Unauthorised Overdrafts (Cost of Credit)

1st reading: House of Commons
Tuesday 25th April 2017 Commons Chamber

Motion for leave to bring in a Bill (Standing Order No. 23)

12:52

[Rachel Reeves (Leeds West) (Lab)]

I beg to move,

That leave be given to bring in a Bill to require the Financial Conduct Authority to make rules restricting the cost of credit for unauthorised overdrafts on bank accounts in certain circumstances; and for connected purposes.

I want to begin by urging all parties to include in their election manifestos a commitment to capping charges on unauthorised overdrafts. Following the great work by my hon. Friend the Member for Walthamstow (Stella Creasy), huge progress has been made on the charges faced by people who access finance through payday loans, with the introduction of a cap. Mandated by the Financial Services (Banking Reform) Act 2013, the Financial Conduct Authority has introduced a cap set at £24 a month for anyone borrowing £100 for 30 days. Millions of people are struggling with spiralling debts and overdrafts. They deserve to be protected from excessive charges and rip-off practices that only make their situations worse. We have seen from the payday loan cap that this can be achieved. Legislation would allow the FCA to implement a cap without delay or the risk of the banks taking the matter to the courts.

Imagine, Mr Speaker, that you are £200 overdrawn. It is not great, but as you have an overdraft arrangement with your bank that allows you to go £200 overdrawn without incurring charges, it will not cost you anything except for the interest. Then, imagine that a direct debit goes through and puts you into your unarranged overdraft. Unless you can quickly pay money into your account during any grace period, you will quickly start to rack up charges. Going as little as 10p overdrawn can mean charges of £5 a day from high street banks.

Research published in February by Which? found that consumers needing to borrow as little as £100 could be charged up to seven times more, or £156, by some major high street banks than the Financial Conduct Authority allows payday loan companies to charge when lending the same amount over the same period. Because bank overdraft charges apply to monthly billing periods, not the number of days that money is borrowed for, consumers who need £100 could pay up to £180 in fees if they borrow over two calendar months from their high street bank in the form of an unauthorised overdraft. The same applies if they go just a few pence over the overdraft limit. These charges are totally disproportionate to the offence committed.

Last year banks made £1.2 billion from charges on unauthorised overdrafts, mostly from financially vulnerable customers. These are customers who banks should be helping, not pushing further into the red. These are customers who the Competition and Markets Authority has labelled in its report a “captive audience” for the banks and their “uncomfortably high” charges. The CMA has described unauthorised overdraft charges as

“the biggest single problem in the personal banking market”.

Action needs to be taken.

StepChange Debt Charity estimates that 1.7 million people in the UK are trapped in an overdraft cycle and consistently use overdrafts to meet essential and emergency costs. Too many vulnerable customers who are already struggling regularly have to go into an overdraft or over an overdraft limit, which can exacerbate their financial difficulties. Many hard-working families live constantly on their overdrafts, and those in chronic financial difficulties face impossible choices between meeting the costs of essential bills and going further overdrawn or over their overdraft limit. As fees and interest build up over time, these families find it increasingly hard to get out of their debt.

Last year StepChange surveyed its clients with overdraft debt to explore their experiences of overdraft charges. It found that people with overdraft debt who contact the charity regularly go over their overdraft limit. Almost two thirds—62%—of the people StepChange helps with overdraft debt regularly exceed their overdraft limit as they struggle to make ends meet, and on average they did so in five of the past 12 months. These borrowers face average charges of £45 a month for slipping into unauthorised overdrafts, which adds up to a massive £225 a year of unauthorised overdraft charges, and for many the charges are much higher.

StepChange has told me of two cases of vulnerable customers being unfairly pushed into debt spirals by the decisions of banks. The first is of a 42-year-old man who racked up overdraft charges after losing his job. Interest on his overdraft and persistent charges for going over his limit meant that, on average, £80 a month was added to his debt. Over a year, his overdraft debt increased by more than £1,000 because of interest and unauthorised overdraft charges. The second case is of a 38-year-old woman who faced spiralling overdraft debt after getting divorced. The increased burden of managing financial commitments on her own meant that she slipped into an unplanned overdraft by just £90. That led to a cycle in which she was consistently in and out of an unauthorised overdraft, which increased to £1,000 due to interest and charges. Those people, like so many others, were already in difficulty and trying to manage their debt from day to day.

Overdrafts are among the most widely used credit products in the market and form part of a worrying trend in our economy. Our savings ratio as a nation is now at a record low of 3.3%. Our household debt-to-income ratio is at 145%, up 6% in the past year. Unsecured debt has grown by 10% in just 12 months. I am worried about the sustainability of our personal finances and about a consumer demand too heavily reliant on debt and personal borrowing. The Government need to do more to ensure that our economy is not built on the shallow foundations of debt and overdrafts, but instead on investment and secure, decently paid jobs. Rising debt is symptomatic of a wider problem in our economy, which is reflected in growth levels and rising inequality. We need an economy that works for the many and not just the few, and a banking system that does the same.

Last year the Competition and Markets Authority published a review, which disappointingly fell short of proposing an independently set maximum cap on the charges on overdrafts, as we have with payday loans. Instead, the report said that banks will be required to set their own ceilings on their unauthorised overdraft charges, in the form of a monthly maximum charge. However, most banks already have that—it might be £5 a day or £90 a month. The problem is not that there is not a voluntary cap; the problem is that we need a lower cap, set by the regulators and not individually by the banks. The monthly maximum cap proposed by the CMA will do absolutely nothing to stop the deepening of a person’s debt crisis. Banks should be passing on the low bank rate to their customers, not punishing them with disproportionate charges.

Competition in this section of the market in personal banking is weak, and in the past few years it has become weaker still as a result of the merger of many high street banks. The recent troubles at the Co-operative Bank, which has lower charges than many others, could reduce competition further. As the CMA’s review found, heavy unauthorised overdraft users are the least likely to switch bank accounts. Given the substantial revenues that unauthorised overdrafts generate for the banks, there is little financial incentive for them to lower their charges. I do not want to deny the banks the right to charge for the services that they provide, but what I am calling for is some fairness and proportionality. There are simply no great offers among the high street banks for financially vulnerable customers; in fact, the exact opposite is the case.

Most of us regard banks as more reputable and fair than payday lenders, so it is a bitter irony that it is a better deal for some people who need short-term credit to go to payday lenders rather than their high street banks. Banks need to improve their behaviour, and I urge them to step in and protect their customers. After the CMA effectively passed the buck to the Financial Conduct Authority, the FCA made the welcome decision to include this issue in its ongoing—and welcome—review of high-cost short-term credit, which will report later this year, but in order to take action, the FCA would benefit from a mandate from Parliament.

I urge the Government to support the Bill and make those changes a reality, to help the customers who are being ripped off by their banks. This cannot continue.

Question put and agreed to.

Ordered,

That Rachel Reeves, Stella Creasy, Wes Streeting, Helen Goodman, John Mann, Yvonne Fovargue, Chris Evans, Gloria De Piero, Stephen Hammond, Chris Philp, Sir David Amess and George Kerevan present the Bill.

Rachel Reeves accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 12 May and to be printed (Bill 172).