MPs hint at industry-wide cap on overdraft fees
MEMBERS of the Treasury Committee have condemned the complexity of overdraft charges imposed by banks, with at least one member calling for an industry-wide cap.
Their remarks come after the Committee requested 12 banks to write to them with details on their overdraft fees.
Given the diverse complexity of charges revealed by the banks' responses, chair Andrew Tyrie said, "Some customers are being charged very high rates for using their overdrafts, both arranged and unarranged."
He went on to criticise the remedies proposed by the Competition and Markets Authority (CMA) in their report into retail banking from August, stating that they "don't appear robust enough to deal with this serious problem."
His comments come as part of the Committee's inquiry into the results of this report, and while they're unambiguously critical, their importance all depends on whether they can convince the Financial Conduct Authority (FCA) to actually implement more stringent measures than those advocated by the CMA.
A dizzying array
One economics professor, Diane Coyle, said that, with the report, a "once in a generation opportunity to fix a really important and dysfunctional market looks like it is being squandered".
Similarly, Paul Lynam, the chief executive at Secure Trust Bank, argued that "the CMA has proposed no remedies to address" the unfair regulation in the banking industry. In particular, they have failed to propose a remedy to the "disproportionate capital requirements" that put bigger banks at a distinct advantage over their smaller competitors.
On the basis of such testimony, the Treasury Committee wrote to 12 banks on July 7th, asking them to outline their overdraft charges as fully as possible.
The replies of these 12, published for the first time on Tuesday, present a dizzying array of different charges and fees.
Barclays, for one, charge 75p per day for overdrafts up to £1,000, £1.50 per day for overdrafts between £1,000 and £2,000, and £3 per day for overdrafts in excess of £2,000.
HSBC, by contrast, ask for a fixed £5 for each day their customers are in overdraft.
On their own, such details don't appear too complicated, yet when the replies of every bank are read as a whole, it becomes apparent that almost all of them structure their fees in very different ways.
And because most of them do use such different structures, they become very difficult to compare and contrast in any clear and meaningful way.
Several banks charge interest instead of, or as well as, these fixed fees.
RBS, for example, charge a monthly £6 usage fee - but they also charge an Equivalent Annual Rate (EAR) of interest on overdrafts each month, which can vary from 14.89% to 19.89% depending on the type of account a customer has.
Lloyds, meanwhile, demand both interest and daily fees, which also vary according to the kind of account a customer has with them. With a Classic Account, for instance, customers will have to pay a monthly rate of 1.53%, whereas a Premier Club Lloyds Account offers a lower rate of 1.20%.
It's because of the sprawling diversity of such charges and rates that the Treasury Committee have singled out overdraft policies for being too difficult for most people to understand.
Yet Mr Tyrie, the chair of the committee, also said they were often too expensive, noting that "some customers are being charged very high rates for using their overdrafts, both arranged and unarranged".
For example, the maximum possible yearly fee for having an overdraft of more than £2,000 with Barclays is £1,095.
To take another bank, TSB don't have any kind of cap on fees for authorised overdrafts. Rather, they continue adding interest indefinitely onto the overdrawn amount until it has been repaid, meaning that it could end up being very, very high.
Worse still, they're not entirely clear on what this interest rate is or will be, neither in their response to the Treasury Committee nor in their banking charges guide.
As such, the very idea that most customers could arrive at a clear indication of what they're likely to be charged for an overdraft is more than a little questionable.
This obscurity regarding overdraft charges is ultimately why the Treasury Committee have criticised bank pricing for being far too complex. It's also why they've criticised the CMA's solution to this complexity for not being robust enough.
In particular, the CMA had proposed that banks set their own monthly maximum charge on unauthorised overdrafts.
In light of the fact that many banks already do this regarding unauthorised overdrafts, it's unlikely that such a proposal will do much to reduce the intimidating complexity of retail banking.
Furthermore, as one of the biggest problems the Treasury Committee have with overdraft fees is that they're confusingly varied and different, allowing banks to set their own caps separately will do nothing to reduce the underlying variation.
Recognising the insufficiency of individual maximum fees, Committee member Rachel Reeves MP called on the FCA to impose an industry-wide cap on monthly overdraft fees.
"The ball is now firmly in the FCA's court. It must step up to the challenge and take necessary action, for example by imposing a monthly maximum charge on overdrafts, to ensure that those who are most financially vulnerable are protected."
The FCA and the CMA
Whether this will actually motivate the FCA to act is another matter entirely. However, FCA chief executive Andrew Bailey has recently affirmed that they're considering the possibility that something tougher than the CMA's proposals are needed.
Speaking to the Treasury Committee in July, he'd remarked, "Do we implement [the CMA's] recommendations or do we bring some other things to play?"
Since the FCA are the body responsible for putting the CMA's and the Treasury Committee's recommendations into force, such comments raise some hope that the disappointment of the CMA's report may be overcome.
Still, there's a possibility that the FCA may give more weight to the CMA's recommendations rather than the Treasury Committee's.
This is because when the CMA's two-year investigation began in 2014, it was in conjunction with the FCA. The two bodies worked together in the initial stages of the investigation - which suggest that the FCA may be more aligned with the views of the CMA than those of the Treasury Committee.
They may end up simply giving more weight to the CMA's report, if only because more time and more consultation went into its making.
That said, it is at least encouraging that they're reviewing the report's findings, since it demonstrates a recognition on their part that overdraft charges are too high and opaque.
Then again, the CMA also recognised this, yet they ended up only recommending what some banks are doing already.