Hard up
Campaigner Mick McAteer assesses whether the FCA’s proposals for the overdraft market are strong enough.
The way financially vulnerable consumers have been exploited by unjustifiable, unfair and unarranged overdraft charges is an area of great concern. It may not be in the same league as other scandals, in terms of the numbers affected and aggregate financial harm, but the nature of the practices and treatment of vulnerable consumers stands out.
The regulator estimates that, in 2017, current account providers made over £2.4bn from overdrafts alone, with around 30%, or £720m, from unarranged overdrafts. More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016. This implies that these vulnerable customers paid on average £533 in a year on unarranged overdraft charges.
The evidence of harm is well documented in the analysis that accompanies the FCA’s consultation paper CP18/13. Some of the findings are quite shocking.
- People in the most deprived areas are 70% more likely to have to use an unarranged overdraft than those in the least deprived areas; they tend to be from Black, Asian and minority ethnic (BAME) communities and more likely to be financially vulnerable due to poor health or disability.
- Those living in the most deprived areas are paying up to twice as much in charges and fees as those living in less deprived areas.
- Banks made 10 times as much (per £ lent) from unarranged overdrafts as from arranged overdrafts. The FCA observed firms using unarranged overdraft fees to fund other parts of the current account business – in other words, vulnerable customers were cross-subsidising better-off customers in this market.
- Historically, banks justified higher charges on the grounds that unarranged overdrafts were more expensive to operate. But, the FCA acknowledged that, with technology, such different levels of fees on arranged and unarranged overdrafts are no longer justified.
The charge is that banks have been exploiting the vulnerability of certain groups who are, in effect, a captive market with few realistic options to take their business elsewhere or qualify for more affordable forms of borrowing. There is a strong argument that this contravenes the fundamental ‘treating customers fairly’ (TCF) principle.
The harm caused here is not a by-product of normal market competition, but an institutionalised form of financial discrimination against vulnerable consumers. Remember what is at stake here. Discrimination faced by many BAME households in other parts of their lives (education, housing and the labour market) means that they are more likely to be financially vulnerable.
Similarly, people affected by ill-health or disability face a higher risk of being financially vulnerable. We don’t like to think we have ‘red-lining’ in the UK, believing it more of a US phenomenon. But the FCA’s own analysis showed that consumers in the most deprived areas of the UK were paying much more than those in the least deprived areas. And we can’t forget the impact of recent social security reforms, including the roll-out of Universal Credit, which have been associated with even worse levels of financial hardship, overindebtedness and arrears.
In response, the FCA has proposed a series of interventions including: a single interest rate for overdrafts; no fixed daily or monthly charges or fee restrictions; and new guidance to reiterate that refused payment fees should ‘reasonably correspond’ to the costs of refusing payments.
Banks will need to do more to identify consumers showing signs of financial strain or difficulty and help them cut back on overdraft use. This follows on from measures to require banks and building societies to help consumers check if they can get a better deal elsewhere and warn them if they are at risk of unexpectedly going into an overdraft.
The FCA has given the banks until December 2019 to implement the new proposals. As far as they go, these measures are welcome. More active, confident consumers will, as ever, see the most benefit. Mandating single pricing and constraining the application of refused payment fees will limit the ability of banks to use complex, unfair pricing structures to take advantage of consumers who inadvertently find themselves in financial difficulty.
But they do not go anywhere near far enough and do not address the fundamental harm caused by risk-based pricing. The FCA had another chance to show its teeth by capping overdraft charges (which could be more expensive than the notorious payday loans). But it didn’t - despite the evidence of serious harm in the overdraft market and the success of the payday lending price cap. It argues its proposals will have the same effect as a price cap.
However, price caps have been shown to be a very effective, direct way of making markets work. In contrast, the FCA is hoping that consumers will drive competition and produce the right outcomes – in the face of well-documented numerous previous failures to promote competition and switching.
From a financial and social inclusion perspective, the main point is that, as well as not capping overdraft prices, the FCA allows risk based pricing to continue. The single charge for overdrafts will not prevent banks charging consumers they determine to be a higher risk a higher price.
Competition is not going to help these consumers, as other banks will not be competing to attract their custom. So, the basic problem remains. Financially vulnerable consumers, in effect a captive market, will still be subject to detrimental charging practices with no cap in place to protect them. It will be up to the magic, invisible hand of the market to do that. Remember, banking isn’t just another market. It is, to all intents and purposes, a utility and warrants direct interventions.
Furthermore, the FCA should be doing more to get redress for those vulnerable consumers who have already faced unfair and unreasonable treatment at the hands of the banks. We wrote to the FCA to ask whether it considered these practices a breach of TCF; had required banks to stop these practices; and had instructed banks to provide redress to consumers. The FCA has not responded.
It may well be that further action is in the pipeline and it did not fully answer due to commercial confidentiality restrictions. But, we at the Financial Inclusion Centre aren’t letting this go. The FCA deserves real credit for its efforts to improve conduct of business standards in retail financial services. We have been robust defenders of the FCA against unjust criticism – particularly when it has been lambasted for failures outside its control. However, in this case, it has baulked at making the current account market work for vulnerable consumers. It is a very uncomfortable thought, particularly for me as a former FCA board member, that it has failed to stand up to the big banks.
About the author
Mick McAteer, co-director, Financial Inclusion Centre