Beagles formal response to OFT PCA Market Study Consultation Nov 2008

[Amethyst]

Legal Beagles Response to the OFT PCA Market Study - November 2008

For full version see PDF Legal Beagles

For the consultation documents see The Office of Fair Trading: Market study into personal current accounts


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Executive Summary

The personal current account may well be a cornerstone of Britain’s retail financial
system, but for the vast majority of adults it means far more than that: it is a central
and essential component of 21st century life. PCAs are the gateway into the economy
for much of Britain’s household consumption. PCAs allow for the regular payment of
rent or a mortgage, utility bills, food, clothing, and a myriad of other essentials that are
integral to modern life. The PCA represents the economic infrastructure by which our
work, wages and savings are recycled into the economy.

In this respect, we believe that the PCA is an essential utility and not merely a service.
Whilst banks continue to operate PCAs on a purely commercial and highly profitable
basis, it represents a failure by the banks, the government and the regulators to fully
appreciate the nature of the PCA as an essential component of our national economic
infrastructure. Given the historic failures within the banking system to address
concerns over competition and consumer protection, it is apparent that purely
commercial interests cannot be left to dictate the future direction of the PCA.

In March 2000, the Cruickshank Report1 concluded that:
• consumers perceive significant barriers to switching current accounts;
• few consumers are aware of the terms and conditions of the products they hold,
pointing to significant information problems;
• consumers have inadequate representation and redress.

Several recommendations were made in respect of addressing these failings within the
UK banking industry. Just twelve months later, however, the Treasury Select
Committee in their Fifth Report of 2001: Banking and the Consumer, stated:
“We believe that very easy transfer of current accounts between banks is
essential to ensuring increased competition in personal banking services. We
believe that the major retail banks' efforts to achieving this aim in the twelve
months since Cruickshank's recommendation on this point have been
disappointingly slow.”

The Committee report also raised concerns about the cross-subsidy and the
transparency of charges:
“An issue which arose in connection with payment systems, and also more
generally, was the extent to which different banking activities are crosssubsidised,
or more generally the relation between the cost to banks of a
particular service and the charges made to customers. The NCC, for example,
pointed out that banks were absorbing the transaction costs for personal
customers (cash withdrawals and others) by paying very low interest rates (or
none at all) on current account balances and by their overdraft charges…”2

Eight years on from the Cruickshank report and the conclusions of the OFT market
study indicate that little, if any, progress has been made within the UK banking
industry. Although the account transfer processes of some banks have generally been
improved, the remaining issues have not been addressed.

Whilst we support the objectives of the current market study and the ongoing Test
Case proceedings, we have serious concerns over the amount of time it has taken for
such action to be forthcoming. It was only after tens of thousands of county court
claims and complaints about insufficient fund charges, alongside high-profile media
coverage, that the OFT and the FSA contemplated any formal action against the banks
in respect of these charges. Even now, with a provisional finding by the OFT that
these insufficient fund charges are unfair, the banks are continuing to impose these
charges with impunity.

It appears to us, despite years of pressure from the government and regulatory bodies,
that the banks are unwilling to voluntarily implement the essential changes to the PCA
that are required to ensure proper competition and the fair treatment of consumers.
For the reasons set out in this formal response, we are of the opinion that the time for
self-regulation has long since passed. At a time when confidence in the UK banking
industry is at an all-time low, endemic failures within the industry must be rectified
through strict independent regulation combined with greater transparency.

Although the lack of competition, unfair commercial practices and inadequate
consumer redress should be dealt with on their own merit, the political reality of the
recent publicly-funded rescue package cannot be ignored. With £39billion of public
funds invested in this national economic infrastructure, the tax-paying consumer is
entitled to expect more from our banks.

We believe that recent events have granted the OFT a great deal political and moral
authority. There will be no better opportunity for the OFT to ensure a fairer deal for
consumers.



1 Competition in UK Banking: A Report to the Chancellor of the Exchequer, 20 March 2000
2 At paragraph 42 of the Report; see
http://www.parliament.the-stationery.../13804.htm#a13





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[Amethyst]

Introduction to Legal Beagles

1.1. Legal Beagles welcomes the opportunity to respond to the Office of Fair Trading’s
consultation paper - Personal current accounts in the UK – an OFT market study.

1.2. We are a free-to-join internet forum offering help, support and advice to the general
public who have issues involving consumer rights. Legal Beagles was formed and went
live in May 2007. We have a rapidly increasing membership and currently have just over
2000 registered users of which almost 50% are active during any month, plus a daily
viewing of over 800 non registered guests. High proportions of our registered users are
currently reclaiming or have previously reclaimed bank overdraft or credit card fees. We
work closely with many other similar forums, sharing information and discussing issues.
Consumers are often directed between consumer sites to where there may be more
specialist advice suitable to their needs. As we are accessible 24 hours a day every day
of the year, we can provide real time help for people that need one-on -one support and
advice over the many consumer issues that arise from day to day. Through helping
consumers with difficulties in the main attributed to the financial services industry, a
strong community spirit has formed and is very much a feature of our site.

1.3. Legal Beagles is owned by two private individuals, has two principle administrators,
and has a moderating team of seven. We are funded by donations from private individuals.

What we do
1.4. Our aim is to inform consumers of their rights and protection under the law and assist
them in any way we can towards a fair and just resolution to their problems. Consumers
look to us to provide valuable information and knowledge in many different situations
they may encounter. Much of our work is in assisting people on low incomes who are
suffering genuine hardship as a result of financial difficulties that have arisen through
the unfair practices carried out by the various financial institutions.

1.5. Legal Beagles takes a holistic approach to debt and try to assist people by not just
dealing with the immediate concern, but by encouraging people to prevent problems
reoccurring at a later date.

1.6. We are committed to making consumers more aware of their consumer rights and the
protection they can receive from the law and various organisations such as the OFT,
FSA, FOS, and ICO etc. We strive to help people have a greater sense of responsibility
for their own actions and by doing this we can actively campaign for the fair treatment
of consumers taking into account both consumers and service providers.

1.7. We fully support the OFT in their efforts in representing consumers in the current test
case with the Banks, and always have representatives at the court hearings who provide
daily reports on the proceedings and make available court transcripts to our members.
Legal Beagles has become a primary source of information about the test case for
consumers, law firms and the media.

1.8. Legal Beagles is active in co-ordinating and funding legal representation for particularly
severe hardship cases in providing the services of law firms and barristers.


Issues we deal with
1.9. As personal current accounts are one of the main area of concern at present, especially
with the ongoing test case, we have ensured that not only do our users receive up to the
minute reports, they also receive a comprehensive explanation of the direct
consequences to them and how it affects the many claims that are at present stayed as a
result of the test case in conjunction with the terms of the FSA waiver. We also assist in
recognising genuine hardship candidates that should be dealt with under the exemptions
of that waiver.

1.10. Currently we have users who are dealing with issues arising from bank current accounts, business accounts, credit card accounts, secured and unsecured loans, mortgage lenders, Payment Protection Insurance, utility suppliers, telecoms providers, Government benefit payments, and various other consumer issues.

1.11. Legal Beagles and its members are therefore grateful for the opportunity to contribute to this consultation process.

[Amethyst]

Personal Current Accounts

Introduction
2.1. The personal current account may well be a cornerstone of Britain’s retail financial
system, but for the vast majority of consumers it means far more than that: it is a
central and essential component of 21st century life. PCAs are the gateway into the
economy for much of Britain’s household consumption. PCAs allow for the regular
payment of a mortgage or rent, utility bills, food, clothing, and a myriad of other
essentials that are integral to modern life. The PCA represents the economic
infrastructure by which our work, wages and savings are recycled into the economy.
The Personal current Account (PCA)

2.2. We believe that the PCA is an essential utility and not merely a service. It is not just
an essential tool for consumers: its function and utility underpins the smooth
functioning of the UK economy as a whole. The PCA is an essential component of
the economic infrastructure of the country. This is one of the reasons why
governments around the world refuse to contemplate the collapse of major retail
banking institutions, and why unprecedented levels of public funds have been used to
shore up the banking system in Britain and elsewhere. High street banks are unique
in this position amongst British companies, and we believe that such use of public
funding should not come without obligation: the historic failings within the market
must be addressed.

2.3. Although the lack of competition, unfair commercial practices and inadequate
consumer redress should be dealt with on their own merit, the political reality of the
recent publicly-funded rescue package cannot be ignored. We believe that recent
events have granted the OFT the political and moral authority to impose a fairer
settlement for consumers.

Free-if-in-credit pricing model
2.4. The free-if-in-credit model is the standard pricing model offered by UK banks, and it
is fair to say that such “free banking” is taken for granted by UK consumers.
However, as highlighted by the market study, we believe that this pricing model is
anything but “free”.

2.5. The market study highlights two ways in which the use of the “free banking” title is
something of a misnomer: first through “interest foregone”, and second through the
imposition of insufficient fund charges.

Sub-inflation interest
2.6. Although consumers do miss out on higher rates of interest by keeping funds in their
PCA rather than accounts with a higher interest rate, we would assert that “interest
foregone” is understating the reality of the situation. Interest rates for PCAs provided
by the four established banks averages less than 0.5%, and in our experience
consumers do not appreciate that this represents in real terms an annual depreciation
in the value of their credit balance, since inflation has historically been four or five
times higher than the interest rates offered by most UK banks. Due to the fluctuating
nature of amounts held in PCAs, it is unsurprising that consumers do not appreciate
the long-term cost of a sub-inflation interest rate. Although the amounts lost through
sub-inflation interest may be comparatively small for individuals, we believe that
consumers as a whole are losing out to a significant degree.

Profitable nature of PCAs
2.7. When coupled with relatively high levels of interest charged for any arranged or
unarranged overdraft facility, it comes as no surprise to us that revenue generated
from PCAs was in excess of £4billion for 2006. It is clear from these figures, along
with record profits posted by UK banks in recent years3, that PCAs are a highly
profitable endeavour for UK banks, even without taking account of insufficient fund
charges and sales of additional services for which the PCA acts as a gateway.
Insufficient fund charges

2.8. Of greater concern to us is the fact that insufficient funds charges are being viewed
by the banks as a legitimate means of increasing profits: £2.6billion from these
charges in 2006 alone. Our experience reflects the responses set out in the market
study: consumers are not sufficiently informed of exactly when and how these
charges might be applied.

2.9. It is also our experience that it is often the most vulnerable consumers who
frequently pay the greatest level of charges. This is in part due to the vicious cycle
of debt that these charges often create for those on low incomes, particularly
individuals and families reliant on benefits and pensions. Even a single charge can
be enough to disrupt a tight budget, as these charges often trigger additional charges,
pushing these vulnerable individuals further and further into debt (referred to as the
“snowball effect”).

2.10. It is the government’s stated policy to make all payments of social security directly
to a bank account or post office account by 2010. Whilst legislation4 is in place
which prohibits the assignment of, or charges on, benefits or pensions, due to the
mechanism of direct payments into bank accounts, the banks are not restricted by this
legislation. Although any other company would be prohibited from making any
deductions from social security and pension payments before they reach the
recipient, we have specific examples of the banks stripping away the entirety of an
individual’s weekly benefit or pension, leaving them without any monies to meet the
basic needs of either themselves or their families. This results in the banks having a
higher priority over the benefits than the recipient or any other creditor. This goes
entirely against the spirit and purpose of the legislation designed to protect such
vulnerable individuals. We consider it unacceptable that individuals in financial
difficulty are forced to pay non-priority debts to their bank when they have more
pressing priority debts and basic needs to meet. We urge the OFT to find a regulatory
route to prevent such essential benefits and pensions being deducted prior to being
accessible to the recipient. Advance notice of such charges, as opposed to immediate
deductions, would be one possible solution. This would give the recipient of these
benefits the opportunity to make alternative arrangements for future payments to
ensure they can meet essential purchases and payments rather then pay
disproportionate charges to their bank. The OFT will no doubt wish to consult with
the Department for Work and Pensions on this issue.

2.11. We have also dealt with specific cases where these charges have been a significant
contributing factor in the bankruptcy of individuals and the repossession of family
homes. The fact that this continues to be the case even after the instigation of the test
case and the grant of the FSA waiver is of particular concern to us. Our experience
is that the lack of consumer redress identified in the Cruickshank Report has not been
addressed in any meaningful way.

2.12. Although no formal legal ruling has been reached on the issue of the lawfulness of
these insufficient funds charges, we hold the view that these charges are clearly
unlawful. In the test case judgment of Smith J., it was ruled that these charges are
subject to the Unfair Terms in Consumer Contract Regulations 1999, and since this
ruling was following the policy decision of the House of Lords in Director General
of Fair Trading v. First National Bank plc,5 the decision of Smith J. is very unlikely
to be overturned.

2.13. Since that ruling by Smith J., the OFT has written to each bank to inform them that
following on from their year-long investigation into these charges, the OFT has
reached the provisional view that these charges are unfair. Given this extensive
investigation into these charges, and the previous “threshold” of £12 set by the OFT
in respect of credit card charges6, it appears that the banks’ current charges of up to
£38 are manifestly excessive.

2.14. The legal ruling in the test case, combined with the OFT’s preliminary findings that
these charges are unfair, merely confirms what the majority of consumers have
known for many years: insufficient fund charges do not reflect the actual cost to the
banks and they are used primarily as a profit-making tool. The presumption must be
that these charges are unfair and therefore unlawful unless and until a court rules
otherwise.

2.15. It is not, in our view, acceptable to allow the banks to continue imposing unlawful
charges whilst preventing any form of consumer redress through the courts or the
banks’ own complaints procedure. At the very least, interim injunctive relief should
have been sought, or should be sought immediately, to prevent the continued use of
these unfair terms.

2.16. Under Article 7 of EC Directive on Unfair Terms in consumer Contracts7:
1. Member States shall ensure that, in the interests of consumers and of
competitors, adequate and effective means exist to prevent the continued
use of unfair terms in contracts concluded with consumers by sellers or
suppliers.
(Emphasis supplied)

2.17. In our view, allowing the banks to continue imposing such manifestly unfair
charges whilst preventing any form of consumer redress falls far short of the
statutory duty on the OFT to ensure that “adequate and effective means exist to
prevent the continues use of unfair terms”. On the contrary, many consumers
have reached the conclusion that the OFT and the FSA are allowing unfair terms
to be used against them, whilst preventing those consumers from taking any
action themselves. This prevailing view, with which we hold some sympathy, has
seriously undermined consumer confidence in the desire or the ability of the OFT
or the FSA to give adequate protection to consumers. In our experience,
consumers are particularly frustrated at the apparent bias in favour of the banks
by the regulators in enforcing and entrenching this unfair status quo.

2.18. Article 7 of the Directive goes on to state that:
2. The means referred to in paragraph 1 shall include provisions whereby
persons or organizations, having a legitimate interest under national law in
protecting consumers, may take action according to the national law
concerned before the courts or before competent administrative bodies for
a decision as to whether contractual terms drawn up for general use are
unfair, so that they can apply appropriate and effective means to prevent the
continued use of such terms.
(Emphasis supplied)

2.19. In our view, the OFT is the competent administrative body which is mandated to
reach decisions as to whether terms are unfair. There are not, in our view, any
legitimate grounds for awaiting a determination from a court that these charges are
unfair before seeking interim injunctive relief against the continued use of these
unfair charges. Having reached the obvious, albeit provisional, conclusion that these
charges are unfair, we are of the view that the OFT is failing to discharge its statutory
duties if it does not seek such interim injunctive relief. It is not, in our view,
acceptable to allow the test case proceedings to drag on for another 12 to 18 months
whilst allowing the banks to continue imposing these charges.


3 UK banks made profits in excess of £37billion in 2006 and £40billion in 2007.
4 Such as the Administration of Social Security Act 1992
95 [2001] UKHL 52
6 See the OFT Report Calculating fair default charges in credit card contracts April 2006,
http://www.oft.gov.uk/shared_oft/rep...cts/oft842.pdf
7 Council Directive 93/13/EEC

[Amethyst]

Hardship Cases

2.20. Our experience is that the banks are failing to apply the hardship principles under the
FSA waiver with any consistency. We have evidence of banks repeatedly seeking to
recover debts which are made up entirely of insufficient fund charges, even though
the consumer has been recognised as being in hardship, and even though the
consumer in question has already brought legal proceedings, which have been stayed,
against their bank. Consumers are consequentially receiving markers on their files
with Credit Reference Agencies, creating difficulties with organising their finances.

2.21. Although we appreciate that this is strictly a matter for the FSA in this instance, it is
further evidence the banks failing to treat consumers fairly, which further underlines
the need for effective regulation in this area.

Banks’ response to the OFT investigation and test case

2.22. After the instigation of the OFT investigation into insufficient fund charges, the
banks claimed that any challenge to the current use and level of such charges would
result in the loss of “free banking” in the UK. Comparisons were drawn with other
countries and the banking models and charges imposed in those countries.

2.23. We do not believe that these claims hold up to any proper scrutiny. As has already
been established, there is no such thing as “free banking” in the UK, primarily due to
uncompetitive interest rates which are linked to PCAs.

2.24. Furthermore, claims by the banking industry that this would bring about the end of
the “free-if-in-credit” model in the UK only serves to underline the inherent
unfairness of insufficient fund charges. Since only 23% of PCAs incurred these
charges, this is an admission that there is significant cross-subsidy from those
accounts that do incur charges to the remaining 77% of accounts that do not. Our
experiences and the facts set out in the market study demonstrate that it is often the
most vulnerable or “financially constrained” who bear the brunt of these charges. In
those circumstances, the most vulnerable consumers are being expected to subsidise
the remaining consumers for the use of an essential utility: the PCA.

2.25. In any event, we do not accept that a reduction in the level and incidence of these
charges will bring about the end of free-if-in-credit banking. As was highlighted
above, the PCA is of itself a profitable venture for the banks, generating £4billion
revenue for the banks in 2006. In our opinion, it is the banks’ pursuit of
unprecedented profits that has driven up the level and incidence of these charges. As
highlighted in the market study, the level of charges have consistently increased over
the years, even though the actual costs to the banks has probably decreased through
the increased use of computer automation and advances in such technology.

2.26. Furthermore, when choosing any comparisons with other banking models, it is
essential to draw comparisons with models that are closely aligned to those used in
the UK.

[Amethyst]

Comparisons with Republic of Ireland

2.27. There have been historically close ties between the financial systems and financial
institutions of the Republic of Ireland and the United Kingdom. Even after formal
independence in 1922, the Republic of Ireland continued to use the UK currency.
The Saorstát Pound (Free State Pound) introduced by the Currency Act 1927 was
intended to maintain parity with the British Pound Sterling. It was not until
December 1978, with the Republic’s entry into the European Monetary System, that
parity with the British Pound was broken, and even then 50% of the Republic’s trade
remained with the UK. Even today, the Bank of Ireland (not to be confused with the
Central Bank of Ireland) retains Sterling note-issuing rights in the United Kingdom.

2.28. Due to the intertwined history of the Republic of Ireland and the UK, and the
similarities and shared history of their respective financial institutions, the pricing
models used in the Republic of Ireland are the most appropriate comparisons to use
when considering the impact of any structural changes to pricing models in the UK.

2.29. There are four dominant banks in the Republic of Ireland: Allied Irish Banks plc,
Bank of Ireland, Ulster Bank and the National Irish Bank. We shall be drawing on
the first three banks only, as the National Irish Bank has a variety of different
standard accounts, some with an annual fee but improved rates of interest, some with
no fee but reduced rates of interest. Their charging leaflets for insufficient funds
charges are also not readily available.

Ulster Bank
2.30. This is probably the most useful comparison between the UK pricing model and one
used in a foreign jurisdiction, as Ulster Bank is owned by Royal Bank of Scotland
Group. A full breakdown of Ulster Bank’s fees are available online8, but the main
points have been summarised below:

Ulster Bank
Interest on credit: 0.55%
Interest on overdraft: 15.05%
Account maintenance fees: none
Insufficient funds charges:
• Unpaid item fee €12.70 (£10.67) (compared to £38 for RBS
customers in the UK)
• Daily fee of €4.44 (£3.73) for when you are over your limit
(compared with a £28 monthly fee for RBS customers in the UK).



Allied Irish Banks plc
2.31. A full breakdown of AIB’s fees are available online9, but the main points have been
summarised below:
9http://www.aib.ie/servlet/BlobServer?blobcol=urldata&blobtable=MungoBlobs&bl obkey=id&blobwhere=1214
392284474&blobheader=application%2Fpdf
Allied Irish Banks plc
Interest on credit: 0.5%
Interest on overdraft: 14.22%, although there is a fee of €25.39 (£21.33) per
annum to set up and maintain the overdraft facility.
Account maintenance fees of €4.50 (£3.78) per quarter, along with transaction fees
of €0.20 (£0.17p) for automated/self service transactions and €0.30 (£0.25p) for
paper/staff assisted transactions. However, these account maintenance fees do not
apply to students, graduates or people over 60. Furthermore, customers who hold an
AIB Debit Card and are registered for AIB Phone & Internet Banking can qualify
for free maintenance and transaction banking on that account completing at least
one purchase transaction using their AIB Debit Card in each fee quarter and at least
one debit transaction using AIB Phone & Internet Banking in each fee quarter.
Given the above exemptions and the ease and frequency with which such
transactions are carried out, we can only assume that the numbers of customers who
actually pay these fees are in the minority.
Insufficient funds charges: Cheque, direct debit or standing order presented on
your account and returned unpaid €10.00 (£8.40)

Bank of Ireland
2.32. A full breakdown of Bank of Ireland’s fees are available online10, but the main points
have been summarised below:

2.33. As can be seen from the figures above, in comparison to the established banks in the
UK, interest paid on PCAs is on average higher in the Republic of Ireland, the
interest charged on overdrafts is lower, and the insufficient funds charges are
significantly lower – even the highest charges are about one third of what they are in
the UK.

2.34. Although two out of the three banks cited do have a quarterly charge and a per
transaction charge, certain customers are automatically exempt, and regular
customers can easily avoid these charges in their entirety by using their debit card
and online banking 3 times per quarter.

Bank of Ireland
Interest on credit: 3.0% (up to €1500)
Interest on overdraft: 14.5%, including overdraft facility fee.
Account maintenance fees €0.28c (£0.24p) per transaction or €0.13c (£0.11p)
each if bought in bulk, with students and over 60s exempt. Again no transaction
fees if the consumer keeps a minimum credit balance of €500 in the current
account for the full fee quarter, or makes at least 3 debit payments from the
current account using Bank of Ireland 365 online and / or phone in that quarter
Insufficient funds charges
• First over limit item per quarter No Charge
• 2nd and 3rd items per quarter €3.50 (£2.94) each
• 4th and 5th items per quarter €5.00 (£4.20) each
• 6th and subsequent items per quarter €10.00 (£8.40) each
Cheque/DD/SO returned unpaid from your account €12.70 (£10.67) each

2.35. In all respects, it appears that the Republic or Ireland has a banking model that is
much more favourable towards consumers than the standard model used in the UK.
And most telling is that the RBS subsidiary in the Republic uses a free-if-in-credit
model, maintains better rates of interest, and imposes insufficient fund charges that
are roughly a quarter of the cost of those imposed in the UK. We take this as further
evidence of the cavalier approach of the UK banks in their pursuit of profits and the
poor deal that UK consumers receive.

2.36. This evidence demonstrates that more reasonable levels for insufficient fund charges
do not necessarily mean the end of the free-if-in-credit model. We suspect that such
claims made by the banks and the British Bankers’ Association are entirely
disingenuous, and are simply an attempt undermine public support for an end to such
high levels of charging.

2.37. In any event, the majority of our members have indicated that modest transaction
fees or periodic charges would be acceptable to them, provided it gave rise to more
competitive rates of interest and insufficient funds charges that reflected the actual
cost to the banks.

2.38. In our opinion, the OFT should not be deterred in pursuing fair insufficient funds
charges for UK consumers, despite disingenuous claims by the banking industry.
Neither should the OFT be overly concerned by any potential consumer backlash
over modest periodic charges or transaction fees for bank customers provided PCAs
provided real value for money and the issues of cross-subsidy and disproportionate
insufficient funds charges were remedied by effective regulation. We believe that
this would lead to greater transparency of the real cost of banking in the UK, which
would lead to greater competition, and would result in higher switching rates by
consumers.

2.39. Aside from the issues of unfairness, transparency and cross-subsidy, we would
consider it unacceptable if UK banks were to continue to reap such high levels of
profits from consumers for what is an essential utility, particularly when
extraordinary levels of public funding has been used to maintain the integrity of the
banking system.


8http://www.ulsterbank.ie/content/ri/personal/downloads/Personal_fees_and_interest.pdf
10http://www.bankofireland.ie/includes/personal/pdfs/fees_charges_010708.pdf

[Amethyst]

Supply of Personal current Accounts

3.1. We agree with the OFT’s conclusion that the market may be stuck in an equilibrium
that does not work well for many consumers. We appreciate that there are significant
barriers hindering entry into the market for new providers and any expansion by
current providers, particularly the “challenger” banks.

3.2. However, this is all the more reason to ensure that mergers or takeovers are placed
under greater scrutiny. Notwithstanding the current financial crisis, we were
disappointed at the approval of the acquisition of HBOS by Lloyds TSB. This will
result in the number of accounts operated by the largest “challenger” bank being
subsumed within the market share of the established banks. The market will therefore
move from a 65% stake for the established banks to a 79% stake in terms of numbers
of customers.

3.3. It is the case, particularly with reference to the takeover of National Westminster Bank
by Royal Bank of Scotland, that the fees and charging structures of the smaller bank
align themselves with that of the purchasing bank. In the context of HBOS and
Lloyds TSB, this cannot be considered a healthy move for the market which is already
stifled through a lack of “challenger” competition to the dominance of the established
banks. We anticipate the fee structure of HBOS will, in time, fall in line with that of
Lloyds TSB, which we consider to be less favourable to consumers, particularly since
HBOS has, in recent years, offered one of the highest interest rates for credit balances.
We have legitimate concerns that the attractive offers provided by HBOS will
disappear with time. In the current economic climate, we are concerned that
subsequent mergers or acquisitions may be approved which will further undermine
competition within the market.

3.4. In our experience, consumer inertia can also be attributed to another factor: low
expectations. Many consumers are of the opinion that switching banks will be of little
benefit to them, as competitors do not offer better products or better returns. There is
the perception, with which we hold some sympathy, that “the banks are all as bad as
each other”. This is in part a reflection of the negative publicity that the banks have
received due to insufficient funds charges, but primarily due to the longstanding
problem of inadequate consumer redress. The recent financial crisis, when combined
with unprecedented bank profits and staff bonuses of recent years, has lead to
extraordinarily low levels of trust in the banks. In light of recent events, the
allegations of profiteering by the banks have been very difficult to refute.

3.5. In our view, effective regulation and fair treatment of consumers is required to restore
consumer confidence in our banking institutions and their regulators.

[Amethyst]

Consumers' use and awareness of their current accounts

4.1. As part of our response to the OFT market study, we asked our members what
facilities and options they would like to see within their PCA, and what aspects would
make their “perfect bank account”.

4.2. The responses have been summarised below:
• Charges to be proportional and fair;
• Higher interest rate on unauthorised borrowing limited to just the unauthorised
amount, not the entire overdraft (this issue currently affects Abbey customers);
• Better customer service and consumer redress, with a less sales-driven approach to
consumer contact;
• Any overdraft limit should be a limit not a guide – if a DD or SO takes the account
over the prescribed limit then the item should not be paid;
• Documentation to be entirely in Plain Intelligible Language and to be easily
accessible, both within branches and online;
• Independent regulation with consultation from a consumer panel;
• Trigger limits or flags, i.e. if a set number or percentage of DD's, SO's, etc are not
getting met over a time period, then contact and assistance is offered by the bank;
• Alternative or flexible charging dates to coincide with salary or income into the
account, namely set days within the month, such as the last Friday of the month;
• Banking code regulated and properly adhered to by the bank, with regulatory
sanctions and/or fines where there have been repeated breaches;
• Parent/Sister companies should be made clearer on any documentation – so as to
allow better assessment of offers provided by banks and the offsetting of any risks;
• Annual financial “health checks” to identify problems or concerns;
• Enable DD's to be held rather than cancelled with the need to be set up again;
• Allow monthly repayment plan of overdrafts prior to a default situation;
• Simpler opening procedures;
• Being able to contact your branch directly, with the ability of branches being able
to process requests or resolve situations without the need to refer the customer to a
call centre;
• Call centre’s should be UK based;
• Standardised regulation for all default charging aspects. The maximum level and
frequency or total of charges that any bank applies should be set, amended,
monitored, and controlled by the relevant regulatory body. Each bank should be
forced to adopt and use identical terms and conditions in respect of default
charging aspects, with the relevant terms and conditions being drafted, amended,
issued, and administered by this regulatory body. Therefore allowing a proper
comparison in respect of the remaining elements of the facilities and prices
offered.
• Monthly account fees are acceptable at a sensible rate, although they should not be
automatically linked to additional services such as insurance, travel money, etc.
• Financial hardship criteria should be standardised for all banks, with greater detail
being set out within the regulatory code or the Banking Code.
• Text alerts for issues relating to your account, such as a notification that your
account has dropped below a certain level as a pre warning.


4.2. We appreciate that some of these “wish list” facilities and options would have a
commercial impact on the operation of PCAs, and could give rise to additional cost to
the consumer. We also appreciate that not all of these items could be standardised
without compromising competition between the banks. They do, however, reflect
what our members would like to see offered as part of their PCA.


4.3. We also note that there was a consistent and strong response on the need for
independent regulation for the setting of insufficient fund charges, amendments to
those charges, and monitoring of those charges. This underlines the lack of consumer
confidence in historic and current self-regulation by the banks, and is a strong
indicator of the fact that consumers generally do not trust the banks to act in a fair
manner in respect of these charges.

[Amethyst]

Shopping around for and switching PCAs

5.1. Our members generally found that switching services was complex and inefficient.
We have included a number of examples of their experiences:

‘They managed to screw up the switching service spectacularly; the whole
thing was a mess. You have no idea what's going on and why DD have
disappeared from the old account but not yet appear in the listings for the
new one. Worst of all, my mortgage went unpaid as the bank instructed my
previous bank to cancel my old direct debit before the new one was set up. I
have an ongoing complaint about this as not paying your mortgage is BAD!
Credit rating will be affected, please be very wary of the switching service.’’

‘I opened an account with them last month and sent off all my DD/Standing
Order details as requested - received a letter telling me they'd take care of it
all and that I wouldn’t need to contact my old bank. This month my wages
went into my old account but my DDs have come out my new account and
to make matters worse one of my standing orders which is my rent (£460)
has come out of both accounts!’’

‘Having checked my statements this month I noticed that our mortgage
hadn't been taken so I phoned mortgage lender who informed me they had
tried to take it from my old bank account and failed. I have since incurred
another £70 worth of fines as a result (from Mortgage Company and old
bank account). The bank assured us they had taken care of everything yet the
mortgage company said that they were not in a position to do that and
shouldn't have said they could. We even had a letter from them to say the
switch was all complete and our phone call to them in December was
specifically about the mortgage. What’s worse is I have just gone through all
my direct debits one by one and noticed that the Council Tax has not been
taken nor my internet bill so I anticipate more fines on the way.’’


5.2. We appreciate that this process involves administrative tasks, and that sometimes
mistakes happen. However, anecdotal evidence from our members would indicate
that these mistakes occur quite frequently.


5.3. We also have concerns relating to the risk that is borne by the consumer for the
administrative task of ‘switching’ accounts over which they have no control. In
circumstances where other regular creditors, such as mortgage companies or credit
card providers, charge high fees for late or missed payments, we consider it unfair
that such charges should be borne by the consumer.


5.4. In respect of the bank to which the consumer is switching, it is our view that they
should allow a period of grace in which charges are not applied during the switching
period. We are also of the view that where financial institutions would be required to
pay late payment fees caused by these administrative errors, this would reduce the
frequency of such errors. It might also have a beneficial impact on the level of late
payment fees generally, as financial institutions may find themselves paying such fees
themselves.

[Amethyst]

Opening Accounts

5.5. In terms of opening bank accounts, it is our view that the process should be made
much easier, with particular emphasis on greater flexibility over acceptable
identification documents. The experience of our members, as well as the authors of
this report, is that bank staff are generally unwilling to be flexible over the type of
documents they are willing to accept. Whilst we appreciate that there are issues
relating to fraud which must be addressed by the banks, this should not have the
consequence of excluding consumers from access to a bank account. It is often the
case that a bank will require photo ID in the form of a passport or driver’s licence,
neither of which may be held by a consumer, and both of which attract a certain
expense.


5.6. For consumers who do not drive, the only alternative is to apply for a passport, pay
the £72 application fee, and wait the 6-week “not-guaranteed” service period given by
the Home Office Identity and Passport Service. We believe that it is wholly
unacceptable that a driver’s licence or passport must be a pre-requisite for opening a
personal current account or basic account.


5.7. Furthermore, we understand that credit checks are carried out on any consumers that
apply for a bank account, even a basic account, and regardless of whether any credit
is being sought. As a result, individuals with poor credit histories can be refused even
a basic bank account, with serious consequences for that individual’s ability to
control their finances. This inability to open a basic account and have income paid
into it can often result in non-priority debts to the bank which holds their current
account are being paid off before essential debts and basic necessities are being met.
We believe that credit scoring should only be used where a consumer is actively
requesting credit, and should not be accessed otherwise.


5.8. It is our view that the conventional banking network has a reluctance to offer basic
bank accounts, and where they are made available the applications process is
unnecessarily complicated.


Post office accounts
5.9. We welcome the post office retaining the contract for the post office card account.
We value this basic account, and believe that it is vital for many consumers on low
incomes, especially those in receipt of state benefits, particularly as this account can
never incur any charges.


5.10. We would also welcome any move by the Post Office to introduce its own personal
current accounts. Ideally, this Post Office PCA would allow for the setting up of
direct debits and standing orders, as well as allowing online access. We appreciate,
however, that there may be significant costs involved for the Post Office in providing
such a service, which may require public funds to establish or operate. We appreciate
that this would be a complicated procedure under European competition legislation,
and could have consequences for competition within the market. Nevertheless, we
believe that such a move could have significant consumer and social benefits,
particularly for those with low incomes, and those who do not currently have any
form of PCA. This would also allow greater access to banking facilities in rural areas,
where only 4% of villages currently have a bank or building society branch, whilst
60% have a post office.


5.11. We would also support a move to make all current accounts accessible through the
post office, by way of cash withdrawals. Although most of the bank and building
societies have already established such a partnership with the Post Office, two of the
established banks, namely HSBC and the RBS group, have not agreed to such a
partnership. This means that about 31% of PCAs are not accessible at the Post Office.
This has particular consequences for consumers in rural areas where those bank
branches are scarce.

[Amethyst]

Recent changes to PCA structure and charges

6.1. It is clear that self-regulation has failed in the past, and that self-regulation is
continuing to fail consumers. Notwithstanding the investigation by the OFT, a number
of banks have amended their terms and conditions in a way that is less favourable to
consumers as a whole.

Abbey
6.2. Abbey has changed its terms and conditions so that if a consumer exceeds their
overdraft facility by any amount, then the entirety of that overdraft attracts the interest
rate of an “unauthorised” overdraft facility. Thus if a consumer exceeds a £1000
overdraft facility by £1, then the whole £1001 is charged at the higher rate of interest
for unauthorised overdrafts.

Lloyds TSB
6.3. Lloyds TSB has entirely overhauled its charging structure which, in our view, can be
extremely punitive for those on low incomes. Lloyds TSB has capped unpaid/returned
items fees at £20 (maximum 3 per day), and introduced a daily charging rate for being
over your agreed limit, which varies depending on how much you are overdrawn:
• Less than £25 = £6 per day
• £25 to £100 = £15 per day
• Over £100 = £20 per day.
• A Monthly charge of £15 is levied on top of the above charges.
This has resulted in specific examples where consumers have gone from paying
charges of £35 for one returned direct debit in one month, to paying £185 of charges
for the same direct debit being returned the following month.

Barclays
6.4. Barclays have also made substantial changes to their terms and conditions, and
introduced an “opt-out” procedure for the Barclays Reserve Account in August 2008.
This account consists of a 'personal reserve' over and above any agreed overdraft
facility. Only some consumers have been given the reserve, and in our experience
many of the consumers who have been given the personal reserve and the option to
'opt-out' are some of the most vulnerable low-income consumers and would therefore
make use of the ‘reserve’ more frequently and attract more charges than they have
done previously.

6.5. We feel that the information provided to consumers who were given the Reserve
Account was unclear, and was not in plain and intelligible language. We do not believe
that the option to ‘opt-out’ was fair, since many consumers claim not to have received
this information at all.

6.6. Despite a headline reduction to £8 for insufficient funds requests, the Reserve which
was foisted onto vulnerable consumers has seen many consumers further crippled with
excessive charges because Barclays have began charging £22 for every 5 days that you
are over your agreed overdraft and into your reserve amount. The new Reserve
Accounts were offered to customers on an Opt-Out basis and many customers were not
even aware of this change, let alone the ability to “opt-out”.

6.7. If a consumer does opt out, they then have a buffer zone of £15 (increased from £5)
over the current overdraft which is not charged for, and any transactions that would
take you over that would be declined and returned, with the exception of guaranteed
cheques. These insufficient funds transactions will attract a fee of £8 per transaction -
as opposed to the previous £38. The reserve, on the other hand, has no such buffer.

6.8. Comments we have received from consumers about the Reserve Account have been
highly damning:

“I found out one of my Barclays accounts had gone over by £0.98 while on
holiday and I was charged twice, so I ended up with a total charge of £44. In the
old system you were not charged anything if you went over by a max of £5.’’

‘Barclays kindly phoned me yesterday to indicate I owe them around £250 -
apparently there was an opt out letter sent to my wrong address stating there is
now a personal reserve of £150 on my dormant account . I took out £40 when I
had about £5 and only a £10 overdraft - so it wouldn’t have worked before
hand’

‘I received a letter a couple of weeks ago explaining that as a valued customer
they had automatically implemented a reserve on my accounts (x2). I didn’t
really understand the real impact of this and didn’t think anything of it until we
recently went overdrawn by £7.00 for less than 24 hours! Yes a whole £7.00!
Within 24 hours we were charged a whopping £22.00!’’


6.9. Whilst we appreciate that some of these recent changes to terms and conditions for
Abbey, Lloyds TSB, and Barclays may appear to be an improvement, in that there are
lower short-term charges if a consumer can remedy the breach of the overdraft, we
have serious concerns that these changes are extremely prejudicial to the majority of
consumers. This is because most consumers who do exceed any agreed limit on their
overdraft are rarely in a position to rectify the situation before the next payment of a
monthly salary or social security payment. This will inevitably result in vulnerable
consumers paying even greater levels of charges than previously. As noted above,
vulnerable consumers can now pay up to £185 for a single returned or unpaid direct
debit.


6.10. We also have serious concerns at the ability of the banks to impose triple-charging on
consumers; a single breach of the overdraft will lead to an unpaid item charge, a
monthly charge, and a higher level of interest. We are concerned that any “threshold”
figure put forward by the OFT incorporates limits on monthly charges and interest
rates recoverable in order to avoid this triple charging. We raise this concern because
of the market reaction to the credit card charges report, where credit card companies
went from imposing a single fee to triple fees: a returned payment fee, a late payment
fee, and an over limit fee all imposed for the same returned direct debit. Thus an
original charge on credit cards of £25 or £30 has become 3 charges of £12, which
results in a higher charge for the consumer. We would urge the OFT to anticipate this
kind of market reaction, and to effectively regulate the number of times that a bank can
recover insufficient funds charges for the same transaction. We do not wish to see a
repeat of the market reaction to credit card charges whereby consumers could
ultimately pay more in default fees than they were paying previously.


6.11. We have found that a number of complaints are concerned with new services that are
introduced and imposed onto our members’ accounts which were never agreed to.
Usually when a service provider introduces a new service, it is offered to the customer
who has power to decide for himself whether he wants to use the service. Only after
the provider has a written agreement with the customer may the provider commence
rendering and charging for services.


6.12. We are particularly concerned with the uniquely powerful position that every bank has
over its customers’ income. We believe that banks have abused this power by
introducing new services and charging their customers for it whether they want it or
not. A bank is in a position to do this because it has access to its customer’s income
before they do. Therefore it is able to charge its customers with or without their
agreement.


6.13. An example put forward by some members is that of a tradesman introducing a new
service, implementing that service without first agreeing it with his customer, and then
sending the customer the bill. The customer would quite rightly refuse to pay. It is
inconceivable that a regulator or a court would find in favour of the tradesman if the
payment was brought before them in a dispute. Yet, this very practice is allowed to go
on every day in personal banking.


6.14. Many services which exist on most PCA’s since September 2007 did not exist at the
time of opening the account. These services include ‘considering & declining
payments’ and of course ‘unarranged overdraft approval’. Not without good reason,
many consumers believe that these new terms & services introduced on their account
were merely an instrument with which the banks concerned could evade scrutiny on
the issue of penalties and deliberate misrepresentation. However, even after writing to
their bank and asking for these new services to be removed, some customers are met
with the blunt response “your account will be operated according to our agreed terms
and conditions”. Clearly, no such terms were ever agreed, they were imposed and are
indeed being disputed.


6.15. We would urge the OFT to regulate an opt-out system for consumers in respect of the
imposition of insufficient funds charges altogether. One of the most serious complaints
from consumers is the lack of control over how their account is operated. There would
be fewer grounds for complaints, and greater consumer control over their finances, if
they had the option not to allow payments to go out of their accounts when there are
insufficient funds. Whilst we accept that there may be minor costs associated with such
an automatic system, those costs should properly reflect the cost to the banks. It is our
experience that consumers would accept such fees, if they were proportionate to the
actual costs involved.

[Amethyst]

Conclusion and recommendations

7.1. Whilst we support the objectives of the current market study and the ongoing Test
Case proceedings, we have serious concerns with the amount of time it has taken for
such action to be forthcoming. It has taken a nation-wide consumer campaign against
the level and frequency of insufficient fund charges, alongside high-profile media
coverage, before the OFT and the FSA have contemplated any formal action against
the banks in respect of these charges. Even now, with a provisional finding by the OFT
that these insufficient fund charges are unfair, the banks are continuing to impose these
charges with apparent impunity.


7.2. We have serious concerns that this is further undermining consumer confidence in both
the banks and the regulators. In circumstances where the High Court has ruled that
such charges are subject to the test of fairness under the UTCCRs, and where the OFT
has reached a provisional conclusion that these charges are unfair, we believe it is
unacceptable that the banks should be allowed to continue imposing these charges.


7.3. Whilst we appreciate that the OFT has limited funding, and is trying to proceed with
the case in a sensible manner, we are dismayed at the length of time it has taken to
reach this stage, with no end in sight for at least 12 months. We are seriously
concerned that the banks are attempting to drag out the court process for as long as
possible, so as to delay repayments to consumers and to continue imposing these
charges, at a time when many consumers are facing serious financial hardship as a
result.


7.4. We would strongly urge the OFT to use their statutory powers to seek interim
injunctive measures to prevent the continued use of these insufficient fund charges.


7.5. With £39billion of public funds already injected into our ailing banking industry, and
with the prospect of more public funds to come in the future, the tax-paying consumer
is entitled to expect more from their banks. Given the pressing need for increased
regulation of the banking industry following the current financial crises, there will not
be a better opportunity for the OFT to use its moral and political authority to ensure a
fairer deal for consumers by effectively regulating the PCA market and the use of
insufficient fund charges.


7.6. It appears to us, despite years of pressure from the government and regulatory bodies,
that the banks are unwilling to voluntarily implement the essential changes to the PCA market
that are required to ensure proper competition and the fair treatment of
consumers. For the reasons set out in this formal response, we are of the opinion that
the time for self-regulation has long since passed. At a time when confidence in the
UK banking industry is at an all-time low, endemic failures within the industry must
be rectified through strict independent regulation combined with greater transparency.


7.7. One foreseeable result of the OFTs investigation into insufficient fund charges is the
setting of a “monetary threshold” for such charges above which the OFT will take
action, similar to the market study into credit card charges11. At whatever level this
“threshold” for charges is set, our experiences with the market reaction to the credit
card charges report leads us to believe that this reaction will be repeated in the banking
market. Namely that each bank will use the threshold set by the OFT. We urge the
OFT to take recognition of this fact, and to appreciate that any “threshold level” set by
the OFT is likely to become the industry standard.


7.8. In light of this, and the lack of competition that will inevitably follow, we would urge
the OFT to take a stricter approach and actually regulate the market in respect of
insufficient fund charges, setting out clearly the prescribed circumstances in which
they can be imposed and, more importantly, the level of charges that can be imposed.
Whilst we appreciate that this may raise concerns relating to competition, it is obvious
that there is no such competition now, and that a “threshold” level will remove any
scope for competition in the future.


7.9. Legal Beagles and its members would again like to thank the OFT for providing the
opportunity to contribute to this consultation. We would be pleased to offer our input
to any future discussions regarding this or any other consumer issues. We feel we
provide a valuable vehicle for communication between the consumer and the regulator.




11 See the OFT Report Calculating fair default charges in credit card contracts April 2006

[Amethyst]

here

[Amethyst]

Conclusions - October 2009

7 October 2009
The OFT has published a follow up to its 2008 report on Personal current accounts in the UK. The follow up report details how banks will be making the costs of current accounts more transparent and how switching between current accounts has been made easier for consumers.
To combat low levels of price transparency most current account providers will:

• make charges more prominent on monthly statements
• provide information on average credit and average debit balances, and
• provide illustrative scenarios showing unarranged overdraft costs.

To improve the ease of switching between PCAs:

• a new consumer guide and website have been introduced
• measures to reduce the number of problems that arise with the transferring of Direct Debits have been taken, and
• consumers should not be adversely affected by any problems caused by the switching process.

Download Personal current accounts in the UK - A follow up report (pdf 1.79Mb)