Watchdog - Banks Q&A

How can the banks justify massive bonus payments after the mess they've caused in the first place? B. Willis, Cardiff

The current situation arose from sub-prime mortgage lending in the USA and because of the global nature of banking, it has since spread to virtually all countries. Because banks are the backbone of every country's economy, they tend to be blamed, but there are many different players in the global economy and banks are just one part of this. London is one of the three key financial centres in the world and banks from most countries have a presence here. Employing top people invariably means that they command high pay packages, but the very large bonus payments that hit the headlines are paid to only a relatively few people in the City. Banks have remuneration committees that examine bonus and other payments and shareholders can make their views known at banks' Annual General Meetings.

If banks are now financially compromised, why are they still giving big sponsorship deals? Chris Miller

Sponsorship deals are a form of advertising and are agreed for a certain period of time. Like any other contract, banks are obliged to keep to the term of the agreement, regardless of their own financial position.

The crisis that the banks are in is an example of bad management and greed. How are we, the consumers meant to feel reassured when these sorts of people are the ones looking after our money? Ashley, Wilmslow (student from Bangor University looking for work)

It's very easy with 20/20 hindsight to take this view, but the current global financial situation was not forecast and caught many institutions and Governments by surprise. It arose from sub-prime lending in the USA and because of the global nature of banking spread very quickly to other countries. The situation was made worse through the raising of the amount of capital that banks are required to hold to underwrite their lending which then led to a lack of liquidity in the money markets, which is one of the sources of funds for banks and similar institutions. Taken as a whole, banking is a highly-skilled profession and the UK banking system is respected throughout the world.

I have my children's trust fund. If the bank goes bust or has major problems, will they still have their trust funds?Name witheld

Yes, if the bank holding a deposit within your son's trust was to fail then you would be able to make a claim to the Financial Services Compensation Scheme (FSCS) in your capacity as trustee.

The FSCS would treat your claim as a claim on your son's behalf. Any other deposits held in your son's name with the same bank would be aggregated for the purposes of determining the total compensation due, up to the maximum FSCS limit of £50,000.

I object to banks being bailed out with tax payers' money, my money, who then lend me my own money back at a fixed rate of 5.8 per cent when the official base rate is 0.5 per cent. How can they justify not passing on that rate to me, when effectively it is MY money I'm borrowing?Name witheld

Banks are obliged to hold a certain amount of capital to underpin their lending. The amount of capital that banks are required to hold for this purpose was increased recently and some, but not all, banks accepted the Government's injection of capital to meet the new requirements. The Government has quite clearly stated that it considers this arrangement to be temporary in nature. The money that banks lend comes partly from savings account customers and partly from the wholesale money markets. The cost of obtaining these funds is based on the rates banks have to pay in the money markets and this has been high compared with the Bank of England base rate, which is used to control monetary policy rather than being a rate at which banks can actually borrow funds.

Why has the Government put three billion pounds back into the banks? Surely if Mr Brown said everyone in the UK who has a loan/credit card bill (not mortgages) as from January 2009 all would be wiped clean. This way people would have money to spend, save and get a loan and the economy surely would then grow again. Mr PJ Dacey

Banks are obliged to hold a certain amount of capital to underpin their lending. The amount of capital that banks are required to hold for this purpose was increased recently and some, but not all, banks accepted the Government's injection of capital to meet the new requirements. The Government has quite clearly stated that it considers this arrangement to be temporary in nature. This injection is not a gift or a grant to the banks; they are having to pay interest on it. If the Government had simply written off peoples' debts, quite apart from the fact that it would have been unfair to those people who had not borrowed money - and remember that not all banks took up the Government's offer - the Government (or taxpayer if you prefer to put it that way) would not have received any form of interest on the money. As it is, the Government - or taxpayer - could well end up making a profit on the capital injection by the time it is repaid by the banks.

I was appalled to hear the representative of the banks state on tonight's programme (9 February) that we should all organise our finances in a way that we do not go overdrawn. It's the banks' own financial irresponsibility that has landed us all in the current sorry mess. The banks are only as safe as he claims because, WE, THE TAXPAYERS, have baled them out. His comments indicate that their arrogance still leaves them with a 'holier than thou' attitude. Does he not appreciate how low their reputation has sunk and just what the general public thinks of them? Name witheld

Banks are obliged to hold a certain amount of capital to underpin their lending. The amount of capital that banks are required to hold for this purpose was increased recently and some, but not all, banks accepted the Government's injection of capital to meet the new requirements. The Government has quite clearly stated that it considers this arrangement to be temporary in nature and the banks are having to pay interest on the money. Because banks have needed to provide additional capital (not all of it has been provided by the Government) this has caused a lack of liquidity in the money markets which is partly where banks balance their long-term lending (such as mortgages) against short-term deposits. It's a fact that by ensuring that you either don't go overdrawn at all or keep within an agreed limit, you can avoid paying bank charges altogether. There was certainly no arrogance intended; merely a statement of the facts.

My bank is advising of a huge increase in interest rate (23.62 per cent) due to "changes in the credit environment costing us more to lend". Does this mean that I am paying for those who have defaulted on their loans? If so, where is their bad debt provision/indemnity? And what about any allowance for the DECREASE in interest rates? Bonney Jameson, Eastbourne

The money that banks lend comes partly from their savings customers and partly from the wholesale money markets. The current situation in the global financial markets has led to a lack of liquidity which means that the cost to banks and other lenders of obtaining these funds has risen considerably. The interest rates that banks charge their customers is based on the cost of the funds to the bank and on the perceived risk involved. There is an element of bad debt costs involved too. There can be a 'lag' effect in interest rates as the funding for loans and credit cards are often fixed some time in advance. The Bank of England base rate is for monetary policy purposes; it is not a rate at which money can be borrowed in the wholesale money markets.

I'm curious how a Government-owned company is not passing on the interest rate reduction on its mortgages, when the Government is trying to encourage other banks to reduce their rates. Seems hypocritical, surely they should be taking the lead? Patricia Lefevre, West Sussex

The Government has made it quite clear that banks in which it has an interest, either in full or in part, must operate in the same way commercially as any other business in that sector. It has also made clear that its involvement is only on a temporary basis. Money that the Government has provided to some banks to help them meet increased capital requirements is having to be paid for by those banks, so there is a cost involved for the banks concerned.

Banks use money deposited by their saver customers and money obtained in the wholesale money markets to lend on to their customers. This is necessary because savings tend to be deposited with banks on a short-term basis and can often be drawn out on demand, yet banks offer mortgages on a longer-term basis, often up to 25 years. They therefore need to balance those funds in the money markets. Because banks have needed to hold more capital against their lending, there has been a fall in the quantity of money available in the wholesale markets and this has led to higher prices and additional cost to the banks.

Whether or not the Government has an interest in a particular bank, these costs remain the same (or arguably perhaps higher for banks that have borrowed from the Government) and that affects the rate offered to borrowers. The Bank of England base rate is used for monetary policy purposes and does not represent a rate at which money can be borrowed in the wholesale markets.

How do the banks now justify previous bank charges and their current fight to continue to enforce them? People who struggle and need help are largely the ones whom incur bank charges... why should we help banks when they have for the greater part never helped us? It's these things (banks greed) that have contributed to the economy as it is now. There's only so much you can take off the poor.

Banks, like any other business, charge for services that they provide, and that includes unplanned or un arranged overdrafts. It would be wrong to assume that these fees are paid for predominantly by those on lower incomes - in fact four out of five customers don't any fees at all.

All banks publish a full list of the charges and fees that customers incur for the different services that they offer and un arranged overdraft charges specifically can be avoided completely, simply by not going overdrawn without arranging an overdraft facility first.

Why do banks NOT ensure that - when they pass a debt on - the code of practice is adhered to? (Those third-party representatives, known to the creditor, should be contacted in negotiation and NOT the debtor.) Debtors who ask for help are OFTEN vulnerable but still get harassed by creditors or debt collection agencies and - because they're vulnerable - they feel threatened and agree to raise their offers to pay of the debts. They raise them to unsustainable levels through fear or lack of ability. Why do SOME banks NOT respond to balance requests from third-parties? AND then tell debtors they refuse to negotiate with third-parties. That is against OFT and Bank code of practice. It happens with increasing regularity and I have informed Richard Bacon and Nick Hurd MPs. When the guidelines state that the 'Common Financial Statement' should, in general, be accepted unless trigger figures are exceeded - why do so many banks - especially those with USA connections reject them and state their minimum offer regardless of the facts in front of them? Why do so many institutions now use 0870 premium rate numbers? I am a FIF project debt adviser who spends a fortune of our Government funding chasing up institutions that do not respond to correspondence.

There's clear guidance in the Banking Code: When a bank passes a debt on to a collections agency to act on its behalf, the agency should adhere to all relevant codes of practice. And more importantly subscribers to the banking code give a commitment to treat customers who are experiencing financial difficulty sympathetically. Where customers feel they've been treated inappropriately, they've every right to complain.

Banks will be pleased to work with reputable debt counselling organisations at the request of the customer and a list of organisations offering free money advice is included in the Banking Code. Natually they require formal permission from their customers before being able to divulge details of a person's account and before it can discuss arrangements for repaying any outstanding borrowing. And it is any lender's absolute right to determine revised repayment terms where the original arrangments cannot be met so on occasion proposals made by customers or their advisers might not be agreed.

We are facing a brick wall on bank charges on top of charges. Please kindly advise how we move on from here with this.Bruce Voon and David Voon

Where a customer has cancelled a direct debit instruction, either with the originating company or with the bank (either is acceptable, but it's always best to advise both) and the direct debit is subsequently paid, the bank should make an immediate refund of the amount of the direct debit to the customer under the provisions of the direct debit guarantee. The bank would not be aware of the situation of course until advised by the customer.

The matter of charges is a separate one and complaints to banks from customers who believe they have been inappropriately charged are currently being held until such time as the ongoing test case with the Office of Fair Trading is heard. However, where the customer is experiencing financial difficulties this waiver does not apply and the bank should consider whether or not to refund any charges or fees without waiting for the waiver to be lifted.

Why does my account show a discrepancy of £2 between the amount in the account and the amount available for borrowing at certain times during the month? This isn't due to them taking into consideration an amount due out of the account over the next few days. Is it a sly way for banks to be borrowing money for interest? This small amount could run into millions if it was done to all account holders. This has happened for many months, not just since the 'credit crunch'.

Assuming that this doesn't relate to a pending payment or uncleared funds, this is puzzling and would need to be taken up with the individual bank involved. You'd only be charged interest on the actual amount that you borrow, so there wouldn't be any gain for the bank through this.