By Mark Fairlie
Following shadow chancellor John McDonnell’s pledge to limit the amount levied by credit card companies on interest payments last September, the Labour Party have announced a similar policy on bank overdraft fees and interest charges if elected.
According to the party’s press release, people trapped in “persistent overdrafts” will save consumers £233m a year collectively, equivalent to £86 per person per year, as a result of the policy. The party asserts that “revenues from overdraft lending, both arranged and unarranged and including fees for unpaid items, are currently around £2bn a year”
The policy is targeted towards helping those bank customers “where high fees and low wages prevent (them from) ever dragging themselves fully back into the black through no fault of their own”. The party quoted unnamed surveys which state that nearly 3 million people use their overdrafts regularly to pay for “essentials” including food and household bills.
Labour is proposing to extend the lending cap under which payday loan providers and short-term loan companies operate to the High Street banks.
These regulations, imposed and policed by the Financial Conduct Authority, cap the daily interest rate to 0.8% – equivalent to £24 per month for every £100 borrowed. In addition, lenders may not charge more in interest and fees than the amount borrowed – so for every £100 a customer takes out, they must pay no more than £100 in interest and fees.
Bank overdrafts have long been controversial. CashLady, one of the country’s largest credit brokers, cautioned against their use in an article from July 2017.
Commenting on unauthorised overdraft charges, when a consumer spends over and above their agreed limit, the company stated that
“If you spend a month in unauthorised overdraft with your bank, you’ll pay a lot more. That can be as high as £90 with RBS, according to Which? One last word of caution – unlike bank loans which have a defined end date, overdrafts can be withdrawn immediately without notice. If a person is living in their overdraft and that happens, the effects on their finances can be awful.”
Reaction to the announcement
Included in the press release from the party was support and reaction from Michael Sheen, the actor and founder of the End High Cost Credit Alliance.
Mr Sheen stated that current rates of interest charged by “reputable” banks are “extortionate” and that regulators need to make sure that financial service providers “deliver a fairer deal” for those people caught in the “low paid debt trap”.
Speaking to the Daily Mirror, traditionally a supporter of the Labour Party, Damon Gibbons, director of the Centre for Responsible Credit, called the current financial services provision “a failing model” designed to deliver “significant” profits from the poorest in society. He called the announcement an “important step towards ending the debt crisis”.
Banks claim that they have been dropping their overdraft charges in recent years and that they are not exploiting a vulnerable section of its customer base for greater profit.
However, in the view of Financial Conduct Authority, the banks do not appear to be acting with a commensurate level of urgency given the scale of the problem campaigners claim. Last October, as reported in Moneyfacts, the Authority proposed charges to the way that overdrafts are charged “because of the risks they pose to potentially vulnerable customers”.