Current account market: Watchdog looks to cap £1.2 billion overdraft fees
Banks may be forced to cap overdraft charges, give customers annual reminders to shop around for the best value current accounts and make comparing and switching accounts easier under a series of proposals put forward by the competition watchdog.
The Competition and Market Authority (CMA), says the proposals could potentially save consumers £1 billion over the next five years.
The recommendations come as part of the regulator’s preliminary report into the current account market, which found dysfunctional competition is costing consumers millions of pounds a year in banking charges.
It estimates the average consumer could save £116 by switching bank account, with overdraft users potentially saving £153.
- See our Current account guide for our best buys.
Despite the substantial savings up for grabs, 60% of current account customers haven’t switched bank account for at least a decade, and separate figures from the Current Account Switching Service suggests just 2% of current account holders switch bank account each year.
Alasdair Smith, chair of the CMA investigation, says: “For too long, banks have been able to sit back and not work hard enough for their personal and small business customers.
“We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees.”
- See our tips on How to manage your overdraft.
Anthony Browne, chief executive of the British Banking Association, which represents UK banks welcomes the changes, saying: “The industry supports the CMA’s aim to deliver good outcomes for customers as banks are pro-competition.
“We also want to see a regulatory regime that continues to support new entrants to the markets as well as growing banks, and ensures a level playing field. We will consider these latest proposals in detail over the coming weeks and look forward to working with the CMA as they prepare their final report.”
What has the CMA proposed?
Today’s preliminary report proposes a wide range of potential changes, which we explain below.
Cutting overdraft fees
Almost half of current account users use overdrafts, and the banking industry received £1.2 billion in unarranged overdraft charges in 2014.
The CMA wants:
- Fee caps to be introduced: Banks to set maximum unauthorised overdraft costs. These won’t be set universally, but will need to be prominently displayed so consumers can easily compare the cost of borrowing against other current accounts or other types of credit, such as personal loans.
- Warnings when people enter overdrafts: Banks to warn people if they enter an unauthorised overdraft. The competition authority says many users don’t realise when they go overdrawn, so don’t know how much they’re being charged.
- Grace periods for overdrafts: Banks to offer a grace period, perhaps of a day or two, where they will not be charged for going into an unauthorised overdraft.
Mike O’Connor, chief executive of debt charity, StepChange, welcomes the changes, but says they don’t go far enough: “There are 2.6 million people in the UK in severe problem debt and the numbers coming to us for help are still rising.
“The remedies don’t do enough for the millions of overdraft users who are in entrenched financial difficulty. Alerting someone to the fact they are in an unauthorised overdraft will have no effect if they are unable to pay in enough money to escape it.”
The CMA wants:
- Annual switching prompts: Annual ‘nudges’ from banks telling people they switching options could help, particularly if they detail what customers have paid for their accounts. In the insurance market, for example, renewal notices which show price increases are far more likely to encourage people to shop around for a better deal.
- Service comparison tools to be created: Comparison services to show customer satisfaction levels and how many complaints each bank receives to help switchers compare customer service.
- Banks to develop an open banking database: Banks to create software that enables smarter comparison tools. These will let customers securely share their transaction histories with comparison tools and other banks to get personalised price comparisons. These technologies may also be available to other ‘FinTech’ (Financial Technology) companies, potentially allowing app developers to create better smarter tools, perhaps to track spending habits or plan budgets.
Some of these proposals, such as personalised banking tools, build on previous initiatives.
Last year, GoCompare launched the ‘midata’ scheme, which let people compare their actual banking charges, but critics argue the system is hard to use.
Personal finance expert Andrew Hagger says: “A robust but easy to use current account comparison service is ultimately what's needed and it will be interesting to see what this looks like once delivered - it needs to be straightforward to use and less clunky than mi-data if it is to succeed.”
Improving the current account switching guarantee
The CMA wants:
- The current account switching service guarantee to be extended: Currently, if you change bank account via the switching service, payments to or from your old bank account are automatically transferred to your new account for three years. The CMA wants to increase this, potentially indefinitely.
- Customers to be given transaction data after they leave: If someone switches bank account, their old bank should provide their transaction histories on request, either for free or for a reasonable admin fee.
- Multiple accounts via the switching service: The Current Account Switching Service is only available to people who want to close their old bank account and open a new one. This may be revised to allow people to have multiple accounts for different purposes, for example one for earning cashback on their utilities, and another to pay interest on their savings.
What other changes were considered?
The CMA also considered:
- Breaking up the big banks: The big six (Barclays HSBC, Lloyds, Nationwide, RBS and Santander) hold around 90% of all personal and SME bank accounts in the UK. Some argue breaking them up could increase competition.
The CMA says: “We have looked carefully at this, but have come to the view that it is not the size of the banks or the number of banks that is the problem.”
We agree with this – choice in the market isn’t the fundamental problem here. Moneywise lists over 100 current accounts in our comparison tools, for example. Instead, consumers need better tools to help them find the right account.
- Banning free (if in credit) current accounts: Current accounts are far from free, with in-credit customers paying for their accounts in lost interest, and overdraft users stung with interest, charges and fees for informal borrowing.
Neverthess, free current accounts are good value for many people so the CMA has stopped short of a blanket ban on these accounts, instead trying to make the cost of banking clearer, and to encourage people to shop around.
It also had concerns than banning a type of product could lead to rising banking costs overall.
- Portable bank account numbers: Some commentators have suggested people may be more inclined to move bank account if they can take their account number with them, in the same way mobile phone users can ditch their network and keep their phone number.
While this would encourage switching, it would require fundamental changes to the architecture of UK banks. The CMA has baulked at the potential bill, estimates for which range between £2 billion and £10 billion.
What happens next?
The CMA’s final recommendations are due by 12 August, but it’s not clear when any proposals would be implemented.
“The ball is now firmly in the Financial Conduct Authority’s court,” says Alex Neill, director of policy and campaigns at Which?. “Their first task will be to test these proposals to ensure they work for consumers. But they must also go further than better information to tackle the unfair, punitive charges faced by unauthorised overdraft users, some of whom are hit with fees far in excess of payday loans.”
Hannah Maundrell, chief executive at Money.co.uk, welcomes the changes, but stresses the importance of a timeframe for the new rules when the final recommendations are published: “We would really like to see very clear guidelines and deadlines for the industry to follow – otherwise it’s very much a case of all talk and no action.”
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
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.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
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.