Banks urged to cap monthly overdraft charges

Overdraft charges have been criticised by consumer campaigners who say some customers can end up paying more than they would for a payday loan.

The Competition and Markets Authority (CMA), which put forward the proposals, found a wide range of unarranged overdraft fees, with some charging a daily fee of £5 to £10, some charging monthly fees and some also charging interest.

In 2014, £1.2 billion of banks’ revenues came from unarranged overdrafts - which have been described by commentators as a “cash cow” for banks.

According to financial information website Moneyfacts, the average monthly usage fee for an unauthorised overdraft has increased from £43.88 two years ago to £55.69 today.

Under the CMA’s proposals, banks would need to set their own monthly unauthorised overdraft charge cap, which they would have to show clearly. It is hoped that this would encourage banks to compete to drive down the costs, rather than having a single charge cap.

But some experts suggested banks may cut other perks, such as the rewards and interest they offer to customers, to cover the cost of driving down the cap. Others have suggested that if banks are left to set their own caps, there will not be enough pressure on them to drive the costs down.

People may find themselves slipping into an unarranged overdraft when they go over the limit that their bank has pre-arranged with them or when they do not have any pre-arranged overdraft facility. Customers may not even be aware they have gone into an unarranged overdraft - and the CMA wants banks to alert people and give them time to avoid the charges.

Debt charities said many of their clients have some kind of overdraft debt. StepChange Debt charity said that among its clients with any overdraft debt, the average amount owed is £1,725.

In one case StepChange dealt with, a client reported they been forced into an unauthorised overdraft by their bank taking interest and charges - resulting in even more charges. The client was left with no money for food.