The UK’s big five banks recently reported huge half year profits to the City and are projecting profits over £40 billion for the full year. I don’t want to sound like Gordon Gecko but “profits are good” and these profits could be construed as good news of a buoyant economy. Sadly however this is against a backdrop of falling house prices, rising interest rates, high levels of household debt, house repossessions up 30% on last year and inevitably an increase in the number of individuals seeking help with debt problems.
Personal insolvencies increased from 20,000 a year a decade ago to over 120,000 last year and have resulted in criticism for the banks on their dealings with customers. Economic factors and the rise of household debt to around £1.3 trillion have resulted in the growth in insolvencies. Certain banks suggest irresponsible borrowing is to blame despite a recent consultation by the government’s Insolvency Service which stated that ‘over commitment’ accounted for just 9% of arrears on credit commitments. The rest were due to factors such as change in circumstances, redundancy, illness and relationship breakdown resulting in individuals being unable to pay back what they previously thought they could.
Before the banks point the finger of blame elsewhere they should consider the following questions:
- Should they have lent the money in the first place?
- Did they treat their customer fairly when they were in financial difficulties?
Principle 6 of the Financial Services Authority’s (FSA) ‘High Level Standards’ requires that those regulated by the FSA “must pay due regard to the interests of its customers and treat them fairly”. Over recent years the FSA suggests that lending institutions have been busy ensuring that ‘Treating Customers Fairly’ (TCF) is embedded within their organisations in response to their initiative. Most banks suggest that for them it is nothing new and they have subscribed and adhered to the voluntary Banking Code for many years by which they “promise to act fairly and reasonably in all dealings” with customers.
Despite this many banks have been seeking to restrict access for individuals in financial difficulties to statutory available solutions such as Individual Voluntary Arrangements. Their actions prompted the government’s Insolvency Service to warn recently “that the longer term effect could be to push more people into bankruptcy, where creditors would get an even lower return”. It can be seen then that not only do their actions run contrary to TCF and the Banking Code but they do not make commercial sense either. Certain banks however would rather reject the individual’s IVA, not petition for their bankruptcy and allow them to ‘linger on’ in ‘debt limbo’ of an unregulated debt management scheme which allows the bank to not write off debts which are clearly bad.
One might pose the question, “Are some banks putting profits before people?” How are they complying with the Banking Code where they promise they “will consider cases of financial difficulty sympathetically and positively”? In wholesale rejection of IVA the debtors are left with bankruptcy as their only viable option and one would struggle to see how that could be considered as treating the customer fairly.
Insolvency Practitioners readily recall cases where banks: pre-approved individuals for loans and credit cards despite having been informed that they were in difficulties;
lent funds on the strength of debtors’ benefits income yet rejected their IVA because – “they could not afford it as they were on benefits” or referred individuals in difficulties to local Citizens Advice Bureaux yet rejected the IVA solution that the CAB recommended.
The banks’ actions may see more debtors being deprived access to the statutory solutions to their debt problems with the knock-on effect of bank profits being lower.
On the other hand the FSA might just force the banks to treat their customers fairly.
McCambridge Duffy specialise in helping self employed individuals. Should your business be experiencing any financial difficulties call free on 0800 043 3328 where one of our highly experienced staff will be available to help you.