Banks are preparing to make sweeping changes to their overdraft charges to help their most vulnerable customers. But will they work as intended? Chris Burn reports.
They are changes designed to make overdrafts “simpler, fairer and easier to manage” in the words of the Financial Conduct Authority – new measures that will prevent banks from charging higher prices for unarranged overdrafts than for arranged overdrafts and instead introduce a simple annual interest rate charge.
The shake-up, coming into force from April 6, was welcomed by charities and campaigners as a way of better protecting vulnerable customers who were being hit by unarranged overdraft fees that could often be 10 times as high as charges for payday loans. In 2017, firms made over £2.4bn from overdrafts alone, with around 30 per cent from unarranged overdrafts. Shockingly over half of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016.
It’s estimated that seven out of 10 overdraft users will be better off or see no change, while the FCA anticipates the cost of borrowing £100 through an unarranged overdraft will fall from a typical £5 per day to under 10p per day.
But last month, the FCA wrote to major banks demanding an explanation as to why they had almost uniformly aligned new overdraft rates around 40 per cent and asking for more information about their plans to help customers who remain persistently stuck in the red. The changes essentially mean that while people who often tend to go over their authorised overdraft limit and trigger extra charges should pay less, the millions of people who are persistently within their authorised overdraft could end up paying more.
Peter Tutton, head of policy at the Leeds-based debt charity StepChange, says: “It is right to ask banks how they got to where they got to – even higher-cost credit cards will now be less in interest in than overdrafts.” But he adds changes were needed to end unarranged overdraft charges. “A large amount of revenue was being paid by a relatively small number of people. Being charged large amounts of money makes debt problems very hard to get out of. It is a debt trap and the FCA had to do something,” says Tutton. “We are very very pleased that the FCA have done that.”
Tutton says a key part of the new overdraft regime is a requirement on banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty and develop and implement a strategy to reduce repeat overdraft use – such as cutting interest rates or offering a structured repayment strategy such as a loan. But he says with banks being able to set their own strategies which they are not required to disclose, it will take time to see if this is working in practice.
“We don’t know what each bank’s strategy is. In July they have to report back to the FCA. We want the banks to be able to tell a good news story about the sorts of things they have done to help people in difficulty.”
Tutton says one of the problems with persistent overdraft use is its open-ended nature with no ultimate pay-off date.
“It is a trap, like getting the same loan again and again and again forever. With any credit product you take out, you need to think about can you really afford to pay it back and how you are going to do that. It is very easy to get stuck in an overdraft. If you find you are paying for every-day expenses with it, it might be a sign that you need to get some help with your finances as that is when debts start to spiral upwards.”
Andrew Johnson, a money expert at the Government-backed Money and Pensions Service, says: “Don’t panic if you get a letter from your bank about new overdraft charges. If you only dip into it occasionally you may not end up paying more because daily and monthly fixed fees are ending. However if you’re in your overdraft for most of the month, or you’re worried about the changes, it’s a good idea to speak to your bank as soon as possible.”