Office of Fair Trading _UK_ _OFT - European Commission

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					European Commission – Commission services working document:
Consultation on bank accounts

Response of the Office of Fair Trading (United Kingdom)


Introduction

1.1         The United Kingdom’s Office of Fair Trading (OFT) welcomes the
            opportunity to input into the European Commission’s consultation on
            bank accounts.

1.2         The OFT does not consider it has sufficient evidence to justify detailed
            views on all the questions raised. We have therefore instead set out
            some thoughts on some of the topics covered in the consultation, based
            on our past work in this area.1 We have not commented on the
            technical or standardisation issues raised by the consultation or on
            cross-border issues within the EU, and have only provided limited
            comments on basic payment accounts, as we have not considered
            these issues in our previous work.

Background

1.3         The OFT has a longstanding focus on improving the functioning of the
            personal current account (PCA) market in the UK. In 2008, we
            published a market study2 on PCAs which found the market was not
            working well for consumers due to problems with switching PCA
            providers, low levels of transparency of PCA charges and other costs,
            and complexity and a lack of control over the use of unarranged
            overdrafts.

1.4         Following the publication of the market study, the OFT worked with
            industry to enable customers to understand better the costs associated
            with their PCAs and make comparisons with other products that may be


1
    For a list of the OFT’s recent interventions into the retail banking market, please see Annex A.
2
    http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf

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           available. The initiatives agreed were set out in follow up reports
           published in October 20093 (on transparency and switching) and March
           20104 (on unarranged overdrafts). The OFT also continued to monitor
           developments in the market and published further progress reports in
           September 20105 and March 2011.6

1.5        Whilst it is too early to draw a definitive conclusion on the impact of the
           OFT’s initiatives, the reports provide an indication of what the OFT
           consider to be the key problems in the UK’s PCA market and what steps
           we have taken to facilitate improvements. In addition, the OFT intends
           to review the market, and the impact of the range of initiatives
           introduced following the 2008 market study, in the second half of
           2012.

Transparency and comparability of bank account fees

1.6        The OFT's 2008 PCA market study found that consumers lacked
           awareness of the key costs associated with their PCA. We found
           evidence that this was due to the low levels of transparency of the
           costs associated with holding a PCA such as unarranged overdraft
           charges and interest forgone.

1.7        In October 2009, the OFT agreed a voluntary programme with the
           banks to implement a number of initiatives to enable customers to
           understand better the costs associated with their accounts and make
           comparisons with other accounts that may be available. Namely the
           banks agreed to:

              Make charges more prominent on monthly statements, so that
               customers are more aware of the charges that they pay.

              Introduce an annual summary of the cost of their account for each
               customer.

              Provide average credit and debit balances, which will help
               customers to estimate the potential benefits of switching PCA
               provider.

3
    www.oft.gov.uk/shared_oft/personal-current-accounts/oft1249.pdf
4
    www.oft.gov.uk/shared_oft/personal-current-accounts/oft1216.pdf
5
    www.oft.gov.uk/shared_oft/reports/financial_products/OFT1275.pdf
6
    www.oft.gov.uk/shared_oft/reports/financial_products/PCA_update_March_2011.pdf

                                                                                     2
            Produce illustrative scenarios showing unarranged overdraft charges,
             giving customers an idea of the costs for different patterns of use.

1.8     These initiatives, are intended to allow consumers to have available the
        right information, in an easily digestible format, to help them to
        understand the true cost of running their account and hence manage it
        more effectively.

        Enhanced monthly information

1.9     The OFT expects to see significant benefit to consumers from banks
        providing enhanced monthly information7 on the cost of their PCA. The
        intention is that consumers will be able to manage their accounts better
        as a result by taking note of this information and changing their
        behaviour accordingly. For example, a clear total and breakdown of
        charges in summary form will bring account costs to the fore and may
        result in some consumers taking action to avoid unarranged overdraft
        charges in the future. Likewise better information on average credit
        balance may allow consumers to 'sweep' excess balances into a
        savings account.

1.10    A secondary benefit of providing the summary is that some consumers
        (for example, those consumers who have incurred high unarranged
        overdraft charges) may find it a prompt to consider switching to a PCA
        that is more appropriate for them. It may also help consumers identify
        the information they need to obtain on different accounts in order to
        compare them.

        Annual Summary

1.11    In addition to enhanced information on monthly statements, the OFT
        considered that the provision of an annual summary would provide an
        easy to understand analysis of the charges and interest rates that have
        been applied to the consumer's PCA in the previous twelve months. The
        charges incurred would be broken down into categories so consumers
        can see where savings could be made.




7
 See Annex B for the type of information to be included in enhanced monthly statements and
annual summaries.

                                                                                             3
1.12    The main benefit of an annual summary is expected to be that it would
        prompt consumers with significant costs to investigate whether to
        switch to another PCA, although may also contribute to changing
        consumers' behaviour in managing their existing PCA.

1.13    A key specific benefit of having an annual summary in addition to a
        monthly statement is that an annual summary contains a total cost
        figure for the year, which the OFT believes may be more likely to jolt
        consumers into taking action than smaller, regular monthly figures. In
        addition, it would provide something akin to a natural break point for a
        PCA contract, which is currently not available for a PCA. With some
        other financial products, like car and house insurance, contracts usually
        last a finite period, for example a year, prompting consumers to search
        annually for a better product.

        Average credit and debit balances and credit and debit interest rates

1.14    The OFT found that consumers significantly underestimated the amount
        of money they hold in their PCAs. This makes it likely that consumers
        will under-estimate the benefits of moving to a PCA with a better
        interest rate or of sweeping excess funds into a savings account that
        pays higher interest. If consumers are made aware of the average credit
        balance of their PCA, they would be able to calculate how much more
        interest they would earn by switching to a PCA offering a higher
        interest rate on credit balances.

1.15    Similarly, the OFT believes that consumers should be provided with
        better information on their average debit balance. If consumers are
        made aware of the average debit balance of their PCA, they would be
        better equipped to calculate how much less interest they would be
        charged if they switched to a PCA with a more competitive debit
        interest rate.

1.16    In response to these concerns, all major UK PCA providers8 volunteered
        to provide interest rate information either as part of the annual summary
        or as part of the enhanced monthly information:




8
 Barclays, HSBC, Lloyds Banking Group, National Australia Banking Group, Nationwide, Royal
Bank of Scotland and Santander.

                                                                                             4
              debit and credit interest rates: these include any rates which are
               currently, or could be, applied to the account (so, for example, the
               overdraft interest rates will be provided even if a consumer has not
               gone into overdraft).

              the consumer's average credit and debit balances: The average
               credit balance is the sum of the closing balances for those days that
               the consumer was in credit divided by the total number of days in
               the statement period. Average debit balances are calculated in a
               similar way.

           Charging scenarios

1.17       The charging scenarios are intended to illustrate to consumers how
           different patterns of account usage affect the level of charges of
           different PCAs. While they will not enable consumers directly to identify
           the PCA that is the best for them (given the sensitivity of charges to
           specific patterns of usage in the UK), they will provide some initial
           comparisons that it is hoped will be of assistance to consumers.9

1.18       The charging scenarios themselves are provided for each PCA offered
           by each PCA provider. The scenarios differ by the number of days
           overdrawn and the number and value of transactions. While some of
           these are designed to be reasonably representative of common ways
           that consumers might use an unarranged overdraft, others show
           consumers less typical examples to illustrate exactly how differing
           consumer behaviour affects the level of charges. All PCA providers
           agreed to display the information in a format which is easy to
           understand for consumers on their websites.

           Price comparison website

1.19       In general, price comparison websites can reduce the risk of people
           buying inappropriate, poor quality or over-priced products. However, the
           OFT’s research has shown that price comparison sites that cover PCAs
           may not allow consumers to search on important features such as PCA
           cost. The OFT considers that to be useful, such a site should allow
           comparisons to be made on interest rates (both credit rates and
           overdraft rates) and on charges.

9
    See Annex C for more information on the charging scenarios.

                                                                                      5
1.20    The OFT's research also suggested support for an impartial price
        comparison website that would be run by an organisation with no
        financial interest in the consumer's choice, such as a public authority.
        We can see a number of benefits to this approach. For instance,
        consumers could recognise and trust the brand, and a public authority
        site would allow consumers to list products in order of the cheapest,
        taking into account factors like unplanned overdraft charges. Current
        commercial price comparison sites, while offering a useful service, may
        not allow consumers to list products in order of total cost of the PCA.

        Account usage data

1.21    In addition to price comparison websites, as part of the UK
        Government’s ‘mydata’ project,10 some consideration has been given to
        whether full account usage information from at least the previous 12
        months could be made available in electronic form, allowing the
        development of price comparison models that could identify the optimal
        current account based on the customer’s actual transaction history. For
        example, the customer could upload their data to a comparison site,
        which would provide a tailored response showing which products would
        best suit their situation.

Switching between payments account providers

1.22    The OFT's market study found that the UK had low levels of switching
        between PCAs. A contributory factor to these low levels was actual and
        perceived costs that consumers face when switching. The OFT
        considered that a reduction in these costs would have the potential to
        lead to an increase in a consideration of switching and that in turn
        would help to increase the competitiveness of the PCA market in the UK.

1.23    In October 2009, the OFT agreed the following initiatives with Bacs, the
        UK’s payments processor, to improve the process of switching bank
        accounts and to increase consumers' knowledge of and confidence in
        the switching process.



10
  Page 17, Department for Business Innovation and Skills and Cabinet Office, 2011, Better
Choices, Better Deals: Consumers Powering Growth. Available at:
http://www.bis.gov.uk/assets/biscore/consumer-issues/
docs/b/11-749-better-choices-better-deals-consumers-powering-growth.pdf.

                                                                                            6
           Steps to reduce problems that arise from transferring Direct Debits,
            including an originator education strategy which involved
            disseminating best practice, writing to Direct Debit originators who
            did not update their records explaining the need for prompt action
            and producing new forms to standardise interbank communication.

           Measures to reduce the impact on customers of any problems with
            transferring Direct Debits, for example through updating the Service
            User's Guide and Rules to stipulate that consumers should not be
            adversely affected by any problems caused by the switching
            process or a Direct Debit originator.

           A new consumer guide and website on switching between PCAs.

1.24    The OFT's objective was not to increase the levels of switching for their
        own sake but to ensure that the industry put the consumer at the heart
        of the switching process and removed barriers to switching. This may or
        may not lead to an increase in levels of switching – depending on how
        providers respond to the increased threat of switching – but should
        improve the competitive dynamic in the market.

1.25    It was also intended that increased confidence in the switching process
        would work alongside other initiatives around transparency and
        unarranged overdrafts introduced by the OFT, to drive PCA providers to
        offer more competitive products and innovative services to attract
        custom.

        Switching re-direction service

1.26    In addition to the OFT’s initiatives, the Independent Commission on
        Banking, in its final report11 in September 2011, recommended
        measures to improve the UK’s switching system. This included the
        introduction of a switching redirection service for personal and SME
        current accounts which, among other things, will transfer accounts
        within seven working days, provide a direct debit redirection service for
        more than a year, and be free of risk and cost to customers. The
        Payments Council in the UK has subsequently committed to implement
        the recommendation by September 2013.


 http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-
11

Report.pdf

                                                                                   7
Access to a basic payment account

1.27   The OFT has not investigated the functioning of basic bank accounts in
       detail. The OFT's market study, however, highlighted concerns from
       consumer organisations that banks may be reluctant to provide basic
       bank accounts and, as a result, make opening an account more difficult
       than it needs to be. This alleged reluctance can consist of restricting
       access (either geographically or through restrictive application
       procedures), not displaying the appropriate literature in branches, not
       offering the appropriate accounts or restricting the account features
       available (for example, not offering debit cards, standing orders or
       buffer zones).

1.28   There has been much work by the UK Government, Financial Services
       Authority and UK banks in this area and they should be able to respond
       more fully on these concerns.



                                  Claire Hart




                                   Director
                            Office of Fair Trading




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A     OFT’S INTERVENTIONS IN THE RETAIL BANKING SECTOR

Intervention                             More information
Northern Ireland Banking super-complaint http://www.oft.gov.uk/OFTwork/marke
– 2005                                   ts-work/super-complaints/northern-
                                         ireland-banking
Small and medium sized enterprise        http://www.oft.gov.uk/OFTwork/financi
banking review - 2007                    al-and-professional/SME-banking/
The OFT’s Personal Current Accounts        http://www.oft.gov.uk/shared_oft/repor
market study – 2008                        ts/financial_products/OFT1005.pdf
The OFT’s investigation under the Unfair   http://www.oft.gov.uk/OFTwork/consu
Terms in Consumer Contracts                mer-enforcement/consumer-
Regulations and test case – 2009           enforcement-completed/UTCCRs/
Personal Current Accounts follow-up        www.oft.gov.uk/shared_oft/personal-
reports – 2009-2011                        current-accounts/oft1249.pdf

                                           www.oft.gov.uk/shared_oft/personal-
                                           current-accounts/oft1216.pdf

                                           www.oft.gov.uk/shared_oft/reports/fina
                                           ncial_products/OFT1275.pdf

                                           www.oft.gov.uk/shared_oft/reports/fina
                                           ncial_products/PCA_update_March_201
                                           1.pdf
The OFT’s review of the Payments           http://www.oft.gov.uk/OFTwork/public
Council – 2009                             ations/publication-
                                           categories/reports/financial/oft1071
Northern Rock: The effect of public        http://www.oft.gov.uk/OFTwork/marke
support on competition – 2009              ts-work/northern-rock
Cash ISA super-complaint – 2010            http://www.oft.gov.uk/OFTwork/marke
                                           ts-work/super-complaints/cashISAs/
Review of barriers to entry, expansion     http://www.oft.gov.uk/OFTwork/marke
and exit in retail banking – 2010          ts-work/othermarketswork/review-
                                           barriers/
Travel money super-complaint – 2011        http://www.oft.gov.uk/OFTwork/marke
                                           ts-work/super-complaints/travel-money/




                                                                            9
B     INFORMATION FOR ENHANCED MONTHLY STATEMENTS
      AND ANNUAL SUMMARIES

B.1   The type of information to be included in the enhanced monthly
      statements and annual summaries:

         unarranged overdraft charges: the total value and number of charges
          incurred by the consumer in that year, and a breakdown of charges
          by type (for example, into unpaid item charge, paid item charge,
          guaranteed paid item charge or other similar charges)

         monthly/periodic management fees: the total value of any regular
          fees associated with the normal running of an account, for example
          fees for operating a packaged or premium account

         value of debit interest: the total amount of interest that has been
          deducted from the consumer's account (for both arranged and
          unarranged overdrafts) in the relevant period

         total of all overdraft charges, fees and debit interest for the year:
          this would be an aggregate of all the costs debited by the bank as
          part of the running of a PCA during the year

         value of credit interest: the total amount of interest that has been
          added to the consumer's account in the relevant period, and

         Information on debit and credit interest rates and the consumer's
          average credit and debit balances.




                                                                                  10
C     ILLUSTRATIVE CHARGING SCENARIOS

C.1   There were six scenarios that were agreed with the industry. These are
      as follows:

         Scenario 1. We refuse a payment from your account because there
          is not enough money in your account

         Scenario 2. A payment from your account takes you into an
          unarranged overdraft by less than £10. You are overdrawn for one
          day during the month.

         Scenario 3. A payment from your account takes you into an
          unarranged overdraft and you make another payment from the
          account while you are overdrawn. You are overdrawn for two days
          in a row during the month.

         Scenario 4. A payment from your account takes you into an
          unarranged overdraft, and you make nine more payments from the
          account while you are overdrawn. You are overdrawn for 10 days in
          a row during the month.

         Scenario 5. A payment from your account takes you into an
          unarranged overdraft. You are overdrawn for one day. However, on
          three more occasions during the month, a payment takes you into
          an unarranged overdraft. On each of these occasions you are
          overdrawn for three days in a row.

         Scenario 6. A payment from your account takes you into an
          unarranged overdraft. You are overdrawn for 21 days in a row
          during the month and you make 12 more payments from the
          account while you are overdrawn.




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