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Time to end confusing and costly overdraft charges

daniellelevy
Written By:
daniellelevy
Posted:
Updated:
20/03/2019

Alastair Douglas, chief executive of credit report provider TotallyMoney, explains why it’s time for a dramatic overhaul of bank overdraft charges.

Banks have historically earnt billions from overdrafts, levying charges that often confuse customers, which is  something the Financial Conduct Authority (FCA) is taking drastic action on — fast.

If you heard that banks earned over £2bn a year from just one activity, you’d probably suspect the investment divisions: flashy deals, popping corks and flowing champagne.

In fact, overdraft charges are the real culprit, earning banks £2.4bn in 2017 alone – 30% of that came from unauthorised overdraft charges.

A bank can charge its customers up to four times more than their competitors for authorised overdraft borrowing. They are able to get away with this because the charges they levy are confusing and hard to compare.

This confusion can really cost consumers. Some people pay their bank as much as 20% a day for their overdraft – far higher than other alternatives they could turn to.

The Financial Conduct Authority (FCA), the financial regulator, doesn’t think this is fair — and I agree. The FCA has proposed radical changes to the “dysfunctional” overdraft market, especially fixed-fee charges.

I believe these changes can’t come fast enough, to avoid a generation of borrowers getting trapped in high-cost debt.

What’s wrong with fixed-fee charges?

On the surface, fixed fees seem like a fair, transparent way to charge for borrowing. It’s deceptively simple – go into the red and you’ll pay a fixed fee, agreed in advance. Research suggests that consumers understand a pounds-and-pence cost better than an interest rate. So far, so good.

The trouble is, it doesn’t work. In a study, only one fifth of customers could work out the best deal when comparing overdraft fees priced in pounds against fees with an interest rate.

However, 63% of people could identify the best deal when shown the same data using a single interest rate.

Time for change

The FCA suggests that lenders scrap daily or monthly fixed charges and replace them with a simple, single interest rate. The chief executive of the FCA, Andrew Bailey, has promised this will be the “biggest intervention in the overdraft market for a generation”.

The regulator’s consultation lasts until 18 March and a new policy is likely to come out in June of this year.

At TotallyMoney, we’re on a mission to improve the credit scores of five million people in the UK. This can only happen when the information consumers see is clear and easy to understand.

Hats off to the FCA for the bold move in this direction.

Alastair Douglas is chief executive of TotallyMoney