Which? calls for action on complicated and exorbitant bank overdraft charges
17 January 2012
New regulator must be pro-consumer 'watchdog, not lapdog'
Which? experts have discovered that consumers using unauthorised overdrafts would find it virtually impossible to calculate how much their bank would charge them, or to compare charges between banks, as the fee structures are so complicated.
Which? asked a group of consumers to work out the cost of an unauthorised overdraft for four different banks by giving them a mock bank statement1. Despite one of the volunteers being a maths PhD student, not one got all the calculations right, only managing to get seven out of 48 correct between them2.
While overdraft charges may appear easy to compare, as banks charge either ‘simple’ daily fees or interest on their main current accounts, Which? researchers found each had a myriad of complex rules and additional fees. Lloyds TSB’s fees were particularly confusing, with three different types of fees in addition to charging interest on the unplanned overdraft3.
The consumer champion also found that people could be paying over twice as much a month for an unauthorised overdraft with one bank compared to another4. Nationwide BS charged the highest fees for customers making one payment from their account while being overdrawn for just two days in a row in a month. At £50, this was five times more than Halifax (£10).
The highest current account unauthorised overdraft fees Which? uncovered were from First Direct and HSBC, at £150 a month5. While these customers were in the red for many days in a row and made lots of payments from their accounts, Barclays charged £66 for the same overdraft. The research also revealed many banks are using expensive daily fees. RBS, for example, charged £6 a day, equivalent to 2,190% APR on a £100 unauthorised overdraft.
Which? wants the new financial regulator6, the Financial Conduct Authority, to be held accountable for putting a stop to unfair overdraft charges, with clear powers to tackle excessive fees and complicated structures7. Banks should also be forced to provide electronic information to consumers about the way they use their current accounts to allow them to make 'one click' comparisons between accounts.
The consumer champion is today launching its Watchdog not Lapdog8 campaign, calling on the Government to make the FCA a strong ‘watchdog’ and not a weak ‘lapdog’, to stand up to the banks.
Which? chief executive, Peter Vicary-Smith, says:
“While the Government has previously announced reforms to tackle unfair overdraft charges, they simply don’t go far enough. It’s extremely disappointing to find that bank charges are still too high, too complex and impossible to compare.
“It’s essential that the Government gives the new financial regulator the powers to limit these charges and to challenge their complexity. We want to see the new regulator put consumer protection at the heart of everything it does. The regulator must be a strong, open and proactive watchdog that stands up to the banks, not a lapdog."
Notes to Editor
The article ‘Bank charges: how clear are they?’ is in the February 2012 issue of Which? Money. For a full copy of the article, contact Helen Lacey.
Which? is calling for a financial regulator that acts as a consumer champion. Pledge support for its ‘Watchdog not Lapdog’ campaign or volunteer a dog to be a face of the campaign at www.which.co.uk/watchdog
1. In November 2011, Which? asked 12 people to calculate charges for an unauthorised overdraft spanning 14 days and involving 10 transactions. Which? then compared the answers with those calculated by the banks.
2. This table shows the number of times, out of six, that people calculated the unauthorised overdraft charges correctly for each bank. Which? shows the total number of right answers (to within £1) for the interest calculation, the fixed charge calculation (like daily charges and fees for payments processed while overdrawn) and the total charge. It also shows how many times, out of six, people took less than four minutes to find the bank charges information online. Four minutes is the average length of time it took them to find the information for all the banks.
| Could our volunteers calculate what their unauthorised overdraft would be? | |||||
|---|---|---|---|---|---|
| Finding charges info | Interest | Fixed charges | Total cost | Overall score | |
| NatWest Select Account | 5/6 | 5/6 | 3/6 | 3/6 | 16/24 |
| Nationwide BS FlexAccount | 6/6 | 4/6 | 2/6 | 2/6 | 14/24 |
| Halifax Reward Account | 4/6 | 6/6 | 0/6 | 0/6 | 10/24 |
| Santander Preferred Account | 5/6 | 4/6 | 0/6 | 0/6 | 9/24 |
| Lloyds TSB Classic Account | 3/6 | 3/6 | 1/6 | 1/6 | 8/24 |
| HSBC Bank Account | 4/6 | 3/6 | 0/6 | 0/6 | 7/24 |
| first direct 1st Account | 4/6 | 1/6 | 1/6 | 1/6 | 7/24 |
| Barclays Bank account | 3/6 | 2/6 | 1/6 | 0/6 | 6/24 |
3. Lloyds TSB charges a daily fee of £5 for unauthorised overdrafts of more than £10 but less than £25, and £10 a day for overdrafts over £25. It caps these fees at eight in a monthly billing period, but it also charges a £5 monthly usage fee if you use an unauthorised overdraft of more than £10 a month, plus an unpaid item fee of £10 (up to three a day) for unpaid items of over £10.
4. The table shows how much each bank charges, in fees, for a small, medium or large unauthorised overdraft per month (each scenario occurs only after people have made a payment that takes them into their unauthorised overdraft). The priciest bank for each overdraft is highlighted in red. A small overdraft – a payment from your account takes you into an unauthorised overdraft and you make another payment from the account while you’re overdrawn. You are overdrawn for two days in a row during the month. Medium overdraft – a payment from your account takes you into unauthorised overdraft and you make nine further payment from the account while overdrawn. You’re overdrawn for 10 days a row during the month. Large overdraft – a payment from your account takes you into unauthorised overdraft. You’re overdrawn for 21 days in a row during the month and you make 12 more payments from the account while you are overdrawn.
| How much each of these popular current accounts charge for unauthorised borrowing | |||
|---|---|---|---|
| Small overdraft | Medium overdraft | Large overdraft | |
| Barclays Bank Bank Account | 22 | 44 | 66 |
| first direct 1st Account (a) | 25 | 125 | 150 |
| Halifax Reward Account (c) | 10 | 50 | 105 |
| HSBC Bank Account (b) | 25 | 125 | 150 |
| Lloyds TSB Classic/Classic Plus | 25 | 85 | 85 |
| Nationwide BS FlexAccount | 50 | 95 | 95 |
| NatWest/RBS Select Account | 12 | 60 | 126 |
| Santander Preferred Account (d) | 20 | 100 | 115 |
Table notes
- Assumes this is first overdraft in the past six months. For subsequent requests, an additional £25 charge applies.
- Assumes this is first overdraft request in the past six months. For subsequent requests, an additional £25 charge will apply to the medium and large overdraft scenarios.
- Halifax credits your account with £5 for every month you pay in £1,000.
- Santander charges higher fees for other accounts
Figures do not include interest
Correct at December 2011
5. Overdrawn for 21 days in a row in a month and 12 payments made while overdrawn.
6. The coalition Government decided in June 2010 to divide the responsibilities of the current regulator, the Financial Services Authority (FSA), into two new bodies. In Autumn 2011, Which? submitted evidence and influenced the drafting of the Financial Services Bill. In December, the committee set up to look at the drafting issued a report of recommendations that echoed some of Which?’s own concerns. The Bill will take up to a year to be finalised, but when ready, will take the current financial regulator, the FSA, and replace it with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA will focus on the bigger picture issues that have the potential to destabilise the whole economy. The FCA will operate as a consumer champion, and will be tasked with improving competition in the banking sector and stopping dodgy financial products.
7. Which? believes that the Financial Conduct Authority should be given clear powers to tackle excessive overdraft charges and other types of excessive ancillary charges. A Barrister commissioned by Which? noted that the new Financial Services Bill does not clarify whether the FCA would have the powers to limit these charges. Without clear powers in this area, Which? sees the risk of another long legal process where the banking industry challenges the ability of the regulator to tackle these charges, similar to the bank charges case between the industry and the Office of Fair Trading which lasted from July 2007 to November 2009 and which the OFT lost in the Supreme Court.
8. Which? wants the new regulator to learn from the lessons of its predecessor. So we’re calling on the Government to ensure they create a watchdog, not a lapdog, to stand up to the banks.
Which? wants:
1. An open regulator that tells consumers what it does
We want the FCA to tell consumers when firms are found to have broken the rules, what it is investigating and what it is going to do to stop it.
2. A strong regulator that stands up to the banks and promotes competition
We want the FCA to issue fines that are big enough to act as deterrents and promote competition by making sure products are transparent, simple to compare and easy to switch between.
3. A proactive regulator that acts on issues before they become problems
We want the FCA to take a more proactive approach and ban dodgy financial products and misleading adverts before they cause problems. Lessons must be learnt from the Payment Protection Insurance mis-selling scandal.
