High-interest overdrafts will hit consumers harder than payday loans

If there’s one thing that unites this bitterly divided country, it is the view of the banks as complete and utter (insert chosen offensive expletive from Roger’s Profanisaurus). Of late, they’ve been living up to that with bells on.

It has emerged that HSBC is going to impose the usurious overdraft rate of 40 per cent from March 2020, quadrupling the interest paid by some of its customers. This follows a decision by the Nationwide Building Society to charge a similar rate. With these two having taken the plunge, the others are expected to follow suit.

The background to this is the announcement of a crackdown on the “dysfunctional overdraft market” by the Financial Conduct Authority in June.

The watchdog said that banks and building societies made over £2.4bn from this type of lending in 2017. Around 30 per cent of the total came from unarranged overdrafts, which are also sometimes known as “unauthorised” overdrafts.

The fees imposed on customers going overdrawn through these could be ruinous. Some people were left paying more than 10 times what they would have shelled out had they instead taken out a payday loan.

The regulator also found that banks generated more than half their unarranged overdraft fees from just 1.5 per cent of customers. Surprise surprise, they disproportionately came from deprived areas.

In an attempt to fix the problem, the FCA said it would ban banks and building societies from charging higher prices for unarranged overdrafts, bring an end to the fixed fees they levied on top of interest charges, and require that they instead impose a simple annual interest rate advertised by means of an APR so customers could make comparisons.

“The biggest shake-up to the overdraft market for a generation” is how it was described and, even though the phrase “better late than never” sprang to mind (the charges have been causing controversy for years), that wasn’t hype.

Trouble is, with its intervention the FCA shot what was, for the banks, a golden goose. There was always a risk that its decision to act on behalf of one group of horribly treated customers would prompt them to recoup their loses from another. This is what appears to be happening.

For the record, HSBC insists that seven in 10 overdraft users will still be either better or no worse off despite the eye-popping rate.

The bank currently charges between 9.9 per cent and 19.9 per cent on overdraft debt, but also imposes other fixed daily fees such as a £5 charge for entering an unarranged overdraft. These will be scrapped. It will introduce a £25 interest-free buffer on some accounts.

But even with that, it’s still giving with one hand and taking away with the other. Banks are rather like governments in that respect. It’s rather appropriate that the UK government still majority owns one of them (RBS).

The FCA recognised that this could happen when it moved on the market, but argues that the net effect will be beneficial to consumers. The fact that the banks were hitting disadvantaged ones harder than payday lenders alone justifies the decision to take action.

It’s now hoping competition will work its magic on the market by serving to reduce the announced interest rates over time. And it might. The so-called “challenger” banks, including Virgin, TSB, Metro Bank, have been having a tough time of it late.

They could seek to differentiate themselves through cheaper overdrafts. Their investors would have to accept lower margins but they might judge it to be a price worth paying for the extra custom.

Perhaps one or another of the big ones could break ranks and seek to steal a march on their rivals.

And if not? Well, the rates of the first two movers are virtually indistinguishable. They’re not just in the same ball park. They’re in the same seat.

If they all end up on top of each other, it might justify a look from another regulator in the form of the Competition and Markets Authority.