Packaged accounts to spark more bank claims

More than ten million people pay for a packaged or added-value account in return for benefits including various types of insurance and enhanced interest rates.

With an average cost of £15 a month, according to Moneyfacts, packaged accounts are lucrative for banks and building societies.

However, the City regulator last year launched a crackdown on the market amid concerns that many people are paying for benefits that they don’t need, aren’t aware of or couldn’t claim on.

One in three packaged account-holders fails to use any of the add-ons they’re paying for, research by consumer group Which? found.

New rules set out by the Financial Services Authority (FSA) in December and coming into force on 31 March aim to make it clearer to customers what they’re getting for their money.

Banks and building societies will have to provide customers with annual eligibility statements, including details of any insurance bought through their packaged account and a reminder to review the benefits to ensure they meet their needs.

That puts the onus on banks to check at the point of sale that the insurance elements of an account are all suitable for the customer.

Andrew Hagger, personal finance expert at Moneycomms.co.uk, said: “The new rules will prevent sales where it’s clear that the account isn’t suitable, something that hasn’t always happened.”

Older customers will also be informed when they reach, or if they’re about to reach, the age limit on any travel insurance bought as part of their product.

Sylvia Waycot, spokesperson for Moneyfacts, believes the new rules will help consumers get more value from their bank accounts.

“Letting customers know exactly what they are paying for and what they are actually eligible to claim against will help them decide whether the account is worth any fee they are paying,” she said.

“Insurances have terms and conditions which can vary, so it is right that they should be pointed out along with any action that needs to be taken.”

But the changes are also set to cause a stir. Complaints about the accounts are expected to rise as more people realise they’re paying for benefits they don’t want or need, or believe they were mis-sold their account.

The claims management companies that have cashed in on the payment protection insurance (PPI) scandal are primed to target consumers with adverts and unsolicited phone calls and emails telling them they can claim compensation for current account mis-selling.

Complaints about packaged accounts remain relatively low. However, there has been a marked rise over the past six months, the Financial Ombudsman Service (FOS) told The Scotsman, doubling to 60 a week in that time.

Three-quarters of complaints concern sales, while many are about specific add-ons such as mobile phone and travel insurance.

Many people don’t realise they’re paying for their current account, or didn’t understand how much it would cost, said the FOS. In some cases consumers already had the insurance cover they were buying again through their account, while it is often sold even where the consumer wouldn’t have been eligible to claim.

“These problems tend to arise when people come to make a claim only to find that their policy offered only limited cover or pays out only under the most particular of circumstances,” a spokesman for the FOS said.

The changes – and the fears over the repercussions – have sparked a withdrawal from the market. The Co-op this week revealed its packaged accounts would come off the shelves on the day the new rules take effect. The move, which doesn’t affect existing holders of its privilege and privilege premier accounts, came weeks after Lloyds TSB took the same step. The high street banking giant no longer sells its packaged accounts over the phone or in branch, a temporary measure arising from worries over potential mis-selling.

Santander walked away from packaged accounts last year, effectively replacing its range with the innovative 123 Current Account (although this paid-for product does share several features with conventional packaged accounts).

The trend has been bucked by Nationwide Building Society, however, which this month launched the £10-a-month FlexPlus account.

“It looks a really good deal,” said Hagger. “For £10 per month you get comprehensive travel and car breakdown cover, mobile phone cover for all family members, free debit card withdrawals abroad, 3 per cent credit interest on the first £2,500, a £100 fee free overdraft plus a few other benefits too.”

But other providers could respond to the new rules by hiking the fees on their existing products, he warned.

“Whether this additional regulatory burden will force some providers to stop offering packaged accounts or increasing the monthly fees it’s too early to say, but it wouldn’t surprise me to see the latter.”

Ultimately, however, the new rules will deliver better value for consumers despite the temporarily reduced choice, believes Waycot at Moneyfacts.

“Hopefully this will make packaged accounts much more competitive, ideally they should become tailored so that the customer picks the insurances and benefits that are most relevant to them rather being offered an account that promises lots but fails to deliver which has been the main criticism so far,” she said.

Hagger agreed: “These new rules are long overdue, but at least it will mean that customers are treated fairly and not talked into paying out for unsuitable products,” he said.

SEVEN DAYS FOR BANK SWITCHES

Switching current account will become easier from September when new rules will give banks a maximum of seven working days to complete transfers.

Under plans set out by The Payments Council and confirmed last month by Chancellor George Osborne, banks will be forced to speed up a process that currently takes an average of 18 working days to complete.

The seven-day switching guarantee, first proposed by the Independent Commission on Banking, is aimed at improving competition in the current account market. Around three- quarters of accounts are held with Barclays, Royal Bank of Scotland, Lloyds and HSBC. The Office of Fair Trading warned in January that the market was not “working well for consumers or the wider economy”.

The system coming into force in September builds on recent improvements in the switching process that have put the onus on the new bank to oversee the entire switch.

The new rules are still patchy, however. For instance, while banks will be given seven days to complete the switch and consumers can choose which day their regular payments are transferred, there’s no requirement for their card and PIN to arrive within seven days. That raises the prospect of people being unable to access the money in their new account or carry out transactions during that period.