Banks told to set up accounts for the poor

BRITAIN'S high street banks and building societies will be ordered to stop "cherry-picking" wealthy customers while ignoring the needs of the poor, according to a Treasury report.

Due out next month, the report says financial institutions must clean up their act or face the threat of legislation.

Senior Treasury officials have been working with staff from the Downing Street Social Exclusion Unit on a review of the banking system. They have concluded that all major financial institutions are guilty of "financial exclusion".

The review discovered that 1.5 million households do not have a bank account or home insurance and it was shocked at the rate of bank branch closures in less affluent areas.

The New Economics Foundation (NEF), a research institution, has provided the Treasury with details of financial exclusion. In London, wealthy neighbourhoods have an average of five bank branches for every one branch in deprived areas. In Newham, London's poorest borough, there are 21 bank branches, or 10,750 people per branch.

A Treasury spokesman said the banks were involved in drawing up the report and stressed there was an atmosphere of "co-operation and good spirit". However, sources say ministers have indicated that the banks must change their ways. In parts of the US, legislation requires banks to provide services to the poor.

The Personal Finance Research Centre at Bristol University says that almost three million people use moneylenders (paying interest rates of up to 500 per cent), pawnbrokers and cheque-cashing bureaux.

The PFRC calculates that people who use moneylenders and pay utility bills in cash are penalised by pounds 280 annually. They include unemployed single parents, ethnic minorities, people living in rented accommodation and early school leavers.

The Treasury wants greater access to basic banking facilities for the poor and is insisting on increased collaboration between banks and housing associations to offer more flexible and relevant packages. These include accounts with "buffer zones", allowing people to become overdrawn by small amounts without being penalised for it.

"Poorer people need basic money management facilities so they can deposit money safely, withdraw it at any time and do so without going into overdraft," said Thomas Fisher, head of community finance at the NEF.

The NEF said banks should be treated like utility services, which are regulated. "Banks can cut someone off when they hit hard times," Mr Fisher said. "It's an issue of financial citizenship. We have a right to water and we should have a right to basic banking services."

The banks were aware that the Government was prepared to take action and have been looking at ways of improving their services. Ministers are known to be impressed by a new Easy Cash account run by the Bank of Scotland, which offers a basic bank account with an overdraft of just pounds 9.99.

The British Banking Association believes that Labour's more sympathetic approach to poverty has provided the impetus to tackle financial exclusion.