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Win! FCA takes action on the overdraft market

We’ve campaigned for years for an end to rip-off unarranged overdraft fees. Our guest, Chris Woolward, explains how the FCA is shaking up the market.

This is a guest post by Chris Woolard. All views expressed are Chris’s own and not necessarily shared by Which?.

In December last year, I wrote for Which? on our proposals for radical reforms to the way banks and building societies charge customers for overdrafts.

It was really interesting to see your reaction, and we read all of the 100+ comments from readers, with many supporting our approach and the proposals we set out.

Many readers took the time to set out difficult experiences they had with overdraft charges, showing the impact that these charges can have and why the market needs fundamental reform.

There were a couple of common reactions that I thought it might be useful for me to say more about.

Some worried that our proposals would make it too easy for people to borrow by reducing unarranged overdraft charges – that there ‘should be a disincentive to people who do not bother to ask if they can borrow money’.

That’s not how we see it.

Fair and proportionate charges

We’re not banning charges for overdrafts, but making sure charges are fair and proportionate. The evidence doesn’t justify the much higher charges that firms have been imposing for unarranged overdrafts.

We expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20p a day following our reforms, and all overdraft charges to be well below the level of the daily price cap on payday loans.

The fact that these charges currently fall disproportionately on the people who are least able to afford them, and who incur them more frequently, suggests that high charges aren’t acting as a deterrent.

Your stories

The stories you told us illustrated how those on insecure or low incomes or in difficult circumstances can find themselves paying high overdraft charges that they couldn’t predict or avoid. There were also concerns that our changes might lead to unintended consequences.

Some of you suggested that firms would try to recover lost revenue elsewhere – as one put it, ‘I just don’t expect the banking industry to take this lying down’.

We’ll be watching how the sector responds carefully, but this is why we’re not just focusing on prices.

We are making overdraft charging much simpler and easier to compare so customers can see what overdrafts cost, and firms compete to offer better deals.

Since December, we’ve listened to feedback on our proposed changes, directly from consumers and consumer groups including Which?, industry, politicians and others.

We’ve also been out doing more consumer research – exploring how complex people find current overdraft pricing structures and what information that they want to see.

We already knew that people had real difficulty in understanding and comparing overdrafts, but it was still important for us to hear directly about their experiences.

They told us that they found overdraft charges very complicated, to the point that many had decided over time and through experience that trying to understand and engage with overdraft charges under the current system just wasn’t worth their while.

Radically reforming the market

We think people deserve better than that – overdrafts should be simpler, fairer and easier to manage, and people should be able to compare products and understand what they will pay for them. That’s why we are radically reforming the market and bringing our full package of reforms into force.

Read the full details of the changes we are making

We’re very grateful to everyone who took the time to share views and experiences. Thank you for helping to inform what we believe is the biggest reform of overdraft charges for a generation.

This was a guest post by Chris Woolard. All views expressed were Chris’s own and not necessarily shared by Which?.

This strong action from the regulator will come as a huge relief to those people who’ve been regularly hit with such extortionate charges. The changes can’t come soon enough. Do you agree? What do you think of the action that’s been taken by the FCA?

Comments

Used sensibly, arranged overdrafts can save unexpected interest charges but I wonder if they are used as an incentive to encourage us to dip into the red. When my bank offered me the opportunity to arrange an overdraft I did so and accepted their figure of £200. Many years later and this has risen to £1700, even though I have not used it. Whenever I make an online payment from my current account, the figure for the ‘funds available’ is the current balance plus the arranged overdraft. I see that as an incentive to spend money that does not belong to me.

I was entirely in support of these changes……..until I recently received a letter from my building society (a frequent Which?RP) informing me that the new arrangements mean that my overdraft EAR is changing from 18.9% to 39.9%!!!!!!! Not impressed. Which? Can you put pressure on the banks to change this, they have simply used it as an excuse to charge the higher, unarranged fee to all, so now no-one can borrow short term at a reasonable rate? I’d also like a quick link on my banking app to tell me whether it’s cheaper not to pay my credit card bill in full or to use my overdraft to pay it and pay for the overdraft. Impossible to calculate this easily anywhere!

AB, if your credit card APR is less than 39.9% then you’re better off using it. The perverse decision to allow those who don’t bother to arrange an overdraft I (and don’t, therefore, give their bank the opportunity to decide if they are a good risk, or not, and, if not, get into deeper financial hot water) to pay just the same as a responsible customer was foreseeable in one form or another. The banks need to make up the shortfall in income. I didn’t much like the excessive charges they made, but some penalty was sensible; a better solution would be to simply not give an overdraft unless it were approved. Where would the loss in income then come from? Charging people for the use they make of their account, and paying market interest in the balance, increasing loan and mortgage rates for example. But to remain competitive, all banks would need to follow the same route.

I have just been looking at the latest notification of forthcoming charges both for my own bank (Santander) and others. This seems to have given one of the most ridiculous outcomes ever and where it now costs as much or more to use an arranged overdraft than an unarranged overdraft and it is cheaper to hold money on a credit card than pay it off.

Was this an unintended consequence of the Which? campaign? If so, what is Which? going to do about it? Sometimes Which? campaigns don’t always seem to come out in the interests of all members or consumers and greater thought should be given as to their consequences.

Lots of people need to borrow money for lots of different reasons, sometimes short term and sometimes longer. I wonder if all those who have posted above never had a mortgage or home improvement loan and how many truly have never had to borrow money. They may have borrwed money ‘responsibly’ but that is done to individual interpretation and purpose.

Even though I pay it off every month, I use a credit card for everything I buy because of the additional consumer protection it gives me. Is that irresponsible of me to ‘borrow’ that money in the first place?

I don’t see much point in using a credit card for expenditures of under £100 – there is no additional consumer protection for that. The only advantages are possibly to defer payment and to be able to cover a wide range of purchases with one payment, but it is easy to lose control of spending if it all goes on a card.

Credit cards have many advantages but I feel that such an easy path into debt is not prudent. In the days before credit cards, when all major household expenditure was on hire purchase – sometimes called the ‘easy plan’ – there was a greater degree of discipline since if repayments were not maintained there was a risk that the goods would be repossessed.

Using an overdraft to pay off the minimum amount required on the monthly credit card bill really is the slippery slope but I expect it is not uncommon.

I use a contactless credit card whenever the amount is less than £30. It avoids the possibility that someone could see me enter my PIN. I always ask for a receipt even if the retailer assumes that I don’t want one. The balance is payed in full every month and there is plenty of time to make sure that there are adequate funds in my current account. It works for me.

Having said that, I agree that credit cards help many people get into debt and I’m not happy that the present system allows people to sign-up for new cards when they already have debts on other cards.

I use my credit card all the time – food, fuel, small and large purchases, in shop and online, parking – purely for convenience. I keep track of my purchases, using MS Money, check against my statement and pay my monthly bill off in full each time. I think that is a good way of using a card.

It can encourage impulse purchases however, when it hurts less to use a card than to take cash out of your wallet, so they should be used responsibly particularly if on a tight budget.

I do not use contactless. I’ve never had a PIN problem in all the years they have existed, but, as with an ATM and bank card, I don’t make it public.

David wrote: “Even though I pay it off every month, I use a credit card for everything I buy because of the additional consumer protection it gives me. Is that irresponsible of me to ‘borrow’ that money in the first place?”

I don’t see this as irresponsible, especially if you always pay off your credit card every month. It’s always possible to overpay and build up a credit balance.

In the days before my credit card company would allow me to pay by direct debit, I overpaid before I went away on holiday in the summer so that there was enough credit to clear my account when the next bill was due.

“https://www.which.co.uk/news/2020/02/tsb-to-offer-small-short-term-loans-as-an-alternative-to-overdrafts/”. An overdraft should be used as a short term buffer, not long term debt, particularly with interest rates approaching 50%. A personal loan from a reputable source is a much better option. There are no details of TSB’s small (£1000) loans but presumably they will aim to be competitive. Nationwide, for example, offer a £1000 12 mth loan at 13.9%, costing just over £72 in interest charges. However, I expect those applying will need to be approved by the bank – to be assured that the borrower has the means to repay, in both their interests.

Metro Bank will offer a variable overdraft rate of 34% from 25 April, making it cheaper than most high street banks. This is bad news for Metro Bank customers, as it means both arranged and unarranged overdrafts will be 19% more expensive than they are now. However, if it prompts other banks to match Metro Bank’s rate it could be good news for people who use overdrafts elsewhere. Here, Which? looks at why Metro Bank has pitched its rates at 34%, how likely it is that other banks will match this, and what the other big banks are currently proposing to charge from April.

Read more: https://www.which.co.uk/news/2020/02/metro-bank-announces-new-overdraft-rate-how-does-it-compare/ – Which?

The unintended but expected consequence of the change in overdraft rules continues.

“Cheaper” at 34%? Good news? I’m not sure.

I think my Bank will be charging either 35% or 39%, I cannot remember which.

I am assuming that the existing overdraft rate with Metro Bank is 15% but the article didn’t make that clear. I wish Which? would adopt the convention when discussing interest rates and percentages generally that a rate of 34% compared with 15% is a 19 pp increase [percentage points] not a 19% increase. The increase is actually over 125%.

Agreed, John. Or simply tell us the rate has more than doubled.

My bank will be charging me nothing and I intend to keep it that way.

Me too 🙂