A few weeks ago, I spent time at Stepchange Debt Charity listening to calls from those in financial difficulty, to hear first-hand the reality of those who are financially vulnerable and burdened by debt.
A recent survey that they conducted made clear that those who are struggling with debt are using their overdrafts to keep up – with those taking part in the survey using overdrafts on average 11 months out of 12. And of these people, for just under half the year, these same people are going into unauthorised overdrafts – and are being charged on average an extra £225 a year for doing so.
Today saw the Competition and Markets Authority before the Treasury Select Committee, following their report into competition in retail banking published this summer. One of the major issues it looked at is that being faced by so many of those callers to Stepchange - the extortionate charges by banks on unauthorised overdrafts. The major banks currently make over £1bn per year on charges on unauthorised overdrafts, the majority of which is from financially vulnerable customers. The CMA's report was a huge opportunity to finally put an end to what as the Chair of the CMA himself calls "uncomfortably high" charges, but this opportunity was squandered.
Ultimately, the proposals in the CMA report failed to go nearly far enough to protect those financially vulnerable customers who are hit by such charges, despite the Chairman telling me today that these charges on authorised overdrafts are "the biggest single problem in the personal banking market". The key question is what will change for financially vulnerable customers experiencing these charges? The answer seemed to be, probably nothing.
The CMA report proposed a maximum monthly charge that could be charged by the banks on this type of lending – but to be set by the banks at a level of their choosing. Critically, the CMA shied away from proposing a cap that would be imposed by the regulator. But the fact is, most of the banks already set some form of cap, so this looks to me like it will be ‘business as usual’. My questioning of the CMA today did nothing to allay my fears - they were unable to say whether charges would come down as a result of their proposals - and in fact were unable to say what impact this measure would have at all.
Other proposals to address these overdraft charges mean requiring banks to increase alerts and grace periods for those who are about to go over their overdraft limit. But for the majority of these people, who are already struggling and do not have the means to prevent unauthorised overdrafts even if they are alerted to them, these proposals do nothing to help. As the CMA admitted today, these measures are geared at everybody, and not those who are financially vulnerable, for whom there is no direct action proposed by the CMA. When I asked the CMA whether the banks were in fact taking advantage of these customers, the Chairman conceded that as the CMA's analysis have said that these customers are least likely to switch, they were in effect a "captive audience for the banks". Once again, the CMA were unable to say what impact this measure would have.
The fact is, this is just not good enough. These are people who are already in difficulty, trying to manage debt day to day, and for whom the banks should have a responsibility to help manage their finances, and to help them out of the cycle of debt, rather than pushing them deeper into crisis with extortionate charges. And if they do not - the regulator must step in, as in the case of payday lenders. A recent study from Which? showed that the cost of borrowing £100 from some banks for 28 days amounted to as much as £90 in charges, compared with the maximum £22.40 on a payday loan, thanks to action from the regulator to introduce a cap on payday lenders. So it is hard to see the basis on which the CMA could justify treating different providers of the same sort of short-term, high-cost credit in such different ways.
The CMA's report and today's admission by the Chairman of the absence of meaningful direct action to protect the most financially vulnerable is a dereliction of duty. Despite the analysis and rhetoric, the CMA conceded that there was no direct action to help financially vulnerable customers, and as a result, in seems unlikely that for people like those I listened to calling Stepchange a few weeks ago, nothing ultimately will change.
Peter Vicary-Smith, Chief Executive of Which? had previously told the TSC said that he believed that the CMA had left the heavy-lifting and the difficult decisions for the Financial Conduct Authority to make - and I agree. It is disappointing that the CMA report has fallen so short, but the buck has now been passed, and so it falls to the FCA to step up to the challenge. I urge the FCA to take the action that is needed to protect the most financially vulnerable customers by setting a cap on unauthorised overdraft charges.