PCA Publication from OFT - full report

**Amethyst** · 16th July 2008, 07:18:AM

Re: PCA Publication from OFT

Thanks Shazzaw xxx

**Amethyst** · 16th July 2008, 07:19:AM

Re: PCA Publication from OFT

CONCLUSION

6.3 The significant areas of concern are:

• low levels of transparency on fees that make up a substantial proportion of the effective
payment that consumers make for current account services, meaning that consumers
lack the fundamental information needed to compare competing products

• complexity in the way that these fees, particularly insufficient funds charges, are
implemented that makes it hard for consumers to predict when they will be incurred

• the lack of simple mechanisms for consumers to control, or opt out of, whether they use
the service(s) for which they pay, and

• a general and valid perception amongst a significant proportion of consumers that
switching is both complex and risky, and that unless they manually switch, they have
little control over these risks

Market study into personal current accounts

16 July 2008
The OFT has published its market study report into personal current accounts (PCA) in the UK.
The report found that much of banks’ revenue from current accounts is derived from largely hidden charges, with 81 per cent of income coming from insufficient fund charges (£2.6bn) and net credit interest income (£4.1bn). Yet a significant number of customers do not know how much they actually pay in bank charges, either before or after they are incurred, and more than three quarters do not know the credit interest rate of their current account.
Download Personal current accounts in the UK - an OFT market study (1.2 mb)
Download the executive summary (146 kb)
Download annexes to report (all pdf files):
Annexe A - Legal and regulatory framework (187 kb)
Annexe B - Summary report of review of information banks provide to consumers and of price comparison sites (101 kb)
Annexe C - Free-if-in-credit personal current accounts (250 kb)
Annexe D - Personal current account consumer research (589 kb)
Annexe E - Psychology of personal current accounts (170 kb)
Annexe F - Public policy context (87 kb)
See press release
Download market study questions and answers (103 kb)
The OFT has now launched a consultation exercise to invite comments from stakeholders on the high level concerns identified in the report.
Download Personal current accounts market study - a consultation paper (137 kb)
Background and timeline

15 November 2007

After reviewing interactions with court proceedings and taking legal advice it has been decided that the findings of the market study into banks will not be published in advance of the test case.
See press release
26 April 2007
The OFT launched a market study into personal current accounts in the UK.
The main factors that have influenced the OFT's decision to proceed to a market study are:

the significance of personal current accounts to consumers and economic growth
complaints about the level and incidence of current account charges
low levels of price transparency
limited extent to which consumers help drive competition in the provision of personal current accounts.

Download reasons for market study (pdf 131 kb)
See press release

Outcomes
The outcomes the OFT wishes to achieve are:

active and informed consumers who drive competition among banks, which in turn delivers efficiency in supply and value for consumers
banks treating consumers fairly and well within a coherent self-regulatory framework and through compliance with the regulatory framework, thereby pre-empting high levels of regulatory intervention.

29 March 2007
The OFT has announced an in-depth study of retail bank pricing.
See press release

**Amethyst** · 16th July 2008, 07:28:AM

Re: PCA Publication from OFT

http://www.oft.gov.uk/shared_oft/rep...ts/OFT1005.pdf

Full Report

I have pasted some selected parts which i believe will be of most interest below - for those who don't have PDF.

Key findings

The OFT has found evidence of competition in the PCA market. Banks can also demonstrate high
consumer satisfaction and low fees on many of the more visible elements of current accounts –
such as withdrawals from ATMs. Internet and telephone banking have also made it easier for
consumers to manage their account.

However, the OFT believes that the PCA market as a whole is not working well for consumers.

A combination of complexity and a lack of transparency means that consumers and competition
are focused almost exclusively on more visible fees, and not on the less visible elements such as
insufficient funds charges and forgone interest5 – despite the fact that these make up the vast
bulk of banks’ revenues. For insufficient funds charges, this effect is exacerbated by a lack of
simple mechanisms for consumers to control, or opt out of, an unarranged overdraft.

Furthermore, a significant proportion of consumers believe that it is complex and risky to switch6
accounts, with the result that switching rates are very low.

As a result, we believe the ability for the market to function well has become distorted in three
ways:

• first, there seems to be a substantial cross subsidisation from those consumers who incur
insufficient funds charges to those who do not; and to a significant extent from ‘vulnerable’,
low income and low saving consumers, to higher income, higher saving ones

• second, the extent of this cross subsidisation means there is a substantial misalignment
between the banks’ revenues and their costs on many of their products and services. This
may lead to inefficiency through under or over consumption of services by consumers, and

• third, the lack of consumer awareness and switching on the less visible elements provides
banks with little incentive to compete on them. This may also have an impact on longer term
productivity within the banking sector. Without competition in these areas, banks have lower
incentives to create new and innovative services.

Furthermore, given the constraints on competition, and in particular the low switching rates, we
are not persuaded that any additional profits made from less visible elements are fully competed
away in terms of lower fees in other areas. This raises the possibility that a significant proportion
of the profits made on less visible elements are kept by banks rather than passed back to
consumers through more intensive competition.

In essence, the OFT believes that the market may be stuck in an equilibrium that does not work
well for many consumers. A significant number of consumers do not know how much they will
effectively pay in bank fees or how individual elements in the charging structure will be
implemented, either before or after they are incurred. This limited understanding of key account
elements, combined with low confidence in switching, means that the banks have less incentive
to provide better offers on insufficient funds charges and interest. Without better offers from
banks, however, consumers have little incentive to switch.

**Amethyst** · 16th July 2008, 07:38:AM

Re: PCA Publication from OFT

Consumers also had difficulty in understanding and calculating the level of insufficient funds
charges they pay, perhaps unsurprisingly given the complexity of their implementation.
Indeed, when the banks were asked to calculate how much a hypothetical consumer would
have to pay in a given scenario (which included exceeding an agreed overdraft limit) the
reported charges varied from £0 to £260. The high levels of consumer satisfaction with the
value for money of a product may be questioned if many consumers do not know what it has
and will cost them.
Some consumers are not even aware that some fees exist. Even where they are aware of
the existence and level of fees, consumers find it hard to judge when and how these fees
will be incurred. Indeed, only seven per cent of consumers who exceeded their arranged
overdraft limit said it was a deliberate decision. Research12 also showed that 19 out of 22
banks themselves gave out wrong cheque clearance times or were unable to offer practical
advice on this to consumers.
This consumer uncertainty is due to both the lack of transparency of fees – in particular
insufficient funds charges – and the complexity in determining when they are and will be
incurred. This has had the following widespread effects:
• over a fifth of consumers were unaware of insufficient funds charges until they had
incurred one
• over 12.6 million accounts (23 per cent of active accounts) incurred at least one
insufficient funds charge in 2006, and
• those consumers who incurred an insufficient funds charge in 2006 were more likely to
incur at least six charges than just one.
Furthermore, it appears that consumers either do not learn from incurring insufficient funds
charges or that their financial circumstances make incurring charges unavoidable. For
example, of those accounts paying an insufficient funds charge in 2006, more than 57 per
cent also paid an insufficient funds charge in 2005.
Evidence from consumer organisations shows there is significant potential for slight errors in
financial management that can result in hundreds of pounds worth of insufficient funds charges.
Over 6.6 million account consumers paid at least £100 while 1.4 million paid at least £500 in 2006.
Of those consumers that incurred insufficient funds charges, the average incurred was £205.
When questioned, consumers appear to have some misgivings over their lack of ability to
control their accounts. The majority of consumers surveyed expressed an interest in having a
greater ability to control whether they incur insufficient funds charges on their account.13
Finally it is important to note that consumers who pay insufficient funds charges have,
typically, lower incomes, and/or lower savings14 than consumers who do not pay charges.
This is made more serious given the apparent magnitude of the cross-subsidies – we found
that the banks earn over 30 per cent of all their revenues from insufficient funds charges.
5
July 2008
12 ‘Themed Review of Cheque Clearing Cycles’, Banking Code Standards Board May 2006.
13 Over 60 per cent of those surveyed said that they would prefer to have their payment refused rather than enter an
unarranged overdraft.
14 Consumers on low incomes or with less than £1,000 in household savings were significantly more likely to have been
charged in the past 12 months for a refused payment. Furthermore, those with less than £1,000 in household savings
were significantly more likely to have been charged in the past 12 months for going into their unarranged overdraft.

**Amethyst** · 16th July 2008, 07:46:AM

Re: PCA Publication from OFT

UTCCR

Unfair Terms in Consumer Contracts Regulations investigation

1.17 Following some complaints about the level and incidence of current account charges in 2006,
the OFT identified possible concerns under the Unfair Terms in Consumer Contracts
Regulations 1999 (UTCCRs) with one particular aspect of the PCA market – charges for
unarranged overdrafts and unpaid items.
1.18 This report considers unarranged overdrafts from a consumer and market perspective and
examines how they work in practice. It is not an assessment by the OFT of whether or not
insufficient funds charges constitute unfair charges under the UTCCRs. The OFT is
considering this matter separately. (see Box1.2 below).

**Amethyst** · 16th July 2008, 07:51:AM

Re: PCA Publication from OFT

Insufficient funds charges
3.71 Insufficient funds charges are a significant source of revenue for banks: in 2006 the total
revenue from insufficient funds charges accruing to the banks contacted during the market
study was £2.6 billion A, or 31 A per cent of total current account revenue.
3.72 Although banks apply charges in different ways the unit price for charges, where applied, is
similar across suppliers.85 Overall the level of individual charges has gone up considerably in the
last seven years whether adjusted for inflation or not. This is particularly the case for paid item
fees, which increased from an average of £16 to £28, a nominal increase of 75 per cent over
the period.

3.74 Documents supplied by some banks indicate that they believe that increases in insufficient
funds charges do not affect demand for their accounts. In this sense demand does not
respond to changes in price. As a result at least some banks appear to see charges as an
attractive way to generate additional revenue. For instance, internal documents on the level
of charges from three banks stated:
• ‘these proposals [to increase insufficient funds charges] deliver substantial revenue
growth by increasing the yield from existing overdraft customers’
• ‘As the proposals result in no significant worsening in the competitive position of each
product, and as demand is relatively inelastic to changes in [insufficient funds charges],
there is no forecast reduction in planned business volumes,’ and
• 'Increasing [insufficient funds] charges will have less impact on our marketing position
then a credit interest changes due to its lower visibility'.
3.75 It may be the case that some banks do not emphasise the importance of charges associated
with unarranged overdrafts to customers. It was stated in the judgment of the test case on
charges that generally banks ‘make no active attempts to publicise unarranged overdrafts or
to deploy them in marketing activities as a facility’.
3.76 Our consumer survey supports the suggestion that most consumers do not focus on
insufficient funds charges. Many customers do not take these charges into account when
choosing a bank and do not typically consider them relevant even when they have paid
charges in the past. This suggests that consumers do not exert competitive pressures on any
type of account provider on the level of insufficient funds charges.

3.77 Indeed, it is fair to say that the complexities of the application of these charges make it
extremely difficult for consumers to understand the impact of charges and to compare this
impact across banks anyway. This topic is explained in Chapter 4.
Monthly charges
3.78 Monthly charges exist in the UK predominantly where a customer has a packaged account,
although there are some exceptions. Packaged accounts86 are a relatively new product but
there are now nearly eight million in the UK, mostly accounted for by the four established
banks. For some banks, packaged accounts have become a considerable source of revenue.
In aggregate, they accounted for slightly less than seven per centA of total current account
revenue in 2006.

**Amethyst** · 16th July 2008, 07:54:AM

Re: PCA Publication from OFT

3.116 The free-if-in-credit model is, at least to a large degree, reliant on net interest income and insufficient funds charges to cover the cost of providing core money transmission services
and any fixed costs of maintaining the account (for example, maintaining a branch network

**Amethyst** · 16th July 2008, 07:58:AM

Re: PCA Publication from OFT

Unarranged overdrafts
4.50 This section considers unarranged overdrafts from a consumer and market perspective and
examines how they work in practice. It is not an assessment by the OFT of whether or
not insufficient funds charges constitute unfair charges under the UTCCRs. The OFT is
considering this matter separately.
4.51 According to data from the main banks 26 B per cent of accounts with or without an arranged
overdraft facility exceeded their limit in 2006. This is a significant minority estimated as 14
million accounts B+.
4.52 Our consumer survey suggests that there is no significant difference between those with
and without an agreed overdraft facility in terms of their likelihood of having used an
unarranged overdraft in the previous 12 months. About a quarter of each group (22 and 26
per cent respectively) said they had used an unarranged overdraft at least once in the
previous year.
4.53 According to data supplied by the main banks the average number of days per year an
account is in unarranged overdraft is lower than for overdrafts in general. An account in
unarranged overdraft was in it for an average of 16 to 61 days in 2006 depending on the
bank.
4.54 Unarranged overdrafts generally, but not always, attract higher interest rates; typically more
than 25 per cent and as much as 30 per cent. Net debit interest income derived from
unarranged overdrafts was £79 A million in 2006 or just under one per cent of total PCA
revenue for 16 banks. The 16 banks lent £680 A million as unarranged overdrafts in 2006.134
Charges associated with unarranged overdrafts
4.55 Unarranged overdrafts often incur additional charges for paid items and sometimes involve an
additional overdraft excess, or maintenance, charge (see also Box 4.12, glossary and Annexe
C135). When a bank refuses to process a payment because the transaction will exceed the
limit, it may levy a further charge, known as an unpaid item charge.
Incidence and value of charges
4.56 Twenty three B per cent of accounts (12.6 B+ million) incurred at least one insufficient funds
charge in 2006.

4.57 Chart 4.7 shows that those consumers who incurred a charge were more likely to incur a
charge at least six times (39 per cent of those charged) than they were to incur just one (23
per cent) in 2006.
Chart 4.7: The distribution of insufficient funds charges by number for those accounts
that incurred at least one charge, 2006
Source: OFT analysis of data from banks 2006 B
4.58 This multiple incidence of charges may represent either a ‘snowball’ effect or a repeated
incidence or both (see Box 4.8).
Box 4.8: Multiple insufficient funds charges136
Multiple charges may represent either a ‘snowball’ effect, a ‘repeated incidence’ effect, or both.
Repeated incidence describes a scenario where a consumer repeatedly enters unarranged
overdraft on separate occasions and incurs a charge each time. A ‘snowball’ effect is said to
occur where a consumer enters unarranged overdraft on one occasion and incurs multiple
charges. This may come about in a number of ways:
• one shopping trip – if a consumer enters unarranged overdraft on a shopping trip and
purchases multiple separate items he or she may incur a paid item charge for each item,
whatever the value, as well as a maintenance charge
• multiple direct debits set up for one day – if a consumer has managed his or her finances
so that direct debits all go out on the same day of the month and for some reason the
balance is not as high as expected he or she may incur a paid or unpaid item for each
direct debit

• order of payment – the way in which debits due for payment (and credits due to be
received) on a given day are processed by the bank may in certain circumstances have a
bearing on the type and number of charges incurred. Since the way in which transactions are
processed is not explained in terms and conditions, this constitutes an additional difficulty
when estimating the total amount payable
• inability to repay charges – a consumer might be pushed into unarranged overdraft from a
small payment, a payment he or she might be able to repay with interest, but may be unable
to repay the unarranged overdraft charges added to this. If the debt is not repaid by the next
month further charges may apply, and
• charges on charges – the debiting of interest on an arranged overdraft, or other bank
charge (as opposed to payment of an item with insufficient funds to cover it), may itself
cause an unarranged overdraft, and trigger a further charge or charges.
4.59 Turning to the value of charges, while 27 per cent of customers, by account, who incurred
charges only paid up to £50 in 2006, 52 per cent paid more than £100 (see Chart 4.9).

4.60 As 23 B+ per cent of accounts incurred at least one charge in 2006, and over half of them paid
£100 or more in charges, we estimate that around 6.6 B+ million account customers paid at
least £100 or more in 2006, of which 1.4 B+ million paid at least £500.
4.61 We found that not only are those accounts that incur charges likely to incur multiple charges
but also that the charges seem to persist over time. Of accounts charged in 2006, more than
57 B per cent were also charged in 2005. This suggests there is a significant persistence of
charges, either implying that consumers are not learning from their mistakes, or that their
financial position makes incurring charges unavoidable.

4.62 Our aggregate estimate of insufficient funds charges based on data provided by 16 banks is
£2.6 billionA in 2006 where excess fees and paid item charges accounted for £1.5 billionB+ and
unpaid item charges £1 billionB+.
4.63 If the insufficient funds charges (excluding charges for unpaid items) of £1.5 billionB+ in 2006
were treated as the cost of borrowing on the £0.68 billionA average unarranged overdraft
balance over the year for the 16 banks, we estimate that the annual interest rate would be
more than 220 per cent. While short term loans are distinct in their short duration and can be
expensive to administer, this level of charging compares unfavourably with many similar
forms of lending such as credit cards and personal loans.
Who pays charges?
4.64 OFT analysis of the consumer survey shows a strong relationship between the number of
insufficient funds charges a consumer is likely to pay and their age and level of savings,
which is itself influenced by income and social status. The incidence of charges is
disproportionately high among relatively young and financially constrained137 consumers.138
Why consumers use unarranged overdrafts
4.65 The consumer survey found that the most common reasons why consumers exceeded their
arranged overdraft limit (in the last 12 months) were uncertainties about the timing of
transactions and when they would be cleared, rather than a conscious decision. Only seven
per cent of consumers in the survey suggested that they chose to use an unarranged
overdraft (see Table 4.10). While this statistic may be susceptible to under reporting by
consumers, at seven per cent it is still very low.

4.66 It is notable that it is not just consumers who have uncertainties about the timing of
transactions. A 2006 Banking Codes Standards Board mystery shopping exercise on cheque
clearance times found that for 19 of the 22 banks surveyed, their staff did not always give
correct information about clearance times. Even when they did they were often unable to
convert this into practical advice.140
4.67 The second most frequent reason for exceeding the limit in the consumer survey was that
consumers did not check their account. While consumers do have a responsibility to check
their balance, this alone is unlikely to be sufficient. Even if consumers did keep track of all
their transactions, those consumers with balances close to their limit, or making transactions
that might bring them close, would find it difficult to predict whether they were likely to enter
unarranged overdraft or incur a charge. When there are uncertainties about credits, debits,
the relevant balance and the complex application of charges even repeatedly checking an
account may not be enough.
Consumer overconfidence
4.68 The findings of our consumer survey, and other evidence, suggest consumers tend not to
expect to use unarranged overdrafts.141 Thirty four per cent of respondents to our survey who
had incurred an insufficient funds charge, but who did not consider charges to be important142
when opening current accounts, said that the reason for this was that they did not expect to
use an unarranged overdraft,143 even though they had done so in the past. But data supplied
by the main banks show that 57 per cent of consumers that incurred charges in 2006 had
also incurred at least one in 2005. So it seems repeated incidents are not uncommon. In its
study of Northern Ireland the Competition Commission found that consumers did not
consider charges when choosing a current account because they did not think that they were
relevant to them.
4.69 Supporting this, the psychologist’s analysis of the ‘in depth’ interviews shows that, although
over half of the interviewees had experienced insufficient funds charges, almost none had
anticipated going overdrawn, having payments rejected, or paying bank charges. The
conclusion of the psychological analysis was that some consumers are overconfident when it
comes to their finances and probably underestimate the cost of banking. Overall, there
seems to be an element of naivety amongst some consumers when assessing the likelihood
of incurring insufficient funds charges.
70
Personal current accounts in the UK
140

**Amethyst** · 16th July 2008, 08:00:AM

Re: PCA Publication from OFT

Box 4.11: Key unarranged overdrafts data (2006)
• 14 millionB+ current accounts had an unarranged overdraft (26 per centB of all PCAs)
• £0.68 billionA was borrowed as an unarranged overdraft144 (compared with £8.4 billionA as
arranged overdraft145)
• 12.6 millionB+ current accounts (23 per centB of the total) were charged at least once
– 39 per centB of those charged had at least six charges
– 52 per centB of those charged paid over £100
• £2.6 billionA in charges was paid, accounting for 31 per centA of total current account revenue
– £47B was the average charge across all current accounts
– £205B was the average charge for the 23 per centB of current accounts that were actually
charged
• the annual interest rate would be around 220 per cent if the £1.5 billionB+ charges
(excluding unpaid items) were treated as interest on the £0.68 billionA advanced
• 16-61 days was the average duration of unarranged overdrafts (depending on bank)
• 57 per centB of those charged in 2006 had also been charged in 2005
• PCA customers with and without an arranged overdraft facility are equally as likely (there is
no significant difference) to exceed their limit
• almost as many (14 million)B+ current accounts used an unarranged overdraft as used an
arranged one (17.1 million)B+
Warnings about charges
4.70 Banks are relatively unusual in that they are able to both levy and apply charges without a
customer always knowing either will occur. Some other businesses may be able to draw
money from a customer through a direct debit, but they must give 14 days’ notice and the
customer can cancel the direct debit before the amount is paid.
4.71 All of the main banks told us that, once a charge has been incurred, even though the Banking
Code does not specify it, they inform consumers with at least a letter, or some make a
telephone call, in order to warn of the impending debit. However 45 per cent of respondents
in our survey who received some kind of charge said that they were not warned before the
charges were applied. While consumers may have recollection problems this is a significant
proportion and might indicate that banks’ attempts to make customers aware of charges are
not always effective.
4.72 Furthermore, according to information given to us by banks, once customers have been
informed that they have incurred a charge, few major banks make substantive attempts to
inform them of the options open to them to limit further charges or warn them that they are
incurring multiple charges.
71

4.73 Some banks may attempt further contact if consumers have not resolved the situation, but it
was not clear when or whether this was a systematic approach for most or just for a few
customers. Indeed, given the revenue generated from insufficient funds charges, £2.6 billion
in 2006, it may be the case that banks do not necessarily have a strong financial incentive to
help consumers avoid them.
Consumers’ awareness of insufficient funds charges
Knowledge and understanding of charges and the level of charges
4.74 Seventy seven per cent of those surveyed, who had been charged in the past 12 months,
said that they had heard of such charges before they incurred one.146 That means that over a
fifth did not know about charges before they received one. This varied by consumer type
with young people significantly less likely to have known.
4.75 Of those respondents who had been charged in the last 12 months, a significant proportion
(25 per cent) also said they did not know what their bank’s charges were. Of all respondents
to our survey, two-thirds (67 per cent) said they did not know what their bank charged for
entering the unarranged overdraft. The Competition Commission found a similar figure of
72 per cent in Northern Ireland.
4.76 Only five per cent of consumers said that charges were an important factor when choosing
their bank. In comparison 23 per cent of customers, by current account, incurred charges in
2006 and 52 per cent of these paid more than £100 in charges.
4.77 These findings raise a question of whether consumers can use or compare current accounts
effectively if they do not know how much it may actually cost them. Indeed, in Northern
Ireland, the Competition Commission found that consumers often said that they had not paid
any charges when their bank had already confirmed that they had done so. The fact that
consumers do not even realise that they have been charged may increase the persistence of
charges.
4.78 Reviews of account information by the OFT identified that information on the level of charges
is easier to find in 2008 than it was in the 2007 review. However, the information was not
sufficient to understand how the charges might be applied. The OFT understands that
consumers are generally not told the applicable level of insufficient funds charges on their
statement (although there are exceptions).
4.79 Separately, the judgment on the UTCCRs test case stated that, generally, banks ‘make no
active attempts to publicise unarranged overdrafts or to deploy them in marketing activities,’
which might help to explain why many consumers lack awareness of these charges and
many more are unable to estimate their level.
4.80 Internal documents, supplied by some banks, state that consumers focus on other aspects of
an account. This was used as evidence to show a proposed rise in insufficient funds charges
by some banks would not affect the number of accounts they sold.

Complexity of assessing the likelihood, and cost, of use of an unarranged
overdraft
4.81 Engaged consumers might sensibly attempt to manage their current accounts so that they
minimise their average credit balance to minimise their forgone interest. To do this a
consumer must assess the likelihood of entering unarranged overdraft or having an item
refused. In this section we discuss consumers’ use of tools to monitor their current account.
4.82 Almost nine out of 10 respondents to our survey said that they received a paper statement,
and one in five an online statement. Of these two groups the majority (66 per cent) said that
they read their statements thoroughly. Approximately a quarter checked their statements but
did not read them thoroughly. Eight per cent said that they checked or read their statements
only if they had a problem.
4.83 However, in order to keep on top of their account position and hence their available funds,
customers have to keep track of a number of factors and do significant calculations. At any
given time to work out whether they have funds available, consumers need to take their
current balance, and consider what commitments they have already made (for example,
cheques not cashed), what upcoming commitments they may have (such as direct debits)
and what known payments are coming in. They also need to understand how the timing of
these will affect their balance.
4.84 For example, the number of direct debit commitments consumers have may complicate their
assessment of the likelihood of becoming overdrawn or exceeding their limit – 14.6 million
households had five or more regular direct debit commitments on their main current account
in 2006.147
4.85 Even if a consumer does keep track of all these factors, it is not just as simple as saying,
‘don’t spend more than you have and you will avoid an unarranged overdraft’. Even the
margin by which a consumer must avoid use of an unarranged overdraft is uncertain
because, for example, it is often not clear which balance a bank may use for the relevant
calculation, or when.
4.86 Mechanisms for helping people keep on top of accounts do exist, and banks have been
introducing more. Text alerts are a recent innovation some banks offer to allow consumers to
receive their balance by SMS text although we have not analysed data on take up or price.
We understand that some banks contact customers by telephone if they have concerns
about a customer’s balance but it is not clear if this is a systematic and widespread approach.
4.87 It is important to remember that financial capability is a significant issue in the wider
population and therefore not all of these tools may be used or indeed useful for all
consumers. Our survey showed that internet banking is used by around half of consumers
and they use it frequently but it is popular mainly with younger and wealthier consumers.
Similarly, ATM use varies significantly by type, with 16-44 year olds much more likely, and
categories D and E much less likely, to use ATMs.148 But even the balance shown at an ATM
may not, in fact, be the number with which consumers should work.

**Amethyst** · 16th July 2008, 08:01:AM

Re: PCA Publication from OFT

Assessing the likelihood of use of an unarranged overdraft
4.88 A poor understanding of how charges are calculated and applied, and even whether a
consumer thinks that they have been charged at all may, in part, be caused by the complexity
of the application of charges. In its Northern Ireland study the Competition Commission
found that ‘unarranged overdraft charges for all accounts… showed considerable, and undue,
complexity. We believe that this complexity… makes it more difficult for customers to
understand and react to overdraft charges’.149
4.89 The same appears to be true for the rest of the UK. Box 4.12 summarises the key variables a
consumer needs to know in order to assess whether they are likely to use an unarranged
overdraft. Consumers will not always have this information.
Box 4.12: What consumers need to know in order to determine whether they will
use an unarranged overdraft150
Unarranged overdrafts arise in respect of two types of transaction:
• customer-initiated transactions: the customer issues a payment instruction (for example, a
cheque), tries to access funds (for example, an ATM withdrawal), or an instruction previously
set up becomes payable (for example, direct debit), and
• bank-initiated transactions: the bank debits interest, charges or fees to the account, or
reverses a previous credit (for example, when a cheque previously credited to the account is
returned by the paying bank, or when an electronic payment is recalled).
If a customer fails to keep enough money in the account, in order to determine whether she will
use an unarranged overdraft she may need to know some or all the following factors, depending
on the specific situation:
• timing of presentation of items. The customer will normally have little control over when a
cheque is presented for payment by the payee. Direct debits (and standing orders) are set
up in advance: the customer must keep a record of due dates, which may vary within certain
limits. The timing of presentation of debit card transactions may depend on factors unknown
to the customer, such as the merchant’s floor limit and the method of authorisation used.
Other items, such as ATM cash withdrawals are normally under control of the customer. The
timing of bank-initiated transactions is determined by the bank: terms and conditions will
usually (but not always) specify whether charges are debited when they are incurred (and
thus without advance notice), or at a future time (with or without notice). In both cases, an
unarranged overdraft may arise if insufficient funds exist to cover the charge
• what is included in available funds. The amount of funds available to meet payments may
or may not include un-cleared items, depending on the bank. For instance, a bank may count
cheques recently paid in over the counter as available funds, while another bank may not.
Explicit definitions of what counts as available funds are not common in current terms and
conditions, and the customer may have to trawl through several clauses to find an answer
• when available funds need to be in place for an unarranged overdraft not to arise.
Available funds may change during the day to reflect cash withdrawals, deposits, arranged
debit cards transactions and other items. A bank may reckon funds (and thus determine
whether charges arise) at 3:30p.m on the day payment is due, giving customers the
opportunity to pay covering funds and avoid charges (‘grace period’). Another bank may
assess funds at the close of the working day before payment is due. According to OFT
research, several banks’ terms and conditions do not specify the point in time at which
funds ought to be in place for charges to be avoided
• where to check available funds. Some means of checking the account balance (such as an
ATM or an on-line statement) may or may not disclose the same balance used by the bank
to determine whether charges are payable, and
• which payment types can trigger unarranged overdrafts. An unarranged overdraft may
arise in respect of certain transaction types but not in respect of others. For instance, a bank
may allow such overdrafts in respect of debit card transactions, Direct Debits, standing
orders, cheques, ATM mobile telephone top-ups, CHAPS payments, international payments,
telephone or on-line banking payments, etc. Another bank may allow only unarranged
overdrafts in respect of debit cards, cheques, cash withdrawals, Direct Debits and standing
orders, and decline all other forms of payment when insufficient funds exist. At present,
several banks’ terms and conditions do not make explicit which payment types can, and
which cannot, give rise to an unarranged overdraft.
Assessing the cost of use of an unarranged overdraft
4.90 Once the consumer has tried to assess the likelihood of use of an unarranged overdraft he or
she will need to assess the cost of use.
4.91 Box 4.13 lists all the necessary factors a consumer would need to take into account, and
have information about, in order to understand how much he or she could be charged for
using an unarranged overdraft. In all, there are at least seven variables consumers need to
know to predict whether they will incur a charge. Customers will not necessarily have all this
information.
Box 4.13: What consumers would need to know to understand how much they
could be charged for using an unarranged overdraft151
When payment of an item(s) would create an unarranged overdraft, the following variables
determine the total amount charged
• types of charge levied by the bank. Charges can be classified as ‘transaction’ charges
(paid item, unpaid item charge) and ‘maintenance’ charges (monthly and/or daily overdraft
excess charge), see Glossary. Transaction charges are levied per item presented for payment
when insufficient funds are available. Maintenance charges are levied once a month or once
a day, when the account is in unarranged overdraft within the relevant period. The majority
of banks levy both types of charges on their main account

• charge combinations. Several charges may arise in respect of a single transaction. For
instance, if payment of an item creates an unarranged overdraft for the first time in the
monthly charging period, the bank may levy both a paid item charge (for making the payment
when insufficient funds exist) and a monthly maintenance charge (given that the making of
the payment necessarily causes the account to overdraw within the monthly period)
• outcome of the pay/no pay decision, and variable charges. The amount charged will
normally depend on the bank’s decision as to whether or not to pay: with some exceptions,
the unpaid item charge is higher than the paid item charge. The charge is normally a fixed
amount although variable charges are increasingly common: the amount charged may
depend on the value of unarranged overdraft when granted, or on the value of the item
presented for payment when declined
• recurrence of charges. Maintenance charges are levied once in the relevant period, and are
incurred again if the account continues to be in unarranged overdraft in the new period, even
where there is no new transaction in that period. By contrast, transaction charges cannot
arise in the absence of a transaction. For instance, if an account with no overdraft facility and
a debit balance of £100 at the end of the month continues to be in debit on the first day of
the new month, without any transaction occurring on that day, a new monthly maintenance
charge would be incurred, but no new paid item charge would be payable152
• ‘charges on charges’. Bank-originated items, such as the debiting of charges by the bank,
may give rise to further charges. For instance, if a bank declines a £200 cheque payable on
an account with a £15 credit balance and no overdraft facility, it may levy an unpaid item
charge. Debiting the charge at that point in time (as several banks do) would create an
unarranged overdraft. A monthly maintenance charge (and, possibly, a daily maintenance
charge depending on the bank) may also arise as a result
• internal processing of transactions. The way in which debits due for payment (and credits
due to be received) on a given day are processed by the bank may in certain circumstances
have a bearing on the type and number of charges incurred. The total amount payable may
depend, for instance, on whether the bank processes certain payments in a pre-defined
order (such as cheques first, then direct debits, then standing orders, etc.) or, alternatively, it
aggregates them and pays them in ascending order of value, or instead refers payments to a
member of staff. Since the way in which transactions are processed is not explained in
terms and conditions, this constitutes an additional difficulty when estimating the total
amount payable, and
• refunds, buffers and caps. The Competition Commission noted in its Northern Ireland
Banking Report that ‘[i]t appears that banks have increased the use of buffer zones and
charge capping, and have used discretionary refunds, to limit customer dissatisfaction arising
from unarranged overdraft charges. These pricing practices, and the extent to which banks
use their discretion, are not normally known to customers’.153 Banks’ policies prescribe limits
on the maximum number of charges that can be incurred in a specified period (known as
‘caps’), and/or the amount by which an account may go into unarranged overdraft without
incurring a charge (‘buffers’). In addition, a bank may refund a charge when a complaint is
made, or automatically in certain circumstances

4.92 It is clear that this complexity of application, along with the lack of information, makes it very
difficult and time consuming for consumers to calculate the cost of using an unarranged
overdraft.
4.93 It may be that some of this complexity is unavoidable and the argument has been made that
providing too much certainty may encourage reckless borrowing or involve overwhelming
information. However, in the OFT’s view, given this complexity, the significant proportion of
consumers that are incurring charges, many unintentionally, and the fact that these charges
account for around 31 per cent of current account revenue, it can be argued that these
charges should be more predictable and easily understood.
4.94 More recently, a number of banks have taken steps such as adding warning alerts on ATM
screens if a withdrawal will exceed their arranged limit, and offering similar SMS text alerts.
Such steps are a positive move to help some customers stay in control.155
Consumer control over use of unarranged overdrafts
4.95 As discussed, of those that entered unarranged overdraft, few stated that they knew they
would use an unarranged overdraft; in most cases it was not a deliberate decision. This may,
in part, be due to the complexity of estimating the likelihood of entering unarranged overdraft.
4.96 In light of this we asked consumers156 whether they want their bank to process debit card
transactions that take their current accounts into unarranged overdraft, and whether they
would opt out of an unarranged overdraft if they could. Fifty seven per cent of consumers
with an arranged overdraft said that, if they were making a payment using a debit card that
would, without them realising, take their current account into unarranged overdraft, they
would not want their bank to process that transaction. The figure rose to 71 per cent for
those without an agreed overdraft limit, making 62 per cent of all consumers when the two
groups are combined.
4.97 As a follow up question, we asked respondents to imagine the possibility of agreeing up front
with their bank that no debit card transactions that would lead to them going into unarranged
overdraft would be processed. Fifty seven per cent157 of those with an arranged overdraft said
they would take this option and that, instead of paying any charges, they would rather have
to make alternative payment arrangements. The same option was chosen by 55 per cent158 of
those without an arranged overdraft.
4.98 This highlights the lack of control consumers seem to have over this aspect of their current
account. Even those who do not want to use an unarranged overdraft, and are willing to have
debit items rejected if necessary, are unable to opt out. It is not clear why no bank has
offered an opt-out facility, and we do not consider a basic bank account to be a sufficient
substitute for a mainstream current account. It may be the case that there is not a strong
financial incentive for banks to offer an opt-out.

**Amethyst** · 16th July 2008, 08:02:AM

Re: PCA Publication from OFT

Box 4.14: Summary of issues relating to insufficient funds charges
Consumer knowledge and understanding
• 21 per cent of consumers said they had not heard of the charges before they incurred one
• 67 per cent did not know how much their bank’s charges were
• In Northern Ireland, according to the Competition Commission report, many consumers
thought they had not been charged when they had
• Some banks’ documents reported that consumers focus on other aspects of a PCA and
used it as evidence to show a proposed rise in insufficient funds charges would not affect
PCA sales (see chapter five)
Complexity of assessing the likelihood of using an unarranged overdraft
• Consumers are not always presented with sufficient information to calculate whether they
are likely to enter unarranged overdraft
Complexity of the application of insufficient funds charges
• The way in which insufficient funds charges are applied is complex and most consumers do
not have sufficient information on which to assess how much charges could be
• The Competition Commission found that charges were ‘unduly complex’ in Northern Ireland
• The OFT survey of information found that information on the application of charges was
difficult to find
Consumer overconfidence
• Psychological analysis of ‘in depth’ interviews showed that consumers are overconfident and
underestimate the likelihood of incurring a charge
• 57 per cent of consumers that incurred charges in 2006 also incurred at least one in 2005
• Only five per cent of people we surveyed said that lower charges were an important factor
when they opened their main account, and there was no significant difference between
those who had experienced insufficient funds charges in the last 12 months and those who
had not.
Inability to opt out of unarranged overdraft
• In our omnibus survey more than half of the respondents said that they would opt out of an
unarranged overdraft if they could and well over half said they would not want a debit card
transaction processed that would take their current account into unarranged overdraft

**Amethyst** · 16th July 2008, 08:02:AM

Re: PCA Publication from OFT

Consumers’ awareness of warnings
4.99 There appeared to be some concern about the timing and lack of warning concerning the
impending charges in our ‘in depth’ interviews, for example:
‘If you get a letter it’s already too late which is a bit stupid because, although they say in
the letter that you can put your current account back in credit today, it doesn’t give you any
chance because the letter won’t arrive the same day.’
4.100 There is also evidence from the interviews that consumers do not understand the way
multiple charges can accumulate or ‘snowball’ from, perhaps, one payment:
‘I thought I’d be charged maybe £15 or £20 in total, but they walloped me with something
like £70 in total.’
4.101 More recently we understand that some banks have taken steps to alert consumers when
they are about to, or are, using an unarranged overdraft including by text message or on an
ATM display.
4.102 Consumers also have a responsibility to try to stay informed. Our survey found that while
many consumers said that they read their statements, few read other material sent by banks.
Forty five per cent of consumers ‘rarely’ or ‘never’ read material sent by the banks and a third
(33 per cent) only ‘sometimes’ read the material. Since the information referred to includes
interest rate changes and product information we might expect consumers to pay more
attention to it than they seem to.
4.103 Awareness of the cost of using an account is important as it can vary substantially depending
on how the consumer uses it and between different banks. Annexe C illustrates how the
cost, or even return, on accounts can vary by broad consumer category. Consumers with
larger credit balances will pay significantly less than those with large debit balances and lots
of insufficient funds charges but they may forgo interest by holding large credit balances.
Customer satisfaction
4.104 We explored customer satisfaction in our consumer survey. Cost is only one aspect in value
for money. Another important factor is the service a customer gets for their money. Chapter
three explores the significance of customer service to the market more widely.
4.105 Specific questions in our consumer survey on customer satisfaction with current accounts
show that satisfaction is broadly positive. On a scale of one to ten, where one is poor and 10
very good, customer service and value for money were both rated favourably with each
having a mean answer of over seven.
4.106 While this is clearly an important result in its own right, the ‘in depth’ conversations
highlighted that satisfaction can reflect an absence of problems rather than a very positive
experience. In some cases unless there is a problem consumers tend to be content with the
bank, as represented by this quote, ‘They make all the payments on time, they seem to be
efficient and things seem to run smoothly,’ rather than the bank doing anything more than
expected. In addition, in the consumer survey satisfaction was lower for those who had
incurred an insufficient funds charge.

**Amethyst** · 16th July 2008, 08:03:AM

Re: PCA Publication from OFT

How vulnerable customers operate current accounts
Use of current accounts
4.108 The issues that arise for vulnerable consumers are similar to those with conventional current
accounts but with some key differences. In line with other consumers from our consumer
survey, vulnerable consumers tend to use in-branch banking to deposit cheques (44 per cent),
to deposit money (43 per cent), and to withdraw money (41 per cent). They were unlikely to
use telephone banking (55 per cent don’t use telephone banking compared with 45 per cent
of all current account holders) or internet banking (59 per cent don’t use internet banking
compared with 48 per cent of all current account holders).
4.109 The major difference between mainstream current accounts and basic bank accounts is that
a basic bank account seldom has a cheque book facility and never offers an overdraft. The
lack of an overdraft, whether arranged or not, removes an element of interest rate and
charge costs that can affect account holders. However basic banks accounts can still incur
unpaid item charges.
4.110 Charges are a significant issue for vulnerable consumers. For example, when using a
mainstream current account, respondents with savings of less than £1,000 were the most
likely groups of consumer to use arranged overdraft. Twenty one per cent of this group said
they were ‘permanently’ overdrawn, and a further 25 per cent said they were ’usually’
overdrawn. In other words almost half this group of people is habitually ‘in the red’.
4.111 Our consumer survey showed that the best predictor of whether a consumer has incurred
charges is whether they are financially constrained.163 For example:
• those with less than £1,000 in household savings were significantly more likely to have
been charged in the past 12 months for going into their unarranged overdraft164 (48 per
cent compared to 18 per cent of those with at least £1,000 of savings)
• consumers on low incomes or with less than £1,000 in household savings were
significantly more likely to have been charged in the past 12 months for a refused
payment (15 per cent and 31 per cent respectively, compared with 11 per cent and eight
per cent of those with higher incomes or more savings). The most common reason for
refusal among low income consumers was insufficient funds165 (48 per cent compared
with 45 per cent for all consumers who had a payment refused), and
• nearly one in five (18 per cent) of basic bank account holders have been charged in the
last twelve months for having a payment refused (compared with less than one in ten
(nine per cent) of standard current account holders).166 The most common reason for
refusal among basic bank account holders was insufficient funds (52 per cent compared
with 41 per cent for standard current account holders).

**Amethyst** · 16th July 2008, 08:06:AM

Re: PCA Publication from OFT

CONCLUSION

6.3 The significant areas of concern are:

• low levels of transparency on fees that make up a substantial proportion of the effective
payment that consumers make for current account services, meaning that consumers
lack the fundamental information needed to compare competing products

• complexity in the way that these fees, particularly insufficient funds charges, are
implemented that makes it hard for consumers to predict when they will be incurred

• the lack of simple mechanisms for consumers to control, or opt out of, whether they use
the service(s) for which they pay, and

• a general and valid perception amongst a significant proportion of consumers that
switching is both complex and risky, and that unless they manually switch, they have
little control over these risks

PCA Publication from OFT - full report

PCA Publication from OFT - full report

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