City watchdog the Financial Conduct Authority (FCA) warned it would “keep an eye” on high street banks after lenders hiked their arranged overdraft levels to “very similar prices”.
The FCA added it written to banks today asking them “to provide evidence of how they have arrived at their pricing decisions”.
HSBC, Nationwide, First Direct, Lloyds Banking Group and a host of mainstream lenders said last month they would more than double their base overdraft charges to new a standard interest rate of 39.9 per cent in the spring.
Even consumer-friendly app-only banks such as Monzo and Starling have doubled, or near-doubled, their overdraft fees.
This follows new FCA rules that require banks to charge a simple annual interest rate on all overdrafts and get rid of fixed fees by April.
However, the uniform hike in rates from banks has sparked concern from consumer groups as well as the regulator itself.
Which? head of money Gareth Shaw said: “The changes introduced to provide clarity on overdraft fees and charges and protect the most vulnerable, must also allow customers to shop around. The current lack of competition on overdraft pricing is disappointing, so it is right the regulator is taking a closer look.”
The FCA said: “We have now seen the major banks and building societies release their new rates – with most setting very similar prices.”
The regulator added: “We have asked to see their plans for how they are dealing with the most affected customers.
“We expect banks to take steps to support them, for example, firms could reduce or waive interest, offer a continuation of overdraft borrowing at the current rate of interest, or agree a repayment programme – including a personal loan.”
The FCA clamped down on high unarranged bank overdrafts last year, adding it had saved typical borrowers up to £55 per month on an unarranged overdraft of £100 over seven days.
It said its aim was to make the cost of arranged and unarranged overdrafts “more transparent”.
‘Eye-watering daily charges’
Tom Selby, senior analyst at broker AJ Bell, said: “While the intention of the reforms was to help those hit with eye-watering daily charges on unarranged overdrafts – a substantial proportion of whom tend to be people from deprived areas – there has been something of a waterbed effect.
He added: “In the process of pushing down on unarranged fees, the costs faced by those in arranged overdrafts are set to balloon.
“Millions of people in arranged overdrafts are now worried about their borrowing costs doubling overnight, potentially pushing many into a difficult financial position. The FCA has clearly been jarred by the reaction of the market and is now leaning on firms to help customers affected by the imminent rise in costs.”
The FCA said banks collected £2.4bn in revenue from overdrafts in 2017, with around 30 per cent coming from unarranged overdraft fees. It added about 19 million people use an arranged overdraft every year, around 14 million use an unarranged overdraft, while 7.3 million use both types of overdraft in a year.
How to avoid high overdraft charges
- Make sure you’re on the best deal possible and speak to your bank. While arranged overdraft rates are increasing across the market, there are still differences, so it’s worth shopping around and switching to get the best rate available. You should also have a chat with your current lender to see if they can help.
- Make the most of interest-free facilities available. There are still accounts offering an interest-free overdraft of up to £250, so if you have no such facility you should seriously consider switching. At an interest rate of 40 per cent, this would save you around £100 a year.
- Consider a 0 per cent credit card (if possible).With many banks moving to 40 per cent-plus overdraft charges, this kind of borrowing now very much shifts into the ‘high-cost’ category. If you can, consider opening a credit card with a 0 per cent interest rate and transferring the balance over – this will give you some breathing space to pay off the debt before charges kick-in. However, make sure you do this with a plan in place as the credit card company will eventually start hitting you with significant interest charges too.
- Don’t stick your head in the sand Often debt sparks a fearful response, with people preferring to ignore it and hope for the best rather than deal with it head on. So, start off by looking at your balance and working out a sensible time period over which you can try to pay it off, including writing down a reasonable monthly budget. You should then keep a regular eye on your finances to ensure you remain on track.