Lloyds Banking Group response to European Commission Consultation on Bank Accounts

Transcription

1 Lloyds Banking Group response to European Commission Consultation on Bank Accounts 12th June

2 LLOYDS BANKING GROUP (LBG) RESPONSE TO THE EUROPEAN COMMISSION CONSULTATION ON BANK ACCOUNTS 1. INTRODUCTION Lloyds Banking Group (LBG) is a leading UK-based provider of financial services, focusing on retail and commercial customers. The Retail Banking division which operates under multiple brands including Lloyds TSB, Bank of Scotland and Halifax offers customers a full range of current accounts, savings and investments, personal loans, credit cards and mortgages. During 2011 the Group engaged closely with the Independent Commission on Banking (ICB), which was established by the UK Government to examine the banking sector and to make recommendations on structural and related nonstructural measures to promote stability and competition in the banking sector. During this review we proposed a landmark seven day switching service which was a significant part of the ICB s final proposals, and will be implemented by September 2013 in the UK. During the ICB review we also advocated enhancements to transparency, and LBG is currently commissioning a significant piece of independent research which we hope will lead to the development of new tools to help customers understand the full cost of their current account and the development of better comparison tools. We believe that we are well placed to contribute to the European Commission s consultation and to share our experience and expertise in this area. 2

3 2. OUR VIEW OF THE PCA MARKET IN THE UK In the UK, around 90% of consumer use a PCA on a regular basis. The product provides customers with at least four basic services: a facility to deposit and store money with quick and easy access; a facility to receive and make payments by cheque and electronic transfer; a facility to make payments without using cash; and a means for short-term borrowing using an overdraft. Unlike other European countries, the UK has a free-if-in-credit (FIIC) model, where a customer who is in credit does not pay any direct fees for having an account or for core services such as cheques and direct debits. Interest is usually charged on any money borrowed and there are usually charges on borrowing beyond any arranged overdraft limit or if the bank does not make a payment that would take an account beyond such a limit. These accounts make up around 60% of the PCA market. The other main types of PCAs available are basic bank accounts and added value accounts (AVAs). Basic bank accounts are offered for free by most main UK providers, and are targeted at customers who may otherwise not be able to open a bank account (for example due to poor credit history). Niche providers also offer bank accounts that target this market, for example offering so called jam jar accounts where one account is used for paying bills, and remaining funds are loaded onto a pre-paid card for general spending. These accounts help customers manage their budget, but do generally charge a monthly fee for the service provided. AVAs charge customers monthly fees for the account, but offer additional benefits such as travel insurance and free overdrafts. Lloyds TSB introduced AVAs in 2002 and they now account for about 20% of the current account market (measured by the total number of accounts although a higher proportion when measured by total balances). They provide customers with a range of additional benefits they value such as mobile phone insurance, travel insurance and car breakdown assistance from a trusted, reputable brand in a convenient way that allows the customer to have one single number if they need to make a claim or require assistance. Due to the FIIC model, many customers hold more than one PCA. There are around 63 million active full-facility PCAs in the UK, and over 5 million new 3

4 accounts are opened each year with new providers where the customer did not previously hold a PCA. There are over 20 providers of current accounts competing for these millions of new accounts, each offering a range of PCA products for customers to choose from. Some operate mainly online and by telephone, whilst others give customers access to a branch network in addition to remote banking options. Account switching in the UK is higher than initial switching figures may demonstrate, mainly due to the FIIC model. For example, in million accounts were opened by customers switching accounts, however a further 2.3 million accounts were opened in addition to customers' existing accounts. Many of those opening an additional account will go on to switch their main banking relationship. In addition, there are 1 million customers opening their first ever account each year. In our discussions with the ICB we recognised that further enhancements to the switching process could be made and proposed a seven day switching solution which is discussed below. The new switching solution will come into force in the UK by September Further information is available on the UK Payments Council website: 4

5 3. TECHNOLOGY IS DRIVING CONSIDERABLE CHANGE IN THE MARKET AND WILL GIVE CUSTOMERS GREATER CONTROL OVER THEIR ACCOUNTS The PCA market has seen significant innovation from both existing banks and new entrants in recent years Account Management Technology has been used to make it easier for customers to manage their accounts without the need to visit a branch. This was achieved first using telephone banking, then internet banking, and is now being increasingly delivered through smart phone banking. This allows customers to carry out all of the main functions associated with their current accounts such as checking balances, paying bills, moving money around between their own accounts and other providers, and ordering foreign currency twenty-four hours a day and seven days a week. Customers are also able to change standing orders and set up and cancelling direct debits. Earlier this year Faster Payments became the default system for processing online, phone banking and standing order payments in the UK. Customers can now transfer money and make payments in real time between nearly all accounts and payment providers and again link to payments council and details of faster payments service Survey evidence suggests that customers are actively embracing online technology. Around 32% of customers accessed their account online in a three month period to October 2010, compared with just 20% four years earlier. Over 40% of customers use the internet to actively manage their account Mobile Payments We believe that the increased penetration of smart phone technology will lead to significant changes in the way that transaction banking services are provided, bringing new providers into the market. Research by the UK telecoms regulator Ofcom found that over a quarter of adults (27%) and almost half of teenagers (47%) owned a smartphone in August

6 The integration of Near Field Communication technology into smart mobile phones enables these phones to function as debit or credit cards, allowing payments to be made at retailers using existing contactless payment terminals. An example of such service is Google Wallet, to be launched in the UK later this year. LBG is also looking to deploy mobile payments technology in the near future which will allow customers to make payments based on access real-time balance and payment information giving customers full control of their account and spending Text Messages Banks are increasingly using text messaging to alert customers when they are approaching limits on their accounts and to make sure that transactions made overseas are not fraudulent. For example, LBG customers can receive free text messages when they are within 50 of going into an unplanned overdraft, have gone into an unplanned overdraft, or a pending payment will take them into unplanned overdraft. 6

7 4. PRICE COMPARISON WEBSITES ARE ALSO ALLOWING CUSTOMERS TO COMPARE ACCOUNTS THOUGH WE BELIEVE MORE CAN BE DONE TO IMPROVE THE WAY THEY WORK The internet is important in the marketing of banks' PCA products and in the sale of PCAs: across the market, around 11% of PCAs that are opened are applied for via the online channel, where customers have the instant ability to compare accounts between banks. There are already a large number of financial comparison websites, which are increasingly used by customers to search for the best products available. Such sites had 77 million visitors in In addition to PCAs, best buy tables for mortgages, savings, loans and cards are published in most national newspapers every week. The UK s Money Advice Service, the government agency responsible for engaging the public on financial matters, also plans to launch its own PCA comparison facility shortly. Recent developments in the mobile telecoms market suggest that price comparison websites are becoming more sophisticated and could play a much bigger role in PCAs in the future. For example, Ofcom has approved a new website, billmonitor, which is able to provide individual customer recommendations on the best deal in the market based on their own patterns of use. It does this by electronically accessing the customer s mobile phone account for the last twelve months and establishing how many calls were made, texts were sent and how much data was used. It then provides the customer with a clear and simple recommendation of the cheapest deal in the market amongst all providers. This approach and the technology used could in time provide development possibilities for PCAs, as many banks already allow customers to download transaction data that in theory could then be sent securely to a trusted price comparison website. We recognise, however, that there are limitations to the way price comparison sites currently work. For example, comparison sites generally only include paid for adverts, with account information and benefits provided by advertisers. The number of accounts displayed is, therefore, very limited (often between one and five accounts) and the information biased. Similarly, accounts which cannot be opened online are generally not displayed and no attempt is made to understand full customer usage or display the actual annual cost of accounts headline rates and charges are sometimes displayed, but without first capturing usage data these figures are often misleading. The focus on rates also means 7

8 that key non-price features are not included, for example indicators of customer service scores, complaints figures, channels available, special account features etc. We think these sites can be made to work better and would be happy to share these views with the Commission alongside the findings of our consumer research (discussed later). 8

9 5. OUR INNOVATIVE ROLE IN THE MARKET FOR PERSONAL CURRENT ACCOUNTS Across all our brands we have sought to innovate through new technology and innovative pricing. One of our flagship innovations has been a service called Money Manager which is part of the internet banking service for Lloyds TSB customers. This is a powerful tool that allows customers to keep track of their spending and set budgets and reminders for future transactions to help them avoid incurring unplanned overdraft fees. For example, spending plans (as shown in figure 1 below) provide customers with a simple view of spending in chosen categories, making it easier to budget throughout a month. Figure 1 Spending Plans We have also been innovative in the way we price current accounts. The Halifax Reward account offers a simple 5 a month payment for customers who deposit at least 1000 a month, and overdraft charges are equally as simple at 1 or 2 a day for planned overdraft usage, and 5 a day for unplanned overdraft usage (with no additional fees such as returned item fees).this 9

10 charging structure was developed in response to customer feedback about being confused by interest rate calculations. In Lloyds TSB we offer customers Vantage, paying credit interest up to 3% AER on balances of up to 5000 we are the only major high-street provider to pay any interest on fee-free current accounts. In development of our new products and offers we are conscious to also make offers which appeal to the way customers actually make decisions. This has seen the introduction of the Halifax's ' 100 to switch' campaign which gives all new personal current account customers 100 on the day they open a new Halifax current account. 10

11 6. THE DEBATE AROUND TRANSPARENCY AND COMPARABILITY OF BANK ACCOUNT FEES AND ACCOUNT SWITCHING IS WELL ADVANCED IN THE UK LBG HAS BEEN AT THE HEART OF THAT DEBATE There have been a number of voluntarily initiatives that UK PCA providers have delivered in recent years, in conjunction with the OFT. These include: Enhanced monthly statements: providers have made key costs more prominent using a summary box Annual summary: providers have delivered annual statements which set out the key costs of an account to each customer on an annual basis Average credit and average debit balances, and credit and debit interest rates: information on rates and average balances are provided on monthly or annual statements Illustrative charging scenarios: providers publish information showing how much customers would be charged in a series of unplanned overdraft usage scenarios (see figure 2 below) These initiatives have made it easier for consumers to better understand charges and their own account usage. We anticipate that the consumer research discussed below will identify further developments utilising these delivered initiatives. 11

12 Figure 2 Halifax illustrative charges In 2011, we proposed to the Independent Commission on Banking (ICB) a standardised, industry-wide, seven day switching service for personal current accounts to encourage competition. In its final report, the ICB recommended this switching process be implemented across the industry by September The service will make it simple and straightforward for consumers to change bank accounts, with automated processes to transfer standing orders and direct debits, a 13 month credit and debit re-direction service, and service guarantees to ensure the account is fully switched and operational within seven days. In support of the switching service the ICB also recommended the development of tools that help consumers understand the value of their current account and compare it against other accounts ( account transparency tools ), namely: 1. A current account annual statement that would tell consumers about the charges and fees incurred, the benefits received and include forgone interest to allow customers to understand the full cost of their current account. 12

13 2. Developing better comparison tools to help consumers compared current accounts and make more informed choices. 13

14 7. THE UK S SWITCHING SERVICE WILL COME INTO FORCE IN SEPTEMBER 2013 The development and implementation of the new switching process is being led by the UK Payments Council, for delivery in September Figure 3 below demonstrates how the switching process will work. Figure 3 New Switching Process 14

15 8. THE SWITCHING SOLUTION WILL LEAD TO BETTER CONSUMER OUTCOMES THAN FULL ACCOUNT PORTABILITY During our discussions with the ICB we also considered alternatives to redirection in the UK including account number portability. The available evidence suggested that, because account number portability would mean a fairly fundamental redesign of the underlying UK payments systems (based on sort codes and account numbers), it would impact not just banks and the (relatively) limited number of direct debit originators, but also tens of thousands of retailers, restaurants and other businesses. Implementation would thus take a lot longer and, despite advances in IT, cost a multiple more than the account re-direction switching process, and be prone to significant operational risk. From a customer s perspective, account portability seemed to offer little, if anything, above what account redirection will offer. For example when we conducted customer research we found that less than a third of customers surveyed actually remembered their sort code and account number, and many consumers have more than one bank account making it impractical to attribute one set of account details to an individual consumer, as is the case with mobile phone numbers. This is not to say that account portability should not be considered in other European countries (for example where payment systems are simpler, or a lack of Faster Payments systems mean account re-direction is impractical), but due to the complexities and costs we concluded account re-direction was better suited for the UK. We believe that the method used to switch accounts is almost unimportant, instead it is the actual principles of what a switching service should deliver that is important, for example: Guaranteed the customer should have full confidence that the process will be error-free and they will not be worse off as a result of the switching process Fixed timescale the customer should know exactly how long the switch will take, and this needs to be a reasonable timescale Simple the customer should only have to make a single request, rather than dealing with multiple parties 15

16 9. WE ARE TAKING THE LEAD ON THE DEVELOPMENT OF ACCOUNT TRANSPARENCY TOOLS THAT WILL ENABLE CONSUMERS TO COMPARE CURRENT ACCOUNTS Following our recommendations that the ICB adopted, LBG is commissioning a significant piece of independent consumer research looking at account transparency. Specifically, the research will look to take a customer centric view to understand what information consumers need and want regarding their current account benefits and costs. It will also look to consider how to communicate this information through an annual statement (or possibly other methods). In addition it will look to understand if forgone interest (i.e. the difference between any credit interest the customer has received, and the interest they might have received if the balance was in a savings account earning base rate) is something customers give consideration to when choosing a current account and explore how to convey the concept of forgone interest to customers in an annual statement. The research will also look to evaluate the supporting services customers would need to be able to compare their current account against other accounts, such as information on quality and range of service. It will consider how a comparison web site might work to host the information that customers want and how to accommodate the needs of consumers who do not use the internet. The intention is that the recommendations will then be implemented alongside the new switching regime from September We will be sharing the findings with the UK authorities late this Summer and would more than happy to share the findings with the Commission. 16

17 10. WE WOULD SUPPORT STEPS TO ESTABLISH COMMON TERMINOLOGY AROUND BANKING SERVICES AND FEES We would support measures at the Member State level that seek to establish common terminology around banking services and fees. We believe that such measures should be concentrated at the Member State level and should focus on the most common services and fees, leaving firms with the flexibility to innovate with new forms of account offering. Attempts are already underway in the UK to standardise common terminology around overdraft fees through the British Bankers Association (BBA) in line with a commitment made by the banking industry to Mark Hoban, the Financial Secretary to the Treasury. We believe a voluntary approach to common terminology at the Member State level is the best way to proceed as detailed regulation would be likely to limit the current heterogeneity in the market, stifle innovation and take considerable time to implement. 17

18 11. WE BELIEVE THE COMMISSION SHOULD ADOPT A PRINCIPLES APPROACH TO DELIVERING SWITCHING AND TRANSPARENCY ENHANCEMENTS We believe that, due to differing banking payment system infrastructures in place across Member States a principles based approach should be followed by the Commission to deliver transparency and switching enhancements. This would set out basic principles for Member States to follow, but not prescribe exactly how they are delivered permitting individual Member States to deliver enhancements that meet the principles within existing payment system infrastructures. For example, as described above we believe that a PCA switching process needs to be guaranteed, with a fixed timescale, and simple for the customer to use. With these principles in place, each Member State could identify and deliver the most appropriate mechanism to achieve the overall switching principles. 18

19 12. LLOYDS BANKING GROUP ADVOCATES A MINIMUM HARMONISATION APPROACH TO THE COMMISSION S RETAIL BANKING PACKAGE We believe the proposals currently in train in the UK, plus further enhancements delivered on the back of the transparency customer research, will serve as an example of what can be achieved in the current account market through close and constructive dialogue between the industry and regulatory bodies. As different Member States are at different positions with regard to switching, transparency and basic bank account provision we would advocate the Commission takes a minimum harmonisation approach to its planned legislative proposals to ensure that markets that are further ahead can continue to develop in the interests of their customers. 19

20 13. BASIC BANK ACCOUNTS Access for vulnerable customers Lloyds Banking Group provides basic bank accounts across each of our main brands (Lloyds TSB, Halifax and Bank of Scotland), and is the largest provider of such accounts in the UK. We are committed to providing these accounts in order to support consumers who might otherwise struggle to access free banking services. Our basic bank account customers benefit from debit cards which enable them to withdraw cash at ATMs, make purchases in shops, and set up direct debits (for example, to pay utility bills). We have also invested in a range of other services which basic bank account customers can access, for example, telephone and internet banking. Over the last year alone we have opened over 118,000 new Lloyds TSB, 100,000 Halifax, and 15,000 Bank of Scotland basic bank accounts. The cost of providing these basic bank accounts is not insignificant to the Group in 2010 it was around 72 million. To aid simple access for vulnerable customers, we operate a centralised account opening process for basic bank accounts within the Group. This means that the teams who open these accounts on behalf of our customers have considerable expertise in this area and are aware challenges that can arise. Although driving licences and passports provide simple, single document, identification, we acknowledge many financially vulnerable customers may not hold these forms of identification so exercise flexibility and accept a very wide range of other forms of identification, which include: Benefits notification letters HM Revenue & Customs correspondence Local authority tax bills or rent cards Utility bills Tenancy agreements Where a customer is unable to present any recognised form of identification, we also accept third party introductions, for example, a signed letter from a professional (such as a doctor, teacher or social worker), or a suitable existing customer or colleague. 20

21 We believe that the flexible identification options that the Group currently offers does not prevent any financially vulnerable customer from opening a basic bank account Access for mobile individuals We recognise that the Commission has concerns over the access to bank accounts for mobile individuals, for example students and migrant workers who travel across EU borders. The Group recognises that access to such facilities for mobile individuals is crucial for the freedom of movement of citizens across the EU and for the functioning of the internal market. For this reason we make a basic bank account available to anyone who is able to provide evidence of a UK address. Foreign nationals can make use of standard address verification methods available to normal UK customers such as utility bill / council tax bill, however, we recognise customers just arriving in the UK may not always be able to provide such documents. For this reason we make a number of other options available to them such as: A letter issued by an education institution for overseas students A letters issued by recognised major UK public or private sector employer for foreign customers who work in the UK We do, however, also have to apply our own credit risk management processes around individual customer applications for both a basic and other forms of bank account. Basic bank accounts do come with a debit card and as a result can result in losses for the bank Access for non-uk residents The ability of EU consumers to purchase products across border is a fundamental aspect of the Single Market and helps drive competition across EU member states. In this context we welcome the steps taken at the EU level to date to integrate the market for financial services. It is important, however, to recognise the challenges this poses. Most financial institutions have extensive credit risk scoring in place for debt related products 21

22 to limit the extent of potential losses in the event of failed repayment on behalf of the customer. Conventional current accounts and basic bank accounts (as they come with a debit card) both potentially carry that risk. For this reason, Lloyds Banking Group carries out extensive analysis before deciding whether to offer a bank account to any of its customers. We have concerns about making basic accounts available to non-uk residents given the additional conduct and fraud risks involved and potential additional costs; we also question what level of demand there is for these accounts. However, we would be willing to work closely with the Commission on proposals which help address these issues. 22

23 RESPONSE TO QUESTIONS 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 (2007/64/EC) could address those shortcomings? There have been a number of voluntarily initiatives that UK PCA providers have delivered in recent years, in conjunction with the OFT. These include: Enhanced monthly statements: providers have made key costs more prominent using a summary box Annual summary: providers have delivered annual statements which set out the key costs of an account to each customer on an annual basis Average credit and average debit balances, and credit and debit interest rates: information on rates and average balances are provided on monthly or annual statements Illustrative charging scenarios: providers publish information showing how much customers would be charged in a series of unplanned overdraft usage scenarios (see figure 1A below) 23

24 Figure 1A Halifax illustrative charges The OFT will be monitoring how the market and customers will respond to these changes when it conducts its scheduled PCA market study later this year. Further measures are also already in train following the ICB recommendations for the development of tools that help consumers understand the value of their current account and compare it against other accounts ( account transparency tools ). We believe that further enhancements are important, and as such LBG is commissioning a significant piece of independent consumer research looking at account transparency. Specifically, the research will look to take a customer centric view to understand what information consumers need and want regarding their current account benefits and costs, for example interest forgone. It will also look to consider how to communicate this information through an annual statement (or possibly other methods). 24

25 The intention is that the customer research recommendations will then be implemented alongside the new switching regime from September We will be sharing the findings with the UK authorities later this Summer and would more than happy to share the findings with the Commission. 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? We would support measures at the Member State level that seek to establish common terminology around banking services and fees. We believe that such measures should be concentrated at the Member State level and should focus on the most common services and fees leaving firms with the flexibility to innovate with new forms of account offering. Attempts are already underway in the UK to standardise common terminology around overdraft fees through the British Bankers Association (BBA) in line with a commitment made by the banking industry to Mark Hoban, the Financial Secretary to the Treasury. We believe a voluntary approach to common terminology at the Member State level is the best way to proceed as detailed regulation would be likely to limit the current heterogeneity in the market and take considerable time to implement. Recent evidence of how effective this voluntary approach can be successful was seen following a super-complaint from Consumer Focus (a UK consumer body) to the OFT regarding the charges for purchasing foreign currency and using cards overseas. Following a brief 3 month period of consultation between the OFT and the industry, travel money providers agreed to improve the information on options available for consumers purchasing foreign currency in the UK or using credit and debit cards abroad. One of the measures agreed was that providers would give clearer, more accessible information about their charges for using cards abroad, on websites, statements and through call centres. This demonstrates how quickly voluntary agreements to enhance transparency can be reached. 25

26 3. Do you think that glossaries of terms and standardised lists of bank fees would facilitate comparability? If so what format and content should this information have? What body/forum would you consider appropriate to develop such a glossary/standardised list of fees? We question whether glossaries really help consumers understand fees and services, and would recommend that consumer research is conducted to reach a firm conclusion. It is important, however, that glossaries do not lead to product standardisation and limit diversity in the market. Again we believe any measures should be focused primarily at the Member State level on those terms which are most commonly used. 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? The UK has seen considerable growth in the number of price comparison web sites focused on personal current accounts and other financial products. Most of these are privately managed, however, the UK s Money Advice Service (a governmental body responsible for increasing levels of public engagement in personal finance issues) also plans to introduce its own price comparison site for personal current accounts in the near future. These price comparison websites are increasingly being used by customers to search for the best products available; such sites had 77 million visitors in In addition to these websites, best buy tables for mortgages, savings, loans and cards are published in most national newspapers every week. Recent developments in the mobile telecoms market suggest that price comparison websites are becoming more sophisticated and could play a much bigger role in PCAs in the future. For example, Ofcom has approved a new 26

27 website, billmonitor, which is able to provide individual customer recommendations on the best deal in the market based on their own patterns of use. It does this by electronically accessing the customer s mobile phone account for the last twelve months and establishing how many calls were made, texts were sent and how much data was used. It then provides the customer with a clear and simple recommendation of the cheapest deal in the market amongst all providers. We recognise, however, that there are limitations to the way PCA price comparison sites currently work. For example, comparison sites generally only include paid for adverts, with account information and benefits provided by advertisers. The number of accounts displayed is, therefore, very limited (often between one and five accounts) and the information biased. Similarly, accounts which cannot be opened online are generally not displayed and no attempt is made to understand full customer usage or display the actual annual cost of accounts headline rates and charges are sometimes displayed, but without first capturing usage data these figures are often misleading. LBG is commissioning independent consumer research looking at account transparency, specifically how full account costs and benefits can be provided to customers. The research will also look to evaluate the supporting services customers would need to be able to compare their current account against other accounts, such as information on quality and range of service, and account typing based on standardised customer scenarios. It will also consider how a comparison web site might work to host the information that customers want and how to accommodate the needs of consumers who do not use the internet. We would be happy to share the findings of the research with the Commission when they are available later this year. As discussed in question 1, there have also been a number of voluntarily initiatives that UK PCA providers have delivered in recent years. These initiatives have been delivered at relatively low cost, and have made it easier for consumers to better understand charges and their own account usage. We anticipate that the consumer research discussed above will identify further developments utilising these delivered initiatives. 27

28 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 customers should be fully informed of all costs (and benefits) associated with holding their account, including fees paid and interest forgone. Due to the free-if-in-credit model used in the UK, interest forgone is a cost for many consumers, although not easily calculated or displayed on account statements. The independent consumer research we are commissioning will include identifying how this cost can be presented to customers, in a simple to understand and compare format. As discussed in our response to question 1, there have been a number of voluntarily initiatives that UK PCA providers have delivered in recent years to provide consumers with further information on actual fees paid. Consumers are provided with both monthly and annual account charging summaries; this empowers consumers to monitor and prepare for monthly charges before they are due for payment, and highlights to consumers the full annual cost (or benefit) of having an account, potentially prompting consumers to consider looking for better deals. 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 or EU) you consider they should be taken. As discussed in question 1, in the UK a number of remedies were agreed between the industry and the OFT which came into force in January The ICB has also recommended the development of tools that will help consumers understand the value of their current account and compare it against other accounts ( account transparency tools ): A current account annual statement that would tell consumers about the charges and fees incurred, the benefits received and include forgone interest to allow customers to understand the full cost of their current account. 28

29 Developing better comparison tools to help consumers compared current accounts and make more informed choices. In the UK, we believe that the combined impact of these initiatives, once fully implemented, will bring significant change to the market. As stated earlier we will be initiating our own customer research to understand how best to deliver on these recommendations. LBG is also looking to deploy mobile payments technology in the near future which will allow customers to make payments based on access real-time balance and payment information giving customers full control of their account and spending. 29

30 SWITCHING BETWEEN PAYMENTS 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? The ToDDaSO (Transfer of Direct Debits and Standing Orders) switching service was first introduced in 2001 in the UK, and subsequently became an automated service in The service allows account providers to electronically request the transfer of Direct Debit and Standing Order arrangements, on behalf of the customer, from the old provider to the new provider. While this service is generally reliable and simple for most consumers, research has shown that a small number of consumers do face issues, it can take several weeks for the switch to complete, and there is a consumer perception that switching using the service can be problematic. In 2011, we proposed to the Independent Commission on Banking (ICB) a standardised, industry-wide, seven day switching service for personal current accounts to encourage competition, building on the current ToDDaSO switching process and fixing the potential issues consumers may sometimes face. In its final report, the ICB recommended this switching process be implemented across the industry by September The service will make it simple and straightforward for consumers to change bank accounts, with automated processes to transfer standing orders and direct debits, a 13 month credit and debit re-direction service, and service guarantees to ensure the account is fully switched and operational within seven days. The service will be consistent with the Common Principles and will be designed with customers in mind. Further information is available on the UK Payments Council website: 30

31 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. We believe that the switching solution, once implemented in the UK next year, will go a considerable way to giving customers confidence in the switching process. The transparency elements of the ICB s proposals will make comparability of accounts easier. This was borne out in independent research commissioned by LBG during the ICB consultation. The Group engaged Quadrangle, a consumer research firm, to carry out an independent survey on customer attitudes to current account switching today and to seek their views on the proposed new switching process. On overall satisfaction, the survey findings were consistent with the findings of the OFT and GfK with around 80 to 90% of customers saying they are satisfied with their current bank. There were 41% of customers that thought it might be worthwhile moving bank, and just under a third had thought about switching but had not done anything about it. This seemed to be because over a half (55%) of customers thought the current switching process was likely to be a hassle. A quarter of customers thought the process would go wrong and very few customers (13%) thought their bank would take responsibility if it did. The speed of the process was also an issue with only 14% of consumers agreeing that it was a quick process. In the qualitative focus groups, customers compared the current account switching process unfavourably with the process for mobile telephones and energy. In energy, 85% of customers say the switching process is easy and only 4% said cite it was as being difficult. In mobile telecoms, seven6% say the switching process is easy and only seven% say it is difficult. When the new switching proposition was described to customers surveyed, their views changed dramatically. Customers like the seven-day timescale, the fact that the process is guaranteed and banks take responsibility, and that the process would be overseen by the Payments Council, because of their independence. Customers thought the process would transform the supply of PCAs: 64% thought it would make the industry more competitive and 62% thought it would make banks improve the service they provided. Customers thought it would empower them and force banks to do more to keep their business. 31

32 Two thirds of customers said it would make switching easier and 51% said it would make them more likely to switch. Three quarters of customers who had switched in the last five years said it would make switching easier. Of the 28% of consumers who have considered switching but previously done nothing about it; 64% said it would make them more confident to switch and 74% agreed they would be more likely to move their PCA once this service is available. Across all customers, 16% agreed they would be more likely to move their PCA, should the need arise, as a result of the new, improved process. 9. Should the Common Principles remain voluntary? What do you consider are the advantages or disadvantages of making them compulsory at EU level? What would be the likely costs? We believe that the existing Common Principles should remain voluntary because of the differing nature of markets across the EU. Using Common Principles, each Member State could identify and deliver the most appropriate mechanism within existing payment system infrastructures. 10. Should switching principles/measures also cover cross border switching of bank accounts? Ensuring a secure and effective switching facility at the Member State level should be the first priority before assessing the feasibility of cross-border switching. We believe the Commission should assess how switching mechanisms work in Member States before it explores any attempts to introduce a cross-border switching mechanism. Any assessment should also be accompanied by research assessing the viability and customer demand for cross-border switching. 11. According to you how important is the risk of having receipts bills and payments misdirected when switching bank accounts? What measures could be considered to make the switching process safer? Misdirected bills and payments is a key driver behind customer fear of switching. When we commissioned research into switching during 2011, we identified that the inconvenience and cost of misdirection currently leads many consumers to avoid switching. This was therefore the key consideration when we identified the requirements for a new switching process. 32

33 The new solution will have measures in place to remove the risk of misdirection, as transactions will be re-directed from the old account, via the switching hub, to the new account. This re-direction service will be in place for 13 months from when the customer makes the switch. 12. What obstacles if any are still faced by account providers that are smaller or established in another Member State to expand their client base or to enter new markets? Are these connected to problems with switching facilities? We don t believe there are any obstacles faced by account providers that are smaller or established in another Member State. The existing and new switching processes are open to all industry participants operating UK accounts. 13. What other measures should be considered to improve bank account switching? Please describe. We believe that the switching solution and the transparency measures recommended by the ICB and currently in development will help customers compare accounts and have the confidence to switch. The success of these measures is likely be assessed by the OFT at some point in the future, potentially Appropriate marketing of the changes will be required to ensure consumers are aware of the new switching process, in order to change the perception that switching can be difficult / errors can result in fees. 33

34 ACCESS TO 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? We believe that the flexible identification options that the Group currently offers does not prevent any financially vulnerable customer from opening a basic bank account. Lloyds Banking Group provides basic bank accounts across each of our main brands (Lloyds TSB, Halifax and Bank of Scotland), and we are largest provider of such accounts in the UK. We are committed to providing these accounts in order to support consumers who might otherwise struggle to access free banking services. Lloyds Banking Group operates a centralised account opening process for basic bank accounts within the Group. This means that the teams who open these accounts on behalf of our customers have considerable expertise in this area and are aware challenges that can arise. Although driving licences and passports provide simple, single document, identification, we exercise flexibility and accept a very wide range of other forms of identification, which include: Benefits notification letters HM Revenue & Customs correspondence Local authority tax bills or rent cards Utility bills Tenancy agreements Where a customer is unable to present a recognised form of identification, we also accept third party introductions, for example, a signed letter from a professional (such as a doctor, teacher or social worker), or a suitable existing customer or colleague. We recognise that there are outstanding issues with giving undischarged bankrupts. However, these issues were examined in a recent consultation by 34

35 the Department for Business Innovation and Skills and the industry is working with the Government to develop a workable solution. 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? The current UK model works well for consumers without the need for regulatory measures. As discussed in question 14, LBG operates a centralised account opening process for basic bank accounts, making it simple for consumers to open a basic bank account. We will only decline an application for a basic bank account if a customer with a UK address has a history of fraud or is an undischarged bankrupt (as discussed in question 17). 16. Do these measures also facilitate access to basic payment account for non residents? The Group recognises that access to banking facilities for mobile individuals is crucial for the freedom of movement of citizens across the EU and for the functioning of the internal market. For this reason we make a basic bank account available to anyone who is able to provide evidence of a UK address. Foreign nationals can make use of standard address verification methods available to normal UK customers such as utility bill / council tax bill, however, we recognise customers just coming to the UK would not always be able to provide such documents particularly if they have just arrived in the UK and for this reason we make a number of other options available to them such as: A letter issued by an education institution for overseas students A letters issued by recognised major UK public or private sector employer for foreign customers who work in the UK We have concerns about making basic accounts available to non-uk residents who are not based in the UK or who cannot provide the verification outlined above due to the potential fraud risks involved. 35

36 However, we would be willing to work closely with the Commission on proposals which could help address these issues. 17. If consumers still have difficulties in opening a bank account what are the reasons for that? We believe that the existing flexibility Lloyds Banking Group offers in relations to basic bank accounts means that consumers do not face difficulties when opening a basic bank account. We recognise that there are outstanding issues with giving undischarged bankrupts a basic bank account. However, these issues were examined in a recent consultation by the Department for Business Innovation and Skills and the industry is working with the Government to develop a workable solution. 18. If more needs to be done what additional measures should have be envisaged? Should the problem be tackled at national or EU level? We believe that existing measures in place are sufficient and where outstanding measures are required these should be taken forward at the national level. 36