The Financial Conduct Authority (FCA) has come under criticism due to its weak response regarding the controversy around bank overdraft charges. Despite new legislation which will require banks to send more text alerts about charges that will be incurred, as well as online tools which will make the cost of the various fees related to overdrafts much clearer, watchdogs remain unhappy.
More and more Britons are coming to rely on bank overdrafts for credit. The reasons for this are understandable; they are simple to organise, easy to qualify for, and are from reputable and ‘trustworthy’ organisations rather than vicious and shady payday or doorstep loan companies.
However, overdrafts are nonetheless a very expensive form of borrowing. Especially for people who have fallen into an unarranged overdraft, which incurs significant charges rather than just interest. In fact, banks make around 2.3bn pounds from people who go negative on their bank balance. In other words, they are making billions of pounds off of the people with the least money.
After the FCA’s 18-month long examination of overdraft practices in the UK, they have decided that light measures are the best way to move forward in an attempt to curb the problem. Firstly, they will force banks to send frequent alerts to their clients about the money they will be charged because of their overdraft.
They will also demand that banks include intuitive and easy-to-understand tools on their websites which will make the costs associated with overdrafts apparent for anyone who views them, as well as demanding that banks make the fact overdrafts are a form of credit very apparent. Lastly, banks will no longer be able to include an overdraft in the ‘available funds’ section of your account page.
The FCA has rejected calls for caps on overdraft charges. They feel that banks may challenge any proposed caps, leading to a long and drawn out legal battle which might end in the legislation being retracted. This situation happened in 2009 when a Supreme Court challenge concluded in favour of the banks. However, this excuse has not been enough to satisfy critics of high-cost lending.
Gareth Shaw of Which? declared that the FCA was “dragging its heels”, pointing out that it is “wrong that the regulator continues to delay taking action, leaving consumers affected by this unfair practice trapped in debt.”
As the pressure continues to mount, the FCA may have to take further action against predatory banks, or make a final statement ruling out caps once and for all.
Why Are Overdrafts so Dangerous?
There are many features of overdrafts which make them incredibly dangerous, to the point they cost consumers over £2bn pounds a year. This is because:
- Accessibility: Almost anyone can apply for an overdraft. In fact, banks will often automatically grant you one. In the event you make a purchase that you do not have the money for, banks may lend you the money automatically and charge you significant amounts of money for the service.
- Harmless Appearance: Many people who use overdrafts do not understand that overdrafts are another form of unsecured credit. This means that people do not appreciate the gravity of the situation, assuming it is free money they can pay back at their leisure.
- Heavy Fees: The interest on overdrafts is high. It sits at around 15-20% depending on your bank and service which is expensive in comparison to most other forms of borrowing. However, they can also incur heavy charges on top of this, effectively increasing the interest rate even further.
As you can see, there is a lot of reasoning behind the controversy surrounding overdrafts recently. While payday loans have taken a lot of the limelight in terms of attention and legislation in the last few years, it has allowed problematic overdrafts to slide under the radar. This oversight cannot continue for the good of the most financially unstable people in the UK.
I am Having Trouble with My Overdraft, What Can Be Done?
Overdrafts are just another form of unsecured debt, which means there are many solutions which can help you tackle them. Regardless of how bad you think your situation is, our advisers are qualified to come up with a strategy which will allow you to get back on top of your finances and put an end to creditor harassment.
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