Citizens Advice response to the European Commission consultation on bank accounts June 2012 Myddelton House 115-123 Pentonville Road London N1 9LZ Tel: 020 7833 2181 Fax: 020 7833 4371 www.citizensadvice.org.uk: 7833 2181
Introduction Citizens Advice welcomes the opportunity to respond to the European Commission s consultation on bank accounts. The Citizens Advice service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination. The service aims: To provide the advice people need for the problems they face. To improve the policies and practices that affect people s lives. The Citizens Advice service is a network of nearly 400 independent advice centres that provide free, impartial advice from more than 3,500 locations in England and Wales, including GPs surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups. In 2011/12 the Citizens Advice service in England and Wales advised over 2 million people on 7 million problems. Debt and welfare benefits were the two largest topics on which advice was given. Response to the consultation We have provided answers to the key questions on which we are able to offer a view and on which we have evidence. Transparency and comparability of bank account fees 1. Do you consider that the information provided by banks on bank account fees is presented to consumers in a sufficiently clear manner and easy to compare between banks? What good practices could you identify? What are the persisting shortcomings? Do you think that amendments to the transparency obligations in the Payment Services Directive could address those shortcomings? As UK banks operate a free-if-in-credit business model, bank account fees in the UK context relate to failed payments, overdrafts (both authorised and unauthorised) and packaged accounts. In relation to failed payments and overdrafts, Citizens Advice does not consider that the information provided by banks on fees is clear to consumers. Recent research by Which? found that a combination of complicated fee structures and unclear or difficult to find 2
information made calculating and comparing overdraft fees next to impossible for consumers 1. Which? also found wide variation in the amount charged by different banks for various examples of overdrawn accounts and went as far as to call some of the fees exorbitant, observing that one bank was effectively charging over 2000% APR on a 100 overdraft. Citizens Advice Bureaux regularly see cases of small overdrafts or failed payments quickly becoming unmanageable debts, two examples of which are below. A CAB in the East of England saw a 32 year old client who had been briefly overdrawn and incurred significant charges as a result. The client s account had become 30 overdrawn, but was returned to credit within hours. The same day the client was charged a 20 daily overdraft fee in addition to a 5 usage fee. These charges put the client s account back into overdraft, meaning he was charged further fees: this time a 30 daily fee and 5 usage fee. In total, the client faced charges of 60 as a result of being overdrawn by 30 for a number of hours, with more than half of the value of those charges incurred by the bank s own actions. A CAB in the South East reported a case in which a 20 year old client with partner and young child was charged excessive fees for a small overdraft. The client, who believed she had a basic bank account without any overdraft facility, became overdrawn by 11 when a direct debit exceeded her balance. She paid back the overdrawn amount as soon as she was aware but then received a demand for 200 of fees from a debt collection agency acting on behalf of her bank. Fees charged for packaged accounts are generally straightforward. Our concerns in this area are more to do with up-selling by banks, where a customer applies to open a basic or standard current bank account but is misled or otherwise mis-sold a packaged account which they can ill afford, or which offers benefits they cannot use or do not need. A CAB in the South West reported a case where a 50 year old single client on benefits with a poor credit rating could not open a basic bank account. He eventually found one bank which was willing to offer him a packaged account with a monthly charge of 13 that he felt he had no option but to accept despite his financial predicament. As a result the client found himself paying for the services included in the packaged account that he didn t want, didn t need and couldn t afford. The Financial Services Authority is considering new rules to cover selling of insurance with packaged accounts to require banks to ensure that customers are actually eligible for cover under the policy being offered but we do not believe this is sufficient to prevent the wider issue around up-selling. It is not clear that amendments to the transparency obligations in the PSD could address these shortcomings. 1 http://www.which.co.uk/about-which/press/press-releases/product-press-releases/which-moneymagazine/2012/01/which-calls-for-actiononcomplicated-and-exorbitantbank-overdraft-charges/ 3
2. Do you think that standardising bank account fee terminology could help to provide more transparent and comparable information on fees? If terminology were to be standardised, should that standardisation cover all fees or only some of them? If only some of them, on the basis of which criteria should they be chosen? Should terminology be standardised at national or EU level? The main issues for UK consumers stem mostly from complicated fee structures and misselling rather than the terminology used to describe them. A CAB in the East Midlands reported a case where a 53 year old client living on 67.50 a week in job seekers allowance opened a second account with his bank on their advice. The account he was talked into opening was a packaged account which charges 15 a month unless 1,000 is deposited in the account each month. The client s income was nowhere near 1,000 a month and was paid into his other account in any case, so the charges quickly mounted up on his new account. Despite his requests to close the account, the bank refused on the basis that he was overdrawn. Charges amounting to over 200 were added to the account. 4. In order to further increase bank account fee transparency and comparability, which of the following tools should be considered: i) comparison websites managed by public authorities ii) standardised cost simulations to be provided by banks iii) standardised representative examples to be provided by banks iv) surveys by consumer organisations/financial ombudsman v) any other tools you consider relevant? Should any of them be made compulsory? What would be the likely costs? Our first preference would be for the forthcoming new financial regulator in the UK, the Financial Conduct Authority, to make rules to oblige banks to simplify their fee structures and levy reasonable fees that are proportionate to the costs banks incur, but we would be broadly supportive of any tools which help consumers compare fees between banks. However, this is of little value to vulnerable customers on low incomes as they will not be able to switch account provider in any case. 5. What level of detail should the information on actual fees paid have and how frequently should it be provided to the account holder? Would having comparable information on the fees actually paid encourage consumer mobility, including on a cross-border basis? We believe that comparable information on fees actually paid could encourage consumer switching and believe it is not beyond the capacity of the banks to provide a personalised comparison based on actually banking transactions. We note that UK banks have committed to provide customers with the detail of how much they have been in fees and charges every twelve months. As mentioned previously, this will not necessarily allow the people who would benefit most from switching people on low incomes who have incurred charges that have put them into debt to do so. However, given that in the UK fees tend to only be incurred when a customer is in debt to the bank, it is highly unlikely that such customers would be easily able to switch accounts in any case. 4
6. What other measures/instruments should be considered in order to improve the transparency and comparability of bank fees? Please describe and indicate at which level (national of EU) you consider they should be taken. See our answer to question 4. Switching between account providers 7. Do banks in the Member State where you have a bank account offer a switching service? If yes, is it in line with the Common Principles on bank account switching described above? Is information on the conditions of switching presented in a consumer friendly manner? Most banks in the UK do offer a switching service. They are in line with the Common Principles and in some aspects exceed them. The UK Government is planning to introduce an improved switching process from 2013 in an attempt to drive competition between banks by making switching easier. The full proposals are expected to be included in a white paper on banking reform due to be published on 14 th June and we are unable to comment in detail until then. 8. If a switching service in line with the Common Principles is offered by banks in the Member State where you have a bank account, does it remove all obstacles to bank account switching? If not, what obstacles remain? Provide examples of good practices and persisting obstacles encountered. One of the most persistent obstacles to switching can be seen in the basic banking market, where banks appear to be increasingly keen to discourage applicants it could be argued they are competing to avoid basic banking customers. In addition, as is mentioned above, customers whose account is in debit may find it difficult to switch account provider or even open a basic bank account with another institution (discussed below). Access to a basic payment account 14. Do you dispose of information on consumers encountering difficulties in access to a basic bank account? What types of obstacles are signalled by the consumers preventing them from having access to a basic bank account? In 2011/12 Citizens Advice clients reported 129,000 problems about financial services and products with 20,000 relating to bank/building society accounts and the Post Office Card Account (POCA). Around 20 per cent (4,000) of issues with bank/building society accounts and the POCA involved difficulty opening an account. This is twice the proportion of the next biggest category (redress). 5
The proportion of issues with accounts and the POCA relating to opening accounts has remained fairly constant over the last four years, although the numbers of problems brought to bureaux has varied significantly, as can be seen in the table below. Problems with bank/ building society accounts and POCA Problems opening bank/ building society accounts and POCA 2011/12 20,001 4,011 (20%) 2010/11 23,943 5,390 (23%) 2009/10 30,506 5,771 (19%) 2008/09 28,612 5,593 (20%) It is not possible to disaggregate the reasons why clients have had difficulty opening accounts but some key themes emerge from the qualitative data bureaux submit to Citizens Advice on social policy issues: for example, people who are in debt or have a poor credit history, who are in or have been in prison, or who are discharged or undischarged bankrupts will generally face difficulty in opening an account. Consumers without a passport or driving licence also often face difficulties, as banks are not required to accept the forms of ID that the Financial Services Authority suggests as alternatives to photo ID. This may mean people in these circumstances have to apply to numerous banks to find one willing to take them on as a customer or they may be unable to open an account at all. The obstacles that consumers face in opening a bank account are almost exclusively caused by the policies and practices of account providers. A CAB in the North West reported a case in which an undischarged bankrupt was struggling to gain access to banking products. His application for a basic bank account was turned down by nine banks and building societies before he was able to open a basic account with a tenth bank. However, as he could not set up direct debits with his account he has had to make alternative arrangements, including asking a family member to set up direct debits using her account. This has caused the client worry and stress, as well as placing the family member in an invidious position. A CAB in the North East reported a case where a 50 year old client with nonpriority debts who was working in three part time jobs was unable to open a basic bank account. She had been advised by the CAB debt specialist adviser to open a new bank account since she owed money to her existing bank, but when she told the new bank why she was applying for the account she was immediately rejected. A CAB in the South West reported a case in which an unbanked client had been unable to open a basic bank account because he did not have a passport or driving licence. The bank refused to accept alternative forms of ID. The client had a refund cheque from British Gas for over 1000 but was unable to cash it without a bank account, or paying significant commission to a cheque cashing company. The client was particularly stressed as his partner was expecting a baby in the coming weeks and they were keen to buy heating oil for their central heating before the baby was born. The client also needed the money to buy a car seat for the baby in order to bring his wife and child home from hospital in a taxi. 6
A CAB in Yorkshire and the Humber reported a case where a client who had been imprisoned for fraud committed following the loss of his job was struggling to pay back 10,000 of non-priority debts and could not access a bank account. He had attempted to negotiate with his creditors but met with refusal, at which point he attended the CAB. He had been unable to open a basic bank account as a result of his fraud conviction, however this was creating difficulty for him in managing his finances and continuing his rehabilitation. In the UK, not having a bank account can make receiving wages difficult or impossible, as well as creating challenges in receiving benefits and paying bills. Consumers who are unable or unwilling to pay bills by direct debit also tend to have to pay higher costs for services meaning people on the lowest incomes often pay the highest prices the poverty premium. In general, some account providers are more flexible than others and more willing to offer accounts to consumers in financial difficulty. This has lead to the development of an increasingly disproportionate concentration of basic bank accounts in a small number of banks. As banks do not typically make much money on basic bank accounts and may even lose money this risks creating an incentive for the most socially responsible banks to make their accounts unattractive and make their access policies more restrictive. Arguably, this is already happening with the decision in 2011 by RBS Group (RBS and NatWest) to remove the ability of basic bank account holders to make ATM withdrawals from cash machines operated by other banks. Other banks severely restrict access to counter services in branches. A CAB in the South West reported a case where an older client with a NatWest basic bank account found accessing her money difficult following the decision. Previously she had used a local supermarket cash machine to withdraw cash but was now faced with a difficult journey into a local town to visit the nearest branch. She was able to use the Post Office to withdraw cash but her local branch was only open for a few hours each day. This was causing her particular problems as she needed cash to pay for the meal charges at her husband s day centre. Consequently the client decided to change to a different account provider and had to deal with the hassle of changing direct debits and making sure her pension was paid into the new account. 15. Are you aware of any measures taken by banks or other institutions in the Member State where you have your residence to facilitate access to a basic payment account? Have these initiatives been successfully enforced? At least sixteen banks and building societies have made basic bank accounts available in the UK, all of which are broadly in line with the basic specifications for basic accounts contained in the Recommendation on access to basic banking issued by the EC in July 2011. There are variations between account providers in the level of access to counter services in bank branches, fees for failed payments, provision of a cash card, use of ATM networks 7
and level of access over Post Office counters. All offer the accounts without a minimum opening balance and none offer credit facilities or cheque books, although we do receive evidence of instances where bank staff appear to ask for an opening balance or try to sell a packaged account. A CAB in the East Midlands reported a case in which a 47 year old client had attempted to open a bank account was told the only option open to him was a 13 a month packaged account. Believing the advice, the client had opened the account but due to being on a low income and having only a small sum of money in the account the monthly fee had put him into overdraft, incurring charges and fees. To a large extent the policy intention of these accounts have been successful, and since their introduction in the mid-2000s the number and proportion of people without access to a bank account in the UK has reduced dramatically. However, the approach taken in the UK where banks were strongly encouraged but not required to offer basic bank accounts to all consumers has seemingly reached its full potential to bank the unbanked. The latest figures show that despite the significant number of previously unbanked people who now have access to an account, 1.75 million people do not have access to an account that allows them to make and receive payments and 0.89 million people do not have access to an account at all 2. The difference in those numbers is accounted for by the highly restrictive Post Office Card Account (POCA), which only permits payments of benefits into the account and does not have features like direct debits. The POCA faces an uncertain future, with the contract to run it expiring in 2015, and there is potential for significant upheaval if an alternative is not in place and many of the people currently using it are unable to open a basic bank account. 17. If consumers still have difficulties in opening a bank account, what are the reasons for that? As discussed in our answer to question 14, the difficulties relate to the access policies and practices of account providers which often exclude people in financial difficulty. 18. If more needs to be done what additional measures should be envisaged? Should the problem be tackled at national or EU level? We believe there is a strong case for additional measures to be taken. At present the UK Government has not implemented the EC s Recommendation regarding access to basic bank accounts and we are not aware of any intention to do so. Indeed, the UK Parliament s European Scrutiny Committee included the Recommendation in a list of EU publications it felt were of insufficient political or legal importance to justify a report to Parliament. Notwithstanding the difficulties faced by the 1.75 million people who do not have access to a basic bank account at the moment, there is the potential for considerable consumer 2 http://www.bristol.ac.uk/geography/research/pfrc/themes/finexc/vision.html 8
detriment in the basic bank account market if the banks who already have a disproportionate share of basic bank accounts decide to make their accounts more restrictive in terms of access or facilities. This would inevitably see the figure of 1.75 million increase. There is also a risk posed by the uncertain future of the Post Office Card Account, with many account holders not having access to any other kinds of accounts. If the Post Office Card Account is not continued these people will lose the ability to receive benefits. Given the UK Government s inaction in adopting the Recommendation, Citizens Advice would strongly support its policy intention being the subject of a Directive. There are some important caveats to note though. UK account providers currently operate a free-if-in-credit model which also applies to basic bank accounts. It would be regrettable if accounts which are currently free and aimed at people on the lowest incomes were to become fee-charging as a result of making them available to all, as the wording of the Recommendation would allow if it were to be introduced in the UK. We recognise that some EU Member States banking systems operate a business model under which charging for in-credit banking services is the norm, and this must be taken into account. A possible solution would be to add an additional criteria to the specification of reasonable charges: that any charges for a basic bank account must be no more than the charges for an equivalent standard current account within a given banking group. This would allow banks in countries without a free-if-in-credit model to charge the same or less than their standard accounts whilst preventing banks in the UK from introducing charges for basic bank accounts unless they were to substantially alter their business model. We would also observe that for any right of access to basic banking to succeed, there must be specific minimum requirements in terms of functionality and accessibility that all account providers must meet. In the absence of this, banks would have an incentive to deter potential basic banking customers by making their offering less attractive than other banks. This would risk a race to the bottom. As such, the minimum requirements must specify a satisfactory level of functionality, means of access and criteria for setting fees for failed payments. Citizens Advice is an operating name of The National Association of Citizens Advice Bureaux. Registered charity number 27905 www.citizensadvice.org.uk 9