Current accounts offer wide choice but also dissatisfaction

Current accounts are the lifeblood of the personal financial system. The ebb and flow of money is critical and customers understandably require an efficient provider. Whilst the choice of accounts and range of services are impressively wide, dissatisfaction is at a high level.

The Financial Services Authority has revealed that a staggering 1.31 million complaints were directed at banks in the last six months of 2010. Many say this is because staff training has deteriorated, that banks outsource too many operations, that too few are taking rigorous financial examinations and that when a problem arises it is not addressed promptly and efficiently.

Yet only seven per cent have switched current accounts in the past two years, according to Consumer Focus by comparison with 31 per cent for utility provider.

The cost of current accounts is likely to rise following the report earlier this month from the Independent Banking Commission. It has called for banks to raise the reserve capital it holds from £7 to £10 for each £100 loaned.

The five-strong Commission, led by Sir John Vickers, former head of the Office of Fair Trading, wants retail operations to be ring-fenced from investment banking to protect personal accounts. It also wants any future losses to be borne by creditors, not taxpayers.

Last year the OFT revealed the market shares of personal current accounts:

• Lloyds Banking Group 30 per cent (Bank of Scotland, Halifax, Lloyds TSB);

• RBS Group 16 per cent (Direct Line, NatWest, Royal Bank of Scotland, Ulster Bank);

• HSBC 14 per cent (First Direct, HSBC);

• Barclays 13 per cent;

• Santander 12 per cent (Abbey, Alliance & Leicester, Cater Allen);

• Nationwide Building Society 7 per cent;

• Co-operative Bank 3 per cent (Co-op Bank, Smile);

• National Australia Group Europe 2 per cent (Clydesdale, Yorkshire Bank);

• Others three per cent.

Clearly there is going to be more competition over coming months with 600 branches of Lloyds Banking Group expected to be auctioned. The Treasury Select Committee wants to introduce a “public interest test” and its chairman, Andrew Tyrie, said many witnesses had described the banking industry as an “oligopoly”.Its two major criticisms were charges and the difficulty in switching providers. The head of Lloyds’ retail bank said the average customer pays the equivalent of a cup of coffee (£2.50 a week) for their current account.

“Free in-credit banking” is a “misnomer” according to the Committee since customers with positive balances forego their interest.

There are three different forms of current account, whether provided by a bank or building society. Your choice will probably depend on the range of services, cost, access and provider reputation.

Firstly, fee-free basic accounts come with no cheque book or overdraft facility, usually allow standing orders, some offer debit cards and most have access through branch, internet, post office and telephone.

RBS’s Key account has the greatest range of facilities, according to Moneyfacts.

Secondly, there are accounts as above but with cheque books. For the widest range of services, consider Brown Shipley (owned by Luxembourg-based KBL) and Leeds Building Society’s Albion Cheque account although the latter does not permit cash transactions.

Thirdly, the majority of current accounts offer overdraft facilities, many of which are still without charge. Few pay any significant interest on cleared balances with two notable exceptions.

The top payer is Santander which offers five per cent AER for the first 12 months on up to £2,500 (reverting to one per cent after that) for new accounts where at least £1,000 a month is paid in. It also comes with a free arranged overdraft for the first year.

Lloyds TSB’s Vantage accounts pay 3.93 per cent gross on £5,000 and 1.98 per cent on £1,000.

With over 18 million going into overdraft at least once a year, look at fees and rates on three facilities:

Authorised overdraft;

Unauthorised overdraft;

Buffer zone.

With an authorised arrangement, few realise there may also be a usage fee (£1 per day at Bank of Scotland and Halifax, £5 monthly at Cater Allen, Coventry and Lloyds TSB, £7 monthly at Northern Rock) as well as a review fee (£20 per request at Bank of Ireland UK and Co-op, at least £20 at Citibank if £500, £25 per request at HSBC, at least £30 at NatWest if £7,500, two per cent at RBS if £15,000, £20 per request if £500 at Smile.

There is the interest rate to consider. On an EAR basis, this can reach 19.9 per cent (HSBC), 19.89 per cent (NatWest, RBS), 19.3 per cent (Barclays, Lloyds TSB), 18.9 per cent (Nationwide), 18.85 per cent (Clydesdale, Yorkshire Bank).

Some banks have temporary incentives, such as Barclays charging nil interest on agreed overdrafts on transferred accounts for the first 12 months provided at least £1,000 is credited monthly.

If you go overdrawn without authorisation, penal rates kick in, such as 29.99 per cent EAR at Clydesdale and Yorkshire Bank and 29.8 per cent at Citibank.

Free current accounts are still widely available as banks realise most customers do not shop around for such other financial products as credit cards, personal loans, savings vehicles and even mortgages. John Varley, chief executive at Barclays, said in November that free banking may have “outlived its time.”

He said that customers wanted choice and predicted accounts with specific fees for facilities and “packaged” accounts with several benefits for a set charge.

Take care when committing too much money to one provider in view of the depositor protection scheme, where the upper limit is £85,000. A lower ceiling of £50,000 applies to an investment firm and a mortgage advisor.

Some banks require a minimum monthly funding to receive a free account, such as £500 at HSBC, £800 at Co-op (Current Account Plus), £1,000 at Bank of Scotland and Halifax (Reward account), Coventry, Lloyds TSB (Classic, Gold, Platinum, Premier), Santander (all except Everyday) and £1,500 at Leeds-based First Direct.

Today several banks are substantially owned by the Government: Lloyds by 41 per cent and RBS by 84 per cent. The former has swung from £6.3bn loss in 2009 to £2.2bn profit last year and latter moved from an operating loss of £6.1bn in 2009 to £1.9bn profit.

A bank’s reputation can be so easily lost if the service falters. One of the most appalling examples is Barclays which refused to reimburse an elderly couple who paid in cash and were not given a receipt although the staff employee had been convicted of embezzling customer funds.

Such a loss of trust may be the defining reason for changing current account.