Time for a cap: MP calls for more to be done on overdraft charges

By Rachel Reeves, Labour MP for Leeds West and a member of the Treasury Select Committee

To coincide with the release of our research on the impact of unarranged overdraft fees on those in problem debt, Rachel Reeves MP shares her thoughts on how to address the problems with overdrafts.

This summer, the Competition and Markets Authority published their report into competition in retail banking. One of the major issues, and one of huge concern to me, is the extortionate fees charged by banks on unauthorised overdrafts. In my opinion, the proposals in the CMA report failed to go nearly far enough to protect those financially vulnerable customers who are hit by such charges. The CMA report proposed a maximum monthly charge that could be charged by the banks on this type of lending — but to be set by the banks at a level of their choosing. Most of the banks already set some form of cap while hitting customers hard, so this looks to me like it will be “business as usual”.

Now this survey from StepChange Debt Charity reinforces exactly why more must be done to stop these excessive charges on people who are already struggling. From these results, it’s clear that those who are struggling with debt are using their overdrafts to keep up — with those taking part in the survey using overdrafts on average 11 months out of 12. And of these people, for just under half the year, these same people are going into unauthorised overdrafts — and are being charged on average an extra £225 a year for doing so. These are people who are already in difficulty, trying to manage debt day to day, and for whom the banks should have a responsibility to help manage their finances, and to help them out of the cycle of debt, rather than pushing them deeper into crisis with extortionate charges.

The proposals in the CMA Report might make small steps towards helping some — other proposals meant requiring banks to increase alerts and grace periods for those who are about to go over their overdraft limit. But for the majority of these people, who are already struggling and do not have the means to prevent unauthorised overdrafts even if they are alerted to them, these proposals do nothing to help. Critically, the proposed monthly maximum cap will likely do nothing to stop the deepening of a person’s debt crisis, with punitive and disproportionate charges. We need a proper effective cap, set by and enforced by the regulator, for it to have any impact on helping — rather than worsening — the situation for those people most in need.

That’s why I am calling on the Financial Conduct Authority to take action. I am urging the FCA to look at setting a cap for banks on unauthorised overdrafts as has been done for payday lenders. A recent study from Which? showed that the cost of borrowing £100 from some banks for 28 days amounted to as much as £90 in charges, compared with the maximum £22.40 on a payday loan. The FCA must look at this lending in exactly the same way and not shy away from setting a cap for banks too.

The CMA report simply did not go far enough to help those who are most financially vulnerable. The FCA must now step up to the challenge. And in the meantime, I will continue to raise this issue in Parliament and work with organisations such as StepChange Debt Charity to bring about the changes that are needed.

Want to read more on this subject? Find out why our Chief Executive believes the “FCA needs to urgently look at how to reduce the role of overdrafts in problem debt”