The debate over whether overdraft charges should be capped is being reignited by the City regulator, just months after a competition watchdog rejected the idea.
The Financial Conduct Authority (FCA) announced it would include overdraft fees in a review into high interest loans in its response to the Competition and Markets Authority’s two-year investigation into high-street banks, which was completed in August.
The CMA stepped back from imposing a cap on overdraft fees – which campaigners such as Labour MP Rachel Reeves argue cost more than payday loans – and instead said banks should publish their monthly maximum charge (MMCs) for going over the limit.
In its response to the CMA’s findings, which were published in August, the FCA said it was preparing to review “high-cost, short-term credit” which will include overdrafts and other products such as payday loans and doorstep lending.
Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, welcomed the move to look at overdraft charges again. “The CMA’s proposed monthly maximum charges are a small positive step but are ultimately unlikely to make the difference required in bringing down the extremely high charges that many people in financial difficulty end up paying,” she said.
The CMA asked the FCA to look at various areas of its work, which the City regulator agreed to do. It will look at whether new rules are needed around the monthly maximum charges and also monitor the effectiveness of “prompts”, such as text messages, sent to customers before they go overdrawn.
But it is also going further, not only by examining overdraft fees but also embarking on wider scrutiny of retail banking by analysing the impact of so-called “free-if-in-credit” banking on consumers. Campaigners argue that free banking for customers who do not go overdrawn hides the cost of current accounts.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “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,” he said. The FCA will launch a call for evidence in the coming weeks.
The FCA’s remit is wider than the CMA’s as it can also look at whether customers need protection. It has capped charges on payday loans at 0.8% per day of the amount borrowed since last year.
The regulator said some campaigners had argued that unarranged overdraft fees – from which banks make £1.2bn a year – should be set at the same level as arranged overdrafts. According to consumer body Which? the cost of borrowing £100 through an unauthorised overdraft for 28 days from some high street banks was as high as £90. This is up to four times higher than the maximum allowed charges of £22.40 on a payday loan.
Gillian Guy, chief executive of Citizens Advice, said overdraft charges could quickly become unmanageable. “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.”
The CMA also looked at free banking and concluded it worked well for most customers. The FCA said it would now look at this area again. “We intend to undertake further work to better understand how firms’ actions in one market may affect outcomes in another and how conduct and competition are affected by the links between different parts of the business model,” the FCA said.
The move was welcomed by new players attempting to break the stranglehold that the big four – Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays – have on the current account market. There are 70m current accounts in the UK which generate £8.7bn of revenue.
“That the FCA feels the need to undertake further investigations into the practices of banks raises questions about the efficacy of the recent CMA investigation into current account competition. Why must we continue to wait for years for things to improve? This glacial pace of change is at odds with how customers and taxpayers alike expect to be treated,” said Mark Mullen, chief executive of digital service Atom Bank.
Alasdair Smith, who led the investigation by the CMA, appeared before MPs on the Treasury select committee on Tuesday and was forced to defend its conclusions, which focus on boosting competition by encouraging customers to compare their account details with rivals.
Andrew Tyrie, the Conservative MP who chairs the select committee, said: “The FCA have acted quickly. It looks as if they may be prepared to pick up the baton which the CMA has just dropped”.
