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The Banking System

    We used to be able to trust the banks but now we know better, so where and how did it all go wrong. Years ago the banks had to operate within some clearly defined barriers, then came deregulation. Deregulation allowed banks to diversify into mortgages (with a lot of encouragement from the Government) and other financial derivatives. The constant drive for greater profits pushed then from lending 80% on a house to 100% and, eventually 125%. At 80% there was a buffer on the house value if the market reversed, at 100% there was not and at 125% the banks had moved from being the bookie to being the punter. House prices have ALWAYS risen so they felt safe. On the back of this, where the investment divisions of the banks made massive profits, the bankers started to believe that because they made the money, they were entitled to take a load of it for themselves. Now the guardians had become the thieves. Small wonder the liquidity of the banks (and thus their ability to increase business) came under pressure to the point that most of the western world had to nationalise them to stay alive. The situation has settled from what it was a year ago so people are just "carrying on" but if such bad decisions were taken then, are there any others waiting to happen? YES, there is one big one.

    The banks set up the direct debit system to facilitate electronic trading but the retail sector wanted it to be a guaranteed payment system. The banks agreed to this and most people do not realise how that affects them. If you go to the supermarket and spend 100, you probably use a debit card to pay. You put it in the card reader, enter your PIN and the deal is done. This is a POINT OF SALE transaction because of your PIN entry which proves you are there and agree to this sale. The supermarket IT system will have your card details on it so you are at the mercy of their computer systems security. CB knows that all big companies believe they have the best security but MOST of them do not.

    OK, this time you are going to do an internet purchase. You go onto the secure site, give your details and the job is done. Here there is NO PIN NUMBER so it is not fully a POINT OF SALE transaction. Why is this important? Because your details are on the suppliers computer and thus subject to their security (or lack of it). If they were hacked, your details are in the hands of the criminals. If they make someone redundant who has access to the accounts on the computer, and this employee holds a grudge as well as the password to their system, they are also a potential problem. Your details are usable UNTIL YOUR EXPIRY DATE ON YOUR CARD! Any wrongful debit on your account MUST be paid by the bank EVEN IF THE BANK THINKS IT IS A FRAUDULENT DEBIT! The bank has no way to refuse the payment as the direct debit system is a GUARANTEED PAYMENT SYSTEM. This means they cannot safeguard your money, AND NEITHER CAN YOU, READ ON!

    A friend of CB's bought a service on the internet which cost 7.60. When it was time to renew this service, the provider emailed him to say they would automatically take the money using the card details he had given them previously. He asked them to cancel as he did not need the service any more. He faxed his bank instructing them not to pay. They paid. When he took them to task for paying he was told "they didn't have an off button, if the debit request details were correct they had to pay". They also said he had no right to forbid the payment. THIS MEANS THAT ANYONE WHO HAS YOUR DEBIT DETAILS CAN HAVE WHAT THEY WANT AND NEITHER YOU NOR THE BANK CAN STOP THEM! Whoever you buy from has more control over your account than you or the bank! CB's friend  asked about the banks direct debit guarantee and was told they could do nothing. They said he had to report it as a fraud which they would charge him 5 for. He said he had other ongoing business with this company and could not do that. The bank gave him a phone number which was on the debit request. He rang up and got the money repaid himself. The bank did NOTHING.

    How long will it be before a large scale debit fraud is committed? Has it happened already and the banks have kept it quiet? This scheme is so biased in favour of the seller, it is not surprising that most companies are pushing you to pay by direct debit. BT are behaving like thieves in this matter, charging their customers 4.50 per quarter to "process" your payment if it is any  method of payment OTHER than a direct debit payment. Marvelous, 4.50 penalty because you want to pay your phone bill at a bank using the Queens legal tender!

    Speaking of paying bills in a bank, CB's friend paid his credit card bill in cash at a bank last week. The teller advised him that he was paying interest and would he like to apply for one of their cards which was cheaper. He firmly advised the teller that her only job was the payment transaction and to look at his card dealings was NOT her business. The tellers training is commercially biased, always looking for a sales opportunity. Given all the problems with banking shouldn't they try to concentrate on what they are there to do?

    CB has an underlying feeling that the banking problems are not over yet and that only serious Government action can bring the banks back into line. Once that is done we may be able to look at what else may go wrong within the system. NOW, should you dispute CB's statements regarding the direct debit system, ask your bank manager. Best do this by writing a letter and demand a letter reply. When the direct debit system hits the fan, a letter is hard evidence in a court of law, should you need to go there. CB wonders how the banks would react if they were bombarded by letters asking about direct debits. Another alternative is to ask your bank for a new card for security purposes. Do this every month or after using your card for a purchase. It would not take them too long to realise what was going on but you would be safe! If you have regular payments that are the same amount every payment, change your payment method to standing order. On those YOU TELL the bank how much to pay, when and who to, it puts you back in charge of your money. You may find serious resistance to the change both from your bank and your supplier.

    Finally, RBS are currently trying to pay their staff 1.5 Billion in bonuses for the "profit" they have made. Do they not realise that the "profit" is only numbers on a sheet of paper? Do they not realise that the bonuses paid out in previous years are a major contribution to the liquidity problems we have seen the banks experience? Do they not realise that to transfer the bonus money from THE TAXPAYERS FUNDS given to the banks to support them is as basic as theft? When will they wake up? The Government should legislate that any company paying a bonus which exceeds 10% of the basic salary would attract a windfall tax on that employee to wipe up all monies over the 10% figure AND attract a similar tax extracted from the employer. The "justification" used by the banks to cover excessive bonuses is merely a blurring of the line between realistic rewards for the job well done and basic theft.
    If the bank has the funds to cover their required liquidity ANDthey owe nothing to anyone else, then moneys made are a real profit and not a paper profit. Under those conditions a bonus may be reasonable. While ever their required liquidity is covered by an advance or guarantee from the taxpayer they are in debt and until that debt is repaid all "profits" are notional and no money should be paid as bonuses as they are effectively removing the taxpayers money, ie, stealing! Think of the car workers, at the end of a year when they have produced 100,000 cars. Do they then say that 35,000 of those cars are effectively theirs as a bonus "because we made them"? Watch the video of "The World Financial System" which takes quite some time to load or go to youtube and search for "World Finances".

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The JSC Group March 2006