Overdraft fees to be capped in current account market shake-up
Consumers are being stung with unauthorised overdraft charges totalling £1.2 billion a year, according to a two-year investigation into the current account market by the competition watchdog published today.
Half of people with current accounts use their overdrafts, and these people “often have the most to gain from switching”. In fact, the average person could save £92 a year by switching provider, though regular overdraft users could save at least £180.
The report also highlights a general lack of effective competition in the current account market, noting that older and larger banks “do not have to work hard enough to win and retain customers”, even with a regular flow of new challenger banks arriving on the scene.
Just 3% of people switch current account each year.
In light of these issues, the Competition and Markets Authority (CMA) has announced a series of changes to encourage switching, help consumers cut down overdraft charges, and level the playing field for smaller banks. We explain these in further detail below.
Alasdair Smith, chair of the retail banking investigation, says: “The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks.
“We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.
One of the CMA’s proposals is to bolster the Current Account Switching Service (CASS) to make it more effective.
Currently, the CASS guarantees that switching bank account should take no longer than a week and any regular payments will be transferred automatically. This alone should alone should make it easier for people to switch account, but many aren’t aware of the service or don’t trust it.
To encourage use the service, banks will be forced to provide a transaction history to customers after they close an account.
Consumers may also be able to keep their current account number when they switch bank, as they can with mobile phones – although regulator the Financial Conduct Authority (FCA) will now look into whether this is viable.
Banks will also be forced to prompt their customers to review their bank accounts, both on a regular basis and in response to key events, such as when a branch closes. This will encourage people to check they’re getting decent value and service from their account, and switch if they are not.
These prompts have proven effective in other markets, such as among utility providers. However, their effectiveness completely depends on their design so the FCA will be asked to investigate further to find messages that actually encourage people to switch.
Finally, banks and building societies will be forced to publish regular updates showing service levels online and in branch, including a survey showing how many of each bank’s customers would be willing to recommend their account to a friend.
Measures for overdraft users
The CMA’s second key proposal centres around overdraft use. Its investigation found a quarter of consumers use unauthorised overdrafts, but consumer group Which? recently warned that these can be more expensive than payday loans. The problem is exacerbated by complex charging structures that make it near-impossible to compare current accounts.
To combat this, banks will be forced to cap unauthorised overdraft charges in late 2017. This will take the form of a monthly cap that includes fees and interest charges. Banks will be free to set their monthly maximum charge, though they will be forced to publish it.
The CMA will also force banks to alert customers if they enter an unauthorised overdraft, and create grace periods so people aren’t charged excessive fees for briefly going over an overdraft limit. This will be introduced in early 2018.
The CMA is also asking the FCA to explore ways to make it easier for people to shop around for overdrafts, including “eligibility checks” that let people apply for overdrafts in principle without affecting their credit rating. This will work in a similar way to eligibility checks for credit cards.
Mr Smith says: “We are taking measures to give customers much greater control over their overdraft charges, so that they are clearly told when they are about to be incurred and have an opportunity to avoid them. Alongside this, banks will have to cap their monthly charges for unarranged overdrafts.”
Kevin Mountford, banking expert at comparison site MoneySuperMarket, says: “The CMA’s intervention on overdraft charges is long overdue – these end up milking customers, exacerbating indebtedness and all the stress that goes along with it.
“The introduction of a monthly maximum charge is also a step in the right direction, but giving banks the freedom to set their own cap on overdraft charges might not always result in good outcomes for consumers.”
Finally, the CMA will force banks to create new ‘open banking’ standards in 2017, which will put consumers in control of their data. Fundamentally, this will make it possible for people to securely share their information with websites and apps. Though it may sound abstract and dull, it’s potentially the biggest shakeup of banking in decades.
If successfully implemented, these changes will allow consumers to:
- Use a single application to manage all of their bank accounts.
- Allow people to shift money between accounts to avoid overdraft charges or earn more interest.
- Let people make effective price and service comparisons that are tailored to their personal account usage.
Mr Smith says: “Our central reform is the Open Banking programme to harness the technological changes which we have seen transform other markets. We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs.”
Richard Neudegg, of comparison site uSwitch adds: “The CMA’s package of remedies, including the implementation of Open Banking, will go some way to removing the barriers that still exist. It is important that banks get on board quickly – improving customer engagement and therefore increasing competition in the market.
“This should lead to the development of services which help consumers better manage their finances and, critically for competition in market, understand what their bank is actually costing them.
Anthony Browne, chief executive of the British Bankers Association, says: “Banks compete to attract and retain customers every day. They are also focused on giving their customers the best outcome for the services they provide. The CMA’s final recommendations will further help consumers with a package of measures which give individuals and businesses greater power to pick the products that are best for their needs.
“However, we recognise more work needs to be done to create a level playing field by supporting new banks wanting to set up business, as well as helping to grow established banks.”
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.
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.