We evaluate Lloyds TSB's new charges for unapproved overdrafts. The bad news is that many borrowers will be far worse off!
Over the past year, news about personal finance has been dominated by one topic: whether the charges levied by banks on unauthorised current account overdrafts are unfair and, therefore, illegal.
British banks have been notoriously reluctant to argue their case in court, so tens of thousands of customers have won refunds via the courts or the Financial Ombudsman Service. However, all reclaims are on hold at present, as eight major banks have agreed to defend a test case in January 2008 brought by the Office of Fair Trading (OFT). Hence, hundreds of millions of pounds are suspended in limbo until the outcome of this case is known -- and it could drag on in court for years.
In the meantime, Lloyds TSB has become the first of the high-street banks to rejig its fees in an attempt to make its current-account overdrafts look better. Here's what it has done:
- 1. From 2 November, new and existing current-account holders of Lloyds TSB will face a monthly charge of £15 for slipping into the red without permission. On top of this, there is a sliding scale of daily penalty fees ranging between £6 and £20, depending on the size of the unauthorised borrowing.
- 2. At present, Lloyds TSB levies a daily penalty of £30 for unauthorised overdrafts, regardless of their size, capped at £90 per month. Under the new system, the ceiling will be ten daily penalties in total -- which could amount to a staggering £200 a month!
- 3. Under the new fee structure, Lloyds TSB customers will pay £6 per day for overdrafts which are up to £25 over their agreed credit limit. Unauthorised overdrafts of £25 to £100 will cost £15 per day, and those over £100 will cost £20 per day.
- 4. Lloyds TSB's penalty for bouncing payments (including cheques, direct debits and standing orders) will drop from £35 to £20. This is a genuine step forward, but isn't nearly enough (see my final comment).
- 5. Lloyds TSB will no longer charge a penal rate of interest on unauthorised overdrafts. As I warned in The Great Overdraft Sting, presently it charges a whopping 29.8% EAR on unapproved borrowing. This will fall in line with standard rates of interest for authorised overdrafts, which range from 10.4% EAR to 19.3% EAR. Again, this is an improvement, but Lloyds TSB could still do better.
- 6. Lloyds TSB is set to introduce a text-message warning system to warn customers who are within £50 of their overdraft limit, or have already exceeded it. Initially, this warning service will be free for the rest of 2007, but will then cost £30 a year. Internet bank Cahoot provides a similar text and email service, but this is completely free. Hence, Lloyds TSB stands to make handsome profits from its £2.50-a-month service, so this doesn't get my seal of approval.
- 7. Customers who lodge funds in their account (by cash or cleared bank transfer) by 3.30pm on the day of the unauthorised overdraft will escape these penalty charges completely. This corrects an unnecessary evil, so I'm not about to give Lloyds TSB three cheers just yet!
SUMMARY: This is simply window dressing by Lloyds TSB
Although these revised charges appear lower on the surface, they still fall short of what I (as an ex-banker) would call fair. Indeed, under the old system, an unauthorised overdraft of £101 for a month would incur three fees of £30, a total of £90. Under the new system, the penalties would leap to a monthly fee of £15 plus ten additional fees of £20, making £215 in total. This is more than twice the original debt of £101, and shows that Lloyds TSB will still happily fleece its customers!
Finally, I've heard a lot of arguments as to whether these charges are unlawful under the Unfair Terms in Consumer Contracts legislation. In the late Nineties, I ran a large insurance scheme for a major bank which raked in tens of millions of pounds of premiums each year. When a policyholder `bounced' a monthly premium, my company would recoup the time and effort involved in chasing up this payment by charging our banking partner the princely sum of... wait for it... £1. So, who in their right mind would defend charges of almost £40 per item? I certainly wouldn't!
More: Reject the rip-offs by switching to a better current account today! | Britain's Worst Bank Accounts! | Get More Dosh From Your Current Account