/ Money

Is it fair to allow banks to cash in on vulnerable customers?


Last summer, Which? research showed the high cost of unarranged overdrafts and how these charges can hit banks’ vulnerable customers the hardest. Rachel Reeves MP joins us to explain why action on these charges is long overdue…

The latest Which? research published today has again highlighted how banks are still cashing in on customers who rely on unarranged overdrafts.

Charges from big high street banks could cost up to 180% of the amount borrowed, showing the shocking extent to which customers are being pushed further into a spiral of debt by their own banks.

At present, the major banks make more than £1bn per year through the charges they levy on unarranged overdrafts. Most of the money comes from financially vulnerable customers.

These are people who are already in difficulty, trying to manage debt day-to-day, and for whom the banks should have a responsibility to help manage their finances.

Review of charges

Huge progress was made on the charges faced by those accessing finance through payday lenders with the introduction of a cap, so why are the banks being allowed to charge such exorbitant amounts?

The Competitions and Markets Authority (CMA) recognised the issue when it conducted its review into the Retail Banking Market – but it failed to deliver any real solution in its report published last summer.

It fell short of proposing an independently set maximum cap on charges – instead allowing banks to set a cap themselves, at a level of their choosing.

This cap as proposed by the CMA looks like it will be ‘business as usual’ for the banks, and will likely do nothing to stop the deepening of a person’s debt crisis with punitive and disproportionate charges.

We need a proper effective cap, set by and enforced by the Financial Conduct Authority (FCA), for it to have any impact on helping — rather than worsening — the situation for those people most in need.

The CMA passed the buck firmly to the FCA which has, thankfully, agreed to recognise the issue as part of its review into High-Cost Short-Term Credit.

However, in the meantime, financially vulnerable customers are being pushed further into debt by these high unarranged overdraft charges.

Action on charges

That’s why, in a debate in Parliament today, I’m calling on the Government to take action now.

I want the Government to set a maximum cap on overdraft charges to stop banks being able to impose charges that can be as much as 7.5 times higher than the maximum charge on a payday loan.

Today’s research is invaluable in highlighting the true nature of these charges, I’m extremely grateful to Which? for all the hard work and campaigning they are doing on this issue. I’ll continue to work closely with Which?, and do what I can in Parliament to put an end to these exorbitant charges.

This is a guest contribution by Rachel Reeves MP. All views expressed here are Rachel’s own, and not necessarily those shared by Which?.

Have you been hit by an unarranged overdraft charge? Do you think enough is being done to crackdown on these charges?


Halifax advertised a personal loan amount on my internet banking home page of 3.3 APR but when I went to apply it increased to 8.9. Despite speaking to three levels of staff they though nothing was wrong with this false advertising. I have banked with the for 25 years and I am now moving.

This is banks recouping all the fines they have received for miss-selling, fixing rates and all the other stuff they’ve been caught at and to justify bonuses for the top brass. I’ve been there once upon a time but not now. I work within my budget these days. I can’t stand all the hassle.

No one seems to see the Elephants in the room I was a member of the F S A (Federation of Small Business) which was set up to reduce the incidence of Bankers taking advantage of small business’, even forcing them into bankruptcy and taking their assets. The F S A grew and grew and eventually became like our Civil Service mostly a bunch of self important Fat Cats that enjoyed the sound of their own voice. The Financial Controllers are now wasting our hard earned money on a high speed Train service that might let the rich get back to London that very same day and reaping high charges from us poor souls that get caught with the falsified Parking Charge they impose if we drift into a Bus/Taxi Lane!…… I could go on but The North and especially Scotland are forgotten even when the Southerners are reminded that the Condensation Engine i.e. the start of the Industrial Revolution and many of the things we take for granted came into existence in these two areas (Perhaps it is the darker cold nights and the cleaner fresher air.. Oops apart from Glasgow) But in my small Business even I was affected by the horrible local corruption (Brown envelopes) and the Cartel of various “Business” groups that are Lawless but never appear in Court. Maybe the slave days are still with us with most of our products being made in shall we say awkward parts of the World that the Fat Cats supply with their fly deals with money to out price us small manufacturers here in what was Great Britain,,,. Good luck to us all that have too survive what used to be called the Rat Race…..Take Care…Eric

The condensation steam engine, I believe, originated with Newcomen (ex Dartmouth) and was used to pump water out of the mines in Cornwall – which is in the South. I may be wrong! But it matters not – innovation has occurred all over the UK. There are advantages in living in the north – lower property prices and lovely countryside to name but two.

A debate took place again in Parliament today on unarranged overdraft fees that saw a number of MPs speak. Rachel Reeves MP outlined proposals for a draft bill for regulators to cap the maximum amount that banks can charge customers for unauthorised overdrafts, similar to the limit imposed on charges on payday loans of £24 a month. The debate can be viewed here:https://goo.gl/dQpr5O

The proposal by Rachel Reeves for a draft bill [subject to luck in the Private Members Bill ballot] is welcome but it should have been coming from the government who could probably introduce it by way of regulations rather than primary legislation. £24 a month is still a stonking great fee and there will be interest at a high rate on top of that. I don’t support Which?’s view that charges for unauthorised overdrafts should be in line with charges for arranged overdrafts as there are clearly extra costs and potential liabilities with unauthorised overdrafts, but any charges should not be exorbitant or grossly disproportionate [to the extent that they become extortionate]. I also think any charges should be accompanied by supportive advice on money management and a plan for getting back into a manageable situation with debts having regard to the customer’s income and expenditure.

As a matter of interest, has Margot James [Parliamentary Under-Secretary of State for Small Business, Consumers and Corporate Responsibility] made any contribution to the debate?

I wish we would encourage people to arrange overdrafts rather than placing the emphasis on those who either do not bother, or would be refused. We should also consider controlling the fees more fairly for those who do bother to arrangea legitimate overdraft. Many pay 75p a day if they use the facility – potentially £22.80 a month – even for very small overdrafts. Perhaps they deserve the attention first?

I’d propose either £0.75 a day or the going interest rate, whichever is the least. For others, perhaps the best solution is to ban people from going overdrawn unless they have arranged a facility with their bank?

“For others, perhaps the best solution is to ban people from going overdrawn unless they have arranged a facility with their bank?”

I agree. Note, however, as has already been noted here (or elsewhere on W?C) that there is really no such as an “unarranged overdraft”.

By default, many banks set up (or “arrange”) accounts so that overdrafts are possible, up to a nominal (“pre-arranged”) limit but also that, by means of the how (and when) the resulting charges are levied, the arrival of the charges breaches the “pre-arranged” limit, taking the customer into an “unauthorised” overdraft, so that punitive daily charges then apply.

To avoid this, customers need to arrange to remove those toxic arrangements. But it would save them a small fortune (and deny a lot of easy pickings for the bank) if the banks were not allowed to set them up in the first place.

Yes, penalising a person already on a penalty is a pretty despicable practice. Hitting people with another whack does nothing to encourage a responsible approach to financial self-control and shows how the banks’ automated control systems have taken the humanity out of banking. A complete cultural shift is required that stops people getting into unsustainable debt in the first place.

I expect a lot of overdrafts have credit card repayments at their root and, because CC companies are out of sight behind a wall with no face-to-face interaction with card-holders, they have tended to operate in a robotic manner knowing that their customers’ debts will be for the banks to deal with.

Personally, I don’t think people should have to pay a charge of more than £10 a month for the mere fact of being overdrawn without approval; interest covers the bank’s ‘losses’.

Agreed. The banks have always had the remedy at their disposal, if they wished to implement it. That they haven’t (for reasons best known to themselves) is hardly the fault of the customer.

“the mere fact of being overdrawn without approval”. What if they are not able to repay the amount they go overdrawn? It is hardly helpful to the customer. “Approval” should mean the bank assesses the client as capable of managing repayments – in the clients best interests, surely.

“Being overdrawn without approval” is the same as having an unauthorised overdraft. There is a monthly charge just because the account is overdrawn beyond the authorised limit and this repeats month after month even if the debit is diminishing and even though there is little extra administration involved. I am suggesting that an extortionate charge is unfair and doesn’t help the customer get back into authorised territory. My feeling is that a charge of £10 a month is more than adequate to meet the bank’s legitimate expense in supervising the unauthorised overdraft. If a customer cannot, after due allowance of time and attention, pay the outstanding debt then the bank has the right to take recovery action. Making the debt worse by piling on charges that the bank knows are not repayable cannot be a fair and just method of dealing with unauthorised overdrafts. I maintain there should still be serious consequences because using money without authority can never be right. I know why it happens and I know why people do it: they realise they will never get approval to go overdrawn so they just do it anyway. But the banks’ knee-jerk reaction to that needs to change and they should be under an onus to speak to the customer and work them through their difficulties. It takes time, it requires initiative, and it needs compassion; if bank staff can’t do it then they are in the wrong job. Compounding the amount people have to pay back might sound clever in the performance review meeting and bump up the bonus but it is not socially responsible in my opinion. It is tempting to think that banks actually allow people to slide into debt so they can milk them; it must be made clear by the Financial Conduct Authority that there will be no profit in that.

How do you feel about responsible customers who go slightly over their “arranged” overdraft – say £10 – and incur a fixed £0.75 daily charge? Should Which? be tackling this?

Where people have overdrawn into their pre-authoriseded overdraft safety net but then exceed that I would expect the bank to make an unauthorised overdraft charge. A daily charge of £0.75 seems reasonable subject to a monthly cap of £10. Interest on the entire overdraft would be extra. Some people might be within their pre-authorised overdraft, then arrange an additional overdraft, and still overspend creating an unauthorised overdraft. Each element has its own terms. I don’t think Which? should be criticising the banks for charging people a small daily rate capped at £10 in a month for an unauthorised overdraft. The bank should also be talking to the customer to discuss how they will manage their money and make suitable repayments. I happen to think the introduction of ‘automatic’ pre-authorised overdrafts has unnecessarily complicated the problem and confused customers. They have forgotten that they are supposed stay in credit. The ‘safety net’ was there to catch someone who unintentionally slipped over the line and would soon be back in credit. Many customers are living right up to that line permanently because their bank has not intervened. I think the banks have a lot to answer for and are largely responsible for the pickle they find themselves in.

John, what then about banks that charge customers a daily rate of £0.75 to use their arranged overdraft – however much or little of it they might use?

I would like to see banks adopting an educational role to help customers. as Which? has an educational role and money expertise (Which? Money) I would like to see a joint effort to provide suitable material for those who need help – budgeting, borrowing, spending etc. A uniform approach would be good that all banks could promote – perhaps the British Banking Association could be the partner?

Credit cards are one of the big pickle causes John. It is so much nicer to just swipe a card then extract folding money from your wallet. No doubt it boosts consumer spending and the great wheel of the economy but, at the same time, consumers get more and more into debt. Do we take away the freedom to use debt (it used to be HP and other loan schemes)?

Education is wonderful of course, and ideas concerning involving the British Banking Association are great, but all these ideas are merely distractors from the main issue: banks imposing punitive fees on the most vulnerable. We can debate the value of credit card, HP and Dick Turpin forever; the banks will love to see what could be a concerted attack on them dissolving into a welter of argument about minutiae and we mustn’t allow that to happen. It is patently clear that the banks want simply to make as much as they can and the most vulnerable are the easiest targets. Banking is no longer the friendly intimate service we once knew. It’s now become a rapacious form of licensed banditry and we need to adopt a focussed and concerted approach to tackling the main issue: that of the Banks’ unfair and extortionate approach.

They also impose these fees on those who are not vulnerable but know exactly what they are doing. The fees are publicised by banks so customers should know what to expect.

We often, quite rightly, cite the vulnerable in conversations. What I believe we need to do is to give special help to these people (if we can identify them) but not let those who are not vulnerable take advantage. This is not easy – for some their family, friends are probably the best to help. Perhaps we should have a Convo aimed at suggesting how vulnerable people can be identified and helped.

Malcolm – I question whether a daily charge is necessary for an arranged overdraft. The current account balance will go up and down and in and out of credit and any overdrawing will incur interest. I cannot see what justifies a separate charge: the bank has agreed to arrange the overdraft [presumably because it is satisfied that the customer is responsible and will use it in line with the arrangement]; minimal supervision is required; there is little risk to the bank; and once the overdraft is no longer needed the current account will return to credit and the arrangement can be terminated. These arrangements used to be made person-to-person so there was mutual trust and a handshake; now it’s all done on-line or by telephone which I think weakens the relationship. If there are any problems for the banks stemming from this I think they have brought them on themselves.

I am strongly in favour of the banks performing an educational role. They could run evening classes in the last remaining banking halls.

John, the daily charge is instead of conventional interest in the banks I looked at. So it can look extortionate when a small overdraft is being used. I do not think it is fair and I would like Which? to put as much effort into campaigning against this kind of charging for responsible customers as it does for those incurring unarranged overdrafts.

Education can be done best on-line for many perhaps. For others a booklet might help. And for others perhaps they should be asked to visit their bank as a condition of operating their account so they can be helped with the management of their finances.

I use a spreadsheet as an annual budgeting tool that allows me to keep track of my spending, alongside MS Money that, if properly used, gives visibility of the state of accounts. Banks could issue for a small charge a money-management software programme like MS Money that would help a great many, Unfortunately another great many will want to turn a blind eye to their finances in the hope they will muddle through somehow. The shame is it all costs them unnecessary money in interest, penalty charges, charges for unpaid or returned transactions, credit card interest, higher interest charges due to poor financial record, and so on.

I agree with all of that, Malcolm, especially your first paragraph.

I think the banks are stuck in the old mould of believing that a financial penalty will have a lasting corrective effect. More recent generations don’t understand that. You have to carry people with you these days and supportive guidance will work much better. Carrot and stick really.

I also suspect one problem lies in the phrase ‘Unarranged overdraft’ which implies a simple solution of merely arranging an overdraft. The reality, however, is starkly different, because the banks determine what they feel is an ‘appropriate’ overdraft limit and then swoop as soon as it’s breached. In many cases this has the effect of penalising heavily those trying the hardest to make ends meet.

I agree, Ian.

I should have mentioned in a previous post that I understand some banks sometimes [depending on the customer perhaps] charge an ‘arrangement fee’ for setting up an overdraft. Whether this makes it more of a personal loan and takes the place of the daily charge I don’t know. I think many customers are completely confused over the position they are in with their bank. Finding there is more interest to be paid after returning to credit is another little turn of the screw. It’s all perfectly rational and legitimate in a utilitarian way but has the appearance of scavenging.

I don’t disagree with this appraisal of overdraft charges. However at its root it seems to me is whether someone who “borrows” money is capable of repaying it in a reasonable time. If they demonstrably are, then it is in their interests to make an overdraft arrangement with their bank. On the other hand If there is uncertainty about whether they can repay, it is not just interest that the bank loses but the loan itself – which all its other customers must pay for. Borrowing money you might not repay is wrong.

Somewhere there is perhaps a better balance to be struck between banks profiting from unarranged overdrafts, the banks wish to help an impecunious customer through difficult times, and the integrity of the customer in keeping their financial affairs properly managed and above-board.

As well as offering many customers an overdraft limit when they open an account, perhaps they should give the customer a choice of “no negative balance at any time”.

A better solution might be getting rid of all punitive interest charges and charging all customers fair charges for using banking services. Those of us who keep our accounts in credit don’t pay a penny for all the services we use, because these are funded by the high interest charges paid by those who are in debt. In these days of low interest rates, customers would have to have a rather high credit balance to offset the cost of providing them with free services.

However, I do thing that it would be good to offer customers the option of no negative balance at any time, and maybe make that the default for new accounts. I doubt it will happen without legislation because having customers in debt is a good source of income for the banks.

My assumption is some customers will not repay money they “borrow” from the bank. Other responsible customers should not be forced to make this loss good. Charging those who take money without arranging it first seems to be fair. I agree, though, I do not want to see banks profit from this, but simply protect responsible customers.

Those who are short of money for whatever means should not expect commercial institutions like banks to subsidise them. the government’s benefits system is there for that purpose, hopefully targeted at the genuine claimant. For those with difficulty in organising their financial affairs banks should offer an educational resource, face to face, online or through a publication.

As a charity, one of Which?’s remits is education. Perhaps it could advertise a free booklet on tv on personal spending, budgeting and money management and distribute it, in conjunction with the banks. It could also offer a budget (spending and income) software tool for people to download and use. Positive action might well help consumers.

Even though some customers fail to repay debts to banks, it remains lucrative for banks to have customers paying overdraft charges.

Why do you and I deserve free banking that is paid for by those who are in debt?

The root cause of the problem is people not dealing properly, for whatever reason, with their finances. That needs dealing with. Whether or not I get “free” banking (it isn’t of course because my balance earns money for the bank) is immaterial.

We need positive proposals to help these people with their finances, not suggesting I should pay the bank to help support them; I can do that voluntarily through appropriate charities that target the genuinely needy, not those who behave irresponsibly with other people’s money. However if others want to donate money to their bank to pay off the fees of those who don’t have the decency to ask their bank if they can have an overdraft facility then that is their personal choice.

I am trying to raise awareness of the fact that many of us enjoy free banking services paid for by those who pay interest charges. That’s not very fair, is it?

No, it isn’t.

Many of “us” have money in our account(s) that earns income for the bank. Even standard relatively safe investments will pay around 3.7%. So many do not enjoy “free” banking when our deposit is earning money for the bank.

We need a balance between fair charges (I think daily fees for arranged overdrafts are unfair) for those who operate their accounts responsibly, and appropriate charges for those who use their accounts less responsibly, and create bounced payments and unpaid direct debits for example. In between are the “vulnerable” who need real help with their banking; these are people who should be targeted to ensure they get the advice and assistance they need. That might be a good place to start.

Some people do have significant credit in their accounts but that does not alter the fact that overall, those who stay in credit are enjoying free banking services supported by those who pay interest charges. My suggestion is that customers are charged for banking services and receive interest on credit balances – which is fair for all and would allow interest charges to be reduced. I don’t like exploitation of the poor or those who simply cannot manage their money.

That is a fair approach. I think it is wrong that the charges, in whatever form they take, for running an overdraft exceed the reasonable costs of the bank [including a fair profit element] for providing such services and that effectively the excess revenue subsidises accounts in credit. Internet banking has dramatically reduced the costs of servicing accounts so charges to customers in credit could be very low as well, offset by interest on credit balances. I think that would put all the right incentives in all the right places without being punitive.

That’s what I’m hoping for. I saw a figure for the income banks make from overdrafts, possibly in one of our Conversations. It’s a lot.

Perhaps Which? could put the relevant figures together so we work from the same fact sheet. They might also invite the banks, or their association, to give their numbers and their side of the story.

What I find inexplicable is how Payday lenders were capped and banks were not. To assuage the fears of those who are sure they’ll end up paying for those with overdrafts let’s think about how it works.

Capped as they are Payday lenders haven’t yet gone to the wall. So they must still be making money. That in itself seems ample justification for treating the banks in the same way. The banks argue these charges are necessary for them to stay afloat, but that’s clearly not the case. So it seems eminently clear that a cap must be brought in, if for no other reason than the banks’ appalling behaviour in their treatment of those who might occasionally exceed their arranged and approved overdrafts.

But the banks still will make money. Why? Because they’re constantly investing our money on the open markets, betting on futures and lending to organisations where they can charge significantly higher rates of interest than they pay savers. Coupled to all this is the fact that banking has become significantly cheaper for the banks over the past several years. Why? Well, look at the branch closures, the increasing ease of record keeping, the drop in the use and consequent processing of cheques, the rise and rise of technological means of payment. From ATMs to smart cards processing money is becoming cheaper and cheaper. Yet still the banks feel they can levy extortionate charges on those who might momentarily exceed their approved overdraft limits.

Whom does this hit the hardest? The young, whose fledgling attempts to become independent, with all its associated costs – rents, rates, insurance, furniture, utility bills – most of which will be higher for them than older folk because the various companies charge them more because they’re young, are likely to end in misery, depression and in many cases – suicide.

They’re the ones most likely to drift across their arranged overdraft limits and they’re consequently the most heavily penalised by the poor, cash-strapped banks, barely able to keep their multi-million pound head offices floored in ermine.

The banks must be reined in. I still wonder how those responsible for the 2008 financial crisis through a variety of criminal acts, appalling misjudgements, errors and mismanagement are still calmly sipping their gin and tonics on their company yachts when if it had been any normal person they’d have been hung out to dry. Slowly.