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Overdraft charges back on the regulatory agenda

Spotlight back on overdraft charges

The issue of bank overdraft charges resurfaced recently when Andrew Tyrie, Chairman of the Treasury Select Committee, wrote to the Chief Executives of 13 retail banks asking for information about overdraft charges for personal banking accounts. Mr Tyrie has asked the banks to confirm:

  • their daily charge and cap for authorised overdrafts
  • other costs incurred by customers using an unarranged overdraft; and
  • actions banks take when customers enter into an unarranged overdraft. Mr Tyrie says the bank's responses will be published.

The topic was raised in May this year when the Competition & Markets Authority (CMA) published its Provisional Decision on Remedies following a review of retail banking. The CMA proposed ways of tackling issues restricting competition in personal current accounts and banking services for small and medium-sized enterprises. In its press release, the CMA described bank charges and fees as complicated and lacking transparency, causing difficulty for customers to know if they are getting good value. As a result, the CMA said there is a lack of impetus for customers to move their banking services or for banks to review pricing structures or the quality of their offering. The CMA's overarching view is that banks need to work harder for their customers. 

The CMA focused its attention on overdraft charges and unarranged overdrafts in particular. The CMA found that overdraft charging structures are particularly complex and that overdraft users show limited awareness of their overdraft usage, including when they entered an unarranged overdraft. At the same time, the CMA pointed out that banks generate significant revenue through unarranged overdraft charges.

Among other measures, the CMA called for banks to address these charges by setting a monthly maximum charge on personal current accounts and to warn customers when they are entering an unarranged overdraft so they can avoid incurring charges.

The consumer watchdog Which? has criticised the CMA's solution to cap unarranged overdraft charges, citing that banks already impose caps on charges and it does little to address the overall level of fees. Which? instead insisted banks should apply the same level of charges as authorised overdrafts. Which? also criticised the disproportionality between overdraft charges applied by high street banks compared to the charges pay day lenders are permitted to charge under FCA rules (introduced last year to protect consumers from excessive fees). They thereforecalled on the regulator to impose similar protection in the context of overdraft charges.

Although the FCA has raised similar issues regarding overdrafts over the past few years in published research findings, a proactive review undertaken by the FCA to the same standard of scrutiny as pay day lenders is yet to be seen.

What does this mean for lenders?

The fair treatment of customers remains a core part of the regulatory agenda.  The increased scrutiny of overdraft arrangements suggests there may remain issues of inconsistency and inequality of treatment which have yet to be addressed.

A prudent and proactive response to these issues would be to conduct a targeted, sample-based review of overdraft charging structures to ensure they meet current regulatory standards.  If any areas of weakness are identified then it may also be worthwhile reviewing a historical sample of data to confirm there is no systemic risk and to inform any future remediation response.

TLT has extensive expertise of conducting these types of reviews and supporting financial clients in implementing meaningful remediation programmes. If you would like to discuss these matters further or hear more about our expertise then please contact Jake McQuitty or Emily Benson.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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