/ Money

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

Overdrawn

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?

Comments

As a Supply Teacher my income is irregular. Not surprisingly, the only times I have been overdrawn are those when demand for work is low/non-existent and unfortunately when demands on the purse are high (school summer holidays and Christmas). Despite my best attempts to plan I am often overdrawn during these periods – high bank fees place me under additional stress during financially stressful times. I really feel that there should be a grace period of two weeks before the high charges are enforced; I fully support the concept of long-term overdraft fees to prevent people from going into debt and living beyond their means.

It is good to read a post from someone who has recent experience of being in debt. I suspect most contributors to this and similar topics are financially secure – and I hope you become one of them.

Annest, if you can show the bank what the irregularity of your income is but that, on balance. you earn more than, or equal to, what you withdraw then I would hope an arranged overfraft would provide the buffer you need at a reasonable cost.

When I log into my current account I see ‘Today’s balance’ and ‘Available’, the difference being the latter figure includes my arranged overdraft. That seems almost like an invitation to spend money I don’t have.

I have always disliked that presentation of my financial position. I don’t regard my ‘automatic’ overdraft facility as available money; it is a resource of last resort and should not be confused with cash in the bank. I don’t need reminding that I can access additional funds if things get tight and I would actually prefer it if I had to notify the bank – which could easily be done on-line – if I was going to enter that zone. It is an imprudent gesture to those who do not check their balance and coast along knowing that this flotation collar will automatically deploy without any action on their part. That contributes to irresponsibility in personal financial management.

I don’t know whether these ‘automatic’ overdraft limits are ever reviewed by the banks or just keep rolling along indefinitely. I expect for some people they are part of their monthly spending plan which means that any unplanned expenditure automatically tips them into unarranged overdraft territory. I am not sure that every customer has an ‘automatic’ overdraft facility, though, and some might fall straight into the high-interest high-charges pit, although, according to Malcolm’s helpful round-up of the banks’ responses to this campaign, most seem to have a fee-free buffer zone. They also say they go out of their way to inform their customers how to manage their money to avoid high fees and charges; I wonder how – I cannot say I have noticed much publicity in banks or information directed at this worthy endeavour, unlike the big posters encouraging people to take out loans and lifestyle insurance products.

Credit card companies regularly review their customers’ credit limits according to their spending profile. One of mine was reduced recently because I had been making little use of the available credit [because it is my habit to repay the full balance every month]. My first thought was that it was a bit inconvenient because I liked having a relatively high limit in case I wanted to make a major purchase, but on second thoughts I am quite happy with the reduced limit [it is still sufficient for anything you can buy on the high street] and it means that we would have to stop and think before plunging into a large expense and make a simple telephone call to increase the limit if necessary. Making us stop and think is a useful discipline.

The difference also excludes uncleared funds.You will also need to account for unpaid cheques for example and any forthcoming automatic payments. So relying on the “available balance” without a knowledge of your financial commitments is dangerous anyway. It is, however, accurate at that instant in the funds you have avaialable and, as a responsible account holder, if you choose to borrow temporarily on your available overdraft you know you will not incur exceptional costs.

I have had two credit cards since my mid-20s and always paid off my balance. One I kept for large purchases but the other one lived in my wallet and was used for telephone orders. This card and account were obviously at greater risk of fraudulent use so I regularly asked for increases in credit limit to be reversed. I said that I would ask for a higher limit if I needed it. That worked for some time, but eventually the company resumed taking control of my credit limit. In my view the customer should be in charge of the credit limit on their cards – subject of course to the company’s agreement.

Many years ago my bank invited me to have the facility of a £200 arranged overdraft, which I agreed to. It stayed at the figure for years but now it is £1700. Better than an unarranged overdraft I can’t help wondering if the bank might be encouraging me to spend money I don’t have.

I don’t see why the available overdraft could not be shown separately rather than being consolidated in the balance available [as you say, subject to impending outgoings].

I keep a calendar of automatic payments and perhaps banks should offer such a facility within their internet banking system, especially now that so many people choose paperless billing for their utilities and might overlook an e-mail for an irregular charge like the water bill.

My cheque book still includes pages for keeping track of the current account – I expect most banks do the same. I wonder how many people use them.

A little tip: I arrange for my council tax to be paid by direct debit over ten months instead of twelve. This gives me two months, February and March, without this large outgoing, so I have tried to organise other annual payments [subscriptions. memberships, TV licence, etc] to fall due in this period. This smooths the expenditure profile throughout the year.

Maybe those who would like their available balance to exclude an arranged overdraft would like to join my bank. They show, on line and on paper, the actual balance available with the overdraft limit shown separately. Just checked my other rarely used bank and that separates the two also. I wonder how many banks actually combine them. Generalisation can be misleading.

I have just checked the Nationwide’s internet banking site and they show the actual balance available without consolidating the approved overdraft limit. That is shown elsewhere on the site and provides an option for increasing or reducing the amount – I did not test it to see if it was possible to remove the automatic limit entirely but I noticed that mine, at £500, was much higher than I thought it was; I obviously have not checked that part of my statement in a long time. On the website I also noticed that it said “Overdrafts are repayable on demand”.

Overnight Nationwide have completely changed the layout and appearance of their internet banking log-in page. I was surprised to see the new page and was concerned whether it was an authentic site or a clever scam attempt. Internet banking customers have not been sent any advance information that a change of log-in process was being introduced so I telephoned Nationwide to seek reassurance that they had indeed made such a change and that the new page was genuine. After discussing it with a ‘consultant’ and a senior person I was satisfied that the new log-in page was authentic [I asked them to describe it to me as I looked at it on screen]. It would appear that they had not given any thought to how customers might react to such a change and promised to feed back my concerns to senior management. I pointed out that the Nationwide routinely sent me post-coded e-mails about all sorts of banking matters and should have thought to send one out to prepare customers for this alteration. There still seems to be a naivety about banking security even in the banks and building societies themselves.

Barclays do not allow unarranged overdrafts. It would be interesting to know what happens when somebody reaches the point of overdrawing – do they just return a direct debit, bounce a cheque, and refuse to pay a standing order? Perhaps they try to contact the customer, but what if they are away or have not given them their phone number? I don’t think my bank has my mobile telephone number for receipt of a text message.

If banks can get away with paltry and meagre interest rates for savers, caused mainly by their own past indiscriminate and mishandled lending practices, then they should be able to show some leniency for their customers who are unable to rely on central government backing when mismanaging their own financial affairs.

I am not in any way condoning anyone’s financial mismanagement, but if the BoE is responsible for the regulation of interest rates, then it should be able to introduce a cap on the interest charged by banks to their customers who, for whatever reason, habitually go overdrawn.

This action ultimately would need Parliamentary backing and I sincerely hope Rachel Reeves MP, is successful in her attempt to bring this unfair practice to an end.

Very well said, Beryl.

Thank you Ian.

I agree. We can talk about this until the cows come home but it’s good that we have people like Rachel Reeves who are both prepared to take action and might stand a chance of being listened to.

Lauren has provided a link to Rachel’s speech in the House of Commons: https://conversation.which.co.uk/money/banking-overdrafts-unarranged-fca-cma-rachel-reeves/#comment-1475450

It starts at 11 minutes into the video.

Banks can currently get all the money they need on the money markets, it seems, so do not need to pay higher rates to private depositors to attract funds they don’t need. If you need money long term then the best way is probably a personal loan; my bank charges between 3.4% and 4.5%. My view on arranged overdrsafts is they should be used to cover short term gaps.

Perhaps one solution is to have some form of peer to peer banking specifically set up to help vulnerable people, specialising in their needs.

“The bottom line. Retail and commercial banks are essential for the smooth functioning of an economy. Most large banks have specialised divisions that deal in retail banking and corporate banking; both businesses are among the largest profit centres for most banks”

Source: investopedia.com – Retail Banking v’s Corporate Banking

Why big banks like mob they make money out of there victim and they get away with it not every wourld leader turns their backs on the bank victim and they keeping getting away with it God bless

Paul says:
9 February 2017

When will HM Treasury do its job in providing debt-free, interest-free currency, instead of relying on privateers to keep us tied into this fraudulent, debt-based fractional reserve system?

Janie Dunn says:
9 February 2017

It’s all about money, money. Not helping their customers

Janie Dunn says:
9 February 2017

It’s all about money, money. Not helping their customers

Will there ever be an end to banks s******g their own customers?
Will there ever be an end to the HMG doing nothing about it??

I went accidentally overdrawn by less than £2 when out of work, the charges at a daily rate meant I had to close the account and had to pay off £301. This took me a while and was very stressful, at an already low ebb. I had been an account holder continually with them for 40 years. I will no longer bank with that group.

Some banks give a free buffer for this very problem, they give grace periods and enrollment for automatic text alerts to allow you to regularise your account before charges kick in. I don’t understand though how your £2 overdraft, and charges, was not noticed before it got out of control. Did you contact your bank and point out the out-of-all-proportion charge? I met a similar situation with a little-used bank account that I topped up when it was needed – but forgot one month. The result was accumulated charges on my monthly statement. I contacted the bank, pointed out my mistake, suggested they could revert to an alternative interest charge rather than a fixed daily amount, but with no request to do any more. I had a phone response to say the charge had been cancelled and would I like to enroll in their mobile text alert service. No complaints there.

This is a classic example of the private sector being allowed to rip of the less able. Unfortunately, the private/commercial world is rife with examples of this and governments either just do not understand, don’t care or see more important things to be tackled first perhaps. The really sad thing is that this ‘taking advantage’ of less able customers appears evident to variously from the one man operation right up to the biggest companies in the World.

When I challenged Apple a while back over their statement that I needed to change over to iCloud to keep my mac mail address, they argued literally for hours (I have the transcript), to try an convince me that I had to change to iCloud when in reality it was and is possible to keep your mac email and not use iCloud, unless you want device interoperability, in which case, buying your own memory (cloud) and setting up your own iCloud is a real option.

More recently, it has become obvious to many iCloud users that the FREE storage available in iCloud is very limited. There are apparently 2 options: either pay Apple monthly for more and more storage for the rest of your life as your records grow in volume OR, sift out what you do not want in your iCloud to free up space. HERE’S THE PROBLEM: According to information on the web going back before 2013, Apple have been getting complaints that users are having problems freeing up iCloud storage, have recognised that there is a problem for Apple to sort out, BUT, when I hit the problem recently, I found no sign of Apple having sorted this problem. The net result is that most people just give up and pay for more storage. On the surface, this is a huge GLOBAL rip off and ought to be investigated by Which?

Additionally, the industry appears to have been putting it about that to have device interoperability we must have iCloud facilities run at the highest operational level because it is not financially viable for individuals to set up their own Cloud facility. What the industry appears to have forgotten to say is that whereas that may be true today, in the future if individuals invest in there own systems now, there should come a time when the costs of their own system will be overtaken by the ever increasing costs/charges of iCloud storage by Apple.

I have had a battle with my bank regarding charges. It is crippling financially, since I depend on Employment and Support Allowance, which isn’t very great, and only just gives me enough to live on. In saying that, I have an authorised overdraft, for which I pay an “overdraft usage fee” of £6.50 per month – a total of £78.00 per year on a £100 overdraft. In addition, very occasionally (usually at the beginning of the month) my ESA is not even enough to cover my direct debits, therefore I incur a returned direct debit fee of £10 per item refused. If even as few as 2 direct debits are refused, it costs me an extra £20 in fees, making the monthly total £26.50 per month. It goes without saying that for the first half of the month, I rarely have enough money for normal household costs. The stress of managing this, added to my ill health, has made me very depressed, and, no matter what I do, I can’t get any satisfaction from the bank at all.

Greg says:
9 February 2017

I’d been a ‘customer’ of Natwest since a student in 1977 and had NEVER been overdrawn since graduating in 1981. In fact, the account has always maintained a healthy balance, quite often into 5 figures (7, if you count the .00 pence ;o).
A few years ago, the industry in which I worked had a bit of a downturn and my funds became depleted to the extent that I had to sell some shares to keep treading water as no contracts/jobs were forthcoming. I eventually secured another position but because of the ‘month-in-hand’ working my balance was c. -£800 in (arranged) overdraft and I was in danger of creeping into unarranged borrowing for a matter of a few weeks – more importantly, because my mortgage payment needed to go out (to Natwest!).
I spent over an hour with them in their main branch discussing matters and requesting a temporary extension from £1000, to £2000 to cover, the end result of which was they refused. Their best advice? “To withdraw the money on my Natwest Mastercard (attracting interest from the moment it was withdrawn!) and pay that into my account to cover the period”.

Mark Twain’s observation that a banker is someone who will lend you an umbrella when it is sunny, but demand its return when it rains, was never more apposite. They are, quite frankly, a bunch of ****s who believe that ‘loyalty’ is a one-way street, heading in their direction only.

I wouldn’t shed a tear if they went bust.

With a little common sense they might have retained a customer who normally kept a healthy balance in their current account. On the other hand it might be more lucrative to try to keep customers who have to survive on overdrafts.

Did they explain why they would not increase your overdraft Greg?

Nope. And I did insist on knowing the reason. The chap to whom I spoke decided he needed to consult with a.n.other ‘upstairs’. He was gone for around 20mins and when he returned it was a straight ‘no, they’ve refused to extend it’. I even had documentary proof that I had issued an invoice for my fees, and a letter from the company stating that my fees would be paid on the nth of the following month (which more than covered the requested £2000 overdraft by a factor of 4x! But still the answer was ‘no’). You can imagine my response?! Were I a little less reserved I might have gone out into the foyer and broadcast to all the waiting customers therein.

They are not alone in not paying interest on current account credit balances (not even a miniscule 0.05% which Barclays now pays on it’s saver….) , and yet unarranged borrowing is charged at 19.90%.

They really are all a bunch of ****s.

In that respect a ‘bad’ customer is one one who always has a credit balance and pays off their cards in full every month. A ‘good’ customer is one who is unable to do that and therefore generates fees and interest for them. I suppose it is a delicate balancing act for them to charge you just enough that you keep with them, and don’t either top yourself or do a runner!

I’m fed up with our corrupt banking system. Our countries and peopleare kept poor by the 1per cent who own them. When will our governments be brave enough to tackle them and freemasonry?

Petra Lander says:
9 February 2017

Whilst I agree the a charge for any overdraft provided, it should be in direct correlation with the amount borrowed. So if the overdraft used was £2 for 2 hours, it should be a fair interest on that amount and maybe a minimal transaction fee of a few pence and not a fee that is 3000% or more of the amount borrowed!

We need to exercise an element of caution here. Some customers are serial overdraft users and a specific cap in terms of fees should not neccessarily apply to such types. Other than that I agree with a general cap on exhorbitant fees.

We have a second class banking system it should be more controlled by legislation a the moment we have a system that lets banks almost bankrupt people for being a couple of pounds overdrawn it unfair a pure b
Grede and about time we put a cap on bankers wages as this affects there charges greed greed greed any way they can squeeze cash from you time for change

It’s not fair how banks charge so much,once your in the situation you can’t get out,as Barclays charge me £100 a month at times,it’s good to have which on our side

Rules are rules and should be stuck to, the good customers will have to pay more for there accounts, if these fees are reduced.the banks give generous overdraft facilities to all customers who do not abuse there accounts.
The public should understand this.Which does many fine campaigns,THis I S NOtOne of them

I am afraid Mr Duxbury must have thought that the banks create the finance rules, this is the problem which this debate is following. The FCA is being asked why there are no rules, especially where one lender is capped at £24 and another, for no apparent reason, is charging £90?.
The banks severely contributed to the dire financial situation our country is in by not keeping to the Laws of banking, by infringement of the inter bank lending rates etc.It is not a fair society which demands that the poorest and most indebted are fined to bale out the banks.
I am an ex bank employee.

Sylvia Palmer says:
9 February 2017

Nat west even charges you for asking for statements that go back after a year .

The Pay Day Loan is authorised and planned whereas the “Unauthorised” Overdraft is not.
Banks are businesses and are there to make a profit. They are not an extension of Social Services.
Providing the interest rates & fees for services are well advertised / notified then buyer beware.

But by allowing customers to draw on an “Unauthorised” Overdraft the banks are, implicitly, authorising it. If they weren’t then they wouldn’t advance the cash. They can’t have it both ways.

They cannot win whatever they do. If you pay your car insurance by monthly DD and it would take you overdrawn, and your bank refuses to make the payment, you can end up driving without insurance.

You can, as a customer, opt out of going overdrawn, in which case the bank makes no payments that would allow this. Barclays apparently do not allow unarranged overdrafts. So perhaps we should ban unarranged overdrafts – is that what we would prefer?

Banks encourage you to enroll in a text alert scheme that tells you if you are going overdrawn, gives a grace period, and thus allows you to put matters right. Equally, as money is important to almost all of us, we should keep proper track of it then we would know if we were likely to go overdrawn. Banks offer means to help us do this. Many are apparently serial unarranged overdrawers – knowing the costs they presumably know what they are doing.

We need to place substantial responsibility on the customer, who should treat their money responsibly, and talk to their bank or seek advice if necessary. As for those genuinely incapable of properly looking after their finances, we need to focus on how we help them.

They can win – and do most of the time. They need controlling, becuse without controls they’ll continue to ride roughshod over hardworking but low or irrgularly paid people.