#overdraft-fees

How do the FCA’s reforms to overdraft charges measure up?

By Adam Butler, Senior Public Policy AdvocateRadical changes to the rules governing overdrafts will help people in financial difficulty — is there a catch?Exorbitant overdraft charges that hit people in financial difficulty have been the subject of calls for change for at least two decades. Campaigners made progress in reducing one-off ‘failed payment’ fees but high unauthorised overdraft fees remained.With its strong remit to ensure customers are treated fairly, the Financial Conduct Authority (FCA) has finally set out a plan to clamp down on unauthorised overdraft charges [PDF].The substance of the changes the FCA proposes to require banks to make from December 2019 is relatively simple.If banks allow customers to borrow in excess of their overdraft limit, they can charge no more than the standard ‘authorised’ overdraft rate.Banks will be required to charge for overdrafts using a single interest rate expressed in APR rather than through the complex fee structures that are common at present.Banks must in future identify repeat overdraft users in financial difficulty and support them to safely wind down overdraft debt.There are significant upsides to this package, the most important of which is that banning unauthorised overdraft fees will dramatically reduce costs for people in difficulty.To put the impact of the changes in perspective, unauthorised overdraft fees can currently cost more than the interest charge on a payday loan.Following the new rules, the FCA expects unauthorised fees to be ‘significantly below’ the interest rate cap on payday loans.Flaws but not deal breakersThe success of the measures depends on exactly how banks implement the new rules, and there are a few caveats worth noting.The FCA hasn’t specified that banks can’t offer different customers different overdraft interest rates. This means banks may introduce ‘risk-based’ pricing where customers are offered different rates based on their circumstances.This is common among other credit products like credit cards but is largely new territory for overdrafts.The FCA expects firms to recoup income lost due to the end of unauthorised overdraft fees by increasing their authorised overdraft fees across the board modestly.Most light overdraft users will pay a little more, while people in a lot of difficulty who regularly exceed their overdraft limit will pay a lot less.However, if banks introduce higher rates for more frequent users, over time fees may again become concentrated on more vulnerable people.In a worst-case scenario, unauthorised fees could be re-introduced through a backdoor.Risk-based pricing could also undermine competition between current account providers, because instead of being able to see a single overdraft interest rate, people will have to get a personal quote to find out what they’ll be charged.This will make it less likely that competition between account providers will drive down overdraft charges.Banks are also being asked to identify repeat overdraft users who are in difficulty and offer them support.This is important: it makes a big difference to people in difficulty when firms reach out at an early stage to offer them a safe way out of difficulty.This might mean budgeting help, a gradual reduction in an overdraft, or forbearance. The weakness of the FCA’s proposals is that it hasn’t provided a precise definition of repeat overdraft use.This is with reason: patterns of overdraft use are complex and it would be difficult to find a single useful definition of repeat use. However, the FCA may have got the balance wrong and given banks too much discretion.The result could be that people in difficulty are only identified as in need of support at a late stage when repeat use is obvious and financial problems are advanced. That would be little different to the present situation.Nevertheless, the FCA’s intervention is undoubtedly positive news. We’ve called on them to monitor the impact of the new rules carefully.The FCA has stated that it’ll keep the case for a cap on overdraft fees under review. Evidence that high charges remain concentrated on vulnerable customers would be compelling evidence a cap is needed.They should also respond to learning from implementation of the repeat use rules quickly, to ensure firms intervene early and effectively when people get into difficulty.An awkward questionThe stark figures uncovered through the FCA’s investigation of overdraft lending beg an awkward question.Using current account data, they found that half of overdraft fees are concentrated on just 1.5% of customers, and that this group tends to be more vulnerable, with lower incomes and a greater likelihood of illness and disability.It also found that even when firms have been aware customers are in difficulty, they have often not offered effective help.If the evidence is so stark that some banks weren’t treating their customers fairly and meeting regulatory requirements to support people in financial difficulty, why is no redress scheme planned?Moving on as if nothing was amiss smacks of sweeping a significant failure of firm culture under the carpet.You can read our full response to the FCA’s call for evidence on overdraft charges on our website.

Parliament #TalkMoney event on student financial capability

By Mark Haslam, Senior Parliamentary and Public Affairs OfficerLeft to right: Shakira Martin (NUS); Yvonne Fovargue MP; Anita Bailey (NASMA); Sarah Poretta (Money Advice Service)We’re proud of our role supporting the All Party Parliamentary Group on Debt and Personal Finance, and on Tuesday 13 November, the APPG hosted an event on improving student financial capability.The APPG debt event took place on day 2 of Talk Money Week, the nation’s largest conversation about money.The event marked the launch of new research from the National Association of Money Advisers and Money Advice Service, on the financial pressures facing students.Speakers at the event included Anita Bailey from the National Association of Student Money Advisers (NASMA), Shakira Martin, President of the NUS, and Sarah Poretta, Director of UK Financial Capability. Yvonne Fovargue MP chaired the event, and those attending included debt advisers, student money experts as well as MPs.Many of our own clients are young, as are most students, and they tend to more vulnerable to financial pressures than older groups. For instance, they’re more likely to have short term high cost credit loans than other age groups. The research launched at the event, based on a unique survey of 5,118 students, bears this out.The research will help NASMA develop and grow the reach of its good work. It provides a diagnostic toolkit to better understand the unique characteristics of different types of students, categorised in five different types:‘Supported and sensible’‘Confident and thrifty’‘Inexperienced and at risk’‘Anxious but spending’‘Disengaged and overwhelmed’This will help organisations like NASMA better target their support.Student financial capabilityThe event was also an opportunity to reflect on grounds for hope for student financial capability, as well as grounds for concern.The good news is that around three-fifths of students are working to a budget, putting to bed stereotypes about students being footloose and fancy free.The research shows three-quarters of students feel confident managing their money and two in five save money most months of the year.However, on the flip-side, a significant minority of students — around one in five of them — are struggling with their finances.Of those who had gone overdrawn, 40% had used an unauthorised overdraft leading to additional charges and fees. Our overdrafts campaign is calling on the Financial Conduct Authority to ban unarranged overdraft charges, to avoid trapping people in a cycle of problem debt.Student finances and their pressuresThe pressures on student finances are many, and unique.On the expenses side, course costs can be expensive, and transport and childcare costs are singled out as issues. Measures to improve discounted travel for students, and to extend childcare support, have been suggested by organisations like the National Union of Students (NUS).Campaigners also want to tackle pressures on student incomes, for example so more employers pay the living wages (students often work a part, or even full-time job). There are calls for reforms to student finance.In particular, both NASMA and the NUS say the the idea of the student loans system, i.e. paying large lump sums once a term, is out of date and undermining effective budgeting. Instead it would be better for arrangements to be paid monthly or weekly, to help students manage their finances, and avoid build-ups of unnecessary debt.Student finances in the futureWithin the charity, as part of our new four-year strategy, we’re keen to ensure that we start helping to move both the debate and the policy framework towards prevention as well as cure.Tackling the pressures, both at the level of costs and at the level of student finance, could be as effective as early interventions to ensure debt problems, among young people, don’t become a spiral into a debt crisis.However, students, like the rest of the population, will always face unfortunate changes in circumstances that make budgeting difficult. So it’s absolutely vital we continue to support the work of organisations like NASMA, whose work in this areas is so important.We’ll be working more on these issues in the years ahead, and in the meantime we’re delighted to have helped bring these issues to Parliament as part of this year’s Talk Money Week, and in support of our partners’ important work.

Hidden in plain sight: Ending the overdraft debt trap

By Adam Butler, Senior Public Policy AdvocateOverdrafts are a useful flexibility that can easily turn into toxic problem debt. The Financial Conduct Authority is acting to reform overdraft charges. What should it do to protect consumers?Using an overdraft is common: the FCA recently estimated that 19 million people use an authorised overdraft each year and 13 million people use an unauthorised overdraft. Overdraft fees generate £2.3 billion in annual revenue for banks.Overdrafts are designed to be used as a form of emergency or short term credit, used for example when we face an unexpected (or forgotten) bill that pushes our account into a negative balance.Flexibility is what makes overdrafts so useful. However, this flexibility is double-edged: in a financial pinch it’s easy to slide from sporadic use of an overdraft to a big negative account balance.In 2017, we found that half of StepChange clients (49.8%) had accumulated overdraft debt averaging £1,607 by the time they’d sought debt advice, and had been in their arranged overdraft 11 out of the last 12 months. Almost two thirds of clients (62%) with overdraft debt regularly had to exceed their arranged overdraft limit, doing so in an average of five out of the last 12 months.Because overdrafts are often the first recourse when people experience financial difficulties, it’s important that they’re safe for consumers and well designed. Unfortunately, overdrafts can easily make financial problems worse.The overdraft debt trapOver time, banks tend to increase a customer’s overdraft facility as their perceived creditworthiness increases, but are less likely to decrease it when there are signs of financial difficultly. This sets up a trap for people who experience an income shock.Once someone has built up a substantial overdraft debt, charges are punishing. An overdraft of £1,000 might carry a charge in the region of £50 each month. Charges for using an unarranged overdraft are higher, usually ranging from £50 to £95 each month.Following an investigation by the Competition and Markets Authority, firms are required to cap their monthly charge for an unauthorised overdraft, but set the level of this cap themselves.That means overdraft fees sit firmly in the high cost credit market segment. Unsurprisingly, the FCA found that the majority of unauthorised overdraft fees fall on less than two per cent of customers, who tend to live in areas with a higher proportion of vulnerable people.As there’s no requirement to repay a proportion of an overdraft each month (as, for example, there is a minimum monthly payment for credit cards), these charges are added to a negative account balance.As a result, overdraft fees create a debt trap for people in financial difficulty. Each month an overdraft cannot be paid off, an account slips further into debt as fees are added to the outstanding balance.Unfortunately, while there are examples of responsible practice, banks often fail to act to prevent occasional emergency use of an overdraft escalating into problem debt. The upshot is that in circumstances in which people need help to resolve financial problems, an overdraft often draws them further into difficulty.Making overdrafts work safely for people in financial difficultyWe’ve has argued for a number of changes to make overdrafts work safely for people who hit a financially rocky period.The FCA should first take action to ensure that overdraft lending is responsible. This might mean, for example, that people always be able to comfortably repay an overdraft from their monthly disposable income. This would require banks to ensure that an overdraft remains suitable when a customer’s circumstances change.Second, the FCA should ban unauthorised overdraft fees to end the detriment experienced by people in financial difficulty. The FCA has already set out proposals to require banks to simplify and align authorised and unauthorised fees (in essence a ban, although the details of how banks do this will be important).While the FCA’s proposals should reduce unauthorised overdraft fees, we’ve also called on the FCA to set a further backstop cap on overdraft charges, to protect consumers and remove the incentive for lenders to allow persistent overdraft debt to accumulate.Finally, in future, rather than being the start of a drawn out debt problem, repeat overdraft use should be the trigger for banks to spot people in difficulty and offer them a safe way to deal with the debt while continuing to have access to transactional banking.The FCA says it’ll set out the next steps on overdraft fees before the end of the year. The FCA might propose changes that are challenging — for example, as a result of the changes people might be asked to pay a little more when they use an agreed overdraft in future — but the proposed changes are fairer than the present situation in which a high cost credit debt trap is hidden in plain sight.Find out more about our research on overdrafts and how they’ve affeced our clients on our website.

More evidence that action is needed to tackle persistent overdraft debt

By Laura Rodrigues, Senior Public Policy AdvocateThe FCA recently published an update on high cost credit, including new research on overdrafts showing serious concerns about high cost charges and persistent debt.High cost unarranged overdraftsThe FCA’s research found that unarranged overdraft charges are very high cost and bear little relationship to the amount borrowed. They found these charges can be over ten times the cost of payday loans. They also found the banks’ annual revenues were around 200% of the average amount lent out compared to 25% for arranged overdrafts.Another finding was that unarranged overdraft charges are highly concentrated, with was over half of these charges faced by just 2% of accounts.Yet another particular concern was that a significant proportion of charges were linked to consumers using unarranged overdrafts repeatedly or persistently. Between 30–65% of these charges were paid by those who used an unarranged overdraft over 15 times in a two year period.This echoes our overdraft debt research, which found our clients were going into unarranged overdrafts five months out of 12 in the year before they came to StepChange for advice.The main issue is that persistently going into unarranged overdrafts can push people into, or exacerbate, financial difficulties. We’ve called for an end to unarranged overdraft charges and some banks have already taken action to do this.Persistent overdraft debtThe FCA found that a small minority of overdraft users are paying almost half of all charges. There were 6.5% of bank accounts going overdrawn in every month of 2015 and 2016 and they paid around half of both arranged and unarranged overdraft charges.Our recent overdrafts report found that over two million people a year are constantly overdrawn. StepChange clients told us about having to use their overdraft to pay for essentials and getting stuck in an endless cycle of overdraft debt:Once my overdraft was up to £1,250 I could never clear it. My wages went in and took the account to 0 and then all my monthly spends such as bills petrol food etc. were taken from my overdraft. I could never pay it off.A StepChange clientInstead of just adding high-cost charges, the banks should have clear strategies to identify and support those struggling with a route out of persistent debt.These should include proactively reaching out to struggling customers and offering them support to reduce their overdraft balance.This could involve separating their overdraft debt from their everyday spending account by offering them a fee-free basic bank account. We did see some positive examples of this in our report, but this good practice needs to be more widespread and consistent across the industry.When will action be taken?The FCA research is a step in the right direction but their proposed remedies will not be coming out till later this year.Urgent action is needed to tackle the problems of persistent overdraft debt and costly unarranged overdraft charges now.We’re keen to work with the banks and the FCA to take forward solutions to ensure overdrafts are not exacerbating financial difficulties and pushing people into problem debt.

We asked the FCA Chief Executive to cap sky-high overdraft charges

By Mark Haslam, Public Affairs OfficerContinue reading on Medium »