Take out loan to avoid 50% overdraft fees, says City watchdog as it admits changes will leave three in ten bank customers worse off
Families are being advised to take out loans or use their credit cards to avoid ‘ludicrous’ new overdraft fees.
Borrowers face paying interest rates of up to 49.9 per cent if they slip into the red following a change of rules by the City watchdog.
The Financial Conduct Authority admits that three in ten bank customers with overdrafts will be worse off as a result – or nearly 8m account holders.
Changes to overdraft fees rules, that have been implemented by FCA chief executive Andrew Bailey (pictured), will leave three in ten bank customers with overdrafts worse off
And it is now advising borrowers to take out loans or use their credit cards to avoid the increased charges.
But critics said responsible customers could end up being unfairly penalised and pushed towards other forms of high-risk credit.
The changes have been implemented by FCA chief executive Andrew Bailey and the watchdog’s strategy and competition chief Christopher Woolard.
Despite the backlash, Bailey is taking over as governor of the Bank of England in March and Woolard has been appointed interim boss of the FCA.
Andrew Hagger, from personal finance site Moneycomms, said: ‘How can it be right that people with perfect credit records are charged interest closer to sub-prime card rates and guarantor loans?’
The FCA last year said that from April 6 overdrafts should be simpler, fairer and easier to manage. It ordered banks to stop charging higher prices for unarranged overdrafts than for arranged overdrafts.
In response, Nationwide, Santander, HSBC, and TSB have all announced rises of up to 39.9 per cent, while NatWest will charge up to 39.49 per cent, and Barclays 35 per cent. Lloyds has also said it will charge 39.9 per cent, but customers considered risky will be charged 49.9 per cent.
Martyn James, from consumer complaints website Resolver, said: ‘A 49.9 per cent rate by any stretch of the imagination is ludicrous. Lloyds’ is excessively penalising people who have done nothing wrong.’
The FCA insists seven in ten overdraft users will pay less under the rules. But it means that three in ten – or nearly 8m of the 26m with overdrafts – will lose out. They are being urged to look elsewhere.
Woolard said: ‘Overdrafts are not designed to be used for large amounts for long periods of time. People who need to borrow for a longer time may find that other methods of credit are more suited to their needs and may be more cost effective. We have made it clear that firms have to treat all customers who are affected by changes to their charging structures fairly.’
The Government-backed Money and Pensions Service also suggested borrowers consider credit cards or loans instead.
Its money expert Andrew Johnson said: ‘Now may be a good time to think about other sources of funding such as an interest free credit card or personal loan.’
But there are concerns that mounting debts will affect mental health. Chris O’Sullivan, of the Mental Health Foundation, said: ‘We would encourage all banks, building societies and other organisations to factor in the risk to mental health of unmanageable debt for their customers, especially when the cost of servicing debt becomes higher.’
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