British bank account holders are getting poor value for their money from overdraft facilities offered to them, particularly if they pass into arrears, the Financial Conduct Authority has said.
Research conducted by the City regulator found that a large percentage of current account users had often been perplexed by the charges being placed on their accounts, and worryingly regarded overdrafts as an add-on to their income rather than additional borrowing due that should be paid back in a regulated manner, such as with alternate credit related loans.
It is estimated that as of July last year, a total of £8 billion was owed to banks and building societies from overdraft debt, of which around 90% was authorised and pre-arranged.
However, the FCA argued that whilst the majority of overdraft debt is authorised and thus charged at a lower rate that nevertheless the problem lies with the mentality that consumers tend to adopt toward overdrafts, with many simple utilising it as an extension to their income rather than seeking to repay it and take steps to avoid passing into it again.
They highlighted that many people simply place their income into their account to clear the overdraft debt and are then subsequently required to spend it again the next month, rather than paying it off in a regulated manner such as with a credit card.
And the city regulator has now issued a warning to the countryís banks and building societies that they could be hit with new regulations on overdraft charges, after it was also revealed in their research that many had been profiteering from their customerís lack of clarity on how overdrafts work, there associated costs and how they should be addressed
Currently, there are around 61 million current accounts being held in Britain, of which over half have an overdraft attached to them. The FCA estimated that in 2011 alone, financial organisations acquired an astonishing £1.7 billion from peopleís overdraft costs, which comprised a third of the total current account revenue in that year.
Christopher Woolard, director of policy, risk and research, at the FCA, pledged to do all he can in order to make the overdraft facility better for customers, saying: “Just about everybody who banks can have access to some sort of overdraft facility ñ whether they’ve signed up for it or not.
“The sheer size of this market is huge and with overdrafts bolted on to more than 30m UK current accounts; we want to make sure it is working well for consumers.”
ëComplex and opaqueí
Alongside their criticism of the manner in which overdrafts are marketed, the FCA also hit out at the hidden charges that come along with many of the facilities, branding them ëcomplex and opaqueí.
The FCA argued that “even the most astute consumer could struggle to understand what they are paying for” with an unarranged overdraft.
A lack of competition in the market and low switching levels were the factors given for why banks have persisted in giving users poor value for money with their overdrafts, and the FCA have encouraged people to utilise the new ëswitch guarantee schemeí that enables bank account holders to switch to a more competitive supplier within 7 days and necessitates that the existing provider transfer over all payments as well.
However, the British Bankersí Association defended their overdraft facilities, arguing that they still represent good value for a number of people in different situations.
“Millions of people find overdrafts are an easy way to borrow money, more flexible and convenient than taking out a loan,” said Eric Leenders, the BBA’s executive director in charge of retail.
“Anyone who uses this type of borrowing receives details of how much they are charged in their accounts statements.”
The issue of overdraft costs has been heavily scrutinised in the past few years, with it being the centre of a heated court case between bank account suppliers and the Office of Fair Trading over four years ago.
The case was won by the banks though the after effects of media spotlight has been that charges have been more intensely scrutinised due to higher public awareness of their nature.
And over four years later it is appears that the deficiencies in the overdraft system remain, though the FCA will likely be more ruthless in their pursuit of reforming the industry, which will be welcome news for consumers across the UK.