Should the Competition and Markets Authority do more to tackle problems with overdrafts?
By Joseph Surtees, Senior Public Policy Advocate
This morning, the Competition and Markets Authority (CMA) published its provisional decision on remedies to tackle problems in the personal current account market.
Among other things, its report looks at the problems faced by people with unarranged overdrafts, including fees and charges.
The CMA is suggesting new protections for overdraft users, including:
· Banks alerting people when they are going into unarranged overdraft, and give them time to avoid the charges (a ‘grace period’)
· Requiring banks to set a monthly maximum charge for unarranged overdrafts on personal current accounts
These remedies are welcome and necessary. However, we think they’ll not by themselves do enough for the millions of overdraft users who are in entrenched financial difficulty.
Across the UK four million people are regularly using credit to meet everyday living costs and the costs of emergencies. Of these four million, 41% are using their overdrafts as a safety net, as a way to keep their head above water, at least for now.
Banks need to be actively identifying where people are struggling and provide a route for them to begin to pay down their overdrafts in an affordable way. An extended breathing space guarantee would protect people from interest, charges and enforcement while they take debt advice.
If there is a monthly maximum charge for unarranged overdrafts charges, it needs to be set with reference to an independent benchmark to effect any real change, and not by the banks themselves.
For a huge number of families using their overdraft is unsustainable. While lower than for high cost credit, a high proportion of people who rely on overdrafts as part of their coping strategy fall into severe problem debt or moderate financial difficulty.
Those are the families we see every day. Over half of our clients have an overdraft debt. On average, they owe £1,725 to their overdraft provider. Three quarters of our clients have already used overdrafts just to try and keep up with their essential costs.
The CMA have called on the Financial Conduct Authority (FCA) to look at further measures to help people take control of overdrafts, avoid charges, switch more easily to another account.
Along with the FCA’s ongoing credit card market review, there’s a real opportunity here to give people in severe financial difficulties better options to deal with two of the debt types we see most often.