2015 Star Ratings Current Accounts Discussion Paper Defaqto Limited 2014. All rights reserved. No parts of this publication may be reproduced in any form by any means, whether electronic, mechanical, optical or any other, or be stored in a retrieval system without the express written permission of the publisher. The publisher has taken all reasonable measures to ensure the accuracy of the information and Ratings in this document and cannot accept responsibility or liability for errors in or omission from any information given and for any consequences arising.
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. 2
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 UK Current Accounts by type 2012-2014 (% of accounts) 52% 48% 41% standard 21% added value 38% 28% 18% premier 17% 17% 9% young person 7% 2014 4% 2013 2012 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 3
Number 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 135 125 115 105 95 85 Interest offered by Standard Current Accounts (No. of accounts, June 2014) 10 10 4 8 12 5 1 1 5 7 3 13 12 96 95 7 8 11 99 1 2 3 15 104 1 2 1 4 14 111 Over 2% Up to 2% Up to 1.5% Up to 1.0% Up to 0.5% 0% 75 500 1,000 2,500 5,000 10,000 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 4
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 5
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 No of Criteria Standard Added Value Premier 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. 6
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 Standard Current Accounts Star Rating area core criteria 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 7
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 No changes to the Added Value and Premier Account scoring methods as a result of the FCA investigation into add-on products 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. 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. 8 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.
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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 No of Travel Incentives 10
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 Free Card Protection 11
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 Incentive Airport Lounge 12
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 Switch by Mobile 13