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Fairness and equality feels like a logical and simple thing we should all want. However, we live in a society where some people get a worse deal than others because their vulnerability makes it harder for them to cope with financial knocks.
I am reminded of this by the social media uproar this morning, that has been caused by the FCA (Financial Conduct Authority) decision about unarranged overdrafts – it is banning confusing fees/charges and making the costs more transparent. FCA research revealed that charges for unarranged overdrafts were very high, often 10 times the cost of a payday loan – costing more than 10% (of the debt) per day.
Just stop and think about that for one moment. If you go overdrawn by £100, the debt doubles to £200 in less than 2 weeks.
The FCA states that people living in deprived areas and hard-pressed communities, who have low incomes are 70% more likely (than the general population) to incur unarranged overdraft charges and refused payment fees.
From the (anecdotal) evidence on social media (this morning) it sounds like the banks are smoothing out their charges. They are about to lose the huge income they made from unarranged overdrafts and so want to increase agreed overdraft charges to recoup that loss.
Does that sound unfair? Well if you are someone who has been benefiting from this imbalance, you may feel it is hugely unfair to you. You may wonder why you should pay more to subsidise others - maybe you think they need to organise their finances better? Well, I'm not going to talk about why vulnerable people are vulnerable and may struggle to have enough money to feed their family, let alone cope when th fridge breaks, but those of who aren't in this position need to know that this group has actually been subsidising us. The amount they were charged was far more that the cost to the banks and they have been paying inflated amounts to subsidise us - when was the last time you paid a fee to your bank?
As a consumer (with an agreed overdraft) I actually feel the impact on me will be minimal. If I have a debt I cannot clear within a few days then an overdraft is not the right option for me. But, unlike many of these vulnerable customers, I do have plenty of alternative choices.
So what’s your view? Are you comfortable to pay a bit more for your overdraft to help balance things or would you rather return to getting a cheaper rate because you manage your money and believe that those who struggle (and so use an unarranged overdraft) should be charged substantially more?
I suspect some of you may point out that the banks don’t need this income as they make enough profit. I haven’t commented on this aspect because I don’t know enough about the banking system (my expertise is in insurance) but it is good to see that the FCA has this morning reached out to banks to ask how they have reached their pricing decisions. It states “We will be keeping a close eye on the market and we will act should we see continued harm.”
I will be watching how this unfolds – is there any point having an agreed overdraft now? Will we use them less or more? Will banks look for other ways to make money out of us?
Author: Sally Pearce (Conduct Matters Ltd)