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Weak review into overdrafts leaves borrowers exposed to rip-off charges

Promise of radical action to ban high charges, but action is delayed again

Despite evidence that using an unplanned overdraft can cost seven times as much as a payday loan, the UK’s financial watchdog has once again failed to step in and ban banks’ rip-off charges.

The Financial Conduct Authority today (31 May) published its final report into high-cost credit, after launching a review almost two years ago.

It has announced a series of measures it says will save consumers £140m a year, largely by improving transparency around overdraft fees.

But it has said that another review is needed before it takes more ‘radical action’ on overdrafts, kicking the can further down the road and leaving consumers exposed to rip-off bank charges.

The FCA’s own evidence suggests banks coined in £630m in 2016 in unplanned overdraft charges, and make £2.50 for every £1 lent from unplanned overdrafts.

But the 13 million beleaguered borrowers trapped in a cycle of debt from these fees may not get any respite at all as a result of today’s announcement.


True cost of overdrafts

The FCA’s review has laid out the exorbitant charges consumers face for going into their overdraft.

Some 19 million use an arranged overdraft – an amount agreed with their bank – every year, while 13 million use unplanned overdrafts – where you tip over your pre-agreed amount.

It’s the worst off that make the biggest profits for the banks and building societies – more than half of the charges incurred were applied to just 1.5% of customers. The FCA said that ‘On average, consumers in more deprived areas pay twice as much in charges for unarranged overdrafts than consumers living in less deprived areas.’

Consumers spend an average of eight months a year in the red, and an average of four months in unplanned borrowing.

Last year, Which? published a dossier containing consumers’ experiences of being in their overdraft. This included stories of people being charged hundreds of pounds for going a few pounds overdrawn. You can read the dossier in full here.

Tackling overdraft costs

The FCA has proposed a series of measures it says will help overdraft users but has stopped short of banning unplanned overdrafts and bringing charges in line with arranged overdrafts, something Which? has consistently called for.

The FCA plans to:

  1. Remove barriers to switching by requiring firms to provide online or in-app overdraft eligibility tools that allow their customers to get a clear indication of the likelihood of being granted an overdraft without an application for credit appearing on their credit file.
  2. Help consumers understand how overdrafts work: by requiring firms to improve the visibility and content of key information about overdrafts and clearly presenting overdrafts as a form of debt. This includes requiring firms to provide an overdraft cost calculator.
  3. Better engage consumers with their overdraft use and address the unexpected use of overdrafts: by requiring firms to automatically enrol their customers into overdraft alerts to make their customers aware of how much they are using their overdraft and that it may lead to charges.
  4. It also plans to ban firms from including available overdrafts in their descriptions of their customers’ available balance.

This comes off the back of another review by a different regulator, the Competition and Markets Authority (CMA), which in August 2016 demanded that banks set and publish a monthly maximum charge for unplanned overdrafts. For the biggest banks, the maximums are as follows:

Bank Monthly maximum charge
Barclays £67
HSBC £80
Lloyds Banking Group Not applicable
Nationwide £60
RBS Group £80
Santander £95

From 10 July 2018, unarranged overdraft fees on Santander’s range of fee-charging accounts – including the 123 Current Account, 123 Lite Current Account and the recently launched Select and Private accounts – will be scrapped for four million customers.

Its monthly maximum charge will be reduced to £50 for these accounts.

The CMA also required banks to enrol customers into an unplanned overdraft alert system and offer a grace period to allow customers to remedy unplanned overdrafts.

No ban on rip-off fees

Which? has consistently argued that banks are ripping off consumers by charging outrageously high fees for using an unplanned overdraft – despite the cap that was introduced by the CMA.

Lloyds Banking Group in November last year scrapped unplanned overdraft fees – but is the only large bank to do so.

Last week, we found that almost a dozen banks charge more than a payday loan to borrow from an unplanned overdraft. Payday loan charges were capped in 2014.

The FCA has committed to what it calls more ‘radical’ action on overdraft fees. This will include:

  • A ban on all fixed fees including daily, monthly and allowed payment fees, for arranged and unarranged overdrafts. This would not include refused payment fees.
  • Arranged overdrafts to be charged using a single interest rate on each individual account. This could vary for different account types, or even different customers
    holding the same account, but could not have different tiers within a single account.
  • Introduction of a rule to require firms to provide a representative APR in advertising of arranged overdrafts, as currently required for other forms of consumer credit.
  • Alignment of arranged and unarranged prices. Unarranged overdrafts are also to be priced using a single interest rate, no higher than a fixed percentage uplift of the
    interest rate for arranged overdrafts.

Banning fixed fees for overdrafts would impact a number of banks, including high-street bank Barclays.

By committing to look at aligning arranged and unarranged overdraft pricing, the FCA is meeting Which?’s demands for fairer pricing in overdrafts.

But it could be months or even years until any changes take effect. The FCA will be doing the sums on the impact of its proposals and will be publishing the findings in line with a wider review into the retail banking market.

Back in 2008, the Office for Fair Trading launched an inquiry into overdraft fees, yet it has been a decade and there has still been no significant changes to ensure that consumers aren’t ripped off by high overdraft fees.

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