Earlier this year, headlines were made when it was announced that Lloyds Banking Group, which controls around a quarter of all current accounts, has introduced new charges on overdrafts. This would leave anyone borrowing less than £4,100 worse off and make borrowing more complicated.
A quarter of current account holders will be exposed to an annual interest charge of 61% for the first £1,250 borrowed in overdraft. Photo by courtesy of Money Bright.
Media and political criticism of the new fees was sharpened by the Financial Conduct Authority’s proposed crackdown on what it labelled a ‘dysfunctional market’. Although Lloyds Banking Group have rightly been taken to task on their changes to overdrafts, their decision should also bring into relief the boldness of the FCA and their intention to overhaul the current system.
Overdraft fees are additional fees that you are charged the moment you withdraw money that exceeds your available balance. These will vary with each bank, so it is important to be aware of what your bank charges for going into an overdraft.
One might think that they are uncommon, but the reality is that approximately 19 million people use an arranged overdraft and an additional 14 million people rely on unarranged overdrafts every year. Firms made an estimated £2.4 billion from their overdraft fees in 2017 alone.
In fact, annual interest charges for overdrafts at Lloyds Bank, Halifax, and Bank of Scotland are 61%, which is higher than most guarantor loans and credit card charges. Lloyds Banking Group charge 1p every day for every £6 overdrawn by borrowers (for the first £1,250 borrowed), a significant increase in interest from the 1p for every £7 overdrawn.
The financial strain these interest rates place on consumers are compounded by overdraft fees being extremely complicated; banks vary in charging daily or monthly fees, charging interest, or using a combination of these to charge their customers. Consequently, consumers face great challenges in attempting to compare the rates different banks charge, or understand the fees they will be exposed to by overdrawing cash.
While Lloyds claims that there is nothing wrong with their new fees, it is difficult to believe that harming citizens with persistent money problems is morally acceptable. They retort, however, that there is nothing illegal in the sudden increase of fees.
As Martin Lewis puts it, the ‘banks will lend you an umbrella when the sun shines, and ask for it back when it rains’. The moment you are in the red, you begin accruing debt. While the ability to go into overdraft may be a soft cushion to land on, getting back on your feet is not as easy. As a result, preventing this from happening is vital.
Ways to do this would be to continuously check your account balance. Additionally, you can download most banking apps on your smartphone and activate notifications to alert when your current balance is at risk of going into an overdraft. Any changes to banking fees or policies should be flagged up to you through banking letters. Best to read them! This is important and could be what makes you decide to switch banks to a more overdraft-friendly bank.
The fact Lloyds Banking Group has increased their fees for the vast majority of their customers and the market is itself ‘dysfunctional’ should not blind us to the work the Financial Conduct Authority is doing to change this system.
The FCA recognised in their December 2018 consultations paper and policy statement that ‘fundamental change is needed in the overdraft market’. They further recognised that vulnerable consumers, lacking access to clear information on overdraft policies, required greater protection.
They have proposed: abolishing daily and monthly charges replacing them with a ‘simple, single interest rate’; requiring that banks charge unarranged overdrafts in the same way as arranged overdrafts; and introducing standardised advertisements of arranged overdraft prices to allow consumers to compare them more easily.
Their plans are currently being consulted on, and final rules will be published in June 2019(??). Firms providing overdraft services will have six months to comply with these new regulations.
It is deplorable that banks charge such excessive and confusing overdraft fees, causing many borrowers much financial stress, and it is likely little consolation to those currently struggling to make ends meet that sweeping changes to the current system should be implemented by December 2019.
Still, the Financial Conduct Authority’s proposals and plan-of-action evidences that independent, public-spirited regulatory bodies can provide a vital check on corporate power. The FCA’s bold—if nascent—policy on overdraft fees represents a living case study in such regulation.