Policy
Response
Consultation by the Office of Fair Trading on its Personal Current Accounts Market Study
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Contact: Chris Lawrenson Date: 28 Oct 2008 |
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Response by the Building Societies Association
Introduction
1. The Building Societies Association (BSA) represents all 59 building societies in the United Kingdom. Building societies have total assets of over £360 billion and, together with their subsidiaries, hold residential mortgages of £250 billion, more than 20% of the total outstanding in the UK. Societies hold about £235 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 38% of all cash ISA balances. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.
2. Five of our members offer personal current accounts (Coventry Building Society, Cumberland Building Society, Leeds Building Society, Nationwide Building Society, and Norwich and Peterborough Building Society), representing approximately 6% of the personal current account (PCA) market.
Background
3. The Office of Fair Trading (OFT) launched its market study into PCAs in April 2007, following two previous studies of the PCA market - the Cruickshank report in 2000 and the Competition Commission’s Investigation Northern Ireland into PCAs in 2007. The OFT’s market study was established to examine whether the PCA market was working well and, if not, to make recommendations for improvements.
4. The question of fairness of terms, currently the subject of High Court litigation, is not part of the study. In the light of the fact that it is subject to court proceedings, and ring-fenced from the OFT consultation, we do not consider fairness of charges in this response. However, we provided some information on legal aspects of charges in our response, in April 2007, to OFT 318 -
Link to the BSA response
5. The market study confirms that PCAs are “a major part of the financial landscape” because they –
- are held by 90% of adult consumers
- generate over £8billion in revenue, and
- play an important role in respect of consumers in participating in the economy.
6. As is explained in chapter 2 of the consultation on the market study, there are high levels of customer satisfaction in PCAs, numerous benefits in the product, and a number of providers. However, the study also found that there were low levels of transparency, and high levels of complexity, regarding fees, and a perception among customers that account switching was difficult. The OFT believes that the PCA market is distorted, in summary, by the following –
- substantial cross-subsidisation from customers incurring charges to those who do not
- substantial misalignment between banks’ revenue and their costs because of the cross-subsidisation
- lack of customer awareness of charges and switching, leading to less competition and innovation.
The OFT concludes that it is essential that there is a well functioning, competitive market in PCAs.
Executive Summary
7. The OFT’s main concerns relate to low levels of transparency and low levels of switching. This paper provides the BSA’s response to the consultation; the key elements are as follows -
- The BSA agrees that further improvements might be made in respect of transparency and complexity of charges on PCA accounts. However, any changes need to be proportionate and focused, and steps should be taken to minimise information overload, especially for the large majority of customers who are satisfied with their accounts.
- We suggest that a practicable improvement would be to establish a website where providers could include key features of their PCAs in an easily comparable ‘summary box’ format – copies of the relevant table could be provided to PCA customers at account opening and from time-to-time subsequently.
- The market study shows a clear picture of a majority of satisfied customers, whose priorities in respect of their PCAs do not concern charges. Furthermore, the recent BCSB investigation shows that switching is working well. We believe that the OFT makes no substantive case for further changes to the current switching arrangements.
Transparency and Complexity of Charging
8. Chapter 3 of the market study, which is essentially background, examines the structure of the UK market for PCAs and makes some international comparisons. The ‘free-if-in-credit’ model is fundamental in the UK, but rare elsewhere. We agree that, in recent years, there have been very few new entrants from the building society sector into the PCA market.
9. PCAs are not a core building society product but, as noted above, five of our 59 member building societies provide them. Nationwide Building Society, as the study points out, increased its market share from 3% to 5% between 2000 and 2007; a significant increase given the strong, established competition. We believe that the sector’s market share is approaching 6%.
10. We are not surprised at the principal conclusions drawn from the market study; in particular, that -
- there are a number of competitors in the PCA market, but little evidence of new entry – PCAs depend on complex underlying systems and it is no surprise that new providers tend to be small in number – but we are not aware of any suggestions from our members that they face unfair bars to entering the PCA market
- there is evidence of customer inertia and the common preference for a branch as the main means of delivering the service is a factor – if a PCA functions effectively for its customers in its fundamental role as a transactional account, it is no surprise that switching is not particularly prevalent
- competition in the PCA market has two key aspects – price and quality of service
- the free-if-in-credit model relies to a large degree on net interest income and insufficient funds charges to cover the costs of maintaining PCAs and their related services.
11. One person’s ‘customer inertia’ is another person’s ‘customer satisfaction’. The important question would be – do the so called ‘inert’ customers understand the key features of their account? If they do, and they are content to stay with it, then for ‘inertia’ you can almost certainly read ‘satisfaction’.
12. If, on the other hand, they are unaware of the key features and, once made aware, are dissatisfied with the situation, then the ‘inertia’ is more likely to have been based on ignorance, rather than satisfaction. It is unhelpful to suggest that satisfied customers are simply ‘inert’ ones, unless there is strong evidence to support such a contention. It would be interesting to know if the OFT plans further research to examine this important matter in more detail.
13. The BSA’s strong view is that customers are entitled to clear and transparent information about the key features, such as charges and default interest that they can incur, on their financial services products. However, they should not be subject to ‘information overload’ – a growing problem, partly due to increasing legislative and regulatory requirements, and a sensible balance needs to be drawn.
14. In chapter 4, the OFT concludes that –
- many consumers are unfamiliar with the key prices associated with their account
- even those that do have this awareness, find it hard to judge when, and at what level, these charges will be made
- many customers do not learn from incurring charges.
15. The Banking Code requires a Subscriber to give a new customer details of any charges for the day-to-day running of the account; these include –
- standard charges
- additional interest payable for unauthorised borrowing
- charges for returned payments
- usage fees for arranged overdrafts (section 5.1).
section 5.2 notes other ways in which this information can be found and paragraph 5.3 requires a Subscriber to give a customer personal notice at least 30 days before any of the charges care increased or a new charge is introduced.
16. Section 5.5 requires a Subscriber to give a customer at least 14 days notice before taking interest or charges for standard account services. This pre-notification applies to any charge or interest that accumulates to the account, such as usage fees for arranged overdrafts, debit interest etc.
17. The market study breaks transparency into the following topics –
- arranged overdrafts (paragraphs 4.31 – 4.49)
- unarranged overdrafts (paragraphs 4.50 - 4.73; 4.95 – 4.98)
- insufficient funds charges (paragraphs 4.74 -4.94)
- vulnerable customers (paragraphs 4.108 – 4.116).
(a) Arranged overdrafts
18. The market study suggests that, in 2006, almost one-third of accounts that had an arranged overdraft used it on at least one occasion. Around 15% - about 4 million customers - maintained an average debit balance of more than £1,000 while in debit.
19. There were other interesting statistics, but the only substantive comment on the adequacy of information is paragraph 4.42 –
“We understand that consumers are told in their statements the amount of interest they have been charged where relevant. However, this does not mean that they are told either the debit interest rate applied or the average debit balance, although some banks do state the former.”
20. As already noted, Banking Code Subscribers give new customers details of any charges for the day-to-day running of the account (including standard charges eg those relating to authorised overdrafts). As the OFT acknowledges, customers are told in their statements the amount of interest they have been charged where relevant.
(b) Other charges
21. The study suggests that about 26% of accounts, with or without an arranged overdraft facility, exceeded their limit in 2006 – about 14 million customers.
22. The study also reported that many customers “had not heard of [insufficient funds] charges before they incurred one” or “did not know what their bank’s charges were” (paragraph 4.75). In the light of the clear informational provisions of the Banking Code (see above) this presumably means either that –
- the customer did not take notice of the details received when the account was opened,
- had forgotten about the existence of the charges,
- was not telling the truth, or
- the relevant Code Subscriber had failed in its Code obligation.
Since we cannot know in each case which of these circumstances applied, we are unable to see how any firm conclusion can be drawn from these statements and we can make no further useful comment.
23. The OFT’s key concern is the complexity of assessing the likelihood, and cost, of the use of an unarranged overdraft. Boxes 4.12 and 4.13 (pages 75 – 76) set out the information a customer needs to know in order to determine whether or not they will use an unarranged overdraft and the amount of the charge. We acknowledge that this represents a wide range of information.
24. However, customers have a number of tools to help them, ranging from the traditional bank reconciliation (described in paragraph 4.83) to more modern technological aids such as ATMs, Internet banking, SMS text messages etc. In addition, the information requirements in the Banking Code have been continually reviewed and improved.
25. The current ‘true’ balance on a PCA, being a transactional account, will always be more difficult to assess than the balance on other types of product, such as a passbook savings accounts, for example, where - generally speaking – it would need only to be made up for interest. This extra complexity is in the nature of a transactional account. The Competition Commission recognised this point in its market investigation of PCAs in Northern Ireland, but considered that some simplification was needed, nevertheless –
“there is inherent complexity in PCA charging structures, in part because PCAs service a wide variety of needs. However, even recognising this, PCA charging structures are unduly complex, particularly for authorised overdraft charges associated with traditional PCAs, and for unauthorised overdraft charges levied on all PCAs.”
26. The industry, through both the Banking Code informational requirements and through technological advances such as those mentioned above, has done a great deal to help customers in this respect. Some customers, as the OFT acknowledges (paragraph 4.102), do not help themselves to keep informed. There is little that can be done, for example, for customers who do not read account information provided to them or who simply disregard messages from their PCA provider.
27. It must be recognised that there is a limit to how much information firms can realistically give customers and how much most customers will read. There are a number of other complicating factors, such as financial capability (and, increasingly, some consumers’ poor basic numeracy and literacy), proportionality of costs of providing extra information (and who would ultimately bear them), and information overload - especially for those customers who do not want, or require, the information in question.
28. We believe that the information should be clear, transparent, relevant, in plain English, and as targeted as is practicable, but we do not believe that it should be ‘dumbed down’ to a point where average customers feel patronised.
29. However, the Association believes it right that, if there are any other reasonable steps that PCA providers could take to help customers with their informational requirements, they should be examined (possibly by building on the strong informational requirements already in the Banking Code). What are the possibilities? Those approved by the Competition Commission regarding Northern Ireland PCAs were as follows -
- Code Subscribers to satisfy the Banking Code Standards Board (BCSB) that all information provided to customers when choosing or opening a PCA, on statements, and when pre-notifying charges and interest payments, is easy to understand.
- Key product features, including charges and interest, to be included on marketing and pre-sale PCA information. While very cautious of information overload, the Commission decided that explanations should be provided, as a minimum of –
- credit interest rates
- current account charges
- charges for standard current account services
- authorised overdraft charges and debit interest rates
- unauthorised overdraft charges debit interest rates.
- Information on statements. The information is substantially the same as the pre-sale information (see above).
- Summary and breakdown of charges and interest. Northern Ireland PCA providers must supply an annual summary and breakdown of charges and interest.
- Certain additional pre-notification requirements. This comprises advance notice of charges and debit interest incurred. There are, however, systems and credit risk problems associated with this option. Costs would, arguably, be disproportionate to benefits.
30. The PCA market in the rest of the UK is much larger than the PCA market in Northern Ireland. Also, some providers in the UK are quite small and might have PCA products with simpler features than their larger competitors. Therefore, a direct read-across of the Competition Commission’s findings might not be appropriate. In addition, one must test whether all such new informational requirements, added to those already in the Banking Code, would be justified and proportionate. If the matter is over-egged, the provision of information could be counter-productive, leading to customer confusion, or irritation, rather than understanding.
31. However, the Association would fully support a reasoned examination of what improvements would be appropriate for the UK’s PCA market, while bearing in mind the risks of information overload, disproportionate costs etc. If this could be agreed without the need to set up a long decision-making process, so much the better.
32. In our view, a sensible option would be to establish a website (possibly through the BCSB) on which providers would include, with prompt and regular updating, key features, especially those relating to charges and interest, of their PCAs – this could include –
- account/product name
- minimum age to open
- credit interest rate, if applicable
- arranged overdraft interest rate
- unarranged overdraft interest rate
- insufficient funds charges
- other core services charges.
The information would be provided in clear, tabular, easy-to-compare format. The summary box approach, included in the Banking Code in relation to savings and loan accounts since 1 October 2008, could provide an approximate template. Such an approach would appeal to the many customers who are now used to the Internet or online banking.
33. To cater for customers who did not have, or did not want, access to the Internet, PCA providers could give account applicants a hard copy and send customers a hard copy of the latest summary box, relating to all providers (probably – to reduce paper - limited only to interest and charging elements), from time-to-time, and possibly post them in branches. Each hard copy would contain a prominent warning that the information changed regularly and an up-to-date picture could be obtained from the relevant website.
34. It would be very important not to fall into the mortgage regulation (MCOB) trap, where the KFI sheets were originally expected to be brief and easy for customers to compare, but – mainly because of prescriptive regulatory requirements - became very lengthy, complicated and, ultimately, arguably counter-productive.
35. As noted above, the PCA website facility would have to be limited to key account information, especially charges and default interest. Charges for ‘non-core’ account facilities could be supplied to customers, in the usual way, on account opening, along with other account information eg types of debit cards, arrangements on joint accounts etc.
Switching
36. Chapter 5 of the market study covers shopping around for, and switching, PCAs. The OFT’s study discloses that there are high levels of customer satisfaction in PCAs, but the OFT concludes that this might be evidence of disengaged customers. The study goes on to note that very small percentages consider overdraft fees or interest important when choosing a PCA product. Furthermore, the study suggests that, in 2006, about 23% of active accounts incurred at least one insufficient funds charge.
37. Paragraphs 2.7 – 2.8 of the market study describe the standard ‘free-if-in-credit’ PCA model. The OFT notes that it has a cost to users, ie interest “foregone”. While this is technically true, we believe that it means little to the average customer. A great many have low, or relatively, low balances and interest foregone may well be minimal, especially when compared to the range of facilities regularly provided.
38. Indeed, as the OFT acknowledges (see below), PCAs are operating accounts, with numerous features allowing day-to-day transactions. Customers whose main priority was high rates of interest would open a savings account. It is of course commonplace for customers to have a PCA for day-to-day transactions, and one or more savings accounts primarily with a view to earning interest and building savings.
39. Products should suit consumer needs. PCAs and savings accounts are distinct products that meet these, fundamentally separate, customer requirements – respectively, a transactional account for day-to-day use and an account to build savings for the future. Pressure to conflate them, if acceded to, could lead to significant, detrimental market consequences and adverse effects for consumers.
40. The BSA believes there is an alternative explanation to the OFT’s one of “disengaged” customers. It may well be that the large majority of PCA customers, many of whom do not incur account charges, consider charges and interest – whether received or “foregone” - as of little significance. It seems logically to follow, from findings in the OFT’s study, that they are fully aware of those features of their account that are important to them – regular, efficient payment of debits; receipt of credits; ATMs etc. As noted above, PCAs are not savings accounts – they are, as the OFT acknowledges at paragraph 2.3 - day-to-day operating accounts and most customers, the large majority of whom stay in credit, view them as little more than that.
41. If we are right, a key point is to ensure that – in seeking to provide reasonable help the customers in difficulties, and discontented, with their accounts - the interests of that large majority of satisfied customers are fully respected. The Government or regulators should do nothing unfairly to jeopardise the satisfaction of the majority of relevant consumers.
42. The OFT study strongly suggests that most of the dissatisfied customers are among the minority (less than 25% in 2006) who incurred charges – see, for example, paragraph 3.93 of the market study. If there are competition, or other, problems with their products, then it is logical and sensible to deal with them in such a way that, if at all practicable, does not caused problems for the large majority of satisfied customers, who – broadly speaking – operate their accounts without incurring charges.
43. To bring about a ‘solution’ that adversely affects the large majority of customers, who are happy with their product and provider, carries substantial commercial risks and is unlikely to be considered fair by those customers. Equally, we acknowledge that it would be wrong for customers to incur charges because of lack of transparency and because of complexity of charging structures.
44. The key problem identified by the OFT study, apart from transparency and complexity of charging (considered above), is account switching. We deal with this matter in the following paragraphs.
45. The high level of customer satisfaction disclosed by the OFT’s study (see above) is almost certainly a significant factor in the generally low level of switching – why switch if you are happy with your account? Indeed, chart 4.1 on page 56 of the market study, suggests that consumers regard locality of a branch, family connections and familiarity with the firm, as more important factors than interest rates and charges (Ipsos/MORI consumer survey).
46. In addition, as table 4.4 on page 61 and table 5.14 on page 105 illustrate, the typical annual savings for switching are small – another likely reason for low incidence of switching.
47. We agree with the OFT’s comment in paragraph 4.25 –
“If many customers did switch this could change the pricing of higher accounts nonetheless in a competitive market we would still expect consumers individually to make the choice to move.”
In our view, the most likely explanations for the large majority customers who do not switch are that they are satisfied with their product and see disproportionately small rewards for switching (and both conclusions are strongly supported by the OFT’s research). Customers could switch if they want to, but do not want to - it is a matter for them. Further, some customers who, in effect, live on an overdraft, might be reluctant to try to switch for fear of not being able to obtain the same kind of arrangements elsewhere.
48. The BCSB recently completed its review of the transfer of personal and business current accounts and concluded that there were good standards of compliance with the requirements of the Codes and the current account transfer arrangements were generally working well -
Link to the BCSB review
49. The BCSB identified a few minor problems but, on the whole, it is clear that switching is working well. This supports the conclusions reached by the most recent surveys (between 77% and 82% finding switching ‘easy’ or ‘very easy’ – paragraph 5.56). Older surveys, reflecting the more difficult switching environment in the past, should probably be regarded as unreliable.
50. The Association can see little reason for introducing additional changes to the arrangements for switching. The recent evidence demonstrates no significant difficulties other than, perhaps, in respect of a minority of customers perceptions of the obstacles to switching - the BSA’s suggestion of a website containing key PCA information could help in this respect (see above).
Consultation Questions
51. The consultation sets out some examples of the feedback it requires from consultees. Although these are examples only, and we have commented in substance above, we address below, in brief, the specific questions the OFT asks.
- The information consumers would find most helpful to enable them to compare PCAs and to decide whether to switch, or choose
account if a new customer, (both generic and customer specific), and whether such information should be available in standardised
format, and whether it should be held electronically.
We have made a suggestion in paragraphs 32 – 35 above, which we believe would meet the reasonable needs of many PCA customers.
- • The trade off that may exist between the need for information and the potential for being overloaded.
This is always a risk – as we note above, we believe that information should be clear, transparent, relevant, in plain English, and as targeted as is practicable, but we do not believe that customers should be overloaded or that information should be ‘dumbed down’ to a point where average customers feel patronised. The suggestion mentioned above would, in our view, be appropriate.
- Whether there would be benefits for consumers in having comparative data about customer service levels across banks available, and whether this would improve the competitive process?
In principle, we are in favour of transparency. However, much would depend on which data was collected and the means of gathering it. Both the Financial Ombudsman Service and the FSA are currently looking into the publication of complaints’ data. We believe that, if comparative data is to be published, the ombudsmen and regulators should ensure a joined-up approach and examine very carefully potential unintended consequences that could lead to consumer detriment.
We have provided, or are in the process of providing further comment to the FSA and the FOS -
Link to the BSA response
A particular point we are making is that targets for publication should not be based on the ease with information can be accessed, but rather on the intrinsic utility to consumers of the information concerned.
- Which elements of customer service are important and how they should be measured?
As we have noted, PCAs are not a core building society service – our sector provides about 6% of the market. However, the key elements of customer service dealt with in independent research recently commissioned by the BSA might be of use to the OFT in the current exercise -
Link to customer satisfaction research
- How the balance should be struck between PCA providers facilitating consumer control of their finances and consumers’
personal responsibilities for their own actions?
Our response addresses this matter (see paragraphs 26 – 28 above).
- The factors, if any, that should determine the level of charges (for example, how much risk customers should take for the consequences of not having the right amount of funds in their account).
In a competitive market, the key requirement is transparency of charging so that customers may make informed decisions about which provider to choose.
- The measures that would make it easier for consumers to monitor and control their finances.
Please see the discussion above and, especially, the suggestion in paragraphs 32 – 35.
- Whether a high degree of confidence in switching is important for the market, and, if so, how confidence in switching should be
improved (for example, whether data on successful switching should be published)
We believe that the OFT makes no substantive case for further changes to the current switching arrangements.
• Whether the impact of confidence in the switching process varies across different types of consumers.
The OFT study suggests that this is the case (see paragraph 42 above).
- Which part of the switching process is most important to get right (for example, how the role of third parties should be addressed), and who should bear the consequences of switching going wrong.
As noted, we believe that the OFT makes no substantive case for further changes to the current switching arrangements.
- Whether third parties may have a role in using customer-specific data to help consumers compare different bank offers?
Some commercial providers already have this role, but there are questions about the independence of some of them and they are, broadly speaking, unregulated. We believe that the suggestion set out in paragraphs 32 – 35 above would significantly help with consumers’ needs.
