LLOYDS BANKING GROUP ~

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1 Janet Pope Chief of Staff Group Chief Executive's Office LLOYDS BANKING GROUP ~ Rt Hon Andrew Tyrie MP Chairman of the Treasury Committee House of Commons Committee Office 14 Tothill Street London SW1H 9NB Lloyds Banking Group pie 25 Gresham Street London EC2V 7HN +44 (0) direct +44 (0) facsimile W.'l\ 1 1.lloydsbankinggroup.com 22nd July 2016 Dear Mr Tyrie Thank you for your letter dated 5th July 2016 on Personal Current Account (PCA) charges, which you sent to Antonio Horta-Osorio. He has asked me to respond and to let you have the detailed briefing which our team has prepared in answer to your questions. The Competition and Markets Authority's (CMA) inquiry has clearly demonstrated that there is much more that can be done to help customers who use an overdraft and Lloyds Banking Group welcomes the Treasury Committee's continued efforts to draw attention to this important issue. I have attached a document that sets out in full our answers to the questions the Committee has posed and also shares our views on how the CMA's proposed remedies will help overdraft customers in the future. Our team would be happy to answer any further questions you have or discuss the CMA inquiry in more detail and Antonio, of course, would be happy to discuss this with you directly if you wish. To assist the CMA's deliberations we have also developed an early prototype of what 'open data' comparability could look like in personal current accounts and would be happy to demonstrate this to you and your team. Yours sincerely Uoyds Banll.ing Group pie is registered in Scotland no Registered omce: The Mound. Ed'1burgh, EH11YZ

2 Lloyds Banking Group response on current account charges Introduction 22 July 2016 There has been significant progress in the Personal Current Account (PCA) market in recent years. Income from overdrafts as a whole has gone down and there has been a general rebalancing of fees between unplanned and planned overdrafts. Charging structures are now more transparent. Online and mobile banking have transformed the market. Text alerts and mobile apps mean customers are now more aware of how much money they have and with Faster Payments can transfer money instantly to avoid charges. Customers can arrange a planned overdraft online or on their mobile phone and increase their limit if they need to. Our customers can also amend or cancel standing orders and direct debits. They can also cancel an overdraft from their mobile phone if they feel they no longer need it. The likelihood of customers incurring unplanned overdraft charges has also reduced. Lloyds Banking Group (LBG) offers overdraft buffers which help customers avoid being charged fees when they use their overdraft by a small amount, and grace periods which give customers time to correct the position if they go into either their planned or unplanned overdraft by mistake. Online tools are in place to help customers manage their accounts. Balance Extra (available in our Halifax brand) helps customers see their expected balance at the end of the month based on their current patterns of spending and scheduled payments. We offer a range of accounts in all three brands with interest and fee-free overdrafts for those customers who might be worried about running out of money at the end of the month. We offer a range of accounts that prevent customers incurring unplanned fees: basic accounts that are completely fee free for eligible customers and control accounts that prevent any payment being made that would incur an overdraft fee in return for a monthly fee. To support customers in financial difficulty we also refund a substantial amount of fees incurred every year, where customers have got in touch and discussed their position. These are positive changes but more can be done. Competition between banks has resulted in different approaches to overdraft charging - some banks have daily fees and others charge fees and interest on debit balances. This has made charges hard to compare, particularly if customers are not sure how much they expect to borrow or how often they will use their overdraft over any given period. Switching can also be a challenge as a customer with an overdraft will not always know if they can get the same overdraft with another provider. Properly implemented the CMA's remedies will help address the twin problems of comparability and switching. By enabling more effective shopping around they will put pressure on providers to innovate, improve their overdraft pricing and quality of service. The proposed remedies will also have sufficient flexibility to ensure innovation is not stifled and that new and existing providers will be given the flexibility to improve and differentiate themselves. They will also force all providers to send customers mobile and text messaging when they go into an unplanned overdraft and give them a minimum period of time to either pay money in or arrange a planned overdraft to avoid incurring unplanned fees.

3 Response to TSC's specific questions Question 1: What is the daily charge for a customer using an authorised overdraft? Lloyds Bank charges interest on planned overdrafts, rather than a daily fee. These are summarised in table 1 overleaf. A 6 monthly overdraft fee may also be charged. A customer will only pay this fee if they use a planned overdraft by more than any interest-and-fee-free amount or use an unplanned overdraft by more than any buffer at any time during the monthly billing period. Table 1: Lloyds Bank overdraft interest rates Current Account Interest and feefree planned overdraft amount Overdraft interest rate (per month) Overdraft rate (EAR) interest Classic % 19.94% Silver % 19.94% Club Lloyds % 19.94% Club Lloyds Silver Gold % 19.94% Club Lloyds Gold Platinum % 17.28% Club Lloyds Platinum Premier Club Lloyds Premier % 15.43% Note: These interest rates are correct as of July Interest rates are variable. EAR is Equivalent Annual Rate. This is the actual interest rate of an overdraft. It does not take into account fees and charges. Different rates apply for Student and Graduate accounts. Halifax has the following planned daily overdraft charges: Table 2: Halifax planned overdraft daily charges Account Amount of overdraft Daily fee Reward Current Account Up to and including 1, Current Account (and with Control added) 2,000 to 2, ,000 and above 3 Ultimate Reward Current Account Note: Ultimate Reward Current Account has no daily fees up to 300. Different rates apply for Student Current Account, Cardcash and Basic Account.

4 Question 2: Is t/1ere a cap on tl1e charge incurred by a customer using an authorised overdraft? If so, what is the 1naxi1nurn charge that a custo,ner can incur in any week, 1nonth or year? Lloyds Bank and Halifax do not have a maximum monthly charge for using a planned overdraft. Lloyds Bank charges debit interest rather than daily fees so the amount a customer pays will depend on how much they borrow and for how long. As an example, a Lloyds Classic customer borrowing 1,000 for 28 days would pay in total; a 6 monthly overdralt usage fee plus in debit interest' Halifax has tiered daily charges. A Halifax Current Account customer borrowing 1,000 for 28 days would pay 28-1 per day. Question 3: What is the daily charge for an unauthorised overdraft? Lloyds Bank has the following daily unarranged overdraft charges: Table 3: Lloyds Bank unplanned overdraft daily charges Account Amount of overdraft Daily fee Classic Unplanned overdraft of 10 or less No fee Silver Gold Club Lloyds Club Lloyds Silver Unplanned overdraft is more than 10 but less than 25 5 Club Lloyds Gold Premier Club Lloyds Premier Platinum Unplanned overdraft is 25 or more 10 Club Platinum Lloyds This was calculated using Lloyds Bank's overdraft calculator.

5 Halifax has the following daily unarranged overdraft fees : Table 4: Halifax unplanned overdraft daily charges Account Amount overdraft of Daily fee Current Account with Control added Reward Current Account Current Account without Control added Ultimate Reward Current Account All balances All balances 1 5 In addition, Halifax offers the following overdraft buffers: Table 5: Halifax overdraft buffer Account Buffer Impact Ultimate Reward Current Reward Current Account Current Account Account No daily overdraft fees if you are in debit by 50 or less No daily overdraft fees if you are in debit by 10 or less Note: Halifax's overdraft buffer relates to the first 10 or 50 of overdraft spending whether a customer is in a planned or unplanned overdraft. In contrast, Lloyds Bank's overdraft buffers relate to the first 10 of unplanned overdraft usage. Question 4: Is there a cap on the charge incurred by a customer using an unauthorised overdraft? Ifso, what is the maximum charge that a customer can incur in any week, month or year? Lloyds Bank customers will be charged a maximum of eight daily fees in a monthly billing period. Therefore, the maximum monthly charge a customer could pay in unarranged overdraft fees would be 86 (including the monthly overdraft usage fee). Halifax customers could be charged a maximum of 100 in unplanned daily overdraft fees in a monthly billing period. In reality however, customers very rarely pay this much. For both Lloyds Bank and Halifax customers, over half of unplanned overdraft customers paid no more than 2 5 in unplanned overdraft charges in any month,2 and around three quarters paid no more than 50. Over the course of 2014.

6 Question 5 : Are there any other costs incurred by a customer using an unauthorised overdraft, compared to an authorised overdraft - such as additional fees or interest rates? Unplanned overdraft users do not incur any additional fees or interest rates compared to using a planned overdraft other than the daily fees described above. For Lloyds Bank, debit interest is the same for both planned and unplanned overdrafts. Sometimes LBG will not offer a customer an unplanned overdraft or will not extend an existing unplanned overdraft. In these situations, if a Lloyds Bank customer attempts to make a payment by direct debit or cheque but does not have sufficient funds the payment will be returned and a returned item fee will be charged. Lloyds Bank charges 10 for a returned item, capped at a maximum of three per day. Customers benefit from a retry period so that if a customer pays in sufficient funds by 3.30pm the payment will be made and a returned item fee will be avoided. Halifax does not charge returned item fees for its Current, Reward and Ultimate Reward accounts. Question 6: What action does Lloyds/Halifax take - if any - unauthorised overdraft? when a customer enters into an LBG takes the following action when a customer enters into either their planned or unplanned overdraft: (a) (b) (c) (d) (e) customers who have opted in to free text alerts will receive near-limit and overlimit texts; customers are sent a formal notification of charges letter, including a telephone number for customers who may be in financial difficulty. Customers are given at least 14 days' notice before fees are debited from their account; mobile and online customers are shown their account balance and overdraft limit whenever they view account status online or via the LBG app; all customers receive an Annual Statement which details all fees and charges they have incurred; and no further overdraft fees are charged to any customer who remains in their unplanned overdraft for 30 consecutive days. In addition, there are key unplanned overdraft usage thresholds at which point LBG monitors customers for signs they are potentially entering into financial difficulty, as described below. Further Background Unplanned overdrafts are designed for short term rather than long-term borrowing Planned and unplanned overdrafts are intended for different purposes. A planned overdraft is agreed in advance between LBG and a customer and sets the limit up to which a customer may go overdrawn on their account. Customers may apply for a planned overdraft or ask to extend their existing overdraft limit at any time. Planned overdrafts are designed for relatively short term borrowing of no more than several months at a time, but often for much shorter time periods, for example, to help a customer manage their finances if they have to make a significant purchase shortly before their pay-day. Around one third of LBGs active accounts use a planned overdraft, with half of these customers using it for less than eight days per month on average. Unplanned overdrafts are not arranged in advance and are intended as a short-term back-up fa cility rather than for expected borrowing. Providing unplanned credit is a valuable service to customers, which means they can make critical payments, such as a mortgage or utility bill, and make payments for essential services, such as buying petrol late at night, even if they do not have the funds or an agreed credit line. This saves all customers, not just those who use an unplanned

7 overdraft, from the worry of missing critical payments or the inability to complete a purchase at a critical time. There are also financial benefits from avoiding missed payments and the missed payment penalties, including withdrawal or cancellation of service, which may result. Customers are unable to use their unplanned overdrafts for ATM withdrawals, standing orders or Faster Payments. In any given month approximately 7% of active customers will use an unplanned overdraft, and on average for just two days. The CMA found that 76% of customers did not use an unplanned overdraft at all over a year. For customers using their unplanned overdraft for extended periods, LBG caps the total number of days per month for which charges can be incurred. It is important to stress that overdrafts might not always be the most appropriate product for the customer's needs and loans, credit cards and other forms of credit might be better. We have developed a "Lending Pathways" approach to help customers in branch choose the most appropriate form of credit for their needs. This takes into account what the customer needs the money for, how much they want to borrow and for how long. Summary of LBG initiatives to help customers manage their overdraft LBG publishes all its overdraft rates and charges online. We offer customers a range of tools to help them manage their overdraft usage. These include: (a) (b) (c) (d) (e) (f) (g) (h) The process to agree a new or revised limit is quick and simple, so that customers are charged only for a planned overdraft. Customers can do this online or via their mobile app. Overdraft calculators to help customers work out how much they can expect to pay for overdraft use. 3 If a payment takes a customer into their unplanned overdraft they will receive an over-limit text alert. 4 Customers have a grace period of up to midnight to pay in sufficient funds to avoid usage charges, and up to 3: 30pm to ensure any direct debit or cheque is paid. If a customer only goes into their overdraft by less than a buffer amount ( 10 or 50 depending on their PCA) then they will not incur any overdraft fees. Balance Extra, available with Halifax, helps customers see their expected balance at the end of the month based on patterns of spending and scheduled payments. Customers who are unable to pay in sufficient funds and remain in their unplanned overdraft are protected by fee caps. Unplanned fees are capped at a certain number of days each month: 8 days for Lloyds Bank, and 20 days for Halifax 5 LBG also offers a range of PCAs with interest and fee-free overdrafts. For example, Club Lloyds offers up to the first 100, and Halifax Reward up to the first 50, of a planned overdraft as interest-and fee-free. Added value accounts offer larger interest and fee-free amounts. accounts/personal-overdrafts/overdraft-calculator.asp and halif ax.co. uk/ba nkaccounts/ove rdr afts/ove rd raft-calculator I Assuming the customer has chosen to opt-in to t he free text alert service. Halifax has an unplanned fee cap of 100 per month, which equates to 20 days at 5 per day.

8 LBG identifies and helps customers in financial difficulty We have a number of policies in place to identify when customers are using unplanned borrowing and are potentially entering into financial difficulties. There are key thresholds at which LBG monitors customers for signs of financial distress and starts to help the customer through its "Debt Management" service. Customers are no longer charged fees once they pass these thresholds. Customers can also proactively contact LBG if they are experiencing financial difficulties. Once a customer has been identified for the Debt Management service, LBG gets in touch with them to understand their circumstances and conducts an affordability assessment to determine an appropriate and sustainable treatment. This may involve a repayment plan or refinancing, among other options. No customers are allowed further credit while they are in this process. We offer customers a Control Facility which is free for financially vulnerable customers for 6 months. The Control Facility prevents customers from using an unplanned overdraft. It is most suited to customers who regularly do not have enough available funds to make their payments, and the safety feature of a Control Facility helps customers avoid unexpected charges for unplanned borrowing. CMA Retail Banking Investigation The CMA's proposed remedies will make it easier for overdraft customers to shop around and switch PCA providers, and provide customers with better tools to help them manage their overdraft usage. The remedies include: (a) (b) (c) (d) (e) Requiring providers to share 'open data', which will lead to new digital tools that will help customers to compare the cost of accounts easily based on their actual overdraft usage. These tools will help overcome the problem of different approaches to charging. Requiring providers to prompt customers to review how they use their account and compare the market, with the prompts developed through trialling to test what is most effective. This will help push customers into thinking about switching when they perhaps wouldn't otherwise. Auto-enrolling all customers into overdraft text alerts so that all customers not just the most engaged benefit from account management tools. We conducted a trial of our own to test the viability of this remedy and found opting-in customers to text alerts can save significant amounts in unplanned overdraft fees for some customer segments. Requiring providers to cap the maximum monthly charge ("MMC") for overdraft charges. This will provide a visible price point that can help customers choose between products and providers. Making it easier for customers to check that they can get an overdraft on the same terms with a new provider before they switch, removing uncertainty for this group of customers and encouraging them to shop around and switch.