How more transparency can help 13 million overdraft users
I confess that I read everything that Andrew Bailey writes, more often I also read what he says.
Now that is not as creepy as it first seems. The reality is that it is what I get paid to do, and he’s keeping me busy.
In some of my reading material I was particularly interested in his Mansion House speech at the beginning of October when he talked about unarranged overdrafts and the charges associated with such facilities. He said that they were considering “fundamental change”.
CFA members have a long-standing relationship with overdrafts, both authorised and unauthorised. There is an argument to be made that the short-term product has been used as a substitute for when an overdraft is unavailable or when it is too costly. The 28-day loan product was shaped by customers’ experience of the overdraft.
Earlier in the year, when the FCA conducted its High-Cost Credit Review there were questions about unarranged overdrafts; one was “to what extent do you think overdrafts are a substitute, or alternative, for other high-cost credit products?”
Many of my members would say that they not only think of the overdraft as a substitute, but that they consider the overdraft to be a high-cost credit product. In some ways it continues to have the worst elements that are being removed from other products.
Whilst the number of borrowers accessing high-cost short-term credit (HCSTC) is falling, we see that the FCA reports that 3.1 million had an unarranged overdraft over the last 12 months. During 2016, we know that just 760,000 customers had used HCSTC loans.
Which prompts questions about the regulatory approach to overdrafts. Surely the same protections that are in place for short-term lending should cover all short-term lending, including overdrafts?
While there have been some useful suggestions around prompts and alerts (for example suggestions around text alerts), there continue to be issues around price transparency.
The cost of an overdraft varies considerably across the sector, with each bank coming up with different ways of setting their charge. This model is in stark contrast to HCSTC, which clearly sets out the cost of credit and has a price cap.
There is also the actual price of the facility. The research carried out by Which? in the summer of 2016 found some banks would charge 12.5 times more than the HCSTC price cap for an overdraft of £100 taken for a single day. In this case, the daily fee of 80p for an HCSTC loan was much cheaper than then £10 fixed charge for an unauthorised overdraft.
Of course, overdrafts are exempt from the APR regulations that apply to other lending products, and it would be very interesting to see some representative examples.
The response from the banks is predictable, and understandable. They are being clearer in the costs that they will charge for arranged overdrafts, we are seeing the introduction of a daily fee and the removal of fixed amounts.
While in the background they are suggesting the removal of unarranged overdrafts. Banks focus in on the more transparent costs of arranged and say little about unarranged.
What will this mean for customers? We may be about to see the end of the unarranged overdraft. But like in so many areas of credit, removing supply can’t be balanced by just wishing away demand. There will still be a need.
It will be for the consumer credit market to come up with new products. There is innovation out there. There are the 3.1 million customers with unarranged overdrafts that need a new option. And more transparency on costs may prompt some of the 13 million that use overdraft facilities to look for a better option.
This is something the regulator will need to consider alongside any “fundamental change”. To meet the need, the FCA need to be clear how innovation can be encouraged rather than stifled by any new rules.