2015 Star Ratings. Current Accounts. Discussion Paper

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2015 Star Ratings

Current Accounts

About this document

This document outlines the key developments and trends that will inform the criteria we use for the 2015 Star Ratings for Current Accounts – and, based on these, sets out the areas where we would like to consult the industry as part of ensuring that our ratings process remains robust and transparent.

Key developments and trends

The market

We have reviewed developments in the current account market, considering legislation and regulation, provider changes, and current account product changes and have concluded that the following significant changes will be considered in our ratings for 2015:

 There has been a large amount of change in the provider market over the past couple of year, with major new entrants and providers launching a number of new accounts

 The number of different accounts in the market though is little changed overall (125 to 133 in 2 years)

 Introduction of Control Accounts has partially driven up the number of accounts in the past 2 years

Legislation and regulation

The biggest developments in this area at present are the FCA investigation on the sale of 'add-ons', and the introduction of the Payments Council 7 Day Switcher Service.

Payments Council Faster Switching Service

 The introduction of the Payments Council 7 Day Switch service is one of the biggest changes in recent years; it’s launch was heavily publicised and switching numbers have risen markedly

 Around 11% of account switching is still being done outside the PC switching service

 Overall switching numbers are relatively low, and further regulation in this area has been mooted

 We don’t intent to change our underlying account rating methodologies as a result, but we will remove Switch by Mobile phone as a rating criteria as no provider allows this

FCA Review into policy ‘add-ons’

 The FCA investigation into the sale of add-on insurance may well change the focus of the relative importance of these policy add-ons

 As yet it is too early to know whether the FCA will ban the provision of add-ons in current accounts, or make the sale process too complicated to make it worth having these benefits in a banking offer

 We intend to continue to include add-ons in our current account ratings for the time being

2014 2013

2012

standard _{added value}

premier _{young person} 52% 21% 18% 9% 48% 28% 17% 7% 41% 38% 17% 4%

UK Current Accounts by type 2012 - 2014 (% of accounts)

Changes to the taxation of Child Benefit

 In 2013 the government introduced means testing to the provision of Child Benefit for parents who individually earn more than £50,000 a year, with implementation of this through the taxation system

 This has drawn many more people into having to complete a Self-Assessment Tax Return

 We are considering adding the availability of a Tax Return service to the ratings for Premier Accounts

Providers

We reviewed how the make-up of distribution has changed over recent years, comparing 2014 to 2013 and 2012.

 Total distributor numbers have increased somewhat over the period, with 35 distributor brands today compared to 31 in 2012. There are four new entrants to the market (M&S Bank, Post Office, Tesco and TSB)

 Despite the dramatic change in distribution we cannot detect any marked change in the overall types and quality of cover being offered, so feel no need to change our Star Rating criteria on this account

Products/Propositions

We looked at the way in which providers' products and propositions are changing over time.

 With low savings rates there has been a battle for new current account customers by using interest rates as a hook; there are some marked differences between the £1,000, £2,500 and £5,000 saving tiers. We are considering adding interest paid on £2,500 of savings as a consequence

 With the increasing emphasis on interest rates we are also considering adding the frequency with which interest payments are made to the ratings criteria for 2015

 As some accounts offer very low savings rates within the current account, we are considering adding the provision of a Savings Sweep facility to all current account types

 The use of mobile technology for banking is increasing rapidly, so we are considering including the availability of a mobile phone banking app to the ratings, for all account types

96 95 99 104 111 13 ₁₂ 11 15 14 5 ₇ 3 3 4 5 1 ₁ 1 1 4 8 12 2 2 10 10 7 8 1 75 85 95 105 115 125 135 £500 £1,000 £2,500 £5,000 £10,000 N u m b e r o f A cc o u n ts

Interest offered by Standard Current Accounts (No. of accounts, June 2014)

Over 2% Up to 2% Up to 1.5% Up to 1.0% Up to 0.5% 0%

 The use of online banking is increasing at a rapid pace, with customers being encouraged to view statements electronically and stop receiving paper copies. With this in mind we are considering including the cost of receiving a one-off duplicate paper statement if a customer needs it for proof of identity, or for their records

 The recently launched Paym service is in very early stages; many providers have yet to implement it and it is unclear how many customers will be using this service in 2015. For the present we are not including Paym in our rating criteria

 Premier account providers are seeking to distinguish their products from the normal Added Value Accounts; we are considering adding the availability of a Relationship Manager to the Premier ratings

Key implications for the 2015 Ratings process

Product definitions

For 2015 the definitions of how Defaqto classify current accounts will be as follows:

Current Account

Type Criteria for Inclusion Ratings Available

Premier

 Marketed to High Net Worth customers  Minimum single income £75,000 per year, OR

minimum opening balance £5,000 or more

 Premier Current Account  Current Account Switching

Added Value

 Provides one or more non-banking benefit (e.g. travel, mobile, breakdown insurance etc.)  Annual fee applies

 Added Value Current Account

 Current Account Switching

Standard

 Mainstream accounts with no packaged features

 May or may not be an annual fee

 Includes Standard accounts with “Control”

 Standard Current Account  Current Account Switching

Young Person's  Maximum age to open the account is 18 or less  None

Young person’s accounts tend to be low in features compared with adult bank accounts, and will not be included in any ratings for 2015.

Product area weightings

Making the changes we described above will slightly alter the share of product features in the various ratings areas. The criteria mix for the 2015 Star Ratings would be as shown below.

Rating area

Standard

Added Value

Premier

No of Criteria Share No of Criteria Share No of Criteria Share Service 11 28% 12 24% 15 26% Cost/Income 13 33% 13 26% 13 22% Overdraft 9 23% 9 18% 10 17% Access 2 5% 2 4% 3 5% Incentive 3 8% 9 18% 9 16% Travel 1 3% 5 10% 8 14% TOTAL 39 50 58

These criteria reflect that in standard accounts the balance is mostly towards services, account cost (and income) and overdrafts, while in Added Value and Premier Accounts we have more weighting towards incentives and travel benefits and slightly less emphasis on costs and overdrafts.

What does good look like?

For 2015 we see no need to change the core criteria for 4 or 5 star products from those which are currently being applied.

Rating area

Star Rating area – core criteria Standard Current

Accounts

Added Value Current

Accounts Premier Current Accounts

Access  Minimum Monthly

Credit

Service  Cheque Book  Cheque Book  Cheque Book

 Max ATM Withdrawal Overdraft  Overdraft Facility  Overdraft Facility

 Interest Free O/D Limit

 Overdraft Facility  Interest Free O/D Limit Cost/Income  Default Monthly

Charge

 Default Monthly Charge

For Current Account Switching the core criteria for 4 or 5 Star products are unchanged from the 2014 ratings:

Current Account Switching

 Payments Council Switch  Dedicated Switch In Team  Refund Switch Charges  Refund Supplier Charges

Areas for discussion

These are the areas where Defaqto would like to discuss their proposals, and receive any feedback that you might have.

Increasing the number of criteria relating to interest paid on current accounts, or the provision of a savings sweep facility and including the frequency of interest payments

 Driven by our view that interest rates on current accounts is one of the areas of heightened competition at the present

 Providers “gaming” the interest rate tiers mean we need more criteria to distinguish between the accounts.

No changes to the Added Value and Premier Account scoring methods as a result of the FCA investigation into ‘add-on’ products

 Final report not yet published, consultation on remedies to be

published by end of 2014, any actions arising are likely to be given some time to ‘bed in’ during 2015

 Unclear that the FCA will try to prevent the inclusion of benefits like travel insurance, breakdown etc. from current accounts, given the recognised utility of some of these add-ons

 For the present we see no reason not to include these account benefits in our ratings for Added Value and Premier current accounts.

No changes to the DNA scoring method for

Current Account Switching

 The Payments Council faster switching service still is bedding in

 Considerable proportion (11%) of switchers still choose not to use the service, keeping their existing accounts open after the switch

 No sign that providers have moved their switching propositions as a result of the new service

 We cannot see any need to radically change our switching ratings for the coming year.

Move towards more mobile banking and move away from paper

 Inclusion of the provision of a mobile banking app in our ratings for all account types

 Inclusion of the charge for duplicate paper statements into the ratings

 Paym service is in early days; it is unclear how important this will become during 2015 so we have not included this in the rating criteria at present

 Other criteria relating to mobile banking included in a separate rating for 2015.

No other changes to product features studied

 We carried out a review of our DNA scores for 2014, and haven't seen any dramatic market changes that would require us to reconduct this review for 2015 ratings

 There are no obvious elements of account provision that might emerge over the next 16 months

 We intend to remove a small number of criteria from our current ratings because they do not distinguish between products any longer (see the Appendix)

 We cannot see any reason to remove any other elements of benefit from our ratings because of market changes likely to happen in the next 16 months.

Appendix: Proposed 2015 criteria

Based on the above analysis, we propose including the following criteria in our assessment process for the 2015 Ratings (core criteria are in bold text; new criteria are highlighted in green).

Proposed criteria – Standard Current Accounts

 Gross AER - £1,000  Debit Card Charge Europe

 Gross AER - £2,500  Duplicate Stat Charge

 Gross AER - £5,000  Interest Payment Freq

 Gross AER EqCash - £1,000  Cheque Clearance Time

 Gross AER EqCash - £2,500  Withdraw Uncleared Fds

 Gross AER EqCash - £5,000  Faster Payments Service

 Minimum Monthly Credit  Emergency Cash Benefit

 Max ATM Withdrawal  Cheque Book

 Overdraft Facility  Contactless Payment Limit

 Interest Free O/D Limit  Number of Trans Channels

 Overdraft Buffer Limit  Annual Summary on Paper

 Authorised O/D Scenario 1  No of Text Msg Services

 Authorised O/D Scenario 2  Mobile Phone App

 Authorised O/D Scenario 3  Incentive Travel Ins

 Unarranged O/D Scenario 1  No of Discount Incentives

 Unarranged O/D Scenario 2  Number of Pref Accounts

 Unarranged O/D Scenario 3  ID Theft Alerting

 Monthly Charge  Incentive Savings Sweep

 Default Monthly Charge  Forex Fee % Europe

 ATM Charge Europe

The table below sets out the 2014 criteria that we are planning to remove for 2015.

Criteria planned for removal – Standard Current Accounts

Proposed criteria – Added Value Current Accounts

 Annual Summary on Paper  Cheque Clearance Time

 Gross AER - £1,000  Withdraw Uncleared Fds

 Gross AER - £2,500  Faster Payments Service

 Gross AER - £5,000  Emergency Cash Benefit

 Gross AER EqCash - £1,000  Cheque Book

 Gross AER EqCash - £2,500  Contactless Payment Limit

 Gross AER EqCash - £5,000  Number of Trans Channels

 Minimum Monthly Credit  No of Text Msg Services

 Max ATM Withdrawal  Mobile Phone App

 Overdraft Facility  Incentive Travel Ins

 Interest Free O/D Limit  Travel Ins Winter Sport

 Overdraft Buffer Limit  Travel Ins People Covered

 Authorised O/D Scenario 1  Travel Ins Maximum Age

 Authorised O/D Scenario 2  Incentive Travel Ins Area

 Authorised O/D Scenario 3  Mobile Phone Ins Limit £

 Unarranged O/D Scenario 1  No of Insurance Incentive

 Unarranged O/D Scenario 2  Incentive Motor Breakdown

 Unarranged O/D Scenario 3  Motor Breakdown Vehicles

 Monthly Charge  No of Discount Incentives

 Default Monthly Charge  Number of Pref Accounts

 Forex Fee % Europe  Incentive Home Emergency

 ATM Charge Europe  Incentive Extend Warranty

 Debit Card Charge Europe  Identity Theft Assistance

 Duplicate Stat Charge  ID Theft Alerting

 Interest Payment Freq  Incentive Savings Sweep

The table below sets out the 2014 criteria that we are planning to remove for 2015.

Criteria planned for removal – Added Value Current Accounts

 No of Travel Incentives  Phone Types Insured

Proposed criteria – Premier Current Accounts

 Gross AER - £1,000  Emergency Cash Benefit

 Gross AER - £2,500  Cheque Book

 Gross AER - £5,000  Contactless Payment Limit

 Gross AER EqCash - £1,000  Number of Trans Channels

 Gross AER EqCash - £2,500  Annual Summary on Paper

 Gross AER EqCash - £5,000  No of Text Msg Services

 Minimum Monthly Credit  Mobile Phone App

 Minimum Income  Incentive Travel Ins

 Max ATM Withdrawal  Travel Ins Winter Sport

 Overdraft Facility  Travel Ins People Covered

 Automatic O/D Facility  Travel Ins Maximum Age

 Interest Free O/D Limit  Incentive Travel Ins Area

 Overdraft Buffer Limit  Mobile Phone Ins Limit £

 Authorised O/D Scenario 1  No of Insurance Incentive

 Authorised O/D Scenario 2  Incentive Motor Breakdown

 Authorised O/D Scenario 3  Motor Breakdown Vehicles

 Unarranged O/D Scenario 1  No of Discount Incentives

 Unarranged O/D Scenario 2  Number of Pref Accounts

 Unarranged O/D Scenario 3  Incentive Travel Discount

 Monthly Charge  Commission Free Forex

 Default Monthly Charge  Commission Free Trav Cheq

 Forex Fee % Europe  Incentive Home Emergency

 ATM Charge Europe  Incentive Extend Warranty

 Debit Card Charge Europe  Identity Theft Assistance

 Duplicate Stat Charge  ID Theft Alerting

 Interest Payment Freq  Relationship Manager

 Cheque Clearance Time  Concierge Service

 Withdraw Uncleared Fds  Tax Return Service

 Faster Payments Service  Incentive Savings Sweep

The table below sets out the 2014 criteria that we are planning to remove for 2015.

Criteria planned for removal – Premier Current Accounts

 Free Card Protection  Phone Types Insured

Proposed criteria – Current Account Switching

 A/c Transfer O/D Limit  Text Switching Updates

 A/c Transfer O/D Months  Phone Switching Updates

 Match Current Overdraft  Email Switching Updates

 Payments Council Switch  Switch Savings Account

 Switch by Branch  Copy of New DD/SO Issued

 Switch by Internet  Switch In Close Exist A/c

 Switch by Telephone  Refund Switch Charges

 Acknowledge Switch Applic  Refund Supplier Charges

 Transfer Date Choice  Cash If Past Switch Date

 Switch Comp Date Notified  Compare New A/c to Exist

 Advertised Switch Days  Loss of Features Exposed

 Switching Guide  Fees Compare to Exist A/c

 Dedicated Switch In Team  Dedicated Switch Out Team

 Switch In Helpline  Switch Out Helpline

 Online Switching Tracker

The table below sets out the 2014 criteria that we are planning to remove for 2015.

Criteria planned for removal – Current Account Switching