Banking watchdog to look at high cost of overdrafts

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Overdrafts are to be put under the spotlight by the City regulator alongside other high-cost loans, such as payday loans, as part of moves to help customers take more control over their finances.

The Financial Conduct Authority (FCA) said it is planning to focus in on the sector and it will look at both arranged and unarranged overdrafts as part of the probe.

The move was welcomed by consumer campaigners - who said in some cases relying on an overdraft can be more expensive than taking out a payday loan.

A recent investigation by the Competition and Markets Authority (CMA) suggested customers often under-estimate how heavily they rely on their overdrafts and complex overdraft charging structures can make it hard to work out whether they could be better off elsewhere.

The CMA has also previously found the older and larger banks do not have to work hard enough to win and retain customers.

The FCA, which is working to improve competition in the current account sector, wants to get a full picture of the high-cost credit market, which also includes door-to-door lending and logbook loans - where someone's car may be put up as security for a loan.

Aspects of the sector it could consider may be whether someone uses their overdraft heavily because they would struggle to get a loan elsewhere.

A cap on the overall cost of a payday loan has previously been introduced, to prevent borrowers' debts spiralling out of control.

Vickie Sheriff, Which? director of campaigns and communications, said: "We welcome this commitment to review punitive unarranged overdraft fees, which our research has found can be more expensive than some payday loans."

Citizens Advice chief executive, Gillian Guy, said: "Overdraft charges can quickly add up to unmanageable debt.

"An unplanned expense that pushes someone into their overdraft by just a few pounds can lead to them being trapped in a cycle of daily charges.

"We helped people with 52,000 overdraft debt problems in the last year - in some cases people are paying more in overdraft charges than they would for a payday loan."

Andrew Hagger, founder of Moneycomms.co.uk, said consumers have been "baffled" for far too long by overdraft costs - which he said are a key reason why people do not switch banks more often.

He said: "With banks currently charging a mix of debit interest, daily fees, monthly fees and a combination of these, the customer has little chance of knowing if they have the right bank account."

The CMA made a series of recommendations in August to shake up competition in banking, including requiring banks to speed up advances in technology and requiring banks to send alerts to customers going into an unarranged overdraft.

The competition watchdog recommended that the FCA research, test and implement measures to increase consumers' engagement with their overdraft use and charges, and the FCA said it will take action in response to this recommendation.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "It's important that competition works well in the retail banking sector. Our work, taking action in response to the CMA's recommendations, will help to further drive effective competition by helping customers and small businesses to take more control of their finances.

"Our role in regulating retail banking markets goes beyond the remedies the CMA has asked us to take forward, and we will continue to look more broadly at how well these markets work, with a particular focus planned on high-cost credit including overdrafts. We will also be looking at wider retail banking business models."

Omar Ali, managing partner of UK financial services at EY, said: "Increasing transparency around overdraft fees and charges should help people better manage their finances, and ensure they do not end up with bills they did not anticipate.

"Our research shows that fee transparency is a key driver of trust, and that if customers feel their bank is not being transparent about its fees, they are less likely to recommend it to others.

"This should be seen as an opportunity for banks that could result in better customer retention."