Cracking down on overdraft fees

A cap on overdraft fees would stop the big banks using its most vulnerable customers as cash cows, writes treasury select committee member Rachel Reeves MP

The big banks have been using some of their most vulnerable customers as a kind of cashpoint-in-reverse for far too long.

At present, the major banks rake in over £1bn a year by slapping heavy charges on unauthorised overdrafts – most of which comes from financially vulnerable customers.

Almost three in ten – 29 per cent – people with personal current accounts in the United Kingdom have been overdrawn in the past year. Overdrafts can be a flexible form of borrowing and most people only use theirs for a couple of months a year. However, a significant minority – 10 per cent – are much more frequent users and are regularly overdrawn for at least nine months each year.

There are also those customers who regularly go over their overdraft limit and find themselves hit by exorbitant and disproportionate charges for ‘unauthorised borrowing’ – which is, of course, a misnomer as the bank has sanctioned the debt. These rip-off charges are unfair and unjustified and need to be tackled in just the same way as the excessive interest rates levied by payday lenders.

That why I have submitted evidence to the review into high-cost short-term credit being conducted by the Financial Conduct Authority about these overdraft charges.

As a member of the treasury select committee I have taken a keen interest in this as part of our inquiry into the Competition and Markets Authority (CMA) review into retail banking. Ultimately, the proposals to deal with the extortionate charges on overdrafts contained in the CMA’s review published last summer were wholly inadequate and a missed opportunity.

As debt charity StepChange found, there are 1.7 million people in the UK trapped in an overdraft cycle, consistently using overdrafts to meet essential and emergency costs. Having to go into an overdraft or over an overdraft limit can lead to and exacerbate money problems for financially vulnerable customers. These households can struggle to get out of their overdraft as fees and interest on overdrafts can build up and make it increasingly difficult to get out of the red.

A StepChange survey showed borrowers who have slipped into an unauthorised overdraft face, on average, charges of £45 a time. This adds up to £225 a year on average on unarranged overdrafts.

The sky-high charges were also highlighted in research published by Which? that showed consumers needing as little as £100 could be charged up to £156 more by some major banks than the FCA allows payday lenders to charge for the same size loans over the same period.

Which? compared the cost of borrowing £100 for 30 days and found unarranged overdraft charges at some banks were as much as 7.5 times higher than the maximum charge of £24 on a payday loan.  And, because bank overdraft charges apply to their monthly billing period and not the number of days the money is borrowed for, consumers who need £100 could pay up to £180 in fees if they borrow across two calendar months.

It is unacceptable that banks are making massive profits at the expense of pushing the most financial vulnerable deeper into debt.

The CMA recognised the problem with unauthorised overdrafts with the inquiry’s chair admitting before the treasury select committee that they were “the biggest single problem in the personal banking market”.  However, when it came to remedies, the proposed solutions fell well short.

There were some measures that will go some way to addressing problems such as the proposal that customers need to be given clear notice when they are going overdrawn and that banks will be required to tell customers when they are going into an unarranged overdraft. But, critically, the CMA fell short of proposing an independently set maximum cap on overdraft charges. Instead, the report said that banks will be required to set their own ceiling on their unarranged overdraft charges, in the form of a monthly maximum charge.

Yet the four major banks that make up 77 per cent of the market already set their own caps on charges which can be as much as £100 a month.

Competition in this section of the market is weak and heavy unarranged overdraft users are the least likely to switch banks accounts.

These proposals do nothing to help the majority of people who are already struggling and do not have the means to avoid unauthorised overdrafts – even if they are alerted to them.

I believe that the CMA effectively passed the buck to the regulators at the Financial Conduct Authority to deal with this issue.

I have been grateful for FCA chief executive Andrew Bailey’s encouraging words about the problem and the subsequent inclusion of the issue in this high-cost short-term credit review.

So, I am now urging the FCA to commit to setting a maximum monthly cap – at a level to be determined – on the charges that the banks are permitted to charge on overdrafts.  Without such action from the FCA, it will be ‘business as usual’ from the banks.

A cap worked to rein in the worst excesses of the payday lending market. It is now time for a cap on overdraft fees to stop the big banks using its most vulnerable customers as cash cows.

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Rachel Reeves MP is a member of the treasury select committee. She tweets at @RachelReevesMP

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Comments: 1...

  1. On February 16, 2017 at 2:23 pm Alasdair Smith responded with... #

    As chair of the CMA banking investigation, I did indeed say to the TSC that overdraft charges are the biggest single problem in the personal banking market. This does not mean that a regulatory solution is easily devised.

    Rachel is not right to say that most of banks revenue from overdraft charges comes from vulnerable consumers: the CMA found that overdraft users (including heavy users of unarranged overdrafts) are a pretty representative cross-section of the customer population.

    This means that a regulatory cap that is tight enough to make a real difference to vulnerable consumers has the risk of causing a significant reduction in the overall availability of unarranged overdrafts. Customers might find an energy bill was unpaid, if the direct debit would take their account into overdraft, and their bank will not authorise an unarranged overdraft.

    As Rachel notes, the CMA is requiring all banks to send text alerts to customers going into unarranged overdraft and to set a monthly limit on unarranged overdraft charges. We think these measures will have an impact on the problem. The advent of Open Banking in 2018 will create new opportunities for bank customers, including vulnerable customers, to get effective help in managing their finances and reducing overdraft charges.

    In the meantime, the CMA has asked the FCA to review the operation of the measures we are putting in place and to consider whether further measures (including the regulatory cap favoured by Rachel) should be adopted.

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