Profit hungry banks abandon poorest to loan sharks

Think-tank calls for banking 'Universal Service Obligation' as HSBC reveal record profits

As HSBC revealed the largest ever profit recorded by a UK-based bank - £11.9 billion - nef (the new economics foundation) has called for an end to banks profiteering from poverty, and for banks to be subject to the same kind of 'Universal Service Obligation' applied to the post office, utilities and telecommunications.

nef believes that there is now clear evidence that the UK's biggest banks are cherry picking customers for premium accounts and failing to meet the needs of the poorest - meaning that the poor pay more for every day services, and are prompted to turn to loan sharks for credit. The banks introduced 'basic' or 'no frills' bank accounts in 2003, but recent research shows that the account features are unsuitable for those on low incomes, the banks are failing to adequately promote them and in cases, are positively discouraging take up.

As HSBC announced record profits for a UK bank on 6 March, there is clear evidence that the UK's largest banks are failing to meet the basic transactional banking needs of the poorest, de facto pushing them into the hands of the loan sharks:

• Around 11 per cent of adults in the UK still don't have access to bank accounts compared with around 1-4 per cent for most European countries.  And, when reviewed against deprivation indices the figures for the UK are starker still - 35 per cent of people in deprived areas don't have bank accounts.
• The UK banking sector is dominated by five large banks, which together control 84 per cent of current account provision.  In 2004, the four largest banks together earned profits in excess of £23 billion - earning in the region of £126 profit per customer in the UK compared with £70 per customer in 2003.
• In 2004, the big UK banks delivered a return on equity to shareholders of 16 per cent, substantially above the average return of FTSE listed companies, while failing to meet the needs of the UK's poorest people.

The ability to open a bank account is fundamental to participation in modern economic and social life.  In a world where we are increasingly encouraged to make direct electronic payments wherever possible, and are given incentives to do so - cash-only transactions are costly and challenging - eroding the earnings of those already on a very low income. 

nef believes that regulation is needed to ensure that the banks meet the needs of the UK's poorest in the form of a 'Universal Service Obligation'. This would enshrine an obligation to serve everyone, regardless of potential for profit, as a fundamental feature of the receipt and continued operation of a banking licence.

"The banks are cherry picking the most profitable customers - only paying lip service to tackling financial exclusion.  Their lack of action leaves the most vulnerable marginalised from mainstream financial services, paying more for everyday goods and with no option but loan sharks for credit.  A Universal Service Obligation would guarantee the right to a transactional bank account for the UK's poorest consumers.  It should be a simple quid pro quo for the licence to operate in a lucrative and well protected market," says Whitni Thomas, Head of Access to Finance at nef.

And while failing to meet the needs of the UK's poorest through mainstream banking, the UK's biggest banks are making moves into the sub-prime lending market themselves - further profiting from their own failure.

Several of the big banks, including HSBC have recently bought into the sub-prime lending industry.  In 2003, HSBC bought Household International -who had made a record $484 million (£270 million) settlement in a class action lawsuit in the US regarding claims about predatory lending in November 2002. Many of the sub prime lenders like Household International have been fined for predatory lending practices in countries where legislation exists, such as the US.

Following the acquisition, HSBC appointed Household International's CEO to its board of directors with a pay package of £37 million over three years. HSBC also makes sub-prime loans in the UK under HFC Bank and Beneficial, and is expanding the Household International model to Brazil, India and elsewhere.

"In the same way that utilities, postal services and telecommunications are a basic right, a bank account is essential to function effectively in society, a Universal Service Obligation would guarantee this right for all." says Thomas

Currently, the banks have no obligation to comply with government targets on financial inclusion - a Universal Service Obligation would transfer the onus of guaranteeing financial access to the banks.  However, nef believes that wider measures are needed to stamp out predatory lending.  Amongst other measures, nef is calling on government to:

• Ban unsolicited credit offers.
• Strengthen the Consumer Credit Bill by defining 'irresponsible lending', including a flexible cap on interest rates and charges - to protect the most vulnerable from over indebtedness and irresponsible lending.
• Create a league table of bank performance on basic bank accounts and initiatives to combat financial exclusion and force banks to disclose their lending activities.

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	related
	at nef BBC Online: Banks 'fail low-income earners' Independent on Sunday: High-street lenders 'pay lip service' to needs of the poor BBC Online: HSBC bank unveils record profits Channel 4 News: HSBC posts record £11.9bn profits ITN: HSBC posts record £11.9bn profits

	contacts
	Jessica Brown