OFFICE OF FAIR
TRADING News Release (84/08) issued by The Government News Network
on 16 July 2008
The market in
personal current accounts is not working well for consumers, the
OFT said today in its report 'Personal current accounts in
the UK' which looks at the £8 billion industry.
The report found that much of banks' revenue from current
accounts is derived opaquely, with 81 per cent of income coming
from two sources: insufficient funds charges (£2.6bn) and net
credit interest income (£4.1bn). A significant number of customers
do not know how much they actually pay in bank charges, either
before or after they are incurred. Over three-quarters do not know
the credit interest rate of their current account, and even those
that do lack the means to calculate the interest they forgo.
The complexity and lack of transparency of personal current
accounts makes it extremely difficult for individual customers to
compare their bank account with other offers. There is thus little
incentive for consumers to switch - especially as people generally
believe that it is complex and risky to switch accounts. Also,
when the switching process does go wrong consumers can find
themselves bearing a significant proportion of the resulting
costs. The result is that only six per cent of customers we
surveyed had switched in the last 12 months - one of the lowest
switching rates in Europe.
A further result is that a minority of customers end up paying
much more for their current account than others - for example, in
2006 we calculate that 1.4m people pay over £500 per year in
charges. This can often mean potentially 'vulnerable',
low income and low saving customers paying more as a result of
incurring insufficient funds charges. The effect is not made any
easier by a lack of simple mechanisms for consumers to control or
opt out of an unarranged overdraft.
Overall, the report finds that the personal current account
market may be stuck in an equilibrium that does not work well for
consumers. Limited understanding of key account elements,
combined with low confidence in switching, means that banks have
less incentive to provide better offers on charges and interest.
But without better offers from banks, consumers have little
incentive to switch.
John Fingleton, OFT Chief Executive, said:
'Personal current accounts are a vital gateway to effective
participation in the economy. But this market is not serving
consumers well.
'Customers lack the information they need to choose the best
deal, and this in turn weakens the banks' incentives to
compete. There is much the banks could do to improve how the
market works, and we hope this report will encourage them to take
steps to do so in the near future.'
In the view of the OFT the status quo is not satisfactory. The
OFT will spend the coming months engaging with banks and consumer
groups to try to achieve greater clarity, transparency and
consumer empowerment in this market, either through voluntary
change or, if necessary, through other routes, potentially
including greater regulatory intervention or a reference of the
market to the Competition Commission.
Other findings from the study include1:
* The aggregate revenue of banks from personal current accounts
(PCAs) was approx £8.3bn - £152 per active account;
* Personal
current accounts generate more revenue for banks than savings and
credit cards combined;
* Insufficient fund charges have
increased by an average of 17 per cent in real terms between 2003
and 2007;
* When banks were asked to calculate how much a
hypothetical customer would have to pay in a given scenario (which
included exceeding an agreed overdraft limit), the reported
charges varied from £0 to £260;
* The average daily unarranged
overdraft balance in 2006 was £680m. Paid item and maintenance
fees totalled some £1.5bn - which would equate to a return of over
220 per cent on the average balance;
* There is significant
potential for slight errors in financial management to result in
hundreds of pounds of charges;
* Over 12.6 million accounts
(23 per cent of active accounts) incurred at least one
insufficient funds charge in 2006;
* Those consumers who
incurred a charge were more likely to incur at least six charges
than just one;
* Four million accounts incurred charges of
over £200 in 2006, of which 1.4 million accounts incurred charges
of over £500;
* In a survey conducted for the study over a
fifth of consumers were unaware of the existence of charges until
they had incurred one.
NOTES
1. The Full Report and Executive summary of the PCA Market Study,
the Consultation Document and further background are available at
http://www.oft.gov.uk/pca
2. The PCA Market Study was launched by the OFT in Spring 2007.
It has been carried out alongside the formal Unfair Terms in
Consumer Contracts Regulations 1999 (UTCCRs) investigation into
terms providing for unarranged overdraft charges (UOD) so that it
can inform the investigation.
3. The UTCCRs investigation began in 2007. The first phase of the
test case was launched in the High Court in July 2007. In April
2008 Mr Justice Andrew Smith ruled that the UOD terms in
banks' personal current account contracts can be assessed for
fairness under the UTCCRs. In May 2008, the Judge gave the test
case banks permission to appeal his finding. In July 2008 a
hearing took place into whether UOD terms in the banks'
historical and basic bank account (and certain other
non-mainstream current accounts) can also be assessed for fairness
under the UTCCRs, and whether they are capable of being penalties
at common law. This judgment is yet to be handed down. The OFT is
continuing to progress the investigation as quickly as possible
and will shortly be writing to the banks with its initial views on
fairness issues.
4. OFT Market Studies are carried out under section 5 of the
Enterprise Act 2002 (EA02) which allows a market-wide
consideration of both competition and consumer issues.
5. While the FSA is the lead regulator for UK banking the EA02
enables the OFT to assess wider competition issues in a way not
open to the FSA.
6. The OFT will now consult about the issues raised by the Market
Study with the banks and other interested stakeholders for a
minimum of three months.
http://www.oft.gov.uk
PUBLIC enquiries: 0845 7224499 enquiries@oft.gov.uk
OFT
reports and consumer information leaflets are available free from:
1 Revenue data is for 2006