THE Financial Services Authority last week set out new rules governing the sale of fee-based bank accounts amid concerns that consumers are being conned into paying for accounts they don’t want or need.
Paid-for accounts comprise a growing proportion of the current account market as banks and building societies seek new ways to make money from customers.
There are now 67 packaged accounts on the market – more than double the number five years ago – and one in five adults in the UK has one, according to the FSA. The monthly fees average £15.28, according to Defaqto, up 31 per cent in just five years.
Yet research shows that few people actually use the added benefits they are paying for. The typical packaged account includes extras such as car and motor insurance, favourable overdraft terms, breakdown cover and commission-free currency (see panel for full list).
With revenues hit by crackdowns on high overdraft charges and payment protection insurance (PPI) sales, packaged accounts would appear to be the future as banks shift away from the traditional free banking model.
That’s one reason why the FSA has issued new rules aimed at tackling widespread mis-selling of the accounts. From the end of March next year, banks must ensure customers are eligible to claim the insurance offered as part of fee-based bank accounts. They will also be forced to send out annual statements reminding customers to check the benefits are still suitable for their needs.
The measures come on the back of growing unease at the number of people paying for the accounts but not getting their money’s worth. In many cases, the benefits being paid for turn out to be useless.
Sheila Nicoll, director of policy at the FSA, said: “These products are often referred to as upgraded accounts, but if you end up paying for an element you can’t claim on, it’s money down the drain.”
The City watchdog added that while the accounts are suitable for some people, the way the products offered in them are bundled together makes it hard for consumers to reach an informed decision.
Complaints to the Financial Ombudsman Service (FOS) about packaged accounts are rising. Many bank customers have reported being shifted into fee-based products without their agreement. Perhaps the most common complaint, however, concerns the validity and value of the perks included.
Thousands of people making claims on insurance policies taken out through packaged accounts have discovered that they aren’t eligible for the cover, or that it pays out only in certain circumstances.
Just three in ten people who pay for the accounts regularly use the benefits included, with two in ten never using any of the added-value extras, according to consumer group Which?
Sylvia Waycot, spokeswoman for Moneyfacts, said: “Unfortunately, many people just forget they have the ‘extras’ as they are not using them regularly, such as accident cover, or commission free currency. The other major problem is that people don’t think they have to register for the insurances and it is too late when they want to make a claim.”
So what do you get if you sign up for a packaged account? The five most common features, according to a recent Defaqto report, are commission-free currency, commission-free travellers cheques, travel insurance, mobile phone insurance and preferential savings deals.
But only a fifth of the accounts pay savings interest of 0.5 per cent or more, Defaqto’s research shows.
There are limitations on other popular features, too.
For example, mobile phone insurance requires the customer to register their mobile number with the bank when opening the account. Many people have complained that they didn’t know this, even though it means they can’t claim on the insurance.
Similarly, many people paying for the accounts already have some of the features – particularly home and contents insurance – on a standalone basis. Even if you don’t already have cover on a standalone basis, it’s worth checking if you can get cheaper or more comprehensive insurance separately, rather than rely on the often limited policies included in packaged accounts.
The message, in short, is to make sure an account is suitable for you before agreeing to pay a monthly fee for it. After all, the average monthly fee amounts to more than £183 a year. If you’re not getting that back in the form of benefits and perks each year, you’re not getting your money’s worth.
For all the concerns over their value, however, packaged accounts will continue to proliferate as the days of free banking slowly draw to a close. Marks & Spencer Money, which opened its first in-store bank branches last month, launches its first current account in October – and it comes with a hefty price tag. Shoppers taking out the account will pay a monthly fee of up to £20, in return for the usual benefits, plus store discounts.
But the FSA rules coming into force next year will help protect consumers from misleading sales of the accounts, according to Waycot.
“Up till now, packaged accounts have been sold along the lines of ‘buyers beware’ and it has been up to the customer to check that the extras are useful and that they use them,” she said.
“Going forward, the roles will be reversed and customers can expect to be sold something useful to their individual needs. This has to be a good thing.”
This could result in the accounts becoming more streamlined, with fewer but more valuable benefits. “Alternatively, we could see accounts that charge less but don’t offer any of the packages, in essence a paid for account but only if there is a bank brave enough to start the trend,” Waycot suggested.
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