Consultation outcome

Implementation of the EU payment accounts directive

Updated 16 November 2015

This was published under the 2015 to 2016 Cameron Conservative government

1. Introduction

1.1 The subject of this consultation

This consultation invites views on the proposed steps that the government will take in order to make sure the UK meets its obligation to transpose the Payment Accounts Directive (2014/92/EU) (‘PAD’).

The consultation also includes a consultation stage impact assessment for the proposed changes, alongside a draft of the legislation that will be required.

1.2 Who should read this?

This consultation should be read by those who will be affected by the changes proposed. This could be any individual, firm or group that is a stakeholder in the UK payment account market including, though not limited to: payment service providers such as banks, building societies and e-money issuers, consumers and consumer groups, charities with an interest in banking and financial inclusion, and other interested parties.

1.3 Background to the directive

PAD was published in the Official Journal of the European Union on 28 August 2014.

PAD sets common regulatory standards that member states are required to meet in order to:

• improve the transparency and comparability of fees related to payment accounts that are used for day-to-day payment transactions

• facilitate switching of those accounts

• ensure access to bank accounts with basic features

The government is required to have implemented PAD in the United Kingdom by 18 September 2016 to meet its treaty obligations and avoid the risk of facing legal proceedings as a result of infraction.

This requires the government to make new secondary legislation and to apply and modify provision in existing legislation that underpins the regulation of relevant payment accounts.

1.4 Relevant existing regulation in the UK

The UK already has in place a robust regulatory regime to protect consumers. The Financial Conduct Authority (FCA) is empowered by the Financial Services and Markets Act 2000 (FSMA) and Financial Services Act 2012 to act to ensure that a firm has its customers at the heart of how it does business, giving them appropriate products and services. The FCA is also responsible for authorising, regulating and supervising other payment services providers as defined in the Payment Services Regulations 2009. This includes e-money issuers, who are also subject to the E-Money Regulations 2011. In particular, payment service providers must meet certain conduct of business requirements set out in the Payment Services Regulations 2009, for example in respect of information that must be provided to consumers before and after the execution of a payment transaction.

To protect consumers and ensure they are treated fairly, the FCA monitors which firms and individuals are able to enter financial markets and ensures that firms meet standards before they are authorised to do so. Once authorised, the FCA supervises how firms work and stops those that do not meet standards from carrying out regulated activities. It also works to ensure that consumers receive the information they need in the right way, so they are empowered to make the best decisions for themselves. The FCA also has powers to impose penalties and secure redress (as does the Financial Ombudsman Service (FOS) – see below).

The FCA also promotes competition in the interests of consumers. Effective competition is a powerful way to achieve benefits for consumers, which include better value, genuine choice, quality products and services, and useful innovation in financial services. Without it, new firms may find it difficult to enter certain markets, incumbents have fewer incentives to offer better deals and services, and consumers might not be able to compare options and choose the products and services that are right for them.

The Payment Systems Regulator (PSR) was created under the Financial Services (Banking Reform) Act 2013 (FSBRA) and launched in April 2015 with the purpose of making payment systems work well for those that use them, promoting effective competition and promoting the development of and innovation in payment systems.

FSMA, as amended in the Financial Services Act 2010, established the Money Advice Service (MAS) as the UK’s independent body charged with enhancing the public’s understanding of financial matters.

Under FSMA, the FSA established the Financial Ombudsman Service, the UK’s statutory dispute resolution scheme which provides a free, independent dispute resolution service for financial services customers. Its decisions, once accepted by the consumer, are binding on the firm concerned. If the individual is unhappy with the FOS’ treatment of their case, they are able to complain directly to the FOS or, if they remain dissatisfied, to the Independent Assessor for the FOS.

Part 5 of the Payment Services Regulations 2009 (‘PSRs’) sets out requirements in relation to the provision of information to payment service users when a new payment account framework contract is entered into and when contractual information (such as the applicable interest rate) changes. It also governs the termination of a framework contract and charges that may apply. The PSRs implement the Payment Services Directive (2007/64/EC) (‘PSD’), which is the source of much of the terminology used in PAD.

Section 78A of the Consumer Credit Act 1974 and the Consumer Credit (Running-Account Credit Information) Regulations 1983 also require that under a credit agreement, creditors should give debtors regular statements of account that conform to certain characteristics.

1.5 UK approach to negotiations on PAD

The government is supportive of measures that enable consumers to make more informed comparisons between current accounts. Improving the information available to consumers, and in turn increasing the number of current account holders who are willing to switch provider, is key to developing a more competitive personal current account market in the UK.

Accordingly, the UK had already taken domestic action on the majority of the areas addressed in PAD, including:

• a series of measures delivered through government agreement with the banking industry to improve transparency of fees and charges, including annual statements and text message alerts for unarranged overdraft fees

• the creation of the 7-day Current Account Switching Service (CASS) which was launched in the UK in September 2013

• improving UK banks’ existing basic bank account offer, alongside their other retail current accounts

The UK government’s objective for the negotiations on PAD was therefore to align the requirements as far as possible with existing UK practice, with a view to minimising any negative impact on UK industry and consumers.

The UK also sought to clarify the scope of the directive and the accounts that it would apply to. Throughout the negotiations the UK was clear that the measures being discussed and the intended outcomes of the directive indicated that it would be most appropriately applied to current accounts in the UK.

Now that PAD has been finalised, member states have discretion to extend its application in a number of areas. The government’s starting approach is not to extend the application of PAD beyond what is strictly required.

The exception to this is Chapter IV of PAD (payment accounts with basic features), where UK policy on basic bank accounts is more developed than that set out in the directive. This reflects over ten years of basic bank account provision in the UK, most recently augmented by a new agreement with the nine largest providers of current accounts, to improve and clarify their terms ^{[footnote 1]}. As a result, the government intends to implement PAD in such a way as to preserve the UK’s existing basic bank account policy as far as possible, while creating the necessary legal certainty for consumers required by PAD.

1.6 UK proposed approach to implementation of PAD

As set out above, the government’s proposed approach to the implementation of PAD is to minimise any negative impact on the UK market as far as possible.

Article 1(5) of the directive allows member states to exempt certain entities, such as credit unions and central banks, from the application of all or part of its provisions. The UK will use this flexibility where the organisations offer payment services, and as a result has carved out the Bank of England, NS&I, credit unions and municipal banks.

Where possible, copy out has been used in the regulations. Although copy out is the government’s default approach for implementing EU legislation, the government does not believe it would be possible, or appropriate, to copy out the entirety of the directive.

Instead, the government proposes an approach that will preserve the existing structures in place to create transparency, facilitate switching, and ensure that consumers are able to access basic bank accounts. At the centre of this will be clarifying the application of the requirements in PAD, by specifying which payment accounts will be drawn into the scope of our implementing regulations.

The language in the directive is set out in two parts: first, the minimum definition at Article 1(6); and second, the additional language in paragraph 12 of the recitals, which set out the types of account that would not be expected to fall within scope of the directive. The recitals can be used as an aid to interpretation of the directive’s substantive articles.

Article 1(6) applies PAD to payment accounts where consumers are at least able to place funds, withdraw cash, and execute and receive payment transactions, including credit transfers, to and from a third party. Further, paragraph 12 of the recitals to PAD states that:

accounts with more limited functions should be excluded”, including: “savings accounts, credit card accounts where funds are usually paid in for the sole purpose of repaying a credit card debt, current account mortgages or e-money accounts should in principle be excluded…however, should those accounts be used for day-to-day payment transactions and should they comprise of all the functions listed at Article 1(6), they will fall within the scope of this directive.

Accordingly, the government proposes to copy out both Article 1(6) and the relevant recital into the implementing regulations. The definition of ‘payment account’ that features in regulation 2 reflects both the description of the accounts that are to be in scope given Article 1(6), while reflecting the clarification of the accounts to which PAD will apply in recital 12. Wherever the term payment account is used in the subsequent chapters, the regulation 2 definition applies.

It is the government’s view that this definition should be sufficient to limit the application of PAD to current accounts – or accounts that have functionalities directly comparable to those of current accounts – in the UK.

The government estimates that around 50 firms offer these types of payment accounts at present. However, it will be for firms themselves to determine whether each of their products falls within the scope of the regulations, and whether the regulations therefore apply to them.

HM Treasury has worked closely with the FCA, PSR and MAS both during the PAD negotiations and as thinking around implementation has developed. HM Treasury supports an approach to implementation that looks to minimise disruption and any adverse impact from the need to transpose PAD.

HM Treasury envisages competent authority roles for the FCA, PSR and MAS in implementing the regulations. The legislation is consistent with the government’s approach to financial services regulation, where regulators have clarity of responsibility, a focused remit, appropriate tools and the flexibility to use them as they see fit.

Question 1

Do you agree with the government’s overall proposed approach to implementation of PAD, including the clarification of the directive’s scope and application?

1.7 Legislative changes required to implement PAD

New secondary legislation will need to be made, and provision in existing legislation modified and amended. Draft regulations, using copy-out wherever possible, are at Annex A.

A number of changes will be required to FSMA in order to implement PAD. These include amendments to the FCA’s powers in respect of information gathering and sharing, investigations and disciplinary procedures.

There will also be limited changes to FSBRA in order to confer a new power on the PSR in respect of designating alternative switching arrangements in accordance with requirements of Article 10(1) of PAD.

Amendments will also be required to the Financial Services and Markets Act (Service of Notices) Regulations 2000 and Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001.

This consultation asks for views on the legislative changes proposed by the government in order to meet its obligations under PAD.

1.8 Timeline for implementation

PAD was adopted on 28 August 2014 and member states are required to transpose its provisions into national law by 18 September 2016. A timeline is set out in Box 1.A below.

1.9 Box 1.A: Deadlines in PAD and in the draft regulations

18 March 2015: EBA to issue guidelines

18 September 2015: MS to notify Commission and EBA of provisional lists of most representative services required in Art 3.(1)

18 September 2016: EBA to submit draft regulatory technical standards and draft implementing technical standards to the Commission. Power delegated to the Commission to adopt the regulatory technical standards.

18 September 2016: MS to adopt and publish implementing laws, regulations and administrative provisions necessary for compliance, and notify the Commission and EBA of competent authorities.

Spring 2017: Within three months of regulatory technical standards and draft implementing technical standards entering into force, MS to publish resulting final list of most representative services.

Late 2017/early 2018: Within nine months of regulatory technical standards and implementing technical standards entering into force, MS to apply measures necessary to comply with requirements on FID, SOF and common symbol

18 September 2018: MS to provide Commission with information on compliance, switching and basic bank accounts (and every two years thereafter)

18 September 2018: Commission to prepare a report on evaluation (and every two years thereafter)

18 September 2019: Commission submits report on application of the directive to the Parliament and Council, possibly accompanied by a new legislative proposal

18 September 2020: MS to provide Commission with information on compliance, switching and basic bank accounts

18 September 2020: Commission to prepare second report on evaluation

18 September 2021: HM Treasury to review legislation and publish report on implementation of the regulations

Given the government’s aim of reducing the burden of implementing this directive on business where possible, the UK is aiming to finalise the measures needed to implement the directive before the end of 2015 in order to provide industry with as much time as possible to adjust to any changes required.

The government will engage with stakeholders over their responses to this consultation. Any changes proposed as a result of this consultation will then be given due consideration and fed into the final legislative draft. In order to fulfil this timeline for implementation the government is aiming to lay this final legislation in Parliament in Autumn 2015.

2. Comparison of fees and charges

2.1 Enabling better comparison of fees and charges

PAD is the first attempt by the European Commission to try to minimise the differences between member states to enable easier comparison of fees and charges for consumers in relation to payment accounts and remove a perceived barrier to the completion of the internal market.

The government is clear that consumers must be able to easily access clear and transparent information about the fees and charges that may apply; and have a reasonable opportunity to manage their account and control whether or not they incur overdraft fees and charges.

PAD requires a further series of measures to develop and clarify the information available to consumer:

• First, each member state is to establish a list of the most representative services linked to payment accounts in their territory. This ‘provisional national list’ must consist of between 10 and 20 services that are subject to a fee, and contain both terms and definitions. The most representative services are to be determined by having regard to the services that are most commonly used by consumers in relation to their payment accounts and to those that generate the highest costs for consumers. The European Banking Authority (EBA) is required to issue guidelines to assist in the application of these criteria. Each member state then submits its list to the European Commission and the EBA.

• The EBA will then develop EU standardised terms and definitions in respect of the services that appear on at least a majority of member states’ national lists.

• Following adoption of the EU terms and definitions by the European Commission, each member state must integrate this EU standardised terminology into its provisional national list and publish the resulting final linked services list for use by payment service providers. This will mean that some terms and definitions contained in the provisional national list may have to be replaced, while others will remain unchanged.

• The terms on the final linked services list, including the EU standardised terms, should be used to compile a Fee Information Document, given to consumers before they decide on a payment account provider. A glossary of at least the EU standardised terms, including their definitions, should also be made available to consumers on request. The EBA will develop a standardised presentation format for the Fee Information Document, and a common symbol to help consumers identify it.

• An annual statement of fees (setting out all the fees incurred and the overdraft and credit interest rates that applied to the account during the previous year) should be provided to the consumer. The UK’s largest banks are already providing an annual statement of this kind to their customers. The EBA will develop a standardised presentation format for the statement of fees, and a common symbol to help consumers identify it.

• Finally, the terms on the final linked services list, including the EU standardised terms, should be used alongside brand names in firms’ communications with consumers.

The government has agreed with the FCA that it should lead on the process for determining the UK’s provisional national list. This provisional list is to be determined based on how often consumers use the services and the costs incurred by consumers in doing so.

Part of the impact on firms will be determined by the content of the final linked services list and the extent to which a payment service provider is already using them. Further, if none of the services that appear in the UK’s provisional list of services linked to a current account are also common to at least a majority of member states, and do not appear on the EBA’s list of EU standardised terms, then the changes to terminology required in the UK will be minimised. However, if all of the services that appear in the EBA’s list are in use in the UK, then the change required would be more burdensome.

HM Treasury expects firms will incur significant costs as a result of the application of the UK’s final national list of terms and definitions to their existing customer information documents, including the development of new or adaptation of existing pre-purchase product descriptions, glossaries, regular statements and annual statements to at least meet the standards set out for the Fee Information Document, Statement of Fees and glossary.

The FCA has commenced a process to identify the UK’s provisional list of services, and will issue a separate call for input on a draft list before it is submitted to the European Commission and the EBA.

2.2 Comparison websites

PAD requires that consumers must have access to at least one comparison website that is operationally independent, clearly discloses its owners and the criteria on which comparisons are made, be accurate and up-to-date, and provides a mechanism for consumers to report incorrect information. Further, once the list of standardised terms has been agreed and is in place in the UK, the directive requires this website to use the standardised terms where applicable.

By drawing together available information on a large number of products, and presenting these in an accessible and engaging format, comparison websites have helped to encourage shopping around and switching in a number of markets.

The Money Advice Service is the UK’s independent body charged with enhancing the public’s understanding of financial matters. The Money Advice Service will be required to operate a comparison website that complies with the minimum requirements in PAD.

HM Treasury does not expect other comparison website providers or payment service providers to incur costs as a result of the comparison website requirements in PAD.

Taken together, the government is confident that the proposed approach to transposition fulfils the requirement in PAD with minimal impact on the direction and development of the wider market in the UK.

In addition, the government will press ahead with its Midata programme, which will allow consumers to use their own personal account usage data to generate comparisons that are more meaningful for them.

Question 2

Do you agree with the government’s proposed approach to the comparison website requirements in PAD?

Question 3

Based on the government’s proposed approach, do you agree that existing payment service providers and comparison website providers will not incur costs as a result of the comparison website requirements in PAD?

2.3 Packaged accounts

Packaged accounts are generally understood to be current accounts that offer an additional service or services, unrelated to the current account (such as mobile phone or travel insurance, or car breakdown cover) for a fee. Packaged accounts comprise around 15 per cent of the UK’s current account market. ^{[footnote 2]}

Such accounts offer their customers convenience, and may also deliver a saving on the cost of the services if they were purchased separately. However, these practices may also reduce transparency and comparability of prices, and make it less likely that customers will shop around for the best deal on each service or be willing to switch to another provider who does not offer the same package of services.

PAD requires that, when payment service providers offer packaged accounts:

1. Consumers should be informed whether or not it is possible to sign up for the account without purchasing the additional services ^{[footnote 3]}

2. If both the payment account and the additional services can be purchased separately, the consumer should be informed about the cost of purchasing each of those additional services separately.

The approach set out in the government’s draft legislation and in the impact assessment is that the obligation on payment service providers will apply where it is possible to purchase both the payment account and the additional service from the same payment service provider. Payment service providers would not be obliged to inform consumers of similar additional services offered by other providers.

The government interprets the language in Article 8 of the directive (‘when a payment account is offered’) as referring to pre-purchase information for new products. Payment service providers would not be required to disclose information to existing customers on products purchased before the regulations come into force.

The government is seeking, as part of this consultation, to understand the potential additional costs to payment service providers in more detail and would welcome views from respondents as to the likely additional burden and impact on both payment service providers and consumer behaviour of providing information to consumers in this way.

Question 4

Do you agree with the government’s proposed approach to packaged accounts in the regulations?

Question 5

What is your assessment of the potential costs to payment service providers of compliance with the requirements on packaged accounts, both in terms of the burden on your business, and in terms of consumer behaviour?

3. Switching

3.1 The importance of switching

If consumers are able to switch their current accounts easily and reliably, then consumers are more likely to shop around and choose a new provider if their current provider is not giving them the service they need. It provides the strongest incentive of all for banks to compete, harness new technology and improve services for their customers.

The switching requirements set out in Articles 9 to 14 of PAD provide member states with a blueprint for a basic switching regime. They place obligations on the transferring service provider (i.e. the old payment service provider) and the receiving service provider (i.e. the new payment service provider). A switch carried out within the timeframe set out in PAD would take twelve working days.

However, Article 10(1) states that member states may also choose to establish or maintain an alternative switching service to the regime in PAD, provided that it:

1. Is clearly in the interest of the consumer

2. Presents no additional burden for the consumer

3. The switch is completed within the same time frame as PAD, or less

3.2 Approach to an alternative switching service in the UK

In considering the appropriate competent authority for the switching requirements in PAD, the government has decided that the PSR and FCA should take complementary roles. In line with its statutory objectives, the Payment Systems Regulator will designate any alternative arrangements for switching as compliant with Article 10(1). This will involve the PSR making a determination on whether any alternative arrangement meets the Article 10(1) criteria.

The FCA will have responsibility for monitoring whether all payment service providers who seek to rely on participation in an alternative arrangement to discharge their Article 10 obligations are in fact a party to such arrangements.

If the FCA were to find that a payment service provider had failed to comply with such requirements the FCA would then require the payment service provider to instead provide customers with the basic switching provisions set out in PAD.

3.3 The Current Account Switch Service

In the UK, the Current Account Switch Service (CASS) has been in place since September 2013 ^{[footnote 4]}. It covers over 99 per cent of the UK’s current account market ^{[footnote 5]}, and it provides:

• a single, consistent service for the customer

• a switch in seven working days, once the new account is open and the switch date chosen and agreed

• the automatic transfer of internet banking payee details held on the customer’s old online account to the new online account

• a redirection service for payments either accidentally sent to or requested from the old account for a period of 36 months, and a notification to the person or organisation that is trying to make the payment of the new account information so they can update their records

• a Current Account Switch Guarantee, which means that customers receive a refund of any interest (paid or lost) and charges made on either the old or new account as a result of the switch failing

In March 2015 the FCA published a review of CASS. It concluded that CASS has made the switching process simpler and easier for consumers and that it has led to a small increase in switching volumes. It also noted that the main barrier to switching is consumer inertia, and recommended measures to raise awareness of and confidence in CASS among consumers. ^{[footnote 6]}

CASS is clearly in the interest of the consumer. It is a free service, already operating across the current account market in the UK, allowing the consumer to specify their switching date, redirecting payments that are accidentally sent to the old account, and offering a guarantee that any interest paid or lost or charges will be refunded if there is a problem. CASS does not create any additional burden for the consumer, as the service is entirely handled by the old and new providers once the consumer requests the switch.

CASS is also delivering switching well within the timeframe envisaged in PAD. Switches via CASS take place within seven working days – a full five working days faster than the minimum requirement provided for in PAD. On this basis, the government proposes to exercise the discretion provided for in Article 10(1) and in line with the position set out in the negotiations on the directive, will put in place a framework to ensure that CASS can continue as an alternative measure to the switching service described in PAD. As set out above, the PSR will consider applications from operators of an alternative arrangement, and make a determination on whether any alternative arrangement meets the Article 10(1) criteria.

Although it would be possible for other switching services to emerge over time and apply for designation, and the PSR would consider applications for designation at that point, the government expects that for the foreseeable future the only alternative arrangement in the UK will be CASS.

As a safeguard, given that not all payment service providers offering payment accounts falling within the scope of PAD may choose to be members of CASS, the government will also regulate to ensure that unless payment account providers are members of CASS, they must provide a switching service for their customers that at least meets the requirements in PAD.

At this stage the government has not been able to make an estimate of the costs to firms of the proposed approach. There may also be some benefits to consumers with payment accounts as a result of this framework, as it will ensure that even payment service providers outside CASS are obligated to deliver a basic switching service to their current and prospective new customers. However, given that CASS covers over 99 per cent of the UK’s existing payment account market (as set out at paragraph 3.7) the actual benefit may be marginal.

One of the purposes of this consultation is to seek more information about the likely impact of this approach, which can then be used to assess the policy and provide an estimate of costs and benefits for the government’s final impact assessment.

As such the government would welcome any information from respondents that will help to establish:

• the number of UK payment service providers engaged in providing payment accounts that may meet the definition of a payment account set out in the draft regulations (see paragraphs. [1.20-1.30])

• the number of UK payment service providers, if any, that would no longer engage in such activity if required to either join CASS or to meet the minimum requirements in the draft regulations

• the cost to payment service providers who provide current accounts outside CASS of setting up the systems and processes to meet the minimum requirements in PAD

• the benefit to an individual consumer, requesting a switch either inside or outside CASS, from the introduction of the regulations

• the impact on, and potential costs to, payment service providers or other affected parties involved in CASS at present

Question 6

What would you expect the costs and benefits to be of the government’s proposed approach to the switching requirements in PAD?

4. Basic bank accounts

4.1 Basic bank accounts in PAD

Under PAD, consumers legally resident in the EU have a right to open and use a basic bank account. This right applies irrespective of the consumer’s place of residence. An application for a basic bank account should be processed without undue delay, and the account should be opened or refused 10 working days at the latest after receiving a complete application.

PAD also sets out the characteristics of a basic bank account, and the level of any associated fees.

Recital 11 of PAD states that the directive should not preclude member states from retaining or adopting more stringent provisions in order to protect consumers, provided that this is consistent with obligations under EU law and with the directive.

4.2 Basic bank accounts in the UK

Basic bank accounts have been available in the UK for over a decade, aimed at supporting financial inclusion for those without a bank account. A 2003 industry agreement (‘the 2003 agreement’) on basic bank accounts established that basic bank accounts should be fee-free, and should not be able to go overdrawn.

An absence of rules around eligibility, combined with the relatively attractive terms, led to an increase in demand beyond the original target customer group. Since the 2003 agreement was made over 9 million basic bank accounts have been opened.

As a result, the participating banks found ways to reduce the costs of providing basic bank accounts. This included limiting access to ATMs, or charging significant fees when direct debits or standing orders failed. Those charges were in some cases very high, and at some banks, without any cap. As a result, some basic bank account customers developed significant overdrafts. This left many customers effectively unbanked, as their accounts could not be used for day-to-day purposes. The proposed introduction of Universal Credit, which requires claimants to have a transactional bank account (e.g. that can be used to pay rent by direct debit) brought this issue into sharp relief.

Following extensive negotiations with the banking industry, in December 2014 the coalition government announced a new voluntary agreement (‘the 2014 agreement’) with the nine largest current account providers in the UK (based on share of the personal current account market) to improve basic bank accounts. From the end of 2015, participating banks will offer basic bank accounts that are fee-free for standard operations, including a failed payment, removing the risk that customers run up unintended overdrafts. Basic bank account customers will be able to use the same services (e.g. ATM and Post Office counter access) as the bank’s other personal current account customers.

The 2014 agreement was made in the knowledge that the requirements in PAD would apply to the UK. The intention is that the 2014 agreement will apply from its implementation at the end of 2015 until the regulations implementing PAD come into force in September 2016.

PAD includes some of the key features of UK basic bank account policy which have most recently been set out in the 2014 agreement. However, PAD also necessitates a clear legal right of access to a basic bank account, and a route to challenge banks’ decisions not to grant that access before a court, which the 2014 agreement could not establish with sufficient legal certainty. After careful consideration, the government concluded that the rights in PAD could not be satisfactorily established via the voluntary agreement alone, and secondary legislation would be necessary.

The government’s view is that the draft legislation published alongside this consultation reflects the UK’s existing basic bank account policy, but brings it into line with the requirements in PAD where necessary. There are three areas where the legislation either departs from the UK’s existing voluntary agreement to align with PAD, or maintains an existing UK domestic policy that is more advantageous to consumers than is set out in PAD. These areas are discussed below.

4.3 Eligibility criteria for a basic bank account

The 2014 agreement states that participating banks will offer a basic bank account where a consumer is ineligible for a bank’s standard current account, and either:

• has no bank account

• has a bank account elsewhere, but wants to change provider

• has a bank account, but is in financial difficulty and wants their bank to open a new, functional account for them

In response to PAD, the regulations will amend these criteria. Instead, participating banks will offer a basic bank account where the consumer is legally resident in the EU, and either:

• does not have a bank account with any UK credit institution

• is ineligible for all bank accounts offered by the participating bank that are not basic bank accounts

The policy aim is to ensure that the consumer is offered at least a basic bank account, even if they do not meet the bank’s stated eligibility criteria or make an unsuccessful application for an account, thus enabling the consumer to enjoy the rights conferred by the directive more efficiently.

The directive offers member states the option to require that consumers who wish to open a basic bank account in the UK ‘show a genuine interest in doing so’, provided demonstration of that genuine interest is not made too burdensome or difficult. The draft regulations do not presently include a requirement to demonstrate a genuine interest, but the government is open to suggestions as to how such a test might be constructed and applied.

Question 7

How could a ‘genuine interest’ test be applied to applications for basic bank accounts in the UK, without presenting an excessive burden to the consumer?

4.4 Grounds for refusal to open a basic bank account or terminate a framework contract for a basic bank account

PAD specifies that member states shall ensure that firms refuse an application for a basic bank account, or close an existing account, where opening the account or allowing it to remain open would infringe domestic laws implementing EU Directive 2005/60/EC on the prevention of money laundering and the countering of terrorist financing.

Firms may also close an existing account where the consumer has: deliberately used the account for illegal purposes; has not performed a transaction on the account for more than 24 months; has provided incorrect information in order to obtain the account; is no longer resident in the EU; or has opened a second account with at least the same features as a basic bank account.

Member states may also identify limited and specific additional cases where firms may be required or may choose to refuse an application for a basic bank account. These cases need to be based on domestic law, and be aimed at either facilitating access, or avoiding abuses by consumers of their right to a basic bank account.

The government considers that the 2014 agreement includes criteria that are insufficiently limited and specific to ensure full compliance with PAD. To correct this, the draft legislation proposes that participating credit institutions may refuse to open an account where:

• to do so would be contrary to the Money Laundering Regulations 2007

• the applicant is a disqualified person within the meaning of section 40 of the Immigration Act 2014

• where the credit institution is not permitted to accept new customers

• the credit institution considers that the applicant’s conduct amounts to the commission of an offence under section 4 of the Public Order Act 1986 or the Protection from Harassment Act 1997

Participating credit institutions may then terminate a framework contract where:

• the consumer has deliberately used the payment account for illegal purposes

• there has been no transaction on the account for more than 24 consecutive months

• the consumer provided incorrect information in order to obtain the account

• the consumer is no longer resident in the Union

• the consumer subsequently opened a second payment account in the UK which provides the customer with at least the services offered by a basic bank account

• the credit institution considers that the applicant’s conduct amounts to the commission of an offence under section 4 of the Public Order Act 1986 or the Protection from Harassment Act 1997

Question 8

Are there other limited and specific criteria based on UK domestic law that you consider should allow participating credit institutions to refuse to open a basic bank account, or terminate a framework contract?

4.5 Basic bank account fees and charges

In terms of fees and charges, PAD sets out a policy that is less advantageous to basic bank account consumers than currently operates in the UK. It also reflects the differences in retail banking markets across the EU.

The UK’s retail banking market still operates, in general, on the basis that current accounts are ‘free if in credit’. Fee-paying accounts are offered by many firms, usually as an alternative to a free if in credit account, but do not represent the core of the market. This sets the UK apart from most other member states, where consumers generally pay for their current accounts and for many of the standard features that they use (e.g. for ATM withdrawals or cheque deposits).

While PAD allows member states the option of deciding between no fees and ‘reasonable fees’ for the standard features of a basic bank account, it anticipates that credit institutions will invariably charge a ‘reasonable’ fee for breaches of the accounts’ terms and conditions by the consumer. If the UK were to copy out this part of PAD, it could recreate the situation where charges for a breach of terms (e.g. an unpaid item fee for a failed direct debit or standing order) were pushing consumers into negative balances.

The government considers that it would be inconsistent with existing UK policy and practice to allow participating credit institutions to charge a fee in the case of a breach of the account’s terms by the consumer. The draft legislation therefore reflects and maintains the position agreed by participating banks in the 2014 agreement.

4.6 Participation in and costs of basic bank accounts

PAD does not require every credit institution in the UK to offer basic bank accounts. Instead, member states must ensure that basic bank accounts are provided to consumers by a sufficient number of firms to guarantee access for all consumers and prevent distortions of competition.

The government set the threshold for participation in the 2014 agreement on the basis of firms’ personal current account market share at the start of negotiations. Firms with a market share greater than 1 per cent of the market were invited to participate.

The nine banks who have agreed to offer basic bank accounts at present, in line with the 2014 agreement, are: Barclays, the Co-operative Bank, HSBC, Lloyds Banking Group (including Halifax and Bank of Scotland brands), National Australia Group (including Clydesdale and Yorkshire brands), Nationwide, RBS Group (including NatWest and Ulster Bank brands), Santander and TSB.

The rationale for this decision was that it captured the largest banks, as well as the medium-sized banks who were seeking to grow their market share, and ensured sufficient coverage across the UK personal current account market.

In order to retain flexibility to reflect changes in the market in future and ensure sufficient access for consumers in the UK, the government intends to keep the market for basic bank accounts under review. The Treasury proposes to take a power to designate banks that will be required to offer basic bank accounts, based on criteria designed to ensure access to basic bank accounts for all consumers and prevent distortions of competition as required by PAD. The proposed criteria to be taken into account are:

• the credit institution’s geographical coverage

• the distribution of consumers within the United Kingdom

• the credit institution’s share of the United Kingdom’s payment account market

The Treasury would consider designating additional banks to offer basic bank accounts based on these criteria and in consultation with the FCA. Before giving a designation notice, the Treasury would notify the credit institution and consider any representations it wished to make.

In addition, the Treasury could cancel a designation notice if it was considered necessary. In that case, the credit institution could cease to offer basic bank accounts to new customers, but would be required to maintain its existing stock of basic bank accounts until the customers holding them ceased to be eligible for those accounts.

Article 1(4) of the directive allows member states to extend the application of PAD’s basic bank account provisions to payment service providers other than credit institutions, but the UK does not intend to use this flexibility. However, if credit institutions or other payment service providers wish to offer basic bank accounts in line with the requirements set out in the draft regulations, the government would regard this as a welcome development.

The government believes that this approach will ensure that it is able to maintain access to basic bank accounts for UK consumers, but without discouraging newer, smaller entrants to the personal current account market who may otherwise find the cost of providing basic bank accounts a barrier to entry.

It has not been possible to estimate the costs to participating firms of delivering basic bank accounts under the 2014 agreement at this stage, as firms are in the process of implementing the new agreement.

The government would like to collect information about the likely impact of the changes which can then be used to assess the policy approach and provide an estimate of costs and benefits for the government’s final impact assessment.

As such the government would welcome any information from respondents that will help establish the estimate of the cost to participating credit institutions of providing basic bank accounts under the approach set out in the draft regulations.

Question 9

What would you expect the costs and benefits to be of the government’s proposed approach to basic bank accounts after September 2016?

5. Amendments to UK legislation

There are a number of changes that will be required to the Financial Services and Markets Act 2000 (FSMA) in order to implement PAD. These include amendments to the FCA’s powers in respect of information gathering and sharing, investigations and discipline.

There will also be limited changes to the Financial Services (Banking Reform) Act 2013 in order to confer a new power on the PSR in respect of designating alternative switching arrangements, such as the Current Account Switch Service, in accordance with requirements of Article 10(1) of PAD.

Amendments will also be required to the Financial Services and Markets Act (Service of Notices) Regulations 2000 and Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001.

In drafting these changes the government has sought to use copy out where possible, although this is not always appropriate as the provisions apply existing legislation, which is structured differently to PAD.

Question 10

Do you have any comments on the government’s proposed changes to existing UK legislation or secondary legislation?

6. Consultation questions and how to respond

6.1 How to respond

The Treasury invites responses on the specific questions raised. The questions can be found throughout the document and are also listed in full below.

This consultation will run from 23 June to 3 August 2015.

Responses can be sent by email to padconsultation@hmtreasury.gsi.gov.uk. Alternatively they can be posted to:

Payment Accounts Directive consultation
Banking and Credit team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding, please say if you are a business, individual or representative body. In the case of representative bodies, please provide information on the number and nature of people you represent.

6.2 Consultation questions

Question 1

Do you agree with the government’s overall proposed approach to implementation of PAD, including the clarification of the directive’s scope and application?

Question 2

Do you agree with the government’s proposed approach to the comparison website requirements in PAD?

Question 3

Based on the government’s proposed approach, do you agree that existing payment service providers and comparison website providers will not incur costs as a result of the comparison website requirements in PAD?

Question 4

Do you agree with the government’s proposed approach to packaged accounts in the regulations?

Question 5

What is your assessment of the potential costs to payment service providers of compliance with the requirements on packaged accounts, both in terms of the burden on your business, and in terms of consumer behaviour?

Question 6

What would you expect the costs and benefits to be of the government’s proposed approach to the switching requirements in PAD?

Question 7

How could a ‘genuine interest’ test be applied to applications for basic bank accounts in the UK, without presenting an excessive burden to the consumer?

Question 8

Are there other limited and specific criteria based on UK domestic law that you consider should allow participating credit institutions to refuse to open a basic bank account, or terminate a framework contract?

Question 9

What would you expect the costs and benefits to be of the government’s proposed approach to basic bank accounts after September 2016?

Question 10

Do you have any comments on the government’s proposed changes to existing UK legislation or secondary legislation?

6.3 Confidentiality

Information provided in response to this consultation, including personal information, may be published on disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1988 (DPA) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory code of practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

HM Treasury will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

6.4 Consultation principles

This consultation is being run in accordance with the government’s consultation principles. The government will be consulting for [6] weeks. This shortened period is in order to give stakeholders adequate time to respond while also ensuring that government is able to meet industry’s concern to have the UK approach to the implementation of this directive finalised as soon as possible.

1. New basic fee-free accounts to help millions manage their money, gov.uk, 15 December 2014. ↩

2. Promoting competition in the UK banking industry, BBA, June 2014. ↩

3. By definition, any services which are included on the final linked services list would not be considered additional services for this purpose. ↩

4. More information on CASS is available online at: www.simplerworld.co.uk/Pages/About.aspx ↩

5. Making current account switching easier, FCA, March 2015. ↩

6. Making current account switching easier, FCA, March 2015. ↩