New Which? research has revealed that the most expensive overdraft fees cost an incredible seven times as much as a payday loan.
We first raised the alarm over these fees in 2016, and we are concerned that, despite scrutiny from the regulator, not enough has been done to protect consumers from these sky-high fees.
And now, along with 84 MPs from all the main parties, Which? is demanding that the financial regulator, the Financial Conduct Authority (FCA), takes urgent action to end this unfair practice by restricting unarranged overdraft charges to the same level as arranged overdrafts.
The cost of unarranged overdrafts
Our research compared the cost of borrowing £100 for 30 days in an unarranged overdraft (beyond your overdraft limit) across 16 high street banks, with borrowing the same amount for the same length of time through a payday loan.
Overall, 11 of the banks investigated charged more than a payday loan company, and considerably more so in several cases. In 2014, the FCA capped payday loan charges, meaning that the cost of a loan in our scenario would be £24.
Our research found that:
- Santander’s fees were almost 7.5 times higher and £155 more expensive – its customers were charged £179 over 30 days.
- TSB is more than 6.5 times more costly, charging £160.
- This is followed by HSBC and First Direct – more than six times higher, at £150.
- RBS and NatWest are six times higher at £144.
- Yorkshire Bank and Clydesdale Bank are all five times more expensive, charging £120.
The fees are particularly high because bank charges apply to their monthly billing period, not the number of days the money is borrowed for, meaning customers can effectively be charged more for going across two charging periods.
Which? reviewed the unplanned overdraft charges levied by the named banks in April 2018 on fee-free accounts with no minimum monthly payment.
We assumed the customer had already used up a £1,000 planned overdraft facility, and included all additional daily or monthly charges that applied as a result of the emergency borrowing.
We did not include charges for the planned overdraft, interest, or charges that relate to specific account usage, such as paid or unpaid item charges.
Correction: This story originally listed Smile and Co-operative Bank as charging more than a payday loan in our scenario. This is incorrect and the story has been updated.
FCA must tackle sky-high overdraft fees
Unarranged overdraft fees are particularly costly because bank charges apply to your monthly billing period, not the number of days the money is borrowed for. This means you can effectively be charged more for going across two charging periods.
In 2016, Competition and Markets Authority set out to tackle the issue by introducing a monthly maximum charge for unarranged overdrafts in August last year. But the measure has clearly failed to stop banks from charging sky-high rates.
Meanwhile, the FCA has previously pledged to tackle the problem, but has delayed consultations on much-needed interventions, leaving people still facing these exorbitant fees. Last year, it found that 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 more than £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.
Since Which? first called for banks to lower their unarranged overdraft fees, Lloyds Banking Group has acted to scrap unarranged overdraft fees, meaning it now has the lowest charges of all investigated banks – £19.80 cheaper than a payday loan at just £4.20.
Meanwhile, Santander has also committed to Which?’s calls and will remove fees on unarranged overdrafts for its paid current accounts from July this year – although this will not apply to other Santander accounts. Which? and parliamentarians are now calling for other banks to urgently follow suit.
Which MPs are supporting Which?’s overdraft clampdown calls?
| Sir David Amess | Conservative Party |
| Julian Knight | Conservative Party |
| Paul Masterton | Conservative Party |
| Luciana Berger | Labour Co-op |
| Chris Evans | Labour Co-op |
| Barry Sheerman | Labour Co-op |
| Tulip Siddiq | Labour Co-op |
| Gareth Snell | Labour Co-op |
| Alex Sobel | Labour Co-op |
| Gareth Thomas | Labour Co-op |
| Debbie Abrahams | Labour Party |
| Tonia Antoniazzi | Labour Party |
| Ian Austin | Labour Party |
| Hilary Benn | Labour Party |
| Chris Bryant | Labour Party |
| Rosie Cooper | Labour Party |
| Alex Cunningham | Labour Party |
| Nic Dakin | Labour Party |
| Jack Dromey | Labour Party |
| Frank Field | Labour Party |
| Yvonne Fovargue | Labour Party |
| James Frith | Labour Party |
| Roger Godsiff | Labour Party |
| Helen Goodman | Labour Party |
| Kate Green | Labour Party |
| Lilian Greenwood | Labour Party |
| Harriet Harman | Labour Party |
| Dan Jarvis | Labour Party |
| Darren Jones | Labour Party |
| Graham Jones | Labour Party |
| Susan Jones | Labour Party |
| Liz Kendall | Labour Party |
| Stephen Kinnock | Labour Party |
| Khalid Mahmood | Labour Party |
| Siobhain McDonagh | Labour Party |
| Conor McGinn | Labour Party |
| Catherine McKinnell | Labour Party |
| Madeleine Moon | Labour Party |
| Matthew Pennycook | Labour Party |
| Jess Phillips | Labour Party |
| Rachel Reeves | Labour Party |
| Chris Ruane | Labour Party |
| Virendra Sharma | Labour Party |
| Ruth Smeeth | Labour Party |
| Nick Smith | Labour Party |
| John Spellar | Labour Party |
| Jo Stevens | Labour Party |
| Wes Streeting | Labour Party |
| Stephen Timms | Labour Party |
| Liz Twist | Labour Party |
| Matt Western | Labour Party |
| Martin Whitfield | Labour Party |
| Mohammad Yasin | Labour Party |
| Sarah Chaion | Labour Party |
| Ian Murray | Labour Party |
| Vernon Coaker | Labour Party |
| Gill Furniss | Labour Party |
| Angela Eagle | Labour Party |
| Stephen Lloyd | Liberal Democrats |
| Mhairi Black | Scottish National Party |
| Deirdre Brock | Scottish National Party |
| Alan Brown | Scottish National Party |
| Lisa Cameron | Scottish National Party |
| Douglas Chapman | Scottish National Party |
| Joanna Cherry | Scottish National Party |
| Ronnie Cowan | Scottish National Party |
| Angela Crawley | Scottish National Party |
| Martyn Day | Scottish National Party |
| Patricia Gibson | Scottish National Party |
| Patrick Grady | Scottish National Party |
| Chris Law | Scottish National Party |
| David Linden | Scottish National Party |
| Angus MacNeill | Scottish National Party |
| Stewart McDonald | Scottish National Party |
| Stuart McDonald | Scottish National Party |
| John McNally | Scottish National Party |
| Carol Monaghan | Scottish National Party |
| Gavin Newlands | Scottish National Party |
| Brendan O’Hara | Scottish National Party |
| Tommy Sheppard | Scottish National Party |
| Alison Thewliss | Scottish National Party |
| Philippa Whitford | Scottish National Party |
| Alistair Carmichael | Liberal Democrat |
| Ben Lake | Plaid Cymru |