facilities?
Q68 Lindsay Roy: Yes, loans for small businesses, fees for financial applications and renewals?
Miss Gow: It is not something that we tend to see much in the personal debt, which is the majority of our client base. Although we see certainly after the fact, if things go wrong, that clients end up with very large amounts of charges, there does not tend to be for clients the kinds of fees that you see going to small businesses.
Q69 Lindsay Roy: In terms of bank charges and fees, have you any indication that it is still arbitrary rather than a consistent set of criteria that are being applied?
Miss Gow: I would have said it is very consistent; it is very high consistently. There does not seem to be any kind of discussion with the banks at all on the amount.
Q70 Lindsay Roy: Is it a dictatorial regime?
Miss Gow: It is. If you have a cheque returned, it will be £35, and no matter what reason it happened, there is no discussion. That is how much, and if the clients go into the branch and try to discuss it, they are told, "No, that is how it will be. That is how much is charged."
Q71 Lindsay Roy: So it is being done to people, not with people.
Miss Gow: Yes.
Q72 Lindsay Roy: There is little dialogue?
Miss Gow: Absolutely.
Q73 Lindsay Roy: It is perhaps perceived as arbitrary. "Why is it that figure as opposed to ...?"
Mr Dryburgh: Yes, and consumers have a real lack of awareness of charges. Last year the majority of people that incurred charges did not know those charges existed. When they are charged for insufficient funds or unpaid items, people do not know what they are being charged for.
Q74 Lindsay Roy: So there are big communication issues with clients?
Mr Dryburgh: I think so, and transparency as well.
Lindsay Roy: That is something we might want to pick up on.
Q75 Chairman: I can understand that your clients are not the small, medium or big businesses. They have their issues which they have raised with us, charging excessive overdraft interest rates, renewal fees and commitment fees, but my understanding is, talking to my constituents, that the banks and building societies and these financial institutions are exploiting the most vulnerable in our communities. They are charging them very high interest rates, and in some cases, if they go over their limit by £5, or even £2.50, the clients end up losing £50-£100. They write one letter, they charge £25, then they have penalty charges. What do you do with these clients who feel the banks are unreasonable, in fact ruthless, with these people? What are you advising these clients?
Miss Gow: Generally, at that point, we are saying to the clients that really, the relationship with that bank has broken down, and we would be suggesting to the client that if they have income that is paid into their bank account, they should be looking at opening a different bank account, and then we would sort out their debt with their bank separately. If they do not do that - and this is where it comes that it is the most vulnerable people - people's benefits go in and it is all swallowed up in charges, so they find themselves with no money to live on.
Q76 Chairman: The difficulty is, unfortunately, nobody is there to defend those people from the banks and the financial institutions. I tried to introduce a private Member's bill to prevent excessive charges by the banks. I suggested that if somebody goes over their overdraft limit, the money that person should be charged should not be more than 2.5% of the excess amount, and the courts should be given some degree of power so that if clients feel they are being treated unfairly, they can challenge those decisions in a court of law. What is your view of this? How can we stop these banks exploiting the most vulnerable in our communities? What can we do?
Miss Gow: There was the case this morning, and we have seen on bank charges the OFT have tried to challenge it and they have been told that they do not have the right to challenge the bank charges as unfair. So we are now back at stalemate, because the banks have total control. Whilst they are your banker and that is where your money is being paid into, they have total control over what they do with your money. As I say, clients are more and more having to go to other banks, to credit unions, choosing other forms of banking to break out of that vicious circle.
Q77 Chairman: Can you tell us, with your experience, whether clients of CAB in
Miss Gow: Certainly.
Q78 Chairman: Are the banks in
Miss Gow: I am not hearing anything to suggest it is any different.
Mr Dryburgh: According to our colleagues, they have very similar issues, often with the same banks.
Q79 Mr Devine: Is there any bank that behaves worse than another, or are they all the same?
Mr Dryburgh: I think it is across the board. I think some banks are slightly better than others on some things and slightly worse on others. Banks tend to follow each other. If one bank does well on one thing, on another they do worse. They often follow each other.
Q80 Mr Davidson: You mentioned earlier on that the Co-op and Barclays were doing one thing particularly well. Have either of those banks a good record generally or was that just an aberration?
Miss Gow: It is purely from the point of view that they have said that they will open bank accounts for undischarged bankrupts. As to the rest of their banking, I could not comment.
Q81 Mr Davidson: You do not have a league table of bad banks?
Miss Gow: No. To be honest, it is pretty much across the board that we see the problems.
Q82 Mr
Davidson: Given that the case was lost
today, have you thought about suggesting a set of rules for banks which they
should be following in response to the fact that they get huge amounts of money
from the government, from the public purse, and that there should be rules of
engagement, so to speak? Given that
there is almost a duopoly in personal banking in
Mr Dryburgh: Certainly that would be great. It is maybe not for us to tell them what to do. It would be difficult.
Q83 Mr Davidson: If not you, then who? You are dealing with things at the sharp end. I get some cases and individual MPs will get some cases, but you are dealing with this systematically. I do not know really whether or not the additional charge for bouncing a cheque as compared to the charge for going over your overdraft limit, which is the most significant issue and which is the one upon which we ought to be placing the greatest pressure on the banks. I would have thought that, even as a start, you perhaps ought to have a look at whether or not there is a particular set of things that you would want government to pick up as part of the deal with the banks as part of their social responsibility. You have not done any of that?
Mr Dryburgh: The banks are always something we try to lobby on, especially on things like bank charges. In terms of bank charges, all the different fees for cheques bouncing, overdraft infringements, unpaid items, it all comes under the same kind of thing. We think it is all unfair and irresponsible. We do work with the banks continually to try and tell them our problems and to try to work out solutions with them.
Q84 Mr Davidson: One of the things I wanted to pursue with you at the very beginning was not just the question of irresponsible lending but there is also irresponsible borrowing. A number of people have got themselves into the position they are in now as a result of being greedy and so on, and not running their accounts in the way they ought. What I am trying to separate out in my own mind is the extent to which the bank charges are justifiable as a charge on people who are behaving irresponsibly and to what extent they are simply taking advantage of people who are in financial difficulties. They presumably have a defence. Their defence presumably is that "people do business with us, they know the terms, they decide to go over, it is only fair that our costs should be met, otherwise the burden falls on people who are running their accounts properly." I am just interested in exploring with you what the response to that ought to be.
Mr Dryburgh: I think with overdraft charges there should be a sting in the tail if you go too close to zero. They should bounce you back up, but they are so punitive and disproportionate to people's incomes that they keep people in overdraft. So it is not that people continually go into them; it is that they cannot get out of it at all. They get one charge and suddenly they owe hundreds of pounds. There should be in proportion so that people can learn from their mistake and get back out and know not to go back in. They are so punitive that people are getting stuck in them.
Q85 Mr Davidson: Do you have a shopping list of items that you have been going to the banks with, saying "These are the things that we would like to change"?
Mr Dryburgh: Yes.
Q86 Mr Davidson: I think it would be helpful if you let us have that. Presumably your shopping list is in an order, and that would give us an indication of the significance of the individual items compared one to the other.
Miss Gow: Certainly. I would say at the end of the day I know the banks talk about irresponsible borrowers but they were the professionals and they were the ones who lent the money. The idea that the poor bankers were done over by the public is --- The public have found themselves, for one small mistake - you maybe go to the cash machine, you take out £10, you forget that you have a standing order due which puts your account overdrawn by a few pence, you suddenly are hit by a £35 charge, they then hit you with £28 at the end of the month - there are not many people's wages can sustain that level of charges. All it takes is one incident like that and it becomes a whole knock-on and spirals out of control for the client and before they know it, there are thousands of pounds of charges.
Mr Davidson: Give us a list.
Q87 Chairman: It would be helpful to the Committee, if you feel that what the banks are doing is wrong and you have suggestions as to how they can improve themselves, if you could drop a note to the Clerk to the Committee. Can I thank the witnesses for their attendance this afternoon. Before I declare the meeting closed, do you want to say anything in conclusion, perhaps on areas we have not covered in our questions?
Mr Dryburgh: Just one more thing. We have experienced a rise in the number of cases of something called the right of set-off. Basically the banks have the right, if you have an account with them and you also have a loan or some kind of credit, and you fall into arrears on your credit, they can take the money that is in your personal account or savings account to put towards the payment of the loan. Often this happens when people have been paid their wages or their benefits, and they just take all that money, leaving the person with absolutely no money to live on. This is something that we are quite concerned about because it can leave people destitute until they receive their next income. I understand there could be a right to do that but they should be leaving a certain amount of money in people's accounts so they can get by.
Mr Davidson: Put that on the shopping list.
Chairman: Thank you very much for your attendance.