FCA to review overdraft charges; at last!

If you’ve ever had an overdraft you will know that it is never as straightforward as it looks. It can seem like a good idea in terms of having a bit of leeway to dip into if you overspend towards the end of the month, or having money available for emergencies, but sadly the story doesn’t end there. Too many of us fall into the trap of viewing it as real money and spending up to our overdraft limit every month.

We convince ourselves that it’s ok to do live like this – because surely the bank wouldn’t give us an overdraft that is too big for us to manage? But then we get hit with overdraft fees!

We need to understand that banks do not give us overdrafts out of the goodness of their hearts. Overdrafts exist to make money for the banks. In fact, Labour MP and treasury select committee member Rachel Reeves even goes as far to say that big banks use their most vulnerable customers as “cash cows”, using some of their most vulnerable customers as a kind of cashpoint-in-reverse.

Overdraft fees are particularly punishing if a customer goes into unauthorised borrowing. This happens when a customer goes over their overdraft limit and can then find themselves hit by exorbitant charges – even though the bank has allowed them to get into this debt in the first place by allowing payments to go through that take them over their limit.

At Loans 2 Go we are delighted that the Financial Conduct Authority (FCA) is now considering recommending a cap on excessive overdraft charges. In August 2016 the Competition and Markets Authority (CMA) declared that it would not put any kind of cap on these charges but did recommend that the FCA researches the way consumers engage with their overdraft use and charges.

The FCA will also consider the need for rules in relation to overdraft charges and is now collecting evidence in order to do this. Its Executive Director, Christopher Woolard, explained: “Our role in regulating retail banking markets goes beyond the remedies the CMA has asked us to take forward, and we will continue to look more broadly at how well these markets work, with a particular focus planned on high-cost credit including overdrafts.”

Loans 2 Go’s own Legal, Risk and Compliance Director – George Badejo-Adegbenga has been involved in one of the FCA evidence sessions. He has a particular passion for the rights of the consumer and the ease at which they can slip into further debt through punitive overdraft charges, saying: “I think that the true detriment in my opinion is that when customers miss a payment and lenders start adding charges and extra interest … that is to their detriment.”

All this is good news for consumers! Banks can currently charge up to £100 a month for customers who go into the red without agreement. It is one of the few areas that is still unregulated: personal loans, online loans and credit cards are already much more accountable. According to Mike O’Connor – Chief Executive of the debt charity StepChange – “Regulators have acknowledged the need for caps in other markets, including credit cards and payday loans, and there is a clear need for the FCA to set a monthly maximum charge cap for overdrafts.”

The FCA enquiry is likely to continue to 2018 and has been particularly welcomed by the consumer organisation Which? as it will be able to take consumer issues into account, whereas the previous CMA enquiry only looks at issues in terms of whether competition is working effectively. Vicky Sheriff, Director of Campaigns and Communications at Which? said “We welcome this commitment to review punitive unarranged overdraft fees, which our research has found can be more expensive than some payday loans,” said Vickie Sheriff, Which? director of campaigns and communications”.

We will await the outcome of the enquiry with interest but are glad that there is light at the end of the tunnel for those consumers caught in the vicious spiral of debt leading to more debt.