Payment Accounts Regulations 2015
Lord Ashton of Hyde
That the Grand Committee do consider the Payment Accounts Regulations 2015.
Relevant document: 10th Report from the Joint Committee on Statutory Instruments
Lord Ashton of Hyde (Con)
My Lords, I am pleased to introduce these draft regulations which aim to ensure the UK’s compliance with the EU payment accounts directive. The directive sets common standards across member states that payment service providers—in this context, principally banks and building societies—must meet. First, for the account that we use for day-to-day transactions—in most cases, a current account—the directive aims to make fees and charges clearer and more comparable. Secondly, it seeks to make it easier to switch to another provider of such an account in order to facilitate competition. Thirdly, the directive creates a right of access to a payment account with basic features for all consumers legally resident within the EU—these accounts are more commonly known as basic bank accounts in the UK.
The Government supported the directive and had already taken action in many of these areas. Agreements with industry already aim to improve the transparency of fees and charges. We have established the seven-day current account switch service and for more than 10 years our largest banks have offered basic bank accounts and have recently committed to improve that offer even further. The regulations that we discuss today comply with the directive where necessary, but minimise negative impacts on industry and consumers, and preserve structures that are already working well in the UK.
I shall start with a few words on the scope of the directive—namely, the definition of the term “payment account”. For the avoidance of doubt, where I refer to a payment account, I am doing so in line with the definition used in the draft regulations. The definition of this term in the directive could capture very simple types of payment account, well beyond the types of account used for day-to-day transactions that were discussed in negotiations. However, the recitals to the directive make it clear that savings accounts, credit card accounts where funds are usually paid in for the sole purpose of repaying a credit card debt, current account mortgages or e-money accounts should in principle be excluded. The exception to this is when such accounts are used for day-to-day payment transactions. Accordingly, the Government defined payment account in these draft regulations in a way that uses this language to describe and clarify the accounts that will be in scope. It is the Government’s view that this definition should be sufficient to limit the application of PAD to current accounts, or accounts that have functionalities directly comparable to those of current accounts, in the UK.
The Government have given as much clarification as the text of the directive allows. To go further, and entirely exclude some types of account, would be to risk a failure to comply with the directive. It will be for firms themselves to determine whether each of their products falls within the scope of the regulations, and whether the regulations therefore apply to them. The Financial Conduct Authority will supervise and enforce most of the requirements set out in the draft regulations.
When firms offer a payment account in line with the draft regulations, they will need to make new documents available to consumers: a fee information document, which sets out the fees that may be charged before the consumer decides to enter into a contract; an annual statement of fees, provided each year to explain the fees that have been charged; and a glossary to explain the main terms used in the documents, and their definitions. Some of the terminology used in these documents, and in related contractual, commercial and marketing information, will be standardised at European Union level. The process for carrying out this standardisation is rather involved, but is already under way.
As required by the directive, the Financial Conduct Authority established a provisional national list of the most representative services that are linked to current accounts in the UK and subject to a fee. Each member state submitted its list to the European Commission and the European Banking Authority, so that they can develop EU standardised terminology for the services that appear on a majority of member states’ national lists. After the European Commission adopts the EU standardised terminology, the FCA will integrate the standardised terminology into its provisional national list when necessary, and publish the final list for UK payment service providers to use. In addition, the Money Advice Service will operate a comparison website that allows consumers to compare at least the fees that appear on this final list.
The directive also requires action on packaged accounts—that is, payment accounts that offer an additional service or services, such as insurance or car breakdown cover. Consumers will now need to be informed whether the account is available without the additional services. If any of the additional services can be purchased separately from the same firm, the firm should tell the consumer how much each of those additional services would cost. Taken together, these measures should help consumers to understand and compare how much they are charged.
I shall move now to set out the approach to account switching. As I have mentioned, the UK already has a world-leading Current Account Switch Service, which has been recognised by the European Commission. It is managed and operated by BACS, a not-for-profit organisation. But not all member states are in this position, so the directive sets out some rules that all EU payment service providers must abide by when a customer wishes to switch to another payment account in their member state. When a UK payment service provider is not a member of the Current Account Switch Service, and it offers a current account-type product, it must at least follow these rules. However, for the vast majority of the current account market, the regulations allow our Current Account Switch Service to continue to work as it does today.
Compared to the switching rules set out in the directive, our Current Account Switch Service must meet three very simple criteria. It must continue to be in the interest of the consumer, present no additional burden to the consumer and be at least as fast. As the directive makes clear, we can maintain existing services where they meet these three criteria. There is no requirement to exactly mirror the switching rules set out in the directive.
The Government’s clear view is that the Current Account Switch Service that we have now exceeds the three criteria. However, the UK’s compliance with the directive has to be beyond question. That is why the independent Payment Systems Regulator will be responsible for confirming that the Current Account Switch Service meets, and continues to deliver against, the three criteria. We have agreed a proportionate set of powers for the PSR as a competent authority to use, should it ever become necessary, in this limited role. The PSR will provide further information on the designation and monitoring process in due course.
I move on to the provisions in the draft regulations on basic bank accounts. Basic bank accounts help to ensure that everyone is able to access essential banking services. They should be without fees and not offer an overdraft or cheque book. The draft regulations on basic bank accounts reflect the UK’s existing basic bank account policy, particularly where that is more advantageous to consumers, but they bring the UK into line with the requirements in the directive where necessary.
As noble Lords may recall, in December last year the Government reached a new agreement on basic bank accounts with the nine largest providers of current accounts. That agreement clarifies who should be eligible for a basic bank account and brings to an end the widespread practice of charging basic bank account customers for a failed payment, such as a failed direct debit or standing order.
We have taken action in these regulations to ensure that we do not move backwards as a result of implementing the directive. For example, the directive would allow us to establish arrangements that would be less advantageous to UK basic bank account customers by allowing banks to charge fees. However, the Government believe that a basic bank account and its standard services should continue to be provided free of charge provided that the services are provided in sterling. Nor should basic bank account customers be charged for failed payments or for overrunning, given that a key principle underpinning these accounts in the UK is that they should not be offered with an overdraft.
The directive would also allow us to restrict these accounts to only the “unbanked”. However, we are clear that basic bank accounts are also necessary for access to banking for those who may already be “banked” but are unable to use their existing account due to financial difficulty. That is why the eligibility criteria in the draft regulations establish that a consumer should be offered at least a basic bank account if they are unbanked or if they do not meet the bank’s stated eligibility criteria for a standard current account.
As I said, we do not want to move backwards but we also have to ensure that the UK can demonstrate its compliance with the directive. For example, we have had to legislate in order to establish a clear legal right of access to a basic bank account and a right to challenge banks’ decisions before a court. A voluntary agreement could not establish these rights with sufficient legal certainty.
We have also had to limit and make more specific the reasons why a bank may refuse an application for a basic bank account or close one. However—I recognise that there has been some concern from the industry on this point—no bank is required to open an account, or to continue to operate one, where it would otherwise be unlawful to do so.
I hope that I have assured the Committee that these regulations meet the UK’s obligations in implementing the directive in a sensible and pragmatic way, and that all noble Lords will therefore support the Motion. I beg to move.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for outlining the regulations before us today. I listened to his presentation with some care. Of course, realistically, I prepared my remarks in advance, so there may be a little overlap.
The theme that came through, which I found almost joyous, was the way in which the European regulations have been gold-plated. I personally have no objection to regulation; I am a great believer in regulation provided it is good regulation that does good things without disproportionate costs. I think I heard the Minister say, over and again, “We could have introduced a lower standard in this area, but we do not believe we should go back to that lower standard. We should retain and, in one or two cases, enhance the standards in the UK regulations because the EU regulations allow permissions in certain areas”. I would like the Minister, when he has contemplated this, to assure me that there has been a little bit of gold-plating, that it is very fine gold and that it meets the key test of regulation which is that it is good for consumers and for the markets they are in.
The EU payments account directive has three main principles: first, to improve the transparency of fees relating to accounts that are principally personal accounts; secondly, to make it easier for consumers to switch accounts; and, thirdly, to ensure that all EU consumers can access banking services by ensuring that a sufficient number of accounts with basic features are available.
I will start by picking up a point raised in the Explanatory Memorandum. The Government say that they are content with the definition of “payment service providers”, despite representations for further clarification of the scope of the term. The Government state that,
“the definition of the term ‘payment account’ that is used in this instrument gives as much clarification as the text of PAD allows, and that the term covers what are generally referred to as current accounts in the United Kingdom or accounts that have functionalities directly comparable to those of current accounts”.
I think the Minister went on to say that it is for individual firms to determine whether their products are covered, and that the FCA has the role of checking that they have made the right decisions. Perhaps the Minister can confirm that I understood that correctly. If the Treasury will not publish further information on the scope of the term, will the Minister at least say what bodies, aside from banks and building societies, the Government believe will be affected by these regulations?
Quite rightly, the Government emphasise the need for existing initiatives, such as the Current Account Switch Service and the new payment accounts directive, to accept that they may have to be adapted in order to achieve the best outcomes. I think the Government have tried to do that. Therefore, in the relevant sections the Government have said that a copy-out approach has not been taken. With this is mind, how do the Government anticipate that the Competition and Markets Authority’s report on the banking sector will be integrated into this framework? The issues being investigated in its review have a great deal of crossover with what is set out in these regulations. The integration of a further framework could prove challenging. Can the Minister say how each of the important pieces of the jigsaw will fit neatly together?
One particularly important aspect of the regulations relates to the transparency of fees. Research from TSB suggests that banks in the UK make between £7 billion and £8 billion a year from supposedly free current accounts. Any measures that could contribute to helping to make the customer more aware of these fees are important, and we welcome them. It is often in packaged bank account deals that hidden fees are found and under the Payment Accounts Regulations 2015 providers of packaged bank accounts will be required to inform the consumer whether it is possible to purchase the payment account separately from the same provider. If so, customers will need to be provided with separate information regarding the costs and fees associated with each of the other products and services offered in the package that can be purchased separately from that provider.
In the consultation response the Government confirmed that:
“If the payment account is available separately, the payment service provider must provide separate information regarding the costs and fees associated with each of the other products and services offered in the package that can also be purchased separately … The government therefore does not consider that the assumption made by certain firms, i.e. that they will not be required to disclose the costs and fees of products and services available separately because they are not offered on identical terms and conditions, is correct”.
That is welcome news. However, the consultation made clear that a number of firms incorrectly considered themselves exempt from the draft regulations concerning packaged bank accounts. I know the Government made changes to the original wording of the regulations but how else do they intend to communicate these changes to banks to ensure that they are aware of their responsibilities?
A broader concern for payment service providers and trade associations is the limited time available for implementing changes. Payment services providers will have more time to implement these changes as the Government extended the deadline to six months after the FCA publishes the linked service list. When do the Government anticipate that the linked service list will be published and what more can the Government do to assist PSPs in the interim?
On the issue of switching, research conducted for the Competition and Markets Authority found that 37% of people had been with their bank for more than 20 years and that a further 20% had had an account for between 10 and 20 years. Have the Government undertaken analysis into this? If so few people change banks, as has been suggested, then is failing to extend these regulations to cover existing customers undermining the effectiveness of these regulations?
The Money Advice Service will be required to operate a comparison website. Can the Minister go into more detail about the timescale? When does he expect this resource to be available to consumers?
Finally, during the consultation no information was received regarding the anticipated costs to non-Current Account Switch Service members as a result of the proposed approach on switching, nor did the responses address the costs or benefits to consumers as a result of the proposed measures. Will the Minister comment on these issues?
As I said at the beginning of this speech, we do not oppose these measures. Indeed, we feel they are good and that the enhancements and nuances included are to the benefit of consumers. Nevertheless, the UK does not have public confidence in the banking system, and that needs to be addressed urgently. We will support any measures that seek to do that.
Lord Ashton of Hyde
My Lords, once again, I thank the noble Lord, Lord Tunnicliffe, for his support and in-depth scrutiny of these rather extensive regulations. I will try to answer as many of his questions as possible.
The noble Lord felt some joy over my remarks. I am always anxious to give noble Lords as much joy as I can—and hope I always do so. However, in this case I will disappoint the noble Lord a bit. We do not think that these regulations have been gold-plated, if by gold-plating we mean making the regulations more onerous than they need to be, either by commission or omission. We used the latitude available to the UK within the directive to maintain existing policies on financial inclusion, such as on fees. For example, the directive allows banks to charge reasonable fees for basic bank accounts but we are not doing that because the existing agreement does not do it and so it would be to consumers’ detriment. We are using the flexibility not to do that.
We could have required all banks to offer basic bank accounts, but we chose not to do that because we want to maintain access to basic bank accounts for UK customers without discouraging newer, smaller entrants. That point has been raised in other debates. We welcome competition in banking and want to help challenger banks. I am glad to say that at the moment 25 are applying for licences. We want to limit the impact on the industry wherever possible.
The noble Lord asked what types of firm, other than banks and building societies, might be within the scope of these regulations. We want to minimise any negative impact. The directive allows member states to exempt certain entities from the application of all or part of its provisions, so we have used that flexibility where organisations offer some form of payment service, such as for credit unions, municipal banks, National Savings and the Bank of England. Ultimately, it will be for firms themselves to determine whether each of the accounts they offer falls within the scope of the regulations and whether the regulations therefore apply to them. We have been as clear as we can within the directive to determine what payment accounts are covered, but we have used the recitals to explain some of the accounts that are excluded, and broadly, the Government’s view is that current accounts or any other account that is used for normal day-to-day payment purposes are covered.
Lord Tunnicliffe
What would be the process if a firm made a misdetermination of an account? In other words, if it took a view that a particular product was not covered by the regulations but the correct interpretation of the regulations would be that it should be, what process would come into play to require that firm to correct that decision?
Lord Ashton of Hyde
The competent regulator is the Financial Conduct Authority. Ultimately, enforcement action could apply, but in the normal course of dealings, particularly with new regulations, I would expect a conversation to take place with the regulator if there was any doubt. For the vast majority of current accounts, it will be straightforward, but if there were a grey area around the edges, I would expect a sensible conversation to take place with the FCA. In the normal course of events, banks and other financial institutions are required to have an ongoing relationship with their regulator. I would expect that to apply unless something serious went wrong, in which case enforcement action could take place.
Action to comply with the payment accounts directive will certainly not prevent the UK pressing ahead with domestic initiatives to improve competition in banking, provided that the initiatives remain consistent with the regulations. The CMA’s provisional findings, which were published at the end of October, still need to be consulted on. It will issue its final report next spring, and the Government stand ready to take action as appropriate once we have those final recommendations.
I turn to packaged accounts, which also offer separate services such as car insurance, breakdown insurance or something like that. The consultation the Government produced set out the Government’s intended approach to packaged accounts in the draft regulations, which firms scrutinised and commented on. After these regulations have been made, if they are agreed to, the FCA will also consult in the usual manner on any changes to its handbook that it considers necessary to give effect to those regulations, including on packaged accounts.
In addition to its public consultation, the FCA will continue to engage with relevant industry stakeholders to discuss the implementation of the measures, including the extent to which services and their terms and conditions need to be identical to be caught.
The noble Lord referred to the Money Advice Service and asked when the comparison website that it has to set up will be ready. The comparison website will need to use, where applicable, the terms set out in the linked services list. We expect the final list to be published by the FCA during the first half of 2017, once the EU-wide standardised terms and definitions have been adopted by the European Commission. Although the Money Advice Service may choose to set up the website sooner, there is no obligation for it to do so until six months after the FCA publishes the final linked services list.