Massive thanks to EXC for writing up our submissions to the LSB. We are meeting with them on Monday to discuss the way forwards so any input, as always is very welcome.
The case for opting-in.
We believe that there is an overwhelming preference for opting-in to unauthorised overdrafts as opposed to opting-out.
Firstly it is important to understand what it is that is being opted-in to or out of.
During the bank charges test case litigation it was established that bank charges are, in the main, for the service of ‘consideration’ of whether to grant an unauthorised overdraft or not where a payment instruction has been made where there are insufficient funds to meet it. The banks by default, ‘deem’ a payment instruction in those circumstances as an ‘informal request’ for an overdraft regardless of the customer’s true intent. There is no option for the customer to present a payment instruction without it also being deemed as an overdraft request. Indeed no payment instruction exists that actually states that it is also a request for an overdraft either expressly or implicitly. That the banks deem it as such is entirely presumptuous on their part and takes no account of the customer’s wishes.
This was the banks’ pleaded position, accepted by all three courts. The charges are not for the provision of the overdraft itself for which there is an associated interest charge. The service of ‘consideration’ is uniquely compulsory.
In any event the vast majority of account holders opt not to use the service of consideration anyway. The OFT PCA Market Study puts the figure at some 80%. Of the remaining 20% who do use it - unknowingly, unwillingly or otherwise - only a very small proportion actually want it. A large poll conducted by MoneySavingExpert of 5952 people found that 92% of people would prefer a payment instruction to be refused without charge than for it to be considered for payment for a fee. MoneySavingExpert.com Polls
Should it be that an opting scheme should be designed in such a distorted way that 98% ( approximately 50 million people) have to opt-out rather than the 2% who genuinely want the service have to opt-in?
Clearly the banks would prefer an opt-out scheme as the take-up would be less than opting-in. This was highlighted by the Barclays Reserve where customers were given the option of opting-out of the scheme by being sent a letter. In the months after the Reserve went live consumer forums were awash with people claiming that they either didn’t receive the letter, missed the vital information within it or simply didn’t understand it.
1. How important is it for consumers to have the ability to opt-out of unarranged overdrafts on their account?
We would contend that for those consumers that pay bank charges, it is the most important issue they have with their account. For many opting-out (or in) would give them the single most effective tool with which to manage their finances. Any opting scheme would promote better budgeting for those in financial difficulties.
Would consumers be prepared to switch accounts or providers to obtain the ability to opt-out?
Historically switching rates are very low. Regardless of the apparent benefits to some in switching in order to opt-out, the problems perceived by people - as highlighted in the OFT PCA Market Study - remain. These include: Complexity and fear of missing salary or benefits payments & direct debits etc.
But for many of those that matter it is not so much a question of being prepared to switch but one of whether they are able to. Typically those who incur charges would be unable to close their existing account as it would be in debit because of the charges. There is also a real perception that having a negative bank balance or credit rating would prevent them from being able to open an account with an alternative supplier.
2. What do you see as the benefits that an opt-out would bring?
Certainly for those who incur unpaid item fees the benefits are directly financial. But in general:
* Genuinely more control over finances
* Improved ability to budget accurately and effectively
* Greater transparency
* Better relationships and greater trust between customer and bank
3. What factors are consumers likely to take into account in deciding whether to exercise the opt-out?
This would largely be dependent on the nature of the opt-out. If the opt included a blanket refusal of payment instructions due to insufficient funds the biggest factor to be taken into account would be the unpaid bill. But we think it would be easier for most people to negotiate an alternative payment arrangement with, for example, a utility supplier than obtain reasonably priced short term borrowing from their bank.
If the opt was to be on a transaction by transaction basis (our favoured option) consumers could consider opting to pay essential bills such as mortgages. We believe that any fees incurred should be billed for separately and not simply deducted from a consumer's account.
4. What risks are there to consumers of opting out and how important are these? These could include: a. Payments being declined even if they take the account just overdrawn b. Fees for returned items
We cannot accurately answer this question unless we fully understand what the proposed opt-out is. If the opt out does not cover the service of consideration, what does it cover? It cannot only apply to potential paid items that would otherwise take the account into debit because fees for returned items would have the same effect ie bring the account into unauthorised overdraft.
We would appreciate some clarification.
5. What are the essential elements that the proposed standards should cover?
a) That there should be an opt-in as opposed to an opt-out.
b) That the opt should apply to the service of consideration including paid item and unpaid item fees.
c) That it should apply to all existing and future current accounts.
Legal Beagles
______________________
The case for opting-in.
We believe that there is an overwhelming preference for opting-in to unauthorised overdrafts as opposed to opting-out.
Firstly it is important to understand what it is that is being opted-in to or out of.
During the bank charges test case litigation it was established that bank charges are, in the main, for the service of ‘consideration’ of whether to grant an unauthorised overdraft or not where a payment instruction has been made where there are insufficient funds to meet it. The banks by default, ‘deem’ a payment instruction in those circumstances as an ‘informal request’ for an overdraft regardless of the customer’s true intent. There is no option for the customer to present a payment instruction without it also being deemed as an overdraft request. Indeed no payment instruction exists that actually states that it is also a request for an overdraft either expressly or implicitly. That the banks deem it as such is entirely presumptuous on their part and takes no account of the customer’s wishes.
This was the banks’ pleaded position, accepted by all three courts. The charges are not for the provision of the overdraft itself for which there is an associated interest charge. The service of ‘consideration’ is uniquely compulsory.
In any event the vast majority of account holders opt not to use the service of consideration anyway. The OFT PCA Market Study puts the figure at some 80%. Of the remaining 20% who do use it - unknowingly, unwillingly or otherwise - only a very small proportion actually want it. A large poll conducted by MoneySavingExpert of 5952 people found that 92% of people would prefer a payment instruction to be refused without charge than for it to be considered for payment for a fee. MoneySavingExpert.com Polls
Should it be that an opting scheme should be designed in such a distorted way that 98% ( approximately 50 million people) have to opt-out rather than the 2% who genuinely want the service have to opt-in?
Clearly the banks would prefer an opt-out scheme as the take-up would be less than opting-in. This was highlighted by the Barclays Reserve where customers were given the option of opting-out of the scheme by being sent a letter. In the months after the Reserve went live consumer forums were awash with people claiming that they either didn’t receive the letter, missed the vital information within it or simply didn’t understand it.
1. How important is it for consumers to have the ability to opt-out of unarranged overdrafts on their account?
We would contend that for those consumers that pay bank charges, it is the most important issue they have with their account. For many opting-out (or in) would give them the single most effective tool with which to manage their finances. Any opting scheme would promote better budgeting for those in financial difficulties.
Would consumers be prepared to switch accounts or providers to obtain the ability to opt-out?
Historically switching rates are very low. Regardless of the apparent benefits to some in switching in order to opt-out, the problems perceived by people - as highlighted in the OFT PCA Market Study - remain. These include: Complexity and fear of missing salary or benefits payments & direct debits etc.
But for many of those that matter it is not so much a question of being prepared to switch but one of whether they are able to. Typically those who incur charges would be unable to close their existing account as it would be in debit because of the charges. There is also a real perception that having a negative bank balance or credit rating would prevent them from being able to open an account with an alternative supplier.
2. What do you see as the benefits that an opt-out would bring?
Certainly for those who incur unpaid item fees the benefits are directly financial. But in general:
* Genuinely more control over finances
* Improved ability to budget accurately and effectively
* Greater transparency
* Better relationships and greater trust between customer and bank
3. What factors are consumers likely to take into account in deciding whether to exercise the opt-out?
This would largely be dependent on the nature of the opt-out. If the opt included a blanket refusal of payment instructions due to insufficient funds the biggest factor to be taken into account would be the unpaid bill. But we think it would be easier for most people to negotiate an alternative payment arrangement with, for example, a utility supplier than obtain reasonably priced short term borrowing from their bank.
If the opt was to be on a transaction by transaction basis (our favoured option) consumers could consider opting to pay essential bills such as mortgages. We believe that any fees incurred should be billed for separately and not simply deducted from a consumer's account.
4. What risks are there to consumers of opting out and how important are these? These could include: a. Payments being declined even if they take the account just overdrawn b. Fees for returned items
We cannot accurately answer this question unless we fully understand what the proposed opt-out is. If the opt out does not cover the service of consideration, what does it cover? It cannot only apply to potential paid items that would otherwise take the account into debit because fees for returned items would have the same effect ie bring the account into unauthorised overdraft.
We would appreciate some clarification.
5. What are the essential elements that the proposed standards should cover?
a) That there should be an opt-in as opposed to an opt-out.
b) That the opt should apply to the service of consideration including paid item and unpaid item fees.
c) That it should apply to all existing and future current accounts.
Legal Beagles
Comment