House of Commons - Treasury - Written Evidence

Competition and choice in retail banking - Treasury Contents

Supplementary written evidence submitted by Which?

COMPETITION IN BANKING

Unauthorised overdraft charges

1. Which? does not believe that the current voluntary, market driven initiatives to address concerns about unauthorised overdraft charges are delivering sufficient improvements for consumers. Nor do we think that sufficient improvements will be delivered without the Government taking legislative action.

2. As was highlighted by the Court of Appeal in the bank charges case, banks do not compete on the basis of their unauthorised overdraft charges. They compete on other features, such as the rate of interest when the account is in credit or the additional services (such as insurance products) available to consumers taking a current account at an all-inclusive or otherwise special rate. Even though there is now greater consumer awareness of both the existence and high cost of unauthorised overdraft charges, they are not at the forefront of consumers' minds when opening a new current account (not least because the vast majority of consumers expect to run their account in credit). Accordingly, the incentives for market driven improvements are muted at best.

3. It is accepted that unauthorised overdraft charges are a significant income stream for banks, particularly in times of low interest rates (as is currently the case). Unless the banks can recoup this income from alternative sources, banks will have little incentive to reduce this income stream unless their hand is forced. Given the success of the "free-while-in-credit banking model" it will difficult for banks to start overtly charging their customers for current accounts, particularly to any significant degree.

4. These facts are borne out by the developments in the market since the Supreme Court handed down its decision last year. While banks are becoming more transparent about their unauthorised overdraft charges, the fees are still extremely high and, for some consumers, are now higher than prior to the Supreme Court decision as shown by our market analysis below.

5. For these reasons, we believe Government action is necessary. Legislative action should not be delayed further as with each day that passes more consumers are subjected to excessive overdraft charges.

What changes are required?

6. The Supreme Court decision significantly clipped the wings of the OFT and other regulators. Prior to this decision, the regulators understood that the main contractual price was protected from any fairness assessment, but the general understanding was that other "prices" were not so protected. This was in keeping with the purpose of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs) and the underlying EU directive, which was to protect consumers from unfair terms hidden in contractual small print, including charges or costs that may never arise and would not reasonably have been considered by the consumer prior to purchase.

7. The Supreme Court decision has created a loophole in the UTCCRs that was not intended by legislators; is not in the interests of the people the regulations were designed to protect (i.e. consumers) and has unforeseen consequences going far beyond unauthorised bank charges. The Government should therefore act to close this loophole as soon as possible. It is important to note that such a measure would not impose an additional regulatory burden on banks as, prior to the Supreme Court decision, everyone was operating on the basis that such a loophole did not exist (as evidenced by the fact banks were settling early claims and only sought to challenge the law once the significance of their oversight became apparent).

8. In closing the loophole, the Government has two main options: either introduce changes in relation to current accounts or financial services contracts only; or introduce changes for all consumer contracts. The latter option is one we prefer as the issues and principles apply equally to all consumer contracts, and it would seem somewhat strange that consumers are afforded more protection with the purchase of certain services compared to others. That said, we recognise the issue has arisen most significantly in relation to bank charges and that it may be desirable to address that first. If a narrower solution is favoured by Government then it should be introduced on the understanding this is the first step of a multi-stage process.

Proposal for change with respect to just financial services contracts

9. We believe the following simple amendment to the Unfair Terms in Consumer Contract Regulations 1999 would close the loophole with respect to financial services (as was suggested in the Private Members Bill proposed by Lorely Burt MP:[147]

(1) After regulation 6(1), insert—

(2) "(1A) Paragraph 2 shall not apply to a contract for the supply of personal financial services, including all such contracts currently in force."

(3) After regulation 6(2), insert—

(a) "(3) In so far as it is in plain intelligible language, the assessment of fairness of a term in a contract for the supply of personal financial services shall not relate—

(b) to the definition of the main subject matter of the contract, or

(c) to the adequacy of the main price or remuneration, as against the goods or services supplied in exchange.

(4) When assessing whether a charge is or is not a main price or remuneration within the meaning of paragraph 3(b), account shall be taken of all the relevant circumstances at the time the contract was concluded, including whether the imposition of the charge is contingent on other uncertain events and whether the charge is likely to have been considered by the consumer prior to concluding the contract.

(5) Where a term of a contract for the supply of personal financial services provides for the charging of a consumer and the circumstances in which that charge can be imposed are not certain to arise during the term of the contract, then such price or remuneration shall not fall within the main price or remuneration for the purposes of this regulation.

(6) In any proceedings in which reliance is placed on this regulation, a charge shall be assumed not to be the main price or remuneration, as against the goods or services supplied in exchange, unless the contrary is proved."

Proposal for change with respect to all consumer contracts

10. Given the breadth of consumer contracts to which the UTCCRs apply, we believe a slightly different approach is appropriate for a wider solution. As a matter of principle, we do not believe the regulations should seek to dictate the pricing structures used by businesses. Rather, they should incentivise firms to trade fairly and in so doing encourage competition between firms on the merits of the product or service. However, simply incentivising firms to increase pricing transparency is not, in itself, sufficient. In some circumstances, this leads to information overload and causes consumers to "switch off" during the purchase. In others, the consumer will be aware of the charge but disregard it when assessing the bargain as they view that particular charge as unlikely to ever apply to them.

11. Accordingly, Which? considers a price should only be exempt from a fairness assessment if:

the circumstances in which that price may be levied will definitely arise during the course of the contract; or
it is the only price that could be payable by the consumer under the contract.

providing that price is one

on which the business typically competes i.e. the headline/advertised/shop window price (as judged on the basis of the business' marketing strategy and commercial practices); or
that is otherwise prominently provided in good time to consumers prior to conclusion of the contract.

12. We believe this objective test would be straightforward for firms to apply. The greater clarity will also increase consumer confidence in markets and enforcers' ability to take effective action where necessary. Such an approach is similar to that introduced by the Australian Government.[148]

13. We consider it is appropriate for the scope of any exemption to be relatively narrow. A key policy objective from any amendment to the UTCCRs should be to ensure the regulators have, wherever the need arises, the ability to challenge unfair contract terms. It should also be remembered that where a price term falls outside the exemption, this only means that terms can be assessed for fairness—it does not mean that term is automatically unfair—and with our proposal, firms have the freedom to adopt price structures that suits their business needs, choosing whether to compete on a certain price term, or to subject that term to a potential assessment under the UTCCRs.

UNAUTHORISED OVERDRAFT CHARGES—EVIDENCE BASED ON MARKET ANALYSIS

Summary

14. Despite the changes introduced by a number of banks, unauthorised overdraft charges levied by a number of banks continue to be high, unfair and Which? believes disproportionate to the costs incurred by the banks. Total revenue from unauthorised overdraft charges was £2.52 billion in 2009, compared to £2.6 billion in 2006.[149]

15. Many banks have reduced charges for unpaid items and in some cases changed charging structures and levels resulting in lower charges for consumers who might exceed their overdraft limit by a small amount for a short period of time. However, in some cases these have been balanced by a move to daily charges which can result in higher charges for consumers who are unable to pay money into the account to move out of unauthorised overdraft.

16. Lloyds TSB presents its changes to overdraft charges from February 2011 as a significant cut. However, the maximum monthly fee which could be incurred is (at £85) only £5 less than the maximum monthly fee which could be incurred in 2006. The bank is able to superficially present it as a cut because of the significant increase it made to its unauthorised overdraft charges in September 2007.

17. Daily charges also reduce consumers' ability to control their unauthorised overdraft charges as under previous models they were able to prevent charges from escalating by ceasing to make transactions on the account. These charging structures could be more likely to lead to a "snowball" effect with significant charges stretching low-income consumers' budgets, and leading to further charges being imposed.

18. Some major banks covered below such as HSBC and Santander continue to levy high charges for rejected transactions. For example, a consumer who has a transaction with a value of £30 rejected will be charged £25 by Santander and £25 by HSBC. Other banks not covered in detail in this research also levy high charges for rejected transactions—Clydesdale and Yorkshire Banks charge £35, Bank of Ireland charges £21, First Trust Bank charges £35.

19. None of the banks have put forward any information or facts to justify their charges or any information regarding the costs they incur when a customer uses their unauthorised overdraft or has a transaction rejected.

20. At the same time as banks have been making changes to their unauthorised overdraft charging structure the interest rate on authorised overdrafts is at the highest level since records began in 1995. Two banks have also introduced fixed fees alongside or instead of interest charges resulting in significantly increased costs for consumers.

TOTAL REVENUE FROM UNAUTHORISED OVERDRAFT CHARGES

21. Despite the multitude of different changes, unauthorised overdraft charges continue to represent an important source of revenue for the banks. The OFT has found that overall revenue from these charges had only declined very slightly in the three years since the market study had been conducted.[150] The total revenue from current accounts has increased from £8.3 billion in 2006 to £9 billion in 2009.

Year	Revenue from Unauthorised Overdraft Charges
2006	£2.6 billion
2007	£2.48 billion
2008	£2.76 billion
2009	£2.52 billion

TRENDS IN PRICING OF AUTHORISED OVERDRAFTS

22. Despite the falls in the Bank of England base rates, the interest rate charged on authorised overdraft is—at 19.09%—the highest since records began in 1995.[151] The spread between the overdraft interest rate and the Bank of England base rate is also significantly higher than in the period before the financial crisis. Two banks have introduced fixed charges alongside or instead of interest payments. For example, in December 2009, the Halifax brand of Lloyds Banking Group introduced an authorised overdraft policy of a minimum £1 per day fee for all of its current accounts. Ostensibly this is a simpler, more transparent overdraft policy. However, a consumer would need to have an overdraft of nearly £2,000 in order to pay less than the average authorised overdraft rate. The OFT's 2008 market study estimated that, of those accounts in overdraft, no more than 10 per cent of accounts were over £1,000 and no more than 5% over £2000 in debit. This leaves 90-95% of consumers, that regularly use an overdraft, likely to be significantly worse off if paying £1 per day. For example the implied effective annual overdraft rate of £1 per day on a £250 overdraft is 146% APR. Lloyds TSB is introducing a £5 a month charge—known as a "Monthly overdraft usage fee" on top of charging interest on authorised overdrafts.[152] From March 2011, Santander will move to charging £0.50 per day, with the maximum number of days per month on which this charge will be levied varying according to the type of account.

CHANGES TO UNAUTHORISED OVERDRAFT STRUCTURES

23. The following tables present the structures currently and previously used by a number of major banks. Charges for unauthorised overdrafts have been divided into three types:

Unauthorised overdraft charges: Monthly or daily maintenance charges made by the bank once the consumer is in unauthorised overdraft. In some cases these are combined with additional charges for each item paid or transaction processed when the consumer is in their unauthorised overdraft.
Unauthorised overdraft interest rate: The interest levied on the amount exceeding their overdraft limit.
Unpaid item / rejected transaction charge: A charge paid by the consumer when the bank does not process their transaction.

ANALYSIS OF OVERDRAFT CHARGING STRUCTURES OF INDIVIDUAL BANKS

Lloyds TSB

24. In 2007, Lloyds moved from charging a higher rate of interest on unauthorised overdrafts to charging the same rate of interest alongside a daily fee. They have announced that they will be reducing this daily fee from early 2010 and received some credit in the media for "cutting" their overdraft charges. However, the result has been that the maximum charge each month for unauthorised overdrafts is now £85, compared with £90 prior to 2007.[153] Daily fees are now charged even if no additional transactions are made on the account. This gives consumers less scope to stop the additional charges escalating than under the arrangements which existed prior to 2007. Charges will also continue to escalate in subsequent months even if consumers do not make any additional transactions on the account. Whilst the interest rate has been reduced slightly, this only makes a very small difference to the total monthly amount paid by the consumer. For example, a consumer with an unauthorised overdraft of £250 for the whole month would save less than £2 a month from the reduced interest rate.

Year Excess overdraft fee / Unauthorised overdraft fee Unauthorised overdraft interest rate Returned transaction charge

2006 £30 when the customer exceeded their overdraft limit. An additional £30 would be charged each day they made a payment which increased the customer's overdraft. There was a maximum fee of £90 a month 29.8% APR £35 for each payment rejected (max three per day)

2007 Monthly fee of £15
Up to 10 daily fees depending on the amount outstanding:
Less than £25 to £6
£25 to £100 to £15
Over £100 to £20
The maximum monthly fee was £215
Aligned with authorised overdraft interest rate (10.4% to 19.3% APR) £20 for each payment rejected (max three per day)

2010 Buffer zone of £10 introduced, below which no charges are payable.
Monthly usage fee of £5
Up to 8 daily fees depending on the amount outstanding:
Less than £10 to £0
£10 to £25 to £5
Over £25 to £10
The maximum monthly fee is £85
Aligned with the rate paid on authorised overdrafts (10.4% to 19.3% APR) £10 for each payment of more than £10 rejected (max three per day)

Halifax

25. Halifax made a significant change to their unauthorised overdraft charging structure in December 2009.[154] This moved from charging a monthly fee together with charges for each paid or unpaid transaction to charging a daily fee. The daily fee can be equivalent to a very high APR. For example if a customer has an unauthorised overdraft of £300 then a £5 daily fee is equivalent to 608% APR. The application of a daily fee also means that customers can do little to stop the charges escalating if they are unable to pay money into the account. Student accounts continue to be offered under the old charging structure of monthly fees and additional charges for paid and unpaid items. It is not clear why Halifax decided to exclude the Student account from these changes.

26. At the same time as introducing the daily charge for unauthorised overdrafts, Halifax also introduced a daily charge of £1 for authorised overdrafts. This was a substantial increase in the cost of authorised overdrafts compared to the previous arrangement of charging interest at around 19%. For example a £1 a day charge on an authorised overdraft of £250 is equivalent to 146% APR.

Year Unauthorised overdraft charge Unauthorised overdraft interest rate Unpaid item fee

Prior to December 2009 £28 per month (Maximum of £28 per month)
£35 for each paid item (up to a maximum of three per day)
28.8% £35 for each payment rejected (max three per day)

December 2009 £5 per day (Maximum of £155 per month) [No additional interest charged] Not charged

Student account[155] £28 per month (Maximum of £28 per month)
£20 for each paid item (max one per day)
24.2% £10 for each payment rejected (max one per day)

RBS

27. RBS initially cut their overdraft charges in September 2009. In particular there were significant cuts to unpaid item fees. From February 2011 they will be introducing a daily charge for unauthorised overdrafts. This will result in an increase in charges for those consumers who are in their unauthorised overdraft for a significant proportion of the month. It will also reduce the ability of consumers to stop charges increasing by ceasing to make transactions using the account. RBS have also taken the opportunity to increase their unpaid item fee.

Year Unauthorised overdraft charge Unauthorised overdraft interest rate Unpaid item fee

Prior to September 2009 Monthly maintenance charge of £28
Paid item fee of £30 (Max £90 per month)
Guaranteed card payment fee of £35
29.8% £38 (max three per day)

From September 2009 Monthly maintenance charge of £20
Paid item fees of £15 (up to a maximum of £90 a month)
14.89%-19.89% £5 for each payment rejected (up to a maximum of 10 per month)

From February 2011 Daily charge of £6 for each day an unauthorised overdraft of over £6 exists (Maximum of £186 per month) [No additional interest charged] £6 for each payment rejected (up to a maximum of 10 per month)

Santander

28. Santander introduced a graduated fee structure for paid and unpaid items in September 2007. They also increased the monthly charge from £20 to £25. In March 2011, Santander will be making further changes to their overdraft pricing structure. The maximum unpaid and paid item fee will be one of the highest at £25 and there are no restrictions on the number of unpaid/paid item charges which can be incurred each day or month. They charge one of the highest unpaid item fees for basic bank accounts. Santander have abolished their previous graduated approach to paid and unpaid item charges meaning an increase in charges for consumers who only exceed their overdraft limit by a small amount. They have also introduced different unpaid item charges for different accounts meaning that, for example, customers with a basic bank account are charged a higher amount for unpaid transactions than a customer with a packaged account.

29. They have also moved to a £5 daily fee for unauthorised overdrafts although they are capped at a maximum of 20 days a month for most types of current account and at 10 days a month for the packaged accounts where the consumer also pays a monthly fee.

30. The changes in March 2011 are alongside changes to the cost of authorised overdrafts. Santander has moved to charging £0.50 per day with a maximum number of daily charges in each month of between 10 and 20 depending on the type of account held. For premium/packaged accounts it is typically a maximum of 10 days per month and 20 days for other normal types of current account.

Unauthorised overdraft charges Unauthorised overdraft interest rate Unpaid item fees

Prior to September 2007 Monthly fee of £20
Paid item fee: £30
Unknown £35 for each payment rejected

September 2007 Monthly fee of £25
Paid item fees vary by the amount of the transaction
£0 to £9.99: £5
£10 to £19.99: £15
£20 to £29.99: £25
£30 or more: £35
28.7% [The higher unauthorised overdraft interest rate is applied to the whole balance of the overdraft including both authorised and unauthorised amounts.] Unpaid item fees vary by the amount of the transaction
£0 to £9.99: £5
£10 to £19.99: £15
£20 to £29.99: £25
£30 or more: £35

From March 2011

Preferred In Credit Rate Account, Premier Direct, Premier & Current Accounts, Preferred Overdraft rate account £5 each day (capped at 20 days in each monthly statement period)
£25 for each Paid item
[Daily fees charged instead of interest] £25 for each unpaid transaction

Reward, Travel, Family, Premier 50 and Premier 21 current accounts, Premium current account £5 each day (capped at 10 days each monthly statement period)
£5 for each paid item
[Daily fees charged instead of interest] £10 for each unpaid transaction

Basic bank account Unauthorised overdrafts not available Unauthorised overdrafts not available £25 for each unpaid transaction

Barclays

31. In 2008, Barclays introduced a system known as "Personal Reserve" which charges £22 for each period of five consecutive working days or less during which customers utilise their "Personal Reserve". Consumers are able to opt-out of having a personal reserve and in this case, Barclays will reject transactions which would take a consumer over their overdraft limit.

Unauthorised overdraft charges Unauthorised overdraft interest rate Unpaid item fee

Prior to August 2008 £30 per paid transaction (up to 3 per month) 27.5% £35 per returned transaction (one charge per day)

From August 2008 £22 for each period of up to five consecutive working days [No additional interest charged] £8 per unpaid item (Max five per day)

HSBC

32. We believe HSBC[156] has not made any changes to its unpaid item charges in the last three years. It still has relatively high unpaid item fees for rejected transactions which exceed £25.

Year Unauthorised overdraft charges Unauthorised overdraft interest rate Unpaid item fees

Current Arrangement fee of £25 charged for each overdraft request made (This includes requests the customer makes to process a payment which would result in them exceeding their current overdraft limit). Maximum of £150 per month
[Arrangement fees not charged for the first unauthorised overdraft request made every six months, where the unauthorised overdraft is less than £10 and the fee will not exceed the amount of the overdraft eg a total unauthorised overdraft of £15 will incur a charge of £15]
17.9%-19.9% For each returned transaction -Payment of:
Less than £10: no charge
£10 to £25: £10
Over £25: £25

Nationwide

33. Nationwide made changes to their charging structure in November 2010.[157] They also introduced a facility for consumers to change the "reserve limit" or the amount above a consumer's overdraft limit in which Nationwide will authorise transactions. Whilst this might give consumers more control it does not help them avoid charges since Nationwide charges the same amount—£15—for a paid item (a transaction it honours) as for an unpaid item (a transaction it rejects). Previously it did not impose a paid item fee other than for guaranteed cheques. This means that consumers who have transactions paid under the new structure will incur higher charges than under the old structure.

Unauthorised overdraft charges Unauthorised overdraft interest rate Unpaid item charge

2009 £20 maintenance charge per month
£21.50 for guaranteed cheques paid
18.9% £30 for each rejected transaction

2010 £20 maintenance charge per month
£15 paid item fee
[Maximum overdraft fees which can be incurred in one month is limited to £85]
18.9% £15 for each rejected transaction