High-cost credit: Overdrafts. Citizens Advice response to CP18/13
The arranged and unarranged overdraft markets work badly for consumers. There is a lack of competition in the arranged overdraft market which means consumers pay over the odds for the product. A lack of competition and consumer engagement means arranged overdraft users could gain considerably from switching. The nature of unarranged overdrafts, the incentives on banks to lend, and the conduct of lenders mean people can too easily get stuck in persistent debt and pay a high price for a product which badly serves their needs.
The unarranged overdraft market is worse still. The relationship consumers have with a product they don’t plan, and normally don’t mean, to use means that there is barely a market for unarranged overdrafts. That means consumers pay a very high price and banks have strong incentives to let them continue to use the product in ways that lead to consumer detriment.
The FCA have build on the work of the CMA - and over a decade of work before that - that highlights how badly overdraft markets function. The remedies set out in this consultation paper will go some way to addressing that detriment. But, crucially, the remedies consulted on will do very little. The FCA should act as soon as possible to protect consumers from the very high prices in both overdraft markets by introducing limits to what consumers can pay by:
Banning the use of fixed fees. Fixed fees lead to overdraft users, particularly frequent unarranged overdraft users paying a very high price for low levels of borrowing.
A single interest rate on each account, which should be advertised using a representative APR. The complexity of overdraft fees means they are difficult to compare and interpret discouraging shopping around and making staying on top of costs harder than it needs to be.
The interest rate should be aligned between arranged and unarranged overdrafts. The FCA’s proposal to align the costs of arranged and unarranged overdrafts would mark a significant improvement for consumers - and would form an important part of the process of ensuring that overdrafts are used as intended, rather than as a long-term source of credit.
A backstop price cap. A backstop price cap should be used to build on the CMA’s monthly maximum charge. An FCA enforced cap would limit the possibility of unintended consequences of the alignment of charges.
The competition and information remedies set out in Section 3 in the report are largely positive and will help at the margins but are not proportionate to the level of harm identified in the FCA’s own research or the CMA’s market investigation.