Banks urged to scrap unplanned overdraft charges

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Banks urged to scrap unplanned overdraft charges

Author Felicity Anderson

A UK charity has called on banks to scrap unplanned overdraft charges to end the “vicious cycle of borrowing.”

The debt charity StepChange said in its recent report that many UK banks are still charging for unplanned overdrafts, resulting in customers who are, “trapped in a cycle of debt,” reports the BBC.

Claiming that it has evidence of banks failing to help customers who have admitted to being in financial difficulty, the charity has asked for bank reforms to help protect customers unable to afford the repayments on large overdrafts.

“Lenders and regulators must take action to ensure that overdraft lending is affordable, that borrowers in financial difficulty get the right support and that we break the cycle of persistent overdraft debt,” Peter Tatton, head of policy at StepChange, told the BBC.

“Trapped in a cycle of debt”

According to the Financial Conduct Authority (FCA,) 13 million people have been overdrawn over the last 12 months, signalling that overdrafts remain one of the most reached for consumer credit products.

StepChange has said that half of its clients have overdrafts, with each person owing an average of £1,722.

The charity says that these borrowers typically use their overdrafts to pay off household bills, persistently finding themselves in the red at the end of each month and thus remaining in a cycle of debt.

Banks still offering unplanned overdrafts

Last year, the Competition and Markets Authority found that £1.2bn of the banks’ annual revenues came from unauthorised overdraft charges and called for banks to cap their unarranged overdraft fees.

Two major banks have made changes to their overdrafts, altering the amounts charged for planned and unplanned borrowing, in some cases abolishing unplanned borrowing altogether, although there’s still much work to be done.

Banks urged to scrap unplanned overdrafts charges

At the beginning of this month, Lloyds Banking Group, which includes Halifax and Bank of Scotland, abolished its unarranged overdraft fees and overhauled its fee structure for arranged overdrafts.

Moneysavingexpert.com has highlighted changes will see 90% of its customers better off or unaffected, around two million customers, “will be worse off as the new fee structure has made their overdraft more expensive.”

Barclays customers, meanwhile, have not been offered unplanned overdrafts since 2014, although the BBC reports that they can apply for, “emergency lending.”

Many banks still offer unarranged overdrafts, with the Evening Standard reporting that Royal Bank of Scotland, NatWest and Santander still offer unplanned borrowing.

According to the newspaper, Santander charges up to £95 for each month a customer is overdrawn. RBS, NatWest and HSBC cap their charges at £80 a month.

Responsible Lending

StepChange said banks insist on giving customers large overdrafts, despite many borrowers not being in a financial position to afford the repayments.

The BBC highlights an example in the charity’s report, where one of its clients was offered an overdraft of £2,250, even though they were only working part-time and in receipt of benefits.

High street banks, however, have insisted that they are committed to lending responsibly.

“Overdrafts can help customers smooth their cash flow, but if circumstances change or they are struggling with their finances, they should contact their lender straightaway,” a spokesperson for UK Finance told the BBC.

What is the future of Unplanned Overdrafts?

The Financial Conduct Authority is reportedly considering a complete ban on charges for unplanned overdrafts as part of its study into high-cost credit, but it is not due to report it until next year, according to the Evening Standard.

By | 2017-12-07T13:10:54+00:00 December 7th, 2017|Banking, Personal Finance|0 Comments

About the Author:

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Felicity is a passionate advocate of simple living. Based in Scotland she was once a crime reporter, before moving on to obtain her degree in History. Felicity now focuses on business and financial journalism.

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