/ Money

Have the CMA’s banking fixes fallen short of the mark?

Bank fix

The Competition and Markets Authority (CMA) has today unveiled its grand plan to improve competition in banking. But we think the proposals have fallen short of the mark.

Back in October, I wrote about the CMA’s recommendations for improving competition in banking. And it’s fair to say pretty much everyone, including many banks themselves (well the challenger banks at least), was left feeling underwhelmed.

But to the CMA’s credit, they did say they’d go away and take suggestions on board. Well today’s new, updated proposals show that sadly, not much has changed.

Better banks

The problem is that the cost of using a current account depends on how you use it, but charging structures can be complicated, and pretty expensive if you slip into an unarranged overdraft. And despite banks rarely achieving decent satisfaction ratings, people don’t switch, leaving the big four banks with a dominant market share.

So if you throw in relatively low satisfaction, disillusioned customers thinking all banks are the same, and a small group of customers being charged through the roof, but not switching and not being helped to manage their situation, the diagnosis is not good.

Now there are some recommendations in the CMA’s report (PDF) that are undoubtedly good.

Recommendations like making banks regularly prompt their customers to check they’re getting good value from their provider, and making switching easier, are sensible housekeeping stuff that, in truth, banks should be doing anyway.

There’s also already been some good progress made on a new app to help people compare what bank is best for them, based on their actual account usage. Plus proposals requiring banks to alert people when they are about to go into their overdrafts, and giving them grace periods to avoid charges – these are certainly welcome steps in the right direction.

Fallen Short of the mark

But where the CMA has fallen short is what they’ve billed as a ‘cap’ on unarranged overdraft charges.

In reality, it’s not much of a cap. Banks are only being required to set their own maximum monthly charge and disclose this to their customers. It fails to mention that some banks already have a limit on the monthly cost of unarranged overdraft charges.

Also, while the CMA believes that transparency will help customers compare and encourage them to switch to a cheaper provider, it does so in the knowledge that heavy overdraft users are the least likely group to switch.

And if any of you are wondering about customer service in banking – well the CMA is proposing to require banks to display a small number of core indicators of service quality, like willingness to recommend the bank to a friend. There are also proposals to publish other quality measures to help people compare between providers.

But it’s not yet clear how this will work. What we’d like to see is some customer engagement, to test whether the information being presented is what people actually want to know.

Next steps

While this is technically only the CMA’s provisional decision, after almost two years or investigating and rejecting calls for stronger action, it’s unlikely it will change its mind.

So it’s now over to the Financial Conduct Authority to implement the CMA’s remedies and judge whether they go far enough.

What do you think? Do you think that this a missed opportunity to improve banking?

Do you think banks that hit customers with unfair charges should be held to account?

Yes (99%, 4,903 Votes)

No (1%, 38 Votes)

Don't know (0%, 13 Votes)

Total Voters: 4,954

Loading ... Loading ...

Replaying to one of my post’s above, malcolm r said:

“DerekP, if people have every intention of repaying their bank when they take money in excess of their account balance, then why do they not do the courteous businesslike and financially sensible thing – ask their bank for an arranged overdraft facility. It is simple and cheaper if you need to use it. If the bank will not give them a facility then maybe they regard the applicant as a bad risk. Why should any business give credit to someone who they think might not repay?”

As I think I’ve mentioned in previous posts and or Convos, I think banks deliberately ALLOW this to happen so they can make money via their fees for unauthorised overdrafts.

Our poor “average” model consumer, e.g. anyone who does not know their annual energy consumption and/or who cannot work out the cheapest tariff for them, and/or who cannot be trusted to fit their own 3 pin plugs (etc…) may also readily fail to balance their books. If so, they will provide a staple diet for all forms of money lenders, from their bank to their catalogue account and on via payday lenders to local loan sharks.

So the banks (and other lenders) ALLOW this to happen to any customers who lack the life skills to operate a prudent and cautious approach to home finance.

Also, it is EASY for lenders to cover any risks of non-repayment. In money-lending-101, one is taught that the interest charges for any loan must include some insurance charges to mitigate the risks of non-repayment.

For example, if a lender loans £1 to 100 people, he won’t mind too much if 10 of those people never ever pay him bank, so long as the other 90 pay back their original loans, to a total value of £90 and interest charges, e.g. to a total value of £20 or more. Then overall, he’s made £10 on the deal.

Further more, if our lender is at all peeved by the non-repayments, he might sell those £10 worth of debts onto a debt recovery company for a few quid. The debt recovery company can then apply their specialist skills and may end up persuading the debtors to eventually pay back some fraction of the money that is owed.

It is certainly the case that the banks do not make it widely known that it is quick, easy and possibly much cheaper to set up an overdraft facility on a current account on request and by arrangement. They could even provide an on-line channel for trusted customers.

I do agree that people who go into over draft without informing their bank should be charged. Courtesy costs nothing! An arranged overdraft facility is easy to set up and can be used when needed. However, the banks need to explain simply what their charges will be for this service and not attempt to make a fortune out of the charges they levy. I have to say that over the years I have always found my bank most helpful in explaining all their charges for different facilities.

I don’t think the banks are the problem. I think our education system is. Instead of beating up the banks spend the same amount of effort educating those who have difficulty managing their money, on how it all works. If the vast majority of bank users were smarter about money then the banks would not be able charge them because they would not be making silly mistakes.

I do think all banks should present all their charges in a clear unambiguous way. Perhaps the CMA could rule that a common format should be used; in the same way that food labelling has some common standards especially in weights and measures.

A very good point. Our current western capitalist economy is based on the principle that it is OK to borrow money so long as you can afford to pay for it.

As with most other things in life, the cost of borrowing money can be reduced by careful planning and shopping around.

Unplanned/”authorised” borrowing from one’s bank carries the penalty of costing “convenience store” prices.

People with unauthorised overdrafts are effectively stealing from the bank and should be penalised. Restrictions on these charges could mean the end of free current accounts. Why should I be penalised for managing my finances prudently?

How is it stealing if the banks provide unauthorised overdrafts as a (very expensive) service? If they fail to repay then that is stealing. I am not aware that banks are obliged to provide unauthorised overdrafts. Perhaps they are a good source of income to the banks.

Bank customers have the option of asking for an overdraft facility. If the bank thinks you are a suitable candidate then they will grant it. Not asking, but taking out more money than you have, is underhand and irresonsible. You would not expect to take out of Tescos more shopping than you could pay for, and expect them to hope you’ll pay them back in the future.

The essential step is to understand your own financial situation – face up to it perhaps – and work out how your spending can match your income. If it does match, but reliable income might not always coincide with payments then an authorised overdraft can be used to bridge the temporary gap. If your spending exceeds your income then this gap can never be bridged, whether you take an authorised overdraft or take money without authorisation. Banks could simply block all unauthorised withdrawals and leave people in very awkward situations – unpaid car insurance direct debit for example – but they don’t necessarily. However it is only fair that they try to deter regular practice of this kind.

Is it stealing if banks automatically provide unauthorised overdrafts at high interest rates? Maybe those who pay these interest rates are more valuable customers to the banks than those of us who manage to keep in the black.

I don’t think overspending the account balance can be regarded as stealing. Banks profit from any overdrawing but presumably charge even more for unauthorised overdrafts. I suspect many of the people who have incurred unauthorised overdraft charges did already have an authorised overdraft limit on their account as it is a fairly common feature and deals with the temporary cashflow situations that Malcolm referred to. If so it is possible that they have been charged at the excess rate on the entire amount of their overdraft not just the unauthorised component. Since each case is dealt with on its own merits and banks will never discuss their policies in regard to these matters, it is difficult to get a picture of what actually happens and how banks balance their desire to keep a customer within the fold and their need to deter irresponsible account management. I presume ultimately customers who frequently exceed their approved limits get called in for an interview and would eventually be relieved of their banking facilities. That is such an extreme step, or at least it has the most serious adverse consequences in all manner of ways, that banks will do all they can to avoid it while still trying to maintain some discipline.

Giving a loan and not sticking to their. Alleged agreement.
In terms conditions.
That they would give advanced warning of when taking repayment.
Taking without consent Full payment back within days of loan issued.
No reasonable repayment time Given.
Whole wages Taken without consent.
SO made overdrawn.
Then Building Society could Bounce my Direct Debits
Charge me For then.
The Direct debit companies then have to charge me a non
Repayment charge.
Nice One for Building Society.
Also not allowing me to pay Back Direct Debits before their Alleged date.
Because of their interest costs that they said would be incurred