Spiralling overdraft charges adding millions to problem debt

_{12 October, 2016}

Spiralling charges on unarranged overdrafts are adding millions of pounds to problem debt and they must be capped by the FCA. New figures suggest that almost two thirds of people seeking our help with overdraft debts have regularly exceeded their limit and faced charges of £45 each time on average.

Every month, between 6,000 and 10,000 people contacting us will have incurred unarranged overdraft fees. In the year before they sought debt advice, we estimate that they will have been hit with over £1.3 million in fees between them.

The new figures also show that people with overdrafts had gone into the red in almost every month during the last year. We believe that too many people in financial difficulty are being trapped in an overdraft cycle and we're calling on the FCA to take strong action to both cap charges and reduce the role of overdrafts in persistent problem debt.

Regular overdraft use rife among people in problem debt

Our new survey of 1,019 clients with overdrafts revealed that on average, they went overdrawn in 11 of the last 12 months. Our recent national research has shown that around 1.7 million people are trapped in an overdraft cycle, consistently using overdrafts to meet essential and emergency costs. This makes them significantly more likely to fall into financial difficulty.

More than half of the people advised by us in the first half of 2016 had overdrafts. This amounts to 93,000 people struggling with overdraft debt and they owed an average of £1,679 on their overdrafts, in addition to their other debts.

People in financial difficulty paying millions a year in charges

Many of those trapped in a cycle of using their overdraft regularly had exceeded their overdraft limit. Nearly two thirds (62%) of survey respondents had gone over their limit in the last year and did so in an average of five of the past 12 months. 39% of respondents revealed that they faced average charges of £45 each time for using an unarranged overdraft, adding around £225 a year to their already heavy debt burden.

Each month, we're contacted by around 15,500 people with overdraft debt. Based on the survey results, we estimate that approximately 9,600 go into an unarranged overdraft, doing so in an average of five of the 12 months before they seek debt advice. Around 6,000 would pay an average of £45 per charge, a total of £225 for the year. We therefore estimate that those seeking advice on overdraft debt in any given month will have paid at least £1.35 million in unarranged overdraft fees between them over the last year.

People who are struggling with problem debt can face impossible choices between paying their essential bills and staying within their overdraft limit. If they do exceed their limit, the fees can be substantial and if they are in financial difficulty, they may be unable to get their account back under that limit. This results in more fees, which makes the problem progressively worse each month as the debt builds up.

The Competition and Markets Authority (CMA) found that in 2014, more than half of overdraft users went into an unarranged overdraft and 10% did so for nine months or more, while consumer group Which? recently showed how overdrafts can be more expensive than payday loans.

A cap on overdraft charges must be set by the FCA

We're repeating our call for a maximum monthly charge (cap) on unarranged overdrafts, set independently by the FCA. We think the FCA is best-placed to balance the competing priorities of lenders and consumers and can set an effective and fair cap on the charges using a similar approach the one used to cap payday loans.

The CMA has proposed that banks set their own caps on unarranged overdraft charges. However, the ‘big four’ banks already have a cap on their charges, some as high as £90 a month, and they occupy 77% of the market. In addition, the CMA said that banks made £1.2 billion from unarranged overdraft charges in 2014, calling into question whether there is enough incentive for a low cap on the charges. Unless there is strong action from the FCA, we're concerned that little will change and that the severe detriment to consumers will be allowed to continue.

More needs to be done to help people who struggle

We also believe that the FCA needs to do more to tackle the detriment caused by persistent overdraft use. This should include looking at what more can be done by lenders to support people who are trapped in an overdraft cycle and give them better and more affordable ways of paying back their debts.

Mike O’Connor, our Chief Executive, said:

“Overdrafts are the second most common type of debt we see and many of our clients, who are already in real financial difficulty, have been hit with penalty charges averaging £225 per year.

“Financially vulnerable people need help rather than being pushed further into trouble each month. It is time for the FCA to intervene, as they did with payday loans, to set a cap on the amount banks can charge for unarranged overdrafts. The FCA also needs to urgently look at how to reduce the role of overdrafts in problem debt so people can finally break free from this vicious cycle that far too many of them become trapped in.

“Without strong and swift action, hundreds of thousands of financially vulnerable people will see their problems get worse and millions of pounds will keep being added to the country’s personal debt problem.”

Notes to editors

1. We carried out a survey of 1,019 clients with overdrafts in September-October 2016.
2. The final report of the CMA’s retail banking market investigation recommended a Maximum Monthly Charge on overdraft fees, but that it should be set by the banks themselves. It also recommended that the FCA undertakes further work to increase customer engagement with overdrafts.