84 MPs back calls for FCA to tackle overdraft costs

Research conducted by consumer group Which? has found that, in the most expensive cases, unarranged overdraft fees can be as much as seven times as expensive as a payday loan.

The cost of borrowing £100 for 30 days in an unarranged overdraft – borrowing beyond your overdraft limit – was compared with borrowing the same amount for the same length of time in the form of a payday loan.

Unarranged overdraft fees can be particularly costly as charges apply to consumers’ monthly billing periods, not for the number of days the money is borrowed for. This means customers can be charged more for going across two charging periods.

Of the 16 high street banks sampled, 13 were more expensive than payday loans. In 2014, the FCA capped payday loan charges, meaning that the cost of a loan was no more than £24.

It was found that Santander’s fees were almost 7.5 times higher and £155 more expensive – its customers were charged £179 over 30 days.

TSB is over 6.5 times more costly, charging £160. This is followed by HSBC and First Direct, which are more than six times higher, at £150. RBS and Natwest charged £144.

Meanwhile, Smile, Co-operative Bank, Yorkshire Bank and Clydesdale Bank are all five times more expensive, charging £120.

Lloyds was the cheapest, having scrapped unarranged overdraft fees in 2017, meaning it is £19.80 cheaper than a payday loan at just £4.20.

In 2016, the Competition and Markets Authority (CMA) put forward plans to introduce a maximum charge for unarranged overdrafts, while the FCA is considering new rules for a maximum monthly overdraft charge, as part of measures to fuel competition in the current account market.

In a statement, the FCA suggested it may overhaul the practice. A spokesperson for the regulator said: “We are concerned about the way the overdraft market works for some people. Often the fees are too high and charges can be unreasonable. We think the market may need fundamental reform and we have questioned the role of unarranged overdrafts should play in a modern market. We’ll set out our findings on May 31, including proposals to address some of our concerns.

“In the UK there are 52 million personal current accounts. Any proposed changes to overdrafts must look at the wider banking sector to prevent harm to consumers without impacting on people who rely on overdrafts for normal, day-to-day banking.”

Peter Tutton, head of policy at StepChange Debt Charity, said: “Overdrafts are the second most common type of debt our charity deals with, leaving many at risk of falling into persistent problem debt by entering a cycle of using their overdraft from month to month. They are meant to be short-term, but our evidence shows that they can all too easily trap people in expensive and long-term cycles of persistent debt.

“Fundamental reform is needed. There has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges. We know that there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon. Banks which have not yet done so should follow suit, while the FCA should investigate unaffordable lending in the overdraft market as part of its upcoming consultation on high-cost credit and overdrafts.”

Of the 84 MPs that signed the letter calling for the curbs to unarranged overdraft fees, three were Conservative, seven were Labour Co-op, 48 were drawn from Labour, 23 from the Scottish National Party. The Liberal Democrats supplied two, while there was one Plaid Cymru signatory.