Banks to be banned from charg­ing higher fees for unar­ranged over­drafts

The Malta Business Weekly - - NEWS -

Banks in the UK are to be banned from charg­ing ex­ces­sive fees for unau­tho­rised over­drafts as part of the City watch­dog’s clam­p­down on the “dys­func­tional” high-cost credit sec­tor.

In what the Fi­nan­cial Con­duct Au­thor­ity de­scribed as its big­gest in­ter­ven­tion in the sec­tor for a gen­er­a­tion, it is propos­ing a sim­ple, sin­gle in­ter­est rate for each over­draft re­gard­less of the amount bor­rowed, with no fixed daily or monthly charges.

Last year, banks and build­ing so­ci­eties made more than £2.4bn from over­drafts, with about 30% from unar­ranged over­drafts – more than £700m – the watch­dog said. More than half the unau­tho­rised over­draft fees came from just 1.5% of cus­tomers in 2016, with peo­ple liv­ing in de­prived ar­eas most af­fected. In some cases, these fees can be more than 10 times as high as those for pay­day loans.

Laura Suter, a per­sonal fi­nance an­a­lyst at the stock­bro­ker AJ Bell, said: “Some­one with a £100 unar­ranged over­draft at the mo­ment can pay £5 a day in charges, and the FCA plans to re­duce this to just 20p a day.”

TSB, Royal Bank of Scot­land and NatWest lead the list of the worst banks for unar­ranged over­drafts, ac­cord­ing to the con­sumer group Which?. TSB charges £76.35 for dip­ping into an unau­tho­rised over­draft by £100 for one week while RBS and NatWest both charge £56. San­tander, Cly­des­dale Bank and York­shire Bank each charge £42.

Banks that don’t charge unar­ranged fees in­clude Lloyds Bank­ing Group, which owns Lloyds, Bank of Scot­land and Hal­i­fax; Star­ling Bank; and M&S Bank.

Which? also com­pared the cost of bor­row­ing £100 for 30 days in an unar­ranged over­draft in May. A pay­day loan cost £24, due to the price cap in­tro­duced in 2015. An un­uatho­rised over­draft is far more ex­pen­sive: San­tander charges £179 over 30 days, TSB charges £160, HSBC and First Di­rect charges £150, RBSA and NatWest £144 and York­shire and Cly­des­dale Bank have £120 fees.

The debt char­ity StepChange wel­comed the ban on unau­tho­rised over­draft charges. Its head of pol­icy, Peter Tut­ton, said: “[It] should help to dis­rupt the toxic ‘debt spi­ral’ ef­fect that over­drafts can cre­ate, trap­ping peo­ple in a per­sis­tent cy­cle of over­draft debt. Re­quir­ing firms to in­ter­vene ear­lier and more mean­ing­fully when their cus­tomers show re­peated use of over­drafts is hugely im­por­tant, too.”

StepChange said over­drafts were the sec­ond most com­monly held con­sumer credit debt after credit cards, with the av­er­age over­draft run­ning at £1,523.

Which? said the ban would come as a “mas­sive re­lief for all those reg­u­larly hit with such ex­tor­tion­ate charges, which cost some peo­ple thou­sands a year”.

Its man­ag­ing di­rec­tor, Jenni Allen, added: “The reg­u­la­tor must now en­sure these im­por­tant changes are swiftly in­tro­duced and en­forced to fi­nally stop this un­fair prac­tice and put an end to these ex­ces­sive fees.”

UK Fi­nance, which rep­re­sents banks and other fi­nan­cial firms, said: “UK Fi­nance mem­bers have been work­ing with the reg­u­la­tor to ex­plore new ways to bet­ter iden­tify and sup­port cus­tomers with re­peat over­draft use. We will con­sider to­day’s pro­pos­als care­fully and con­tinue to li­aise with the FCA in the com­ing months.”

De­spite calls from char­i­ties and MPs, the watch­dog would not set a monthly price cap, ar­gu­ing it could prompt providers with low, or no, charges to raise prices, but said it would con­sider in­tro­duc­ing a cap if it saw “signs that prices are be­com­ing harm­ful”.

Martin Lewis, founder and chair of MoneySav­ingEx­pert, said try­ing to cal­cu­late or com­pare over­drafts was “flum­mox­ing due to a mul­ti­plic­ity of charg­ing struc­tures – such as 20% APR, 50p a day, or 1p per day per £7 over­drawn”. He added that the FCA was on the right track with its lat­est mea­sures. How­ever, he re­it­er­ated his call for a cap.

Money Ad­vice Trust, the char­ity that runs Na­tional Debtline, said the op­tion of im­pos­ing a price cap should re­main on the ta­ble.

The FCA says that over­draft prices must be ad­ver­tised in a stan­dard way, in­clud­ing an APR to help cus­tomers com­pare them; and re­fused pay­ment fees should “rea­son­ably cor­re­spond to the costs of re­fus­ing pay­ments”.

The watch­dog also told banks to do more to iden­tify cus­tomers who are in fi­nan­cial difficulty and to help them re­duce their over­draft use – with­out an­nounc­ing spe­cific mea­sures.

The watch­dog has al­ready or­dered firms to pro­vide on­line tools that al­low cus­tomers to check if they can get a cheaper over­draft else­where, along with cal­cu­la­tors that trans­late in­ter­est rates into pounds and pence. It has also asked for mo­bile phone alerts and changes to how over­drawn bal­ances are dis­played at cash ma­chines.

The FCA chief ex­ec­u­tive, An­drew Bai­ley, said: “These changes would pro­vide greater pro­tec­tion for the mil­lions of peo­ple who use an over­draft, par­tic­u­larly the most vul­ner­a­ble. It is clear to us that the way banks man­age and charge for over­drafts needed fun­da­men­tal re­form … These changes would make over­drafts sim­pler, fairer, and eas­ier to man­age.”

The watch­dog has also pro­posed new rules for doorstep lend­ing, cat­a­logue credit and store cards. It wants to in­tro­duce ad­di­tional pro­tec­tions on “buy now, pay later” of­fers, in­clud­ing stop­ping back­dated in­ter­est for re­pay­ments made dur­ing the of­fer pe­riod, that will save con­sumers about £40m-£60m.

The FCA will con­sider feed­back be­fore pub­lish­ing its fi­nal rules on over­drafts and “buy now, pay later” of­fers next June.

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