Last April, I tried to introduce a new law to cap rip-off overdraft fees in the same way as charges on payday loans are limited. Yet, more than a year later, lenders are still getting away with charging exorbitant fees.
As new research this week from Which? reveals, charges on unarranged overdrafts are currently up to 7.5 times higher than payday loans. Borrowers can be charged an eye-watering £179 to borrow £100 over 30 days. The charges can be even higher because they apply to monthly billing periods and not the number of days. This means that customers face higher charges if their unarranged overdraft runs across two monthly billing periods.
The introduction of a Maximum Monthly Charge set by the banks has clearly done very little to improve the situation. Which? found that 13 of 16 banks it investigated still charged more than a payday loan company for borrowing £100 over 30 days. If bank fees were capped in a similar way to those of payday lenders, the cost of borrowing £100 for the 30 days on unarranged overdrafts would be £24.
These unjustifiable charges add to the problems faced by people who are already struggling financially. Last year, a report by debt charity StepChange found nearly 50 per cent of its clients had overdrafts, averaging £1,722. The charity estimated 2.8 million people used their overdrafts to cover the cost of essentials such as food and utility bills.
In stark contrast to the debts racked up by their customers, banks make more than £1 billion a year from the sky-high fees they slap on unarranged overdrafts. Regulators at the Financial Conduct Authority (FCA) promised to tackle this obvious injustice, but has dragged its feet when action is urgently needed.
In reality, there is little different between an unarranged and an arranged overdraft. But the distinction allows banks to cynically charge a premium for unarranged ones, pushing vulnerable customers into a vicious cycle of debt instead of helping them get out of financial trouble.
Two years ago, the Competition and Markets Authority called unarranged overdrafts the “single biggest issue in the personal banking market” yet failed to take meaningful action.
Instead, they passed the buck to the FCA which pledged to tackle the problem. But it has delayed consulting on possible solutions.
This is why 84 MPs, with Which?, have written to the FCA to urge it to crack down on these pernicious charges. We are also calling on the Government to introduce legislation to give the FCA a mandate to get on with this.
Banks are less obvious villains than unscrupulous payday lenders and vulnerable customers are the least likely to switch banks, even when they could possibly get a better deal. The problem is so severe that payday lenders now offer better value than some banks because of the high fees on unarranged overdrafts. This must stop.
The cap on payday loans has shown that action by the government and the regulator can work. So, what are they waiting for? It is time to cap the rip-off fees on unarranged overdrafts.
Rachel Reeves is chairwoman of the business select committee
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