Banks ‘charging too much for overdrafts’

Banks and building societies are still charging consumers too much for overdrafts.

Research carried out by the Financial Conduct Authority (FCA) stated the facilities were not providing customers with good value for money, while many borrowers were confused about charges. Figures showed over 30 million current accounts in the UK have the measures bolted on to them.

The regulator found the process of dipping into an overdraft can become almost habitual, with many people not giving much thought to interest levels or the amount of fees they will have to pay. Furthermore, with consumers not considering the facilities when deciding which bank account to choose, financial institutions are not under any sort of pressure to develop agreements which are of good value.

According to its study, the FCA found many customers are unsure about what unarranged overdrafts actually are, while some even view them as an extension of their income. The report stated their presentation as 'available funds' contributes greatly to this.

In addition, consumers were more likely to make repayments based on the amount of money they have coming in, rather than wanting to make set instalments to clear off an outstanding balance. Meanwhile, some financial institutions may be given incentives by management to raise more revenue by increasing overdraft levels. This is perceived by most people as a sign their bank trusts them.

The regulator did acknowledge lenders have gone some way to improve their overdraft services, mentioning recent measures agreed by the industry, the Office of Fair Trading and the government to provide text alerts for clients. Although the FCA stated this was helping the situation, it claimed unarranged facilities still carried high charges and their terms and conditions were so complex that many customers struggled to understand what they were paying for.

Christopher Woolard, director of policy, risk and research at the organisation, stated it would investigate how banks and building societies set and monitor their overdraft limits and their governance for doing so. It will also consider making some voluntary measures compulsory in the autumn.

By James Francis