Banks’ rip-off overdraft fees still worse than a payday loan, warns Which?

Which? is calling for an end to rip-off overdraft fees as it reveals they can still cost over seven times more than a payday loan.

Which? first raised the alarm over these fees in 2016 and is concerned that despite scrutiny from the regulator not enough has been done to protect consumers from these sky-high fees. And now, along with 84 MPs from all the main parties, Which? is demanding the Financial Conduct Authority takes urgent action to end this unfair practice by restricting unarranged overdraft charges to the same level as arranged overdrafts.

The consumer champion compared the cost of borrowing £100 for 30 days in an unarranged overdraft across 16 high-street banks with borrowing the same amount for the same length of time through a payday loan. Overall, 11 of the banks investigated charged more than a payday loan company, and considerably more so in several cases.

The FCA previously capped payday loan charges, meaning that the cost of a loan in our scenario would be £24. Which? found:

  • Santander is almost 7.5 times* higher and £155 more expensive, charging its customers a massive £179 over 30 days.
  • TSB is over 6.5 times more costly, charging £160.00.
  • This is followed by HSBC and First Direct – over 6 times higher, at £150.
  • RBS and Natwest are £144 and 6 times higher.
  • Meanwhile, Yorkshire Bank and Clydesdale Bank are all 5 times more expensive, charging £120.

These fees are particularly costly because bank charges apply to their monthly billing period, not the number of days the money is borrowed for, meaning customers can effectively be charged more for going across two charging periods. The Competition and Markets Authority set out to tackle the issue by introducing a monthly maximum charge for unarranged overdrafts in August last year – but the measure has clearly failed to stop banks from charging sky-high rates. Meanwhile, the FCA has previously pledged to tackle the problem, but has delayed consulting on much-needed interventions, leaving people still facing these exorbitant fees.

Since Which? first called for banks to lower their unarranged overdraft fees, the Lloyds Banking Group has acted on its calls and scrapped unarranged overdraft fees, meaning it now has the lowest charges of investigated banks – £19.80 cheaper than a payday loan at just £4.20. Meanwhile, Santander has also committed to Which?’s calls and will remove fees on unarranged overdrafts for its paid current accounts from July this year – although this will not apply to other Santander accounts. Which? and parliamentarians are now calling for other banks to urgently follow suit.

Gareth Shaw, Which? Money Expert, said:

“It’s alarming that the majority of banks are still allowed to charge more than payday loan firms through these rip-off overdraft fees. These extortionate fees can cost thousands of pounds a year, hitting those who can afford it the least.

“The regulator cannot drag its heels any longer. We must see urgent action to restrict these charges, bringing them into line with arranged overdraft fees to finally end this unfair practice.”

Notes to editors

Which? reviewed the unplanned overdraft charges levied by the named banks in April 2018 on fee-free accounts with no minimum monthly payment. We assumed the customer had already used up a £1,000 planned overdraft facility, and included all additional daily or monthly charges that applied as a result of the emergency borrowing. We did not include charges for the planned overdraft, interest, or charges that relate to specific account usage, such as paid or unpaid item charges.

* Exact comparisons for the banks are as follows: Santander is 7.45 times more expensive, TSB is over 6.7 times more costly. HSBC and First Direct are 6.25 times higher. RBS and Natwest are 6 times higher. Yorkshire Bank and Clydesdale Bank were all five times more expensive.

* Santander charges will no longer apply to its paid current accounts from 10th July 2018, although this will not apply to other Santander accounts.

  * Overall, Which? looked at the following bank accounts: Bank of Scotland (Classic), Lloyds Bank (Classic), Lloyds Bank (Club Lloyds), Halifax (Reward), Danske Bank (Choice), Barclays (Bank Account), Nationwide BS (FlexDirect), Clydesdale Bank (Current Account Plus), Clydesdale Bank (B Current), Yorkshire Bank (B Current), Yorkshire Bank (Current Account Plus) Co-Operative Bank (Current Account Plus), Co-Operative Bank (Standard), Smile (Current Account), First Direct (1st Account), HSBC (Bank Account), TSB (Classic Plus), Natwest (Select), Royal Bank of Scotland (Select), Santander (123 Account).

May 2016: The CMA proposes requiring banks to set a monthly maximum charge for unarranged overdrafts on personal current accounts. Customers may not even be aware of when they go into unarranged overdraft or realise the costs they are incurring, so the CMA also wants banks to alert people when they are going into unarranged overdraft, and give them time to avoid the charges.

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