(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 for 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 , , , , , , , , , , Sir
and present the Bill.
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).
