Ripoff overdrafts costing seven times more than payday loans must be banned, says Which?

Eighty-four MPs are backing calls to put an end to 'exorbitant' fees on unarranged borrowing

Ben Chapman
Wednesday 23 May 2018 10:25 BST
Thirteen of 16 banks' unarranged overdrafts are more expensive than a payday loan, and “considerably more” in several cases, Which? found
Thirteen of 16 banks' unarranged overdrafts are more expensive than a payday loan, and “considerably more” in several cases, Which? found (Shutterstock)

Banks are still ripping off their customers with overdrafts that are several times more expensive than payday loans, the consumer group Which? has said.

Which?, along with 84 MPs, is demanding that the Financial Conduct Authority (FCA) takes urgent action to restrict the “exorbitant” fees.

The consumer champion said banks have still not done enough to protect consumers, two years after it highlighted the practice of charging sky-high fees for unarranged overdrafts.

Which? compared the cost of borrowing £100 for 30 days on an unarranged overdraft across 16 high street banks with borrowing the same amount for the same length of time through a payday loan.

Overall, 13 of the banks investigated charged more than a payday loan company, and “considerably more” in several cases.

The FCA has capped payday loan charges and interest at the equivalent of £24 for £100 of borrowing over 30 days, but it has failed to act on overdrafts, which can be significantly more expensive. The regulator has previously pledged to tackle the problem, but has delayed consulting on interventions, meaning consumers still face hefty fees.

Which? found Santander to be the worst offender. It costs £179 to borrow £100 for 30 days through an unarranged overdraft with the bank; more than seven times higher than the cost of a payday loan for the same amount.

TSB is more than 6.5 times more costly at £160, followed by HSBC and First Direct – more than six times higher, at £150. RBS and Natwest charge £144, while Smile, Co-operative Bank, Yorkshire Bank and Clydesdale Bank are all five times pricier at £120.

Santander has now committed to remove the charges by July this year and Lloyds has already got rid of its unarranged overdraft fees.

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 failed to stop most banks from charging sky-high rates.

Gareth Shaw, Which? money expert, said it was "alarming" that most banks were still allowed to charge such high amounts.

"These extortionate fees can cost thousands of pounds a year, hitting those who can afford it the least," he said.

“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.”

Peter Tutton, head of policy at StepChange debt charity, said overdrafts were the second most common type of debt that his organisation deals with.

"They are meant to be short-term, but our evidence shows that they can all too easily trap people in expensive and long-term cycles of persistent debt.

“Fundamental reform is needed. There has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges.

"We know that there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon."

Last year, StepChange found that 2.1 million people in the UK spent the whole of 2016 in their overdraft, often racking up large amounts of fees and interest.

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