Banks agree to highlight overdraft charges
Banks have been ordered to make their current account costs more transparent and make it easier for customers to switch providers.
An investigation by the Office of Fair Trading (OFT) last year found that customers found it too hard to switch current account providers, and struggled to understand interest rates and charges such as overdraft fees.
In response, the consumer watchdog says banks have now agreed to make their costs more transparent and the switching process more reliable. The current account market is worth around £8 billion, but often works against the needs of customers, the OFT says.
Measures to improve transparency include:
• Providing customers with an annual summary of acccount costs
• Highlighting charges in a prominent position on monthly statements
• Illustrating the average credit and debit balances – this should highlight the potential benefits of switching banks
• Producing scenarios that show unarranged overdraft charges, giving consumers an idea of the costs for different patterns of use
The OFT is also introducing an interest calculator on the Consumer Direct website, which it says will help consumers understand and compare the costs of their bank accounts.
Measures to encourage customers to switch providers include:
• Banks must improve their systems to reduce the number of problems that arise when direct debits are moved from one current account provider to another
• A new consumer guide and website will be launched to increase consumer awareness of the automatic switching process
The OFT has so far refrained from introducing measures to make unarranged overdraft charges more transparent. This is because the test case between the OFT and banks is still ongoing, with the House of Lords currently considering the issue. The OFT wants to be given the right to potentially cap unarranged overdraft charges but, unsurprisingly, banks and building societies are resisting this.
More on the bank charge test case
John Fingleton, chief executive of the OFT, says: “As consumers become more aware of the costs of their account and more confident in switching as a means to get better value, so banks will need to offer more competitive and innovative products and services to attract - as well as retain - customers.”
However, he adds: “The third problem area we identified - unarranged overdraft charges - still needs to be resolved for the market to work in the best interests of bank customers.”
The OFT’s investigation last year found that just 6% of customers had switched current accounts in the previous 12 months – one of the lowest switching rates in Europe.
The OFT also found that 81% of banks’ current account revenue came from “opaque” sources - £2.6 billion from insufficient funds charges and £4.1 billion from net credit interest income.
In total, the market was worth over £8 billion, equal to £152 per active account - meaning current accounts generate more revenue for banks than savings and credit cards combined.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.