Which? is calling for a crackdown on unarranged overdraft charges as we find that consumers face higher charges for using an unarranged overdraft than they would if they took out a payday loan.
New Which? research finds that consumers needing as little as £100 could be charged up to 12.5 times more by major high street banks than the Financial Conduct Authority (FCA) allows payday loan companies to charge, when borrowing the same amount for the same period.
In January 2015, the FCA introduced a cap on high cost short-term credit to protect consumers from excessive fees charged by payday loan companies, but we found unarranged overdrafts can be much more costly when people are borrowing for the short-term.
Which? compared the cost of borrowing £100 for 28 days and found that charges at some high street banks were as much as £90, up to four times higher than the maximum charges of £22.40 on a payday loan. The charges could be even higher if interest payments or possible unpaid item fees are included, or the money is borrowed over two bank monthly charging periods, because the maximum charge relates to the bank’s monthly charging period and not the borrowing period.
Following its review of retail banking in the UK, the Competition and Markets Authority (CMA) has published a number of provisional remedies to tackle overdraft charges, including a requirement for banks to have a monthly maximum charge for unarranged overdraft usage. However, Which? has criticised this and stated it is unlikely to make much of a difference because banks typically already put caps on charges and it does not address the overall level of fees.
Which? is calling for unarranged overdraft charges to be set at the same level as arranged overdraft charges and for the FCA to review overdraft charges in the context of other forms of credit and crackdown on punitive fees.
Alex Neill, Director of Policy and Campaigns, said:
“People with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies. The regulator has shown it’s prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers.”