CMA must throw spotlight on the cost of ‘free’ bank accounts

The Financial Services Consumer Panel is an independent statutory body, set up to represent the interests of British consumers in the development of policy for the regulation of financial services.

Tuesday, 27 October 2015

Last Thursday, the Competition & Markets Authority (CMA) published the interim findings from its inquiry into the market forCMA_Logo_01 personal and business current accounts.

The proposed solutions are unlikely to lead to a market that works better for consumers, and it is not surprising that the report has been criticised from many quarters for not going far enough. The CMA places great emphasis on switching. As the theory goes, if people switch away from high prices and poor service this will exert competitive pressure on the industry as a whole.

However, people are reluctant to switch. They want a relationship with their bank, believing this will, for example, help them get a loan or mortgage when they need one. This is particularly true of small businesses. Switching is seen as a hassle, the risk of things going wrong too great. Providing more information and a few prompts will not overcome consumers’ perception that the potential benefits of switching to another bank are simply not worth it.

Perhaps more to the point, how are consumers supposed to switch away from high prices when they do not know what they are paying? The CMA has provisionally concluded that ‘free if in credit’ (FIIC) banking does not inhibit switching. This may well true, but the implication is that people who switch do so for reasons other than price. If the CMA believes FIIC is not relevant, then it needs to explain how consumers’ decisions based on non-price factors will drive better, cheaper, products and services.

This issue is not new. Back in 2011, the Treasury Select Committee concluded that the cost opacity inherent in the FIIC model did not provide consumers with “sufficient information about charges to make an informed choice”. Similarly, the PRA’s Andrew Bailey said in 2012 that we need a “much better sense of what we are paying for [banking] and how we are paying”.

We agree. Cross-subsidisation, coupled with murky pricing structures and contingent charges, obscures the true cost of having a bank account, and, by definition, there are winners and losers.

The CMA’s provisional findings have not shed any light on the distribution of costs and benefits arising from FIIC, probably because banks can’t (or won’t) estimate the profitability of their individual product lines. The Panel commissioned its own research last year, and concluded that the losers were most likely those with high balances not earning interest; people who used overdrafts; and those who did not shop around.

We think it is impossible to gauge whether the current account market is competitive without knowing the cost and profitability of bank accounts and related products. The possibility to cross-subsidise current accounts from other product lines, such as mortgages, may also have an impact on competition in the current account market by acting as a barrier to new entrants.

The Panel will be putting these arguments to the CMA, and we hope that the final findings will put the spotlight on the true cost of ‘free’ banking and the impact on competition.

FCA should rate firms’ behaviour

The UK’s financial system offers a wide choice of products and services to consumers, and appears to be competitive. Yet people cannot make effefinance_textctive choices: they cannot easily differentiate between hundreds of products all doing similar things, nor firms all selling similar products. They are prey to being treated poorly by their providers because they do not know enough to challenge what the provider is telling them.

The list of instances of bad firm conduct is long, and well known. Suffice it to say that fines the Financial Conduct Authority (FCA) levied on firms rocketed from £66 million in 2011 to £1.4 billion in 2014. Despite the negative publicity surrounding these large fines, it seems to have had little impact on what consumers do.

The Consumer Panel wanted to understand why people don’t switch away from firms that visibly behave so badly, and what the regulator could do about it. How could the FCA harness the power of the consumer to help it?

The FCA has said that “most firms need to do more to communicate with consumers in a way that truly empowers them to make effective decisions”, and that it will drive improvements in the information consumers get about financial products and services. We think it needs to go further, and give consumers information about how well firms are likely to treat them post-sale.

People buy financial products on price, product features and a big leap of faith, hoping that once they’ve entered a contract, firms will treat them well (and sometimes end up sorely disappointed).

We know from our research that consumers would like information about firms’ behaviour and service quality, to help them take some of that ‘leap of faith’ out of their decisions. There may not be an obvious link between forex rigging, say, and how long people have to wait to speak to someone in customer services. But both of these say something about the culture of a firm, and how much it cares about its customers.

We would like to see a score for firm behaviour that gives people an insight into firm culture. We have in mind something like the star system the Food Standards Agency introduced for restaurants and cafes. This tells people at a glance the hygiene rating for the eatery they are thinking about using, before they walk in the door.

A rating for firms could be based on, for example, penalties and redress paid out by firms, quality of service indicators, and customer feedback. The FCA already requires firms to publish information about complaints; it could go further and compel firms to disclose some of the   ‘hidden’ information that people say they want. It is not perfect, of course: by its very nature a rating can only ever represent a snapshot. But it would be a lot better than nothing.

Information about the post-sale experience should help drive competition, help firms differentiate themselves and increase trust in the market.  It would be good for everyone. We have called on the FCA to lead the development of this simple rating of financial services providers.

Would consumers use it? We think so, in time, but that may not matter in the short term. The very existence of an authoritative measure like hygiene ratings has been enough for eateries to want to improve their standing vis-a-vis their competitors, and led to improvements in food hygiene[1]. Just implementing the system itself improved conduct irrespective of whether consumers used it or not.

[1] According to a two-year study, published in April 2015 by the Policy Studies Institute at the University of Westminster

Meeting EU movers and shakers in Brussels

EU flags outside the European Parliament buildingConsumer Panel members recently went to Brussels to meet with some EU decision-makers, including MEPs, the European Commission’s new financial services directorate; and partner organisations such as BEUC, Better Finance and Finance Watch.

With so much financial services regulation coming from Brussels, we need to get our views on consumer protection heard by those involved in the making of Europe’s laws and regulations. We talked about the need to get better consumer representation in EU decision-making, as well as more technical issues related to investor protection under MiFID II and the Capital Markets Union initiative.

The European Commission has recently unveiled its proposals for “Better Regulation” at EU-level. This is welcome, but it is important that ‘better’ does not become synonymous with ‘light-touch’. The industry is now praying in aid of competitiveness to demand that financial regulators go easy on it.

Stopping product mis-selling, cleaning up LIBOR or forex rigging, or getting bankers to take responsibility for their actions do not amount to ‘banker bashing’ as some would have it. Banks should always remember who bailed them out in the crisis. A well-regulated industry should help competitiveness, not hinder it.

The current EU drive to cut red tape and boost competitiveness risks diluting consumer protection. The Capital Markets Union Green Paper did not contain any specific proposals for substantive safeguards for retail investors who are being targeted as new sources of capital for investment, including in risky and illiquid vehicles such as ELTIFs.

ELTIFs, a new type of fund, will not normally offer investors the possibility of early redemption of their units or shares. Given these limited redemption opportunities, it is important that investors understand the illiquid nature of the investment.

The Panel will be working to ensure that the next stages of the CMU plans cover this angle effectively. In particular, we believe an EU-wide investor compensation scheme – previously abandoned as “too difficult” – is the minimum necessary to boost consumer confidence. We have also urged the Commission to undertake thorough consumer testing of its proposals, and we will reiterate the point for better EU consumer research more broadly when the retail financial services Green Paper is published later in the year.

Sensible regulation requires input from all affected stakeholders, and consumer representation in Brussels remains woefully inadequate. Our own research has shown that financial services industry lobbyists outnumber consumer representatives in Brussels by 700 to one.

The Commission has recently said that consumer groups do not always accept invitations to join the many expert groups which advise the EU on new policy initiatives. It is important to realise that this reluctance is not based on an unwillingness to engage: consumer groups simply do not have the financial and technical resources to muster the kind of lobbying that the industry can fund so easily.

This problem is compounded by the EU’s use of arcane and opaque decision-making processes, which are inaccessible to most consumer and civil society groups. Laws are finalised in closed sessions called ‘trilogues’. This means deals are made behind closed doors without stakeholder consultation or impact assessments. This practice needs to stop in order for the EU to operate transparently, restoring accountability for the laws that it creates.

The Panel, as one of the few consumer groups across Europe specialising in financial services, will continue to engage with EU policy-makers to work towards a fairer representation of the consumer viewpoint.

You can read more about the Panel’s priorities at EU-level on our website.

Consumer Panel priorities for the new Government

As David Cameron’s new government gets its feet under the table, the Panel has been reflecting on what the new administration could do for consumers of financial services.

Financial consumer protection is the job of the Financial Conduct Authority, of course, and it has wide powers to act. It has used these to crack down on unscrupulous debt management companies, make the provision of financial advice more transparent and broker a redress scheme for small businesses who were mis-sold interest rate hedging products.

However, there are some things only the Government can, or is best placed to, do. The first of these is to resist industry pressure for ‘lighter touch’ regulation. We have been there before, and it ended badly. Consumers have not forgotten, even if the industry appears to have done so. The FCA is doing the job Parliament set it up to do. If the industry does not like it, it needs to change its behaviour rather than appealing to Government to make financial services more globally competitive by reducing regulation. Consumer protection and competitiveness are not incompatible.

So, what are the big problems for financial services consumers?

1.      Firms continue to behave badly. Compensation for mis-sold payment protection insurance now stands at £19 billion, while the interest rate hedging products scandal has so far seen firms pay out £2 billion in redress to small businesses. There were 329,509 new complaints to the Financial Ombudsman Service in 2014-2015, while 55% of all resolved complaints were settled in favour of the consumer. The banks say this is all ‘historical’, but complaints about packaged bank accounts – still being sold – have risen by 1300% in two years.

2.      People, and those who advise them, do not know what they are paying for investment. A large chunk of investment savings disappears in, often opaque, costs and charges, eating into retirement income.

3.      Risk is being demutualised both in lending and insurance, leading to people being excluded from financial products and services when they have previously had access.

4.      Pensions freedoms are both an opportunity and risk. Greater freedom and choice should also mean more competition. Annuity providers know consumers now have a choice, and should sharpen up their act accordingly. However, we believe there is a real risk that industry will develop inappropriate products to replace the lost profits from selling annuities, or that people will cash in their pension pots when they have not properly understood the implications.

We believe that some of these issues can best be fixed by legislation:

1.      Introduce a general duty of care on financial services firms carrying out regulated activities through the Financial Services & Markets Act 2000. This would oblige providers of financial services to avoid conflicts of interest and act only with the interests of the customer in mind. It would also allow consumers to claim compensation from firms directly if the latter have acted negligently, but most importantly it would act as a driver to change firm culture to behave more responsibly and put the customer first.

2.      Establish a more nuanced legal definition of “high net worth” consumers, so that people who suddenly acquire a large sum of money (particularly a pension pot) are not treated as being more financially sophisticated than they are. This would, in particular, require an amendment to the Financial Promotion Order 2005.

3.      Extend financial consumer protection rights to a larger proportion of small businesses. Many small businesses behave like individuals in buying financial products and services, yet they are often treated as ‘sophisticated’ consumers in law. Relevant legislation, including the Unfair Contract Terms and Unfair Trading Regulations, should be amended to provide the UK’s smallest businesses with more protection when purchasing financial services and products. The Government should also investigate options to widen access to binding alternative dispute resolution for such businesses.

4.      Allow the FCA to publish more information about misbehaving firms. Section 348 of the Financial Services and Markets Act 2000 (FSMA) prevents the FCA from publishing information received from firms and individuals so, for example, firms which perform badly in mystery shopping cannot be ‘named and shamed’. An amendment to FSMA would allow the FCA to put more information in the public domain to help consumers make informed choices about the firms they choose to deal with.

5.      Enable English and Welsh consumers to claim damages for unfairly refused or delayed insurance pay-outs, in line with Scottish law. The previous Government caved into industry pressure and did not include the Law Commission’s clauses on late payment in the 2014 Insurance Bill.

Other problems cannot be fixed by the law, but the Government still has a role to play:

1.      Financial exclusion remains a problem. As the Financial Inclusion Commission has shown, the pace of technological innovation means it is also taking on different forms. The Panel believes a member of the Treasury’s ministerial team should have explicit responsibility for financial inclusion, and provide leadership across the Government to ensure financial inclusion is incorporated as a matter of priority into policies in all relevant Departments.

2.      The Government was right to establish the ‘Pension Wise’ guidance service to help people make informed choices about their options following the recent pension liberalisation. However, it is crucial that the service is reviewed early on to ensure a consistent and high-quality delivery. We are concerned that the guidance could look very different depending on who the delivery partner is, and – for face to face – where they are based.

3.      EU legislation has a significant impact on the UK’s legislative and regulatory framework in a range of financial services, including retail banking, asset management and pensions, making timely and constructive engagement by the Government in Brussels crucial. We will set out our specific recommendations to the Treasury for its work with the European institutions in the coming weeks.

Pension reforms: Panel urges caution

On 6th April a revolution begins – a pensions revolution. Retirees aged 55 or over and in Defined Contribution schemes will from that date be given unprecedented freedom in how they access their pension pots.

While these reforms should largely be good for consumers, there are some considerable caveats. The semi-compulsion to buy an annuity was there for a reason. In return for generous tax breaks on pension savings and to avoid a hefty tax charge consumers were (more or less) forced to hedge longevity risk by purchasing an annuity. This was intended to ensure their money would not run out and the taxpayer be left to pick up the bill.

This longevity risk is now being shifted firmly to the consumer, who is ill-equipped to bear it. People consistently underestimate how long they will live; many will be destined for poverty in old age, or a bailout by future taxpayers.

As Consumer Panel research published in December 2013 showed, there was, and still is, a lot wrong with the annuities market. But the alternative may be worse. The pension landscape was always complicated, but new choices and products will add to this complexity. Some will be outright scams; others will eat away at pension savings through high and opaque charges.

The FCA will need to be vigilant, scanning the market for dubious products, and taking action quickly when necessary to prevent serious detriment.

The Government’s flagship guidance service, ‘Pension Wise’, has a big task ahead of it. It must deliver good, holistic, outcomes for consumers and be flexible enough to deal with changing circumstances. Consumers need to understand the risks and opportunities of taking charge of their pensions savings, and the tax and benefits consequences. The guidance service must be equipped with the right people, with the correct qualities, experience and training to deliver a good service.

Their circumstances will vary widely. Many will have a home worth a lot more than their savings. Others may not have net assets at all. Retirement is becoming less of a ‘cliff edge’ – many will want to carry on working part-time, or in a less pressured job. Pension Wise will need to deliver good outcomes for all these consumers, wherever they live and however they choose to access the service.

The FCA has been charged with monitoring the standards of the Guidance Service.  This may seem to be classic FCA territory, but it is not.

Pension Wise delivery partners are not regulated: the FCA cannot take enforcement action to improve standards, only ‘recommend’ changes. Enforcement is the Treasury’s job, but it is also responsible for delivery, so it may be reluctant to shut down poor providers.

The Panel will be watching how the new freedoms work in practice. Later in the year we will bring together consumer organisations to exchange views, feedback and intelligence on what the first few months of pension freedom has delivered.

In the meantime, it’s vital the messages coming from all stakeholders involved in this market must be clear and consistent. “Take your time, think things through and get help when you need it”.

Resources for Consumers

Pension Wise:


Money Advice Service

Financial Inclusion Commission report

The Financial Inclusion Commission has this week made recommendations on widening access to financial services for disadvantaged consumers. We have been a strong supporter of this work, and gave oral and written evidence to the Commission.

The Panel has had concerns about access since our mystery shopping of basic bank accounts in 2002.  Just having a financial product or being able to get one is not enough: the product must deliver real benefits.

Over the years, more people have had access to basic bank accounts, but been treated badly. These accounts have often contained ‘nasty surprises’ in the form of massive charges for returned payments, or had limited functionality. There were nearly 20,000 complaints to the Financial Ombudsman in 2013-2014 about current accounts, of which over a third related to bank charges.  This is the third year in a row the number of complaints about bank accounts has risen.

The forms of credit available to those excluded from the mainstream rarely deliver any benefits at all. Initiatives like the Child Trust Fund and Saving Gateway, which demonstrably helped those on low incomes to build assets, have been abandoned.

The Commission’s report therefore serves as a timely reminder that financial exclusion is persistent and that the problems have become more deeply entrenched. Leadership is vital.

The Financial Conduct Authority (FCA) can play its part. Its recent work on vulnerable consumers showed how badly they are treated by the financial services industry; and its thematic review on mobile payments highlighted the risk of digital exclusion. It also acted quickly to eliminate the worst practices of the ‘payday’ lending sector, and it can use ‘Project Innovate’ to encourage the industry to come up with new solutions to old problems.

While all these initiatives help, the FCA also needs to assess systematically the impact of its regulation for all consumers, including those who aren’t currently in the market.

Regulation cannot solve the problem of people borrowing money in order to feed their families, as many do. This is for Government.
We hope that the next Government will give serious consideration to the Commission’s recommendations. After 17 years of financial inclusion policy-making by successive Governments, it is scandalous that we still do not have universal access to transactional banking services, and that this is only in prospect now because of European legislation.   We hope, also, that the lessons of those 17 years will be learned, and mistakes not repeated.

Welcome to the blog of the Financial Services Consumer Panel

Welcome to the first Financial Services Consumer Panel blog. You will be able to see our press releases and publications and hear our views on issues of the day here. I hope you will find it a thought-provoking addition to the debate about what matters to financial services consumers.

We are a statutory panel of experts, advising and challenging the UK’s Financial Conduct Authority (FCA) on how financial services can better meet the needs of consumers.

We want to see an open, competitive financial services marketplace, where people can get access to the products and services they need at a fair price, and trust providers to have their interests at heart. It doesn’t sound too much to ask for, but we still have an industry characterised in many cases by the ‘wrong’ sort of competition, lack of transparency, and mis-selling.

Most of our work involves advising the FCA privately, although we also respond to the regulator’s public consultations. We also challenge Government, industry and EU institutions in the interests of consumers. Much of our financial services regulation now comes from the EU (and beyond), and few consumer groups have the resources to counterbalance the weight of industry lobbying in Brussels.

We commission research and develop position papers. Most recently, we’ve put out papers on cross-subsidies in personal current accounts and the hidden costs of asset management. Our aim is to shed some light on issues which have a big impact on consumers, and generate debate. More than that, we want our work to lead to positive change, to enhance regulation where necessary or to improve the way industry does things.

In 2015, we will continue to push for greater transparency of investment costs, and better fund governance. Millions of people are being auto-enrolled into workplace pensions; a small change in costs can mean a big difference to individuals’ standards of living in retirement.

The FCA’s regulation of the consumer credit industry is also high on our agenda, as is the Chancellor’s pension reforms. While the new freedoms will be good for many people, they are not without risk. We are also looking at how people decide which firm to buy products from, and whether firms’ bad behaviour influences their decision.

With a busy schedule for the year, we are pleased to welcome two new members to the Consumer Panel. Mark Chidley will focus on issues affecting small businesses as consumers of financial services, and Kitty Ussher on advice, consumer research and pension reforms.


Sue Lewis

Chair, Financial Services Consumer Panel