FCA DEMANDS ANSWERS OVER RATES WHICH HIT THE VULNERABLE
BANKS may have shot themselves in the foot by announcing sky high overdraft rates on the back of new rules from the City regulator.
They are now being forced to explain to the Financial Conduct Authority why they are hitting account holders with rates of almost 40% when they dip into the red.
When the FCA announced changes to overdraft charging, which come into effect from April, it warned that if the banks didn’t offer competitive rates, it could consider overdraft charge caps.
It’s right the FCA is investigating the rates. Why have most of the banks gone for 39.9%? Did they just follow Nationwide Building Society, which was the first to announce its new fixed overdraft rate last summer? Or did they come to some sort of cosy joint arrangement?
DYSFUNCTIONAL
The FCA study into the overdraft market found it was dysfunctional and didn’t work well for account holders.
It was unfair, as those dipping into an unarranged overdraft were paying way over the odds and tended to be the most vulnerable who could least afford it. The cost could often be 10 times, and in some cases 20 times, as high as payday loans.
The charging system for anyone using an overdraft was also utterly bamboozling with a ridiculously complex range of fees and charges that no one could quickly understand or easily compare.
The new rules were meant to simplify the system with banks being forced to charge just an annual interest rate with no extra fees or charges for using an overdraft.
This was to prevent the most vulnerable from paying vast amounts and subsidising the rest of the market, and to enable account holders to compare rates across the providers.
A statement from the
FCA said: “The FCA has been in regular contact with the major banks and has written today to ask them to provide evidence of how they have arrived at their pricing decisions. We are also being clear that we expect firms to take positive steps to help customers who may be worse off or in financial difficulties as a result of these changes.
“We have asked to see their plans for how they are dealing with the most affected customers.”
Banks were left to their own devices to adhere to the new rules and come up with fixed rates.
But all they have all done is to hike up rates for everyone who uses an overdraft. So, instead of a few people paying way too much, everyone is now hit with expensive rates.
Andrew Hagger, from personal finance website Moneycomms.co.uk, said: “Overdraft interest rates are now almost double those charged on credit cards. Hopefully the FCA intervention doesn’t result in rates on plastic being hiked too. In some cases, the FCA charges have backfired.
“Some providers who had previously hidden behind fixed fees have cut some charges, but customers already on an interest rate-type tariff will see overdraft costs soar.”
DISAPPOINTING
Lloyds Banking Group is the latest to announce the rates it will charge – 27.5%, 39,9% and a hefty 49.9%.
It’s disappointing that premium customers, who are typically the most wealthy, will pay far less than those less fortunate or vulnerable who rely on overdrafts more often.
Lloyds said risk-based pricing is standard practice for loans and credit cards and means it can continue to offer overdrafts to a wider range of customers. It said that 90% of its customers with an overdraft would pay less under the new model.
A Lloyds Banking Group spokesman said: “We are writing to our customers to explain the new overdraft rates that will apply from April. As a result of these changes, 90% of customers with an overdraft will pay less than they do today. The majority of customers will pay the APR of 39.9% on most of our current accounts, 27.5% on our Club Lloyds account.”
The FCA said the new rules would mean seven out of 10 people will be better off or see no change in the amount they pay for using an overdraft. But the rates the banks have announced will hit those who are struggling and constantly in the red.
The watchdog shouldn’t be surprised that banks have simply hiked up overdraft rates for everyone. They have been forced to stop raking in vast sums from those who dip into unarranged overdrafts, and now need to make up that revenue stream.
It cannot let banks get away with charging overdraft rates that are almost double those of credit cards. These extortionate rates are usually reserved for the sub-prime market, those deemed as high risk, not people with good credit records.
While customers may now be able to compare overdraft tariffs more easily, there’s little point in shopping around as it’s pretty much a rip-off rate whichever lender you opt for.
It’s a shame none of the big banks can be transparent about the cost of running current accounts and charge a monthly fee for everyone, rather than hammering borrowers –usually the most vulnerable – with unfair rates.
Banks were left to their own devices but they just hiked rates for everyone