Rachel Reeves, the Labour MP for Leeds West, is calling for the introduction of a new cap on the maximum amount banks can charge in fees each month.
A survey from the Leeds-based StepChange Debt Charity found that borrowers who slipped into unauthorised overdrafts were hit on average with extra charges of £225 a year.
According to StepChange and the Children’s Society, there are an estimated 3,844 children living in 2,204 families across Ms Reeves’ constituency who are struggling with debt.
Regulators at the Financial Conduct Authority (FCA) are currently investigating high cost borrowing and the FCA’s chief executive, Andrew Bailey, attended a roundtable in Leeds yesterday to hear about the issue as part of his regional visit to Yorkshire and the Humber. The event was also attended by representatives from the StepChange Debt Charity, Citizens Advice Leeds and Leeds City Credit Union.
Ms Reeves said: “Far too many people are being ripped off when it comes to charges for overdrafts. These exorbitant fees make it even harder for them to get out of debt.
“I want tough action taken to limit overdraft charges with the introduction of a fair monthly limit on the maximum amount banks can charge for overdrafts – rather than leaving it up to banks to levy whatever charges they want.
“The major banks make more than £1bn a year on charges on unauthorised overdrafts, the majority of which is from financially vulnerable customers. That must stop.”
Mike O’Connor, the chief executive of the StepChange Debt Charity, said: “Many of our clients are trapped in a cycle of overdraft debt as they struggle to make ends meet. Our research shows how people face a situation in which they are regularly hit with unauthorised overdraft charges, making it harder to get their finances back under control and deepening the hardship they face.
“Without action, hundreds of thousands of people are at risk of remaining stuck in this cycle. It is time for the FCA to intervene and set a cap on unauthorised overdraft charges, just as they set a cap on payday loans.”
Speaking before the meeting, Mr Bailey said: “It’s very valuable from our point of view. We’ve decided to do a review of the whole spectrum of high cost credit.
“We’ve already got in place a cap on payday lending. But, of-course, high cost credit takes quite a few forms.
“So we’ve agreed that we would do a review across the whole piste, which I think is a very sensible thing to do, of practices, charging costs and so on.
He added: “That would include unauthorised overdrafts which is something that Rachel and others have pointed to. One of the things that I’m also concerned about here, is that when we do this work on the cost of credit, we also have to have a clear ‘line of sight’ on the availability of credit, because although there has been quite a lot of attention given in recent times to the rate of unsecured borrowing in the country as a whole, that’s an issue in its own right.
“It’s also important that we don’t regulate credit in such a way that those who need it, to particularly assist and manage sometimes erratic income over time, don’t have it cut off, because one of the things that would be not a success in a review of high cost credit would be to push it out into the illegal lending sector. We’ll be looking at all these issues very carefully.”
Mr Bailey also visited the Bradford headquarters of the charity Christians Against Poverty, which helped 21,000 people to take steps to tackle their debt problems in 2016.
Marianne Clough, the charity’s spokesman, said: “Overdrafts are the third most used form of credit for our debt clients, so this is an important issue for the people we help.
“They will all have felt the impact of overdraft charges, as their financial situation worsened before they sought help, so we welcome Rachel Reeves’ work in highlighting the issue.
“The majority of our debt clients are living on a low income, with multiple difficult issues in their lives such as illness, joblessness, poor housing and domestic violence.
“These aren’t just people who have been a bit reckless in the shops, so we really value the best of those banks who are keen to see what they can do to support the most vulnerable families in crisis, and mirror best practice.”
A British Bankers’ Association spokesman said: “Charges for unarranged overdrafts have dropped substantially, with a number of products now offering fee and interest free facilities within an approved overdraft limit. Banks have invested heavily in digital technology to alert customers when their account might be slipping into the red to help them to avoid unnecessary fees and charges, and banks continue to implement alerts and prompts to increase customers’ awareness of their overdraft.”
“Customers who are concerned about their finances should speak to their lender or seek help from a free and impartial debt charity as early as possible. The quicker that help is sought, the easier it will be to find a solution and avoid unnecessary costs.”