The Financial Services Authority (FSA) has warned that some people with bundled or packaged accounts are throwing “money down the drain” because they are paying for perks they either do not or cannot use.
One in five adults has a packaged account, paying an average of £14 a month in return for benefits including insurance, commission-free currency and favourable overdraft terms.
However, complaints about the accounts to the Financial Ombudsman Service (FOS) are rising. It reports claims of customers being moved into the accounts without their knowledge. The most common complaint is from people who have made claims on an insurance policy included in a packaged account, only to find that the cover is limited or pays out only in certain circumstances.
The City watchdog yesterday moved to clamp down on mis-selling by telling banks to make sure customers are eligible to claim the insurance offered as part of fee-based bank accounts.
The rules – proposed last October and to come into force by the end of March 2013 – will see users of packaged accounts receive annual statements reminding them to check the benefits are still suitable for their needs.
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.
“We are closely monitoring the promotion of packaged bank accounts and the new rules will make sure customers know what they’re buying and that they can rely on the product or have the limitations explained before buying.”
The regulator is looking into potentially misleading promotion of packaged accounts where the monthly costs are advertised alongside annual benefits.
The number of packaged accounts available has virtually doubled over the past five years as banks have sought to recoup revenue no longer pouring in from excessive overdraft charges and payment protection insurance (PPI) sales.
Marks & Spencer Money last week revealed that its first current account, to be launched in October, will cost £20 a month in returns for benefits including store discounts.
However research by consumer group Which? last year found that despite the monthly charges, just three in ten people with packaged accounts regularly use the benefits they’re paying for. Two in ten have never used the benefits at all.
Kevin Mountford, head of banking at MoneySupermarket, said: “No doubt better deals can be found by sourcing the add-ons individually, but in a world where many are time poor, a one-stop-shop solution can be attractive. It is therefore essential that consumers make the most of the benefits on offer otherwise they will be paying far more than needed.”
But the FSA’s new rules could accelerate the demise of free banking as banks look for new ways of generating money from current accounts, said Michael Ossei, personal finance expert at uSwitch.com.
“But one thing is very clear, these rules are not just to protect consumers – they will also protect the banks,” he said.
“With so much scrutiny over the mis-selling of financial products, these rules will now help the banks to ensure that they are promoting packaged accounts in a consumer-friendly and appropriate way.”