Bank overdraft fees higher than payday loans as regulator 'drags its heels'

Published by Edmund Greaves on 23 May 2018.
Last updated on 23 May 2018

Man using cash machine

Current account users are being ripped off by banks, according to Which?.

The consumer group is now calling for a regulatory crackdown on the charges that banks make as its research has found in many cases the interest rate paid by customers in an unarranged overdraft is higher than many payday loans.

It is calling for unarranged overdraft charges to be restricted to the same level as arranged overdrafts.

A group of 84 MPs is backing a call for urgent action, demanding that the Financial Conduct Authority (FCA), the industry regulator, considers measures to end the practice.

Comparing the cost of borrowing £100 for 30 days, 13 out of 16 major high-street banks effectively charged more for borrowing than a payday loan company. In some cases, the fees were considerably higher.

Santander was the worst offender, charging 7.5 times higher than the cap on payday loan fees, which is set at £24 by the regulator. Customers would incur an eye-watering charge of £179 over 30 days.

In response to Which?’s findings, Santander has committed to removing fees on unarranged overdrafts for paid-for accounts by July this year. This does not include fee-free accounts however.

Troubled bank TSB is also a culprit, charging 6.5 times higher than the payday loan cap, or £160.

Next are HSBC and First Direct, which both charge more than six times higher at £150. These are followed by RBS and NatWest charging £144 (six times higher), and Smile Co-operative Bank, Yorkshire and Clydesdale Bank all charging five times more than a payday loan at £120.

Despite the Competition and Markets Authority attempt in August last year to introduce a monthly maximum charge, the measure seems to have largely failed to prevent banks charging painfully high rates.

Which? says that while the FCA has previously pledged to tackle the issue, there have been delays on consulting on what measures to take.

Gareth Shaw, Which? money expert, says: “It’s alarming that the majority of banks are still allowed to charge more than payday loan firms through these rip-off overdraft fees. These extortionate fees can cost thousands of pounds a year, hitting those who can afford it the least.

“The regulator cannot drag its heels any longer. We must see urgent action to restrict these charges, bringing them into line with arranged overdraft fees to finally end this unfair practice.”

Overdrafts ‘second most common type of debt’

Peter Tutton, head of policy at StepChange, says overdraft debt is an issue the debt charity often comes across in its work.

“Overdrafts are the second most common type of debt our charity deals with, leaving many at risk of falling into persistent problem debt by entering a cycle of using their overdraft from month to month,” he says.

“They are meant to be short term, but our evidence shows that they can all too easily trap people in expensive and long-term cycles of persistent debt.”

Responding to the criticism, the FCA admits that the market may need “fundamental reform” and says it has questioned the role that unarranged overdrafts should play in a modern market.

An FCA spokesperson says: “We are concerned about the way the overdraft market works for some people. Often, the fees are too high, and charges can be unreasonable.

“In the UK, there are 52 million personal current accounts. Any proposed changes to overdrafts must look at the wider banking sector to prevent harm to consumers without impacting on people who rely on overdrafts for normal day-to-day banking.”

The FCA plans to announce proposals to address some of its concerns about unarranged overdraft fees on 31 May.

 

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Interesting that the banks do

Interesting that the banks do get away with this. They certainly allow customers to get more and more overdrawn and do not contact the customer to let them know they are going over their agreed limits. Often the first time one may realise is when a charges statement drops through the door. The banks are fully aware of who is overdrawn and how much money they are making from the customer. The charges can be crippling and mean one can end up paying more and more in charges every month.