31 March 2015
Banks still failing the transparency test
Until a few years ago, much of what Britain's banks got up to was governed by a voluntary code. As you might expect, it was a particularly flimsy document, which was just vague enough to allow banks to get up to all sorts of tricks. One of the worst examples was the stipulation that if a bank was making changes to interest rates on its savings account, then it didn't have to personally notify customers if the rate change was less than 0.25%.
Instead, all that was required was that the bank put up a poster in its branches, and put an advert in a national newspaper, to let its customers know of the change. If you didn't happen to buy a copy of the right paper that day, or spot the poster in your branch, then tough luck.
A few years ago, the Banking Code was thankfully replaced with some proper rules, policed by the Financial Services Authority (now the Financial Conduct Authority). As was the preference of the FSA at the time, the new rules were not prescriptive. Instead, they were written in broad terms - telling banks that they needed to personally notify customers of "material" changes to their interest rates. Rather than defining what "material" might mean, the rules simply went onto say that the banks should take into account the size of the balance as well as the size of the rate change.
The industry trade bodies did take things one step further and try to come up with their own definitions for what "material" might mean. However, they essentially stuck with the old principle that anything above 0.25% was material, and added a rider that you needed at least £500 in your account for such a change to be noteworthy.
Keeping customers in the dark
Old habits die hard, and as far as I can see, the formalisation of the Banking Code made little difference to the way most banks acted. Evidence to support that supposition was published today by the Financial Ombudsman Service as part of its bi-monthly newsletter. One of its case studies highlighted the story of a long standing customer of a building society who had seen her rate drop substantially over a number of years. While she had well over £500 in her account, the cuts to her interest rate had been around 0.25% each time, meaning that the building society decided it didn't need to let her know.
The Ombudsman sided with the customer and forced the building society to make up her lost interest - but no doubt there are thousands more customers who have suffered the same fate.
Although I'm a fan of principles-based regulation, this is one area where it is arguably failing. By not explaining what "material" means, the regulator allows banks to make up their own minds - and forces them to fight against the temptation to put their bottom line over good customer service.
Frankly, I don't understand why banks are not forced to personally communicate every rate change, however small, to their customers. Preferably, they would do it by text message, email and letter. But at the very least, they would use one of these. Placing posters in branches in an era where fewer and fewer people are using branches is simply not enough.
Where's the interest rate on my statement?
Astonishingly - as I've written here before - many banks still don't print the interest rate on their saving account statements. This is essentially the one piece of information that the customer needs to know - along with how much money is left in their account - and it's not there on their statement. I feel obliged to once again call out my own bank First Direct here. When I log into my online accounts, the rates on my savings accounts are nowhere to be seen on the screen. And this is a bank that is renowned for putting the customer first.
The regulator has only just finished a review of the savings market, and may have missed a good opportunity to sort this out.
There is, however, new banking regulation on its way from Brussels - the Payment Services Directive 2 - so there are still opportunities to get this sorted.
But if there's no appetite for greater regulation, then the FCA should at least start enforcing its principles - and make examples of the banks who are playing fast and loose with the current rules. Some precedent around what is deemed material and what isn’t may start to change habits.
Telling customers how much interest they're earning should be the first rule for any company that wishes to offer savings accounts. It beggars belief that many banks still don't do even this basic task.