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Credit crackdown: payday loan cap remains, but overdrafts face ‘fundamental’ reform

Banks avoid cap on overdraft fees for now, but regulator plans further action

The way banks charge people to use their overdraft faces fundamental reform and is punishing the most vulnerable customers, a report into the credit market has found.

The Financial Conduct Authority’s (FCA) review into ‘high-cost credit’ confirmed that the cap on fees for use of payday loans should remain in place for the next three years, until 2020. Payday loan charges were capped in 2014 to 0.8% of the amount borrowed per day.

Unplanned or unarranged overdrafts can now be more expensive than a payday loan, and Which? has been urging the regulator to take action to reduce costs.

Earlier this month, Lloyds Banking Group, the biggest provider of current accounts in the UK with 22 million customers, announced that it was scrapping unplanned overdraft fees altogether.

The FCA cited four major issues with unplanned overdraft fees, including:

  1. Unanticipated charges and lack of transparency – the regulator said that pricing of unplanned overdrafts were ‘highly complex’, and that customers struggled to understand how the fees worked.
  2. High charges – it recognised our research, that most unplanned overdrafts are more expensive that the payday loan cap
  3. Repeated use – the report says that ‘many consumers use unarranged overdrafts month after month’, incurring high charges which leaves them trapped in a cycle of debt.
  4. Distribution of charges – the FCA is concerned that the worse off are paying a ‘disproportional amount’ for the provision of current accounts.

One in four people used unarranged overdrafts for more than four months in 2016, while almost one in 10 used them for 10 months or more. And the FCA found that in one bank, less than 5% of consumers pay over £250 per year in unarranged overdraft charges, which accounts for up to 60% of the revenue the bank generates from overdraft fees.

At another, the FCA said that ’85-90% of unarranged charges are paid by 10-15% of consumers and less than 5% of consumers account for 60% of charges.’

The FCA plans to undertake further research to decide what action to take on unplanned overdrafts, which could include a cap on charges, and says it could make ‘fundamental changes’ to the way that unplanned overdrafts work.

Unplanned overdraft fees: what are the banks doing

Regulators have been studying overdraft fees over the past few years and in August 2016, the Competition and Market Authority (CMA) required banks to set and publish a monthly maximum charge for unplanned overdrafts.

It also required banks to enrol customers into an unplanned overdraft alert system and offer a grace period to allow customers to remedy unplanned overdrafts. All banks must comply by the third quarter of 2017.

Which? research had previously found that borrowing £100 for 30 days in an unplanned overdraft could cost as much as £156 more than a payday loan.

Since then, banks have been making changes to the way that they charge for unplanned borrowing:

  • Lloyds Banking Group has scrapped unplanned overdraft fees altogether from November 2017
  • RBS Group caps unplanned overdraft fees at £80 per month
  • TSB has capped fees at £80 per month
  • HSBC caps fees at £80 per month and promises to never be more that the amount you’ve borrowed
  • Santander has always had a monthly cap of £95
  • Barclays does not charge unplanned overdraft fees, but caps returned item fees at £32.

Take action on exorbitant overdraft fees

Which? has urged the regulator to tackle overdraft costs quickly, stating that ‘significant concerns about unarranged overdraft charges are not new, Which? previously found that these fees could cost considerably more than payday loan charges.’

The consumer champion added that the ‘FCA’s own research now backs this up, so it must act swiftly to crack down on these exorbitant fees and to restrict unarranged overdraft charges to the same level as for arranged overdrafts, as further delay will only cost consumers.’

Which? has been campaigning to get consumers a fairer deal on overdrafts. Visit our ‘Better Banks’ page and lend your support.

Authorised overdrafts and other types of credit in the spotlight

The FCA also laid out plans to tackle authorised overdrafts. It is worried about ‘long-term indebtedness’, with people living continuously in their planned overdraft, as well as unanticipated charges and borrowers hit with fees that are disproportionate to the amount they’ve borrowed.

Similarly to unplanned overdrafts, it found those paying the highest fees – around £400 a year – accounted for a significant chunk of the revenue banks make from overdrafts altogether.

The regulator laid out further concerns and plans to tackle other parts of the credit market, including:

  • Rent to own
  • Home collection debt
  • Catalogue credit
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