/ Money

Update: are you over the moon with Lloyds’ new approach to overdrafts?

Overdrafts Dossier

Lloyds Banking Group is reshaping its overdrafts to make them simpler. However, whether they will prove less costly for everyone is yet to be seen. How will these changes affect you?

In some very welcome news, we’re pleased to tell you that there has been some significant progress in our campaign against exorbitant unarranged overdraft fees. Today, Lloyds Banking Group has announced it is doing away with these fees.

This positive step sees Lloyds Bank, Bank of Scotland and Halifax simplifying their policies so that all fees and charges for unarranged overdrafts will be removed and, instead, all customers will pay a simple daily rate for using an overdraft with charges assessed on how much customers borrow and for how long. This new policy is due to be introduced in November.

Industry change is overdue

As you may know, unarranged overdraft fees have been a significant concern for Which? given the consumer harm caused by these charges, and we’ve been campaigning for change. What Lloyds has shown is that it is possible for banks to improve the way they operate their overdraft systems and therefore we now look to the other banks to follow suit.

This is, of course, not a magic solution – not everyone will be better off from this. So, it is critical that Lloyds Banking Group supports customers to help them avoid high charges and to reduce their level of debt.

Supporters helping bring about change

In order to show the harm caused by unarranged overdraft fees, today Which? submitted an evidence dossier to the Financial Conduct Authority (FCA) using the experiences that have been shared with us on Which? conversation and by supporters of the campaign. A lot of statistics have been bandied about in the overdrafts debate, but we wanted to ensure impact on individuals and their families is recognised and properly understood.

We heard from a lot of people with the same concerns as Adrian:

‘My bank charged me but it was their charges that sent me overdrawn and each month it becomes a vicious cycle. I’m on disability benefits, so I have limited income.’

Extortionate, disproportionate fees featured heavily in the stories we heard, like Mike’s:

‘My bank also charged me £30 per day for being overdrawn for just £2 for a total of 20 days. Then they also charged me with an unauthorised overdraft of another £30+ interest! Total cost nearly £1000 which was more than my wages! So I kept getting charged every month!’

Flo’s relation suffered a particular injustice when it came to fees and charges for letters:

‘The action of one bank caused a relative’s bankruptcy. If they went overdrawn, not only were they charged £70 for a letter but also another £80 for the unauthorised debt that the cost of the letter caused. This would then trigger another letter at £70. And so on. Despite this they offered to give them a loan as long as previous loans, some of which were nearly paid off, were consolidated into a new loan, ie ‘churning’. By their actions they caused more debt.’

Which? Overdrafts Dossier

Click the image above to the read our overdrafts dossier to the FCA. (PDF 1.9Kb)

We’re banking on further change

The FCA is currently reviewing high cost short term credit (including overdrafts) and we want it to use this review to ensure other banks follow Lloyds’s lead by restricting unarranged overdraft charges to the same level as for arranged overdrafts.

So, while it’s a big step forward today we know there’s still lots more to be done in this area. Hopefully our dossier of your experiences will help to make more change possible. Thank you to you all for sharing your experiences with us, enabling us to show the real life detriment felt by consumers.

Update: 2 November 2017

As of today, unarranged overdraft charges and monthly overdraft usage fees have been scrapped for Lloyds, Halifax and Bank of Scotland customers.

Overdraft customers of these three banks will instead pay a new flat fee of 1p a day for every £7 they borrow. So those who find themselves dipping into their overdrafts for should be slightly better off from today.

We first heard about this news back in July and welcomed the move by these banks. It’s a big step forward in limiting unarranged overdraft charges and bringing these fees more in line with those for arranged overdrafts. We now want to see other banks to follow suit and bring an end to these extortionate charges.

Are you an overdraft user? Have you been affected by extortionate fees in the past? Tell us whether you’re looking forward to these new changes, and why, below.

Simon C says:
15 November 2017

So, the cost for those who have unauthorised overdrafts reduces while the cost for those with authorised overdrafts increases. Exactly how is that fair in anyone’s definition? The cost of Lloyds Bank’s outrageous fee structure has been understated in the press. As the fee is levied daily there is a compounding effect – you end up paying fees on fees on fees etc. The true equivalent annual interest rate is 68.4%.

Greedy banks taking advantage of the poor…period!!! Where is the Government to protect us? If this current situation continues I think we can expect riots.

I am a single mum and i live in my overdraft! I cannot afford these changes, my only option is to go to another bank and arrange with Lloyds to pay them back my overdraft. To be honest they can take me to court i am outraged at this change, I never go over mt limit always and have been a customer for 35 years! Seriously they can chase me for their overdraft money!

hazel fisher says:
18 November 2017

Since the agreed overdraft charges have gone up by 52 per cent my husband moved bank to TSB at the minute there charges are reasonable he doesn’t have an overdraft but my grandkids might in the future they’ll have no leeway with these charges

On 8th Dec Which? say ” We want the regulator to restrict unarranged overdraft fees, bringing them quickly into line with arranged overdraft charges.”

Can they explain why a bank should charge someone who has applied for an overdraft, been assessed as a good risk for the amount involved, and been granted an overdraft facility, just as much as someone who has not bothered to ask and who may not be in a position to repay an unarranged deficit in their account? The likely outcome may well be that unless you take the trouble to ask your bank, they may not make a payment that would take your account into the red; that may mean your car insurance will lapse, your credit card bill will be unpaid and attract a penalty, and other regular payments may not be made.Is that a good outcome? Or are we happy to see responsible bank users subsidising the irresponsible?

Surely we should be looking at justifying the overdraft charges in general. The “daily charge” (52% + APR in Lloyds case) is far too much. A sensible annual rate nearer that offered by credit cards would be fairer. Overdrafts should be for short term requirements; a personal loan is more appropriate for a longer loan,

Which? could help, perhaps in conjunction with the banks maybe via the BBA, by producing booklets to help people organise their finances and keep a check on their assets. Avoiding going overdrawn for anything but a short period should be the objective, assuming you have arranged your outgoings properly in relation to your income.

High overdraft charges are funding current accounts, is said in another Convo. I’m not a banker, so can only go on what I find on the net. One bit of information is that unauthorised overdrafts generate around £1.2bn for the banks a year. That’s a lot. Another report says there are 65 million personal current account customers. Spread the income over those current accounts and it is about £18.50 each. That does not now seem to me to be a lot towards maintaining a “free” account – administration, paying direct debits, looking after online transfers in and out, dealing with cheques, before we start paying for premises, wages, and, of course, a profit.

Some banks are preventing unauthorised withdrawals that would take a customer into the red.

Another site shows how the cost of unarranged overdrafts has been reduced.

Which?Money lists those banks offering current accounts that have “Best rate” overdrafts. These range from APRs of 15.75 to 18.9%, which for an average £500 overdraft for 2 weeks a month cost between £17 and £40 a year. Not something I see as excessive, nor untoward in paying for current accounts.

It seems to me the overdraft issue is not as one-sided as it is portrayed. I would be happier if in dealing with these sorts of topics, this kind of information (assuming mine is correct) were included, for our education and for balance..

I presume the table is from here: https://www.verdict.co.uk/uk-financial-watchdog-review-overdraft-charges-heres-much-uk-banks-make/

From the same document: “It said vulnerable customers can rely on unplanned overdrafts, which can lead to costs higher than that of payday loans.

Andrew Bailey, the FCA’s chief executive, said:

“The nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option.””

This seems to support what Which? says.

Correct. so we need to help people avoid unplanned overdrafts, or divert them to accounts that make sensible charges (not Lloyds, in my view, but those recommended by Which?) The principle surely should be if you are likely to go overdrawn, talk to your bank. It is not only courteous, but likely to be in your best interests (no pun intended). The figures I found seem to give a good picture of the scale of unarranged overdraft charges seen against 65 million current accounts.

My view is that if a bank believes an overdraft will not be repaid, or will put the customer into financial difficulties, their responsible action will be not to grant it. We criticise some banks for increasing some customer’s financial problems, so we can put a stop to that.

I also believe alongside any regulatory changes we should be making material available to help customers run their financial affairs on a sound basis.

I’m happy with the approach that Which? has advocated and I do hope that we will see the end of all punitive interest charges soon.

Though I would like all companies dealing with the public to show consideration for their customers as well as their shareholders, the only way of ensuring this at present is by regulation and monitoring compliance. I suspect that the best way to ensure that banks help customers is for the regulator to produce standard guidance for the companies to follow. Perhaps Which? could help produce printed and online advice but I believe that a face to face approach is vital.

The question that always seems to be evaded is why do some customers expect to borrow money from their bank without asking? What stops them from arranging an overdraft facility and thus saving themselves from unnecessary charges? Perhaps they realise they are a bad risk and will be turned down.

Which?, besides addressing punitive charges, could also advise customers how to better deal with their bank. Equally banks should not support unarranged overdrafts, and it seems the trend to not allow such customers to go overdrawn any longer.

Since the interest rates are published, unarranged overdrafts are one of the services offered by banks. A very lucrative service despite the fact that a minority default on the loan. If banks don’t stop punitive interest rates then I expect there will be pressure for them to be capped.

Paul says:
29 March 2018

This has impacted those with an arranged overdraft as O/D fees have near enough doubled. A lot of people live on their overdrafts as a matter of means and not just frivolity and consumerism. The problem is the bank will be aware of this pattern of use and know that people won’t be able to pay back their O/D as an option to avoid these charges. Consumers are trapped. The banks are covered as they give notice of changes to O/D charges. If I took a loan out and the bank were free to change the interest with 6 months notice this would be the same situation. They also have a hold on customers as defaults on payments severely effect your credit score.

Usury. Is the only word to describe these charges. As is the practise of some high st. stores who allow hire purchase at extrodinary interest rates. Not to mention payday loans at over 1000%. We should bring back the law on usury. We should also pump millions of pounds of tax revenue into a state bank, or credit union which would be a far more moral way to transact. Throw the PHARASEES OUT OF THE TEMPLE.
Self employed people required overdrafts because people and companies don’t pay regularly or on time. Need I mention Carillion. The reverse of all of this has not even been mentioned. That where the same accounts show huge credit balances for large tracts in time, no interest paid. All at a time where the Bank of England base rate is so low. So the banks are borrowing at low rates, paying interest at low or virtually no interest and charging between 52-68% interest on all overdrafts. Which by the way is not a temporary solution for emergencies but a necessary cash flow tool for all small business. At this rate the banks will cripple economic growth yet again and the economic divide will continue unabated. THEN THERE IS BREXIT.

I believe there is still an offence of usury but presume the Lloyds Bank interest rates on overdrafts are not considered to be extortionate.

Most parts of the country have a local credit union but they will not advance loans until their members have accumulated some savings. As mutuals they are a better source for borrowing than banks but their terms and conditions might not attract those who wish to run a permanent overdraft.

No one needs to maintain a high credit balance in a current account. Excess funds can be transferred to an interest-bearing account. Admittedly the interest rates are low but the banks do not need our money at present and there is nothing we can do about that. Most mortgagors are happy about the situation because it means their monthly repayments remain affordable.