What are the new 'fairer' overdraft charges?

YESTERDAY, the Government announced a new voluntary code intended to make unarranged overdrafts fairer: will it work?

All of the UK's major banks have signed up to the code.

That's Barclays, HSBC, Lloyds Banking Group (which includes HBOS), RBS (including Natwest) and Santander.

Altogether these High Street giants own 85% of the UK's current accounts.

The new rules

Those banks have agreed a £5 to £10 'buffer zone' for unauthorised overdrafts to stop consumers being charged when they've only exceeded the overdraft by a small distance.

It will be up to individual banks to decide exactly how big that buffer will actually be within those confines.

As an indicator though, Lloyds TSB already offer a £10 unauthorised overdraft 'buffer', which they introduced in June 2010.

They've also agreed to give current account customers a phone call, text or email if they're close to going into the red.

That measure will be implemented in March 2012 while the other rules won't come into force until 2013.

The agreement also reaffirms banks' commitment to issuing annual statements to allow customers to see how much the account has actually cost over the course of a year.

Are they any good?

The rules are hardly groundbreaking, many won't be implemented for months or years and, once they do come into effect, the banks have made few solid commitments.

Many of these measures - buffer zones, for example - are already in place at several of the main high street banks, such as Lloyds TSB as mentioned, and are of limited usefulness in any case.

Only a minority of customers making a small card purchase would accidentally go into their overdraft by less than a tenner: incorrect or unexpected direct debits going out of the account are surely more of a problem for occasional overdraft users and those could be much higher.

In addition, there will be no cap on charges - a cap on the number of charges or amount a bank can charge have both been put forward as fairer proposals for consumers who are forced to rely on an overdraft because of severe financial difficulties.

There is little here to help that group.

"Consumers will continue to be hit with high penalties which do not reflect the real costs that companies incur and which put some people into genuine hardship," Mike O'Connor, chief executive of watchdog Consumer Focus, agreed.

He also sounded a note of caution about the Government's decision to bring in a code rather than legislation.

"Unfortunately the history of the credit market and financial services shows that self-regulation rarely works," O'Connor added.

"Government must maintain the prospect of formal regulation if this approach is to have a chance of working."

Improving account switching

The code's rules on switching accounts are similarly uninspiring.

Under the code, banks must complete the current account switching process when a consumer moves to a different provider within seven days.

Banks have also agreed to give consumers a grace period on their overdrafts after they switch current accounts.

The grace period has also not been defined and, again, many banks do this in any case.