GLC discussion paper: we want your thoughts & help on pre-paid card charges

GLC would welcome your thoughts and comments on the undernoted 'discussion paper' on pre-paid card charges deducted from customers in sole receipt of social security benefit. You can use the 'comment' section below; or e-mail us with a potential public interest case; see further below.

Discussion paper: the legality of certain ‘pre-paid card’ charges deducted from social security benefits

Some ‘pre-paid cards’ appear to have been targeted at people on social security benefits[1]. Some cards charge a minimum £1.25 fee for each direct credit transfer (DCT) of benefit onto the card, and a minimum £1.25 fee for each cash withdrawal[2].

As benefits are alimentary in nature – in other words welfare payments designed to enable day-to-day life essentials to be purchased – people in receipt of benefit can ill afford to pay such charges for financial services. One question that arises is whether pre-paid card DCT charges or pre-paid card ATM withdrawal charges (‘the charges’) are lawful?

In general, social security benefits (which includes tax credits) are inalienable under social security law, and are not subject to assignation or charge (‘charge’ includes an arrestment[3]). Authority for this proposition comes from section 187 of the Social Security Administration Act 1992 and section 45 of the Tax Credits Act 2002. For example, section 187 of the 1992 Act provides:

187 Certain benefit to be inalienable

(1) Subject to the provisions of this Act, every assignment of or charge on—

(a) benefit as defined in section 122 of the Contributions and Benefits Act;

(b) any income-related benefit; or

(c) child benefit,

and every agreement to assign or charge such benefit shall be void; and, on the bankruptcy of a beneficiary, such benefit shall not pass to any trustee or other person acting on behalf of his creditors.

(2) In the application of subsection (1) above to Scotland—

(a) the reference to assignment of benefit shall be read as a reference to assignation, “assign” being construed accordingly;

For the purposes of this brief discussion paper, we are interested in the contractual nature of the charges under Scots law. Might it be argued that the requirement to pay the charges (importantly, we are only focused on the specific charges mentioned in the first paragraph of this note) is truly a form of assignation between the claimant and the pre-paid card company? Not least because of the mandatory, automatic and cyclical nature of the arrangement.

Traditionally in Scots law, assignation was a form of mandate[4]. If we take the following example: a benefit claimant (‘X’) is due to be paid by the DWP (‘Y’). If X instructs Y to make a payment to Z (a third party), Professor McBryde observes that such an instruction could be an assignation[5]. It will depend on whether the payment is in Z’s favour i.e. whether you are transferring a right, or part of a right, to a third party.

When benefits are paid into a basic bank account or Post Office Card Account (POCA) there is no payment in the third party’s favour. Instead, 100% of the funds are held on deposit on the customers behalf. But consider the position with some pre-paid cards?

When benefit is loaded onto some pre-paid cards, there is an automatic and mandatory alienation of some of the benefit, and therefore not all of the funds are held on the customer’s behalf; and each time the customer wishes to take out cash there will be an automatic deduction of some of the benefit (by the pre-paid card provider) before the cash is issued. These alienations cannot be evaded, and are a core term of the contractual agreement between the parties.

In other words, whenever benefit is loaded onto some pre-paid cards, it is fair to say that some of that benefit stands to be automatically paid over to the card provider, and some will be deducted if the customer wants to take out cash. It may be argued that this fixed arrangement is truly an assignation insofar as a portion of the benefit which is held on deposit is always alienated.

In entering into a contract and signing a ‘DP GEN’ form in favour of the pre-paid card company, the claimant is assigning – or transferring - a fixed proportion of his or her benefits to that company on a cyclical basis. There is no discretion per se. If that is so, then the contractual provisions as regards these charges could fall to be held as void by a court under s.187 of the 1992 Act, or the equivalent provision under section 45 of the 2002 Act.

Govan Law Centre would be very interested to test out these arguments before the court. If you are aware of someone who has been asked to pay such charges from social security benefits in Glasgow on a pre-paid card, please get in touch with Mike Dailly on m@govanlc.com

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[1] http://news.bbc.co.uk/1/hi/business/8475335.stm Some cards impose charges of 2.95% of the transaction, capped at £2.50 per transaction.

[2] For example: http://www.mygocard.co.uk/terms.html This is in additional to any charge that an ATM provider may require.

[3] North Lanarkshire Council v Crossan 2007 SLT (Sh Ct) 169

[4] Para 12-72, The Law of Contract in Scotland, Professor McBryde (2nd edn).

[5] At para 12-11, McBryde (2nd edn).

GLC discussion paper: we want your thoughts & help on pre-paid card charges

Concern over 'pre-paid card' fees

A leaked document obtained by the BBC has revealed concerns from the Department of Works and Pensions (DWP) in Scotland that some 'pre-paid card' companies are targeting benefit claimants.

In Central Scotland, the Clyde and Fife Benefits Delivery Centre received 100 requests from claimants asking for their benefits to be paid onto 'pre-paid cards', despite the fact most claimants were unaware of the high level of administrative charges and fees associated with these cards.

It is understood that companies use stalls in local shopping centres, and have been successful in recruiting customers in, for example, Easterhouse and Castlemilk in Glasgow. An example of these products is the 'Go Card'. It costs £10 to buy and a £7.50 annual management fee is charged after the first month. It costs a minimum of £1.25 and a maximum of £2.50 to have each benefit loaded on to the card and the same charges apply for each cash withdrawal.

GLC's Mike Dailly said:
"Pre-paid cards are wholly unsuitable for anyone on benefits or a low income. They come with a whole host of fees and charges and there is nothing that such products offer which cannot be bettered by a basic bank account or post office account. For example, there are at least eleven basic bank accounts which offer debit card facilities to enable online purchases - all without ATM withdrawal or load-on charges. And basic bank accounts are available to those with a bad credit rating".

"Benefits are designed to provide a 'breadline' standard of living and therefore for anyone to seek to financially target or profit from people living in poverty is disturbing and morally reprehensible. If the rules needs to be changed to prevent the DWP paying benefits to pre-paid cards then the sooner the better as far as Govan Law Centre is concerned".

Listen to Mike discuss this issue with Paul Lewis on BBC Radio 4's MoneyBox. Further dicussion of this issue is available on the BBC's Business pages here. If you need help on basic bank accounts, take a look at the FSA's Money Made Clear leaflet on the range of basic bank accounts available in the UK (opens as a PDF).

Concern over 'pre-paid card' fees