Banks demanded to explain overdraft fees by Treasury Committee
Andrew Tyrie MP, chairman of the Treasury Committee, has demanded 13 banks explain their overdraft fees, amid concerns consumers are being let down by a lack of effective competition in the sector.
The 13 banks that have been asked to account for themselves are: Barclays, First Direct, HSBC, Lloyds Banking Group (which includes Halifax), M&S, Metro Bank, Nationwide, RBS, Santander, Tesco Bank, The Co-operative Bank, TSB, and Virgin Money.
Each has been asked to explain the overdraft charges on all personal current accounts, specifically:
- The charges for both authorised and unauthorised overdrafts
- What, if any, caps apply to fees on authorised and unauthorised overdrafts
- What action, if any, is taken when a customer enters an unauthorised overdraft
Mr Tyrie says: “Consumers need to know what they are being charged for their bank accounts, especially their overdrafts. At the moment they often struggle to find out. So I have written to the banks in an effort to obtain some of this information and, in particular, to see what steps the banks take when a customer falls into an unarranged overdraft.
“The Cruickshank Report in 2000 identified problems with price transparency and the difficulty of comparing products. Almost two decades after this landmark report, these problems remain as bad as ever.”
The report that Mr Tyrie refers to claimed banks were profiting to the tune of £3-£5 billion a year by overcharging consumers and small businesses for banking services.
Those services included loans, credit cards and other types of debt, but it was most damning of the current account market. The report found there was no effective competition in the market, the average customer held their account for more than ten years, few people shopped around and the cost of overdrafts did not reflect the cost.
The table below details some of the key findings from the Cruickshank report:
|Concentration (HHI)||Cost reflective pricing?||Extent of shopping around?||Median time product held years||Effective competition?|
|Credit cards||Fairly high||Varies||Low but increasing||8.1||Moving in that direction|
|Personal loans||Low||Probably no||Low||n/a||Not clear|
|Mortgages||Fairly high||Probably yes||Low but increasing||7.5||Moving in that direction|
|Savings||Acceptablw||n/a||Low||9.9||Some recent improvement|
Source: The Cruickshank Report, 2010
Recent analysis from the Competition and Markets Authority (CMA) does however suggest that “some customers, especially overdraft users could get a deal from their bank,” according to the contents of Mr Tyrie’s letter.
‘Onus should be on banks to get the message across’
Richard Neudegg, head of regulation at uSwitch.com says: “One of the biggest challenges for the current account market is the lack of consumer understanding about what their existing bank account is actually costing – and the onus should be on the banks to get this message across clearly.
“Overdraft users in particular can see charges rack up quickly, so for these customers it is especially important things are clear.”
What’s more, data from the Bank of England suggests that Mr Tyrie might be understating the case when he says “problems remain as bad as ever”.
It claims that interest rates on overdrafts are actually higher now than they were in 2000, when the Cruickshank report was published, despite rates on mortgages and personal loans plummeting.
In the years following the report, interest rates for overdrafts fell slightly, but began rising in 2004 and did not fall again when the base rate was slashed to 0.5% in 2009.
Arguably the Bank of England’s data doesn’t reflect the true cost of overdrafts as it doesn’t included charges, which could be applied on top of overdraft interest rates – but that is exactly what Mr Tyrie is trying to clarify.
See the graph below for how overdraft fees have risen:
Source: Bank of England, 7.7.16
What can you do to cut overdraft rates?
As overdraft charges depend on usage, it’s very hard to see exactly what you’ll pay with any given deal. However, our weekly current account roundup detail the top interest-free overdrafts you can currently get up to £250. Alternatively, the Government is working to help people get personalised account recommendations through its ‘midata’ scheme, which lets people find the best account for them, based on their spending habits over the last year. Here’s how it works.
People struggling to get out of an overdraft could also consider a Money Transfer deal, which lets you shift overdraft debts to a 0% interest credit card, though there’s usually a fee. You can find the best 0% money transfer deals in our weekly credit cards roundup.
Finally, earlier this year a number of banks agreed to provide Basic Bank Accounts, which are fee-free accounts that won’t let you go overdrawn and run up big fees. Here’s our guide to how they work, and who might benefit most.
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.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.