Two years ago, the Financial Conduct Authority (FCA) capped the cost of payday loans. It is now time for them to do the same for unarranged overdraft fees, as well as addressing the problem of persistent overdraft debt.
There is not the same degree of public outrage over overdrafts as there was with payday loans but analysis by the consumer group Which? suggests that using an unauthorised overdraft can be more expensive than a payday loan.
Many households on tight budgets have to rely on overdrafts to cover shortfalls in their monthly budget. Our research shows that there are four million people in the UK who are regularly relying on some form of borrowing to cover the cost of keeping a roof over their head, putting food on the table and heating their home.
Overdrafts are one of the most widely used forms of borrowing in this country, with three in ten current account holders going into their overdraft in the last year. While for many people this is short-term and manageable – most people used their overdraft just a couple of times in the last year – for a minority it can mean being trapped in an ongoing and deepening cycle of borrowing. Every day we help people who have regularly exceeded their overdraft limit, which in turn means being hit with extra fees and charges, making getting back on track the next month an even more difficult challenge.
For those with serious debt problems, the situation can be much more difficult. Research conducted with our clients shows the extent to which overdraft debt can make existing financial difficulties worse. Our clients are using their overdraft in 11 months out of 12 on average and nearly two thirds of those using an overdraft have exceeded their limit. Those that exceed their limit do so an average of five times in a year, the result of which is an average charge of £45 a time or £225 in the course of a year. The truth is that overdrafts are a profitable business – the Competition and Markets Authority (CMA) found last year that banks made as much as £1.2bn in revenues from unauthorised overdraft charges.
There has been some action, but not enough. Last year, as part of its retail banking review, the CMA said all lenders would be required to set a maximum monthly charge for unarranged overdraft fees. The central flaw in the CMA’s proposed remedy is that it would be up to the lenders to set their own maximum monthly charge and the four major high street banks – which make up 77% of the market – already have one, which can be as high as £90, potentially double if this falls across two bank monthly charging periods. In essence, the CMA’s proposals to fix the market were simply a replication of what is already happening.
I’d like to see reform go beyond the imposition of a cap on unarranged overdraft fees. There is also a clear a need to look at the way overdrafts as a financial product are designed. The fact that we, as just one debt charity, see so many people struggling with persistent overdraft debt – around 160,000 people each year – means there is a case for deeper and more comprehensive reforms. The FCA should look at what more can be done by lenders to support those trapped in persistent overdraft debt and give them better ways to pay back their debt without the additional burden and stress associated with additional charges.
It must be remembered that it’s not as if the FCA haven’t taken action to cap the cost of financial products in the past. It was against a background of particularly egregious behaviour by payday lenders and extensive public pressure that the FCA brought in a cap on that particular type of borrowing.
The payday loan industry was one that was beset by problems. Irresponsible lending was widespread, debts were constantly rolled over and through the addition of interest and charges, debts were inflated from small sums of a hundred pounds to over a thousand pounds. The cap introduced at the beginning of 2015 meant interest was fixed at 0.8% per day, default charges were capped at £15 and a total cost cap ensured that no one would ever have to pay more than 100% of the value of their loan in interest and charges, meaning that after borrowing £100, the most that anyone would ever have to pay back was £200.
Without action, hundreds of thousands of people risk being stuck in ongoing cycles of borrowing. The time has come for the FCA to cap unarranged overdraft charges and look at the large scale problem of persistent overdraft debt. It will not have escaped their attention that there is growing pressure for action, the result of which I hope will come in the form of changes that make a measurable difference to people in debt.
In addition to the call to cap unauthorised overdraft fees, StepChange Debt Charity’s full range of recommendations on overdrafts and high-cost credit can be found in its response to the Financial Conduct Authority’s ‘call for input’.