Overdrafts are priced unfairly, says FCA
New research from the Financial Conduct Authority shows that banks 'confuse' consumers with overdrafts costs, and don't provide good value for money.
The Financial Conduct Authority (FCA) has published research into the £8 billion overdraft market, coming to the conclusion that banks are under “little pressure” to provide good-value overdrafts.
It says this is because people aren’t likely to consider overdraft costs when deciding on a current account, and wouldn’t switch accounts solely on the basis of overdraft fees.
Arranged and unarranged overdrafts
Christopher Woolard, director of policy, risk and research at the FCA, says: “Just about everybody who banks can have access to some sort of overdraft facility – whether they’ve signed up for it or not. The sheer size of this market is huge and with overdrafts bolted on to over 30 million UK current accounts, we want to make sure it is working well”.
The FCA looked at both arranged overdrafts, which come as part of a current account package, and unarranged overdrafts, where firms allow customers to go beyond their overdraft limit. Its research found that using an arranged overdraft can quickly become a habit, with customers unlikely to think about what it was costing them.
Recent measures, such as text alerts for unarranged overdrafts, agreed between the banking industry, the Office of Fair Trading (OFT) and the Government have helped improve matters, but unarranged overdrafts are still a problem. These can carry high charges, and the terms set by banks can be so complex that some people “struggle to understand” what they are paying for.
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What did the research find?
The FCA’s research demonstrated that:
- many people don’t realise how much overdrafts can cost and are confused by unarranged overdrafts;
- people often don’t see arranged overdrafts as borrowing and quickly become accustomed to using them, sometimes viewing them as an extension of their income, with the presentation of overdrafts as ‘available funds’ reinforcing this;
- repayments are often driven by income coming in rather than as scheduled payments to clear an outstanding balance;
- there may be incentives for firms to raise revenue by increasing overdraft limits, and these extensions are often perceived by customers as their bank ‘trusting’ them.
Some banks have claimed that overdraft fees subsidise ‘free’ current accounts, but the FCA believe that the situation isn’t so straightforward. Personal current accounts, they say, help banks to sell their more profitable products.
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What happens now?
The FCA have announced that, to reduce costs, it will be investigating how “providers set and monitor overdraft limits”. It will also “start to consider making some voluntary measures mandatory in autumn 2014.”
It will do this work in conjunction with the new Competition and Markets Authority to make sure that actions “complement (and do not duplicate) its current work updating the OFT’s 2013 review of the current account market”.
Where can I get a fair overdraft?
Some current accounts offer interest- and fee-free overdrafts, such as Nationwide’s FlexDirect, which offers 12 months with nothing to pay. This account also has a very good interest rate if you're in credit during the first year, as it will pay 5% on balances up to £2,500. After that, it reverts to 1%.
Meanwhile, First Direct’s 1st Account has a £250 interest-free overdraft and Co-operative Bank’s Current Account Plus has a £200 fee-free overdraft. Santander’s 123 and Everyday current accounts come with four-month free overdraft periods.
More on current accounts:
TSB and Lloyds launch new high-interest current accounts
Will you pay more thanks to 'simplified' overdraft charges?
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