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High-street banks today faced a ban on the “complex and harmful” unarranged overdraft charges that they slap on the millions of customers who accidentally slip into the red.
The threat came in a damning official report from the City regulator. It found that the cost of overdrafts that exceed agreed limits is even higher than the interest rates on payday loans and often hit the most vulnerable customers hardest.
In its review of “high-cost credit”, the Financial Conduct Authority said it had “significant concerns” about the sometimes bewildering array of charges and fees on unauthorised overdrafts.
The watchdog concluded: “Based on the evidence we have to date, we believe there is a case to consider fundamental reform of unarranged overdrafts and consider whether they should have a place in any modern banking market.”
Its chief executive Andrew Bailey said “maintaining the status quo is not an option”, although he added that an outright ban was among a range of possible responses.
Consumer groups welcomed the findings and said they sounded the death-knell for “charges for breaching overdraft limits”. However, there were concerns that any clampdown could lead to higher fees for customers who stay in credit or even threaten free current account banking.
The FCA found that most banks levy a daily fee of £5 to £10 on customers who exceed their overdraft limit, as well as charging an interest rate of six to 16 per cent. There are also penalties of £6 to £15 for each “bounced” payment.
However, most banks also have a monthly cap of up to £100 on daily fees and £75 on unpaid items. Lloyds broke ranks from its high-street rivals earlier this month and scrapped charges on unauthorised overdrafts in a major overhaul of the way it deals with current account customers who go into the red.
Today’s report reveals that although the majority of Britain’s 42 million current account holders stay in credit each month, huge numbers regularly go over their agreed overdraft limits. This generates an estimated £1.2 billion of annual revenue for the banks.
In total about four million account holders — or one in 10 — breach their limits in at least one month a year. About 250,000 do so every month.
The report also found that the fees are concentrated on those customers least able to afford to pay them, contributing to stress and mental illness.
At one unnamed bank, less than five per cent of consumers pay in aggregate 50 to 60 per cent of all the fees — over £250 per year each in unarranged overdraft charges. At another bank, up to 90 per cent of unarranged charges are paid by 10 to 15 per cent of consumers.
The report said: “Those consumers may be experiencing difficulties and the charges themselves could compound underlying problems.”
This month, consumer affairs magazine Which? found some banks were charging customers several times the fees of payday lenders to borrow money. It compared the cost of borrowing £100 for 28 days and found charges at some high-street banks were as much as £90 — up to four times the maximum charge of £22.40 on a payday loan.
Jane Tully, head of external affairs at the Money Advice Trust, the charity that runs National Debtline, said: “Targeted regulation in the high-cost credit market can make a real difference in protecting consumers.
“The FCA is right to now turn its attention to other forms of high-cost credit, as well as unauthorised overdrafts, which have become a common feature of the problems that debt charities help people to resolve.”
Eric Leenders, head of personal banking at trade body UK Finance, which represents the retail banking industry, said: “Our members are committed to responsible lending and to serving better those customers who require access to credit, whether an overdraft, loan or credit card.
“Transparency is important and our members are constantly developing new ways to make the costs of an overdraft even clearer. If a customer is struggling with repayments they should speak to their lender straightaway.”
Commentator David Buik, of City brokers Panmure Gordon, said: “It’s right that the FCA comes down on some of the outrageous overdraft charges but we will all pay for this — of that there is no doubt. The banks will just stop offering free banking.”
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