Banks urged to cap monthly unarranged overdraft charges
Banks should cap customers' monthly unarranged overdraft costs, according to proposals from the competition watchdog to sweep away "complicated and opaque" charges.
Overdraft charges have been criticised by consumer campaigners who say some customers can end up paying more than they would for a payday loan.
The Competition and Markets Authority (CMA), which put forward the proposals, found a wide range of unarranged overdraft fees, with some charging a daily fee of £5 to £10, some charging monthly fees and some also charging interest.
In 2014, £1.2 billion of banks' revenues came from unarranged overdrafts - which have been described by commentators as a "cash cow" for banks.
According to financial information website Moneyfacts, the average monthly usage fee for an unauthorised overdraft has increased from £43.88 two years ago to £55.69 today.
Under the CMA's proposals, banks would need to set their own monthly unauthorised overdraft charge cap, which they would have to show clearly. It is hoped that this would encourage banks to compete to drive down the costs, rather than having a single charge cap.
But some experts suggested banks may cut other perks, such as the rewards and interest they offer to customers, to cover the cost of driving down the cap. Others have suggested that if banks are left to set their own caps, there will not be enough pressure on them to drive the costs down.
People may find themselves slipping into an unarranged overdraft when they go over the limit that their bank has pre-arranged with them or when they do not have any pre-arranged overdraft facility. Customers may not even be aware they have gone into an unarranged overdraft - and the CMA wants banks to alert people and give them time to avoid the charges.
Debt charities said many of their clients have some kind of overdraft debt. StepChange Debt charity said that among its clients with any overdraft debt, the average amount owed is £1,725.
In one case StepChange dealt with, a client reported they been forced into an unauthorised overdraft by their bank taking interest and charges - resulting in even more charges. The client was left with no money for food.
Citizens Advice said a woman aged in her 80s had been paying daily charges for going just over £20 over her arranged overdraft . In another case seen by Citizens Advice, a man amassed £730 in charges after he exceeded his overdraft limit following a job loss. Citizens Advice said in another case, a man racked up £1,000 in charges after going over his authorised overdraft limit.
Some banks have already made changes to help customers manage their finances. For example, in 2014, Barclays introduced text alerts and grace periods. Barclays charges £5 a day for emergency borrowing, capped at a maximum of £35 a month. Halifax charges a maximum of £100 in unplanned daily overdraft fees in a monthly billing period and sends regular reminders to people who continue to use an unplanned overdraft.
Andrew Hagger, founder of Moneycomms.co.uk, said that with charges varying widely, "it will be interesting to see if any providers reduce their maximum charges in the coming months in light of the CMA report and whether this will have a detrimental impact on credit interest or rewards currently paid".
Alex Neill, director of policy and campaigns at consumer group Which?, said more must be done to "tackle the unfair, punitive charges faced by unauthorised overdraft users, some of whom are hit with fees far in excess of payday loans".
Martin Lewis, founder of MoneySavingExpert.com, said: "What's needed to give confidence for people with overdrafts to move banks is a 'switching guarantee' that, if accepted, your current overdraft will be at least matched and at a cheaper cost."
The CMA said its provisional remedies could bring benefits to bank customers to the tune of £1 billion over five years.
To transform the market, it also said new online comparison tools should also be developed to help customers compare deals and the current account switching service should be improved.
The watchdog also wants to make it easier for SMEs (small and medium enterprises) to shop around for better banking services.
It said the prices and availability of loans should be made more transparent so that the majority of SMEs need not, as is the case now, turn directly to their existing bank for finance without considering other offers.
At present, it is hard for bank customers to work out if they are getting good value, the watchdog said. Bank charges are "complicated and opaque" and many customers see switching banks as "risky".
Nearly 60% of personal customers have stayed with the same bank for more than 10 years and over 90% of SMEs get their business loans from the bank where they have their current account.
If personal customers switched to a cheaper deal for their needs, the annual savings could be on average £116 - ranging from £89 on average for customers who do not use an overdraft, to £153 on average for overdraft users.
The watchdog has rejected the idea of breaking up the biggest banks and also stopped short of getting rid of "free if in credit" current accounts.
Alasdair Smith, chairman of the retail banking investigation, said: "For too long, banks have been able to sit back and not work hard enough for their personal and small business customers.
"We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks.
"They will also protect those who fall into overdraft from being stung with unexpected fees."
Responses to the CMA's proposals should be submitted by June 7.
Economic Secretary to the Treasury, Harriett Baldwin said: "We support the CMA's aspirations to increase competition in retail banking, including making it easier for customers to switch banks where they see a better deal; helping overdraft users to understand the fees associated with overdrafts; and enabling small businesses to compare different lending products so that they can get the finance they need at a competitive price.
"Today's interim report is an important piece of work and we stand ready to take action once the final report is published in the summer."