Rachel Reeves: Bank fees pile on the pain to those least able to cope

Even though the interest rates at which banks borrow money are at rock bottom, they fail to pass on that benefit and continue to rip off people with sky-high charges for unauthorised overdrafts.

In January, I chaired a meeting in Leeds when the Financial Conduct Authority chief executive Andrew Bailey was invited to hear about the problems people in the region faced with the high cost of credit.

Leeds-based debt charity StepChange was at the meeting and able to explain to him how the squeeze facing many financially vulnerable people in Yorkshire was made even more severe by some of the extortionate charges levied by banks for unauthorised overdrafts.

It is a problem that is getting worse as inflation and prices in the shops rise and wage increases fail to keep pace. In reality, unauthorised overdrafts don’t even exist as the banks are still allowing the borrowing to go ahead.

Payday lenders can no longer get away with such costly fees since a maximum limit of £24 a month to borrow £100 was imposed a couple of years ago on what they can charge.

It’s high time that the banks were also forced to end these greedy practices and stop ripping off millions of customers.

Our High Street banks make over £1 billion a year from charges on unauthorised overdrafts. The charges are all the more unjustifiable because banks continue to enjoy ultra-low borrowing rates and are again making multi-billion profits after the financial crash.

That’s why I pushed for a new law in Parliament this week to set a maximum cap on unauthorised overdraft fees.

StepChange found there are 1.7 million people in the UK who are trapped in an overdraft cycle. They are consistently using overdrafts to meet essential and emergency costs.

These households can struggle to get out of their overdraft as fees and interest on overdrafts can build up and make it even harder to get out of the red.

A StepChange survey showed borrowers who’ve slipped into an unauthorised overdraft face average charges of £45 a time. This adds up to £225 a year on average on unarranged overdrafts.

And, consumer watchdogs at Which? found customers borrowing £100 could be charged up to £156 more in fees by some banks than payday lenders can charge for lending the same amount over the same period.

In some cases, going as little as 10p overdrawn can cost as much as £5 per day. Borrowing £100 can cost as much as £180, if you borrow across two billing periods. That’s ludicrously high and totally unacceptable.

My Unauthorised Overdrafts (Cost of Credit) Bill would require the Financial Conduct Authority (FCA) to devise new rules to cap the maximum amount that banks can charge.

As MP for Leeds West, I’ve seen the impact these extortionate charges can have on the financially vulnerable.

Banks should have a responsibility to help people bring their finances under control – not add to borrowers’ woes with escalating charges.

Under new rules introduced by the FCA two years ago, interest and fees on all high-cost short-term credit loans from payday lenders are now capped at 0.8 per cent per day of the amount borrowed. If borrowers fail to repay on time, the default charges are capped at £15.

This means that anyone taking out a £100 loan from a payday lender for 30 days and paying it back on time will not pay more than £24 in charges and fees.

It is ridiculous that these rules to halt the unscrupulous practices of some payday lenders do not yet extend to the banks. I’m determined to change that with banks forced to comply with a similar cap on fees.

Regulators at the Competition and Markets Authority looked at this issue last year as part of their review of retail banking and recognised the problem. But they missed the opportunity to recommend the action that is so clearly needed.

We have a problem with increasing household debt and there’s been a 10 per cent rise in unsecured debt in the last year. The household debt to income ratio has grown by 6 per cent in the past year and is now at 145 per cent. Banks are just making the problem worse.

My campaign to stop these fees will not make it into legislation before the general election on June 8.

But, if re-elected, I will keep fighting and make it a top priority to get the change that bank customers deserve.

Ahead of the election, I’m also urging all the political parties to include a crackdown on these rip-off bank charges.

Tackling these unjustified fees should not be a party political issue. It is a matter of what is fair and just. We need to do far more to stop borrowers being hammered with these charges.

Rachel Reeves is MP for Leeds West