Hopes of a shift in industry attitudes towards overdraft fees were dashed last November when the banks won a High Court case in which the Office of Fair Trading (OFT) had sought permission to judge on the fairness of the charges. However, the outcome means little has changed, despite an uproar over the charges that sparked the OFT's attempt to rule on them. While unauthorised fees have dropped slightly, authorised overdraft costs are at their highest in a decade and a new range of charging structures has added to consumer confusion.
In recent days, both Nationwide and Barclays have hiked their authorised overdraft fees, despite the record low base rate. The Nationwide rate is now 18.9 per cent, compared with 12.9 per cent last year, while the Barclays rate has jumped from 17.9 to 19.3 per cent.
There are also reports that some banks are using the court ruling to reject valid refund claims from customers, with reports of customers being wrongly informed that their bank has permission to continue shelving the complaints.
Legal experts believe such actions are in contravention of Lending Code guidelines obliging banks to treat customers in financial hardship "fairly". Yet Citizens Advice Scotland (CAS) research published on Thursday found that unfair overdraft charges remain a significant problem for its clients.
Susan McPhee, acting chief executive of CAS, said: "Despite all the talk from banks about how they were going to be more responsible and help people through the recession, here we see the real story – the banks are still imposing heavy charges on vulnerable people. CAB advisers all across Scotland deal with case after case of people who have been hit by huge overdraft fees."
One mature student in the east of Scotland sought advice from CAS after being charged 28 and then another 38 for an overdraft of 60 pence. The charges mean that with a weekly income of just 50 he is now unable to clear his overdraft and avoid incurring further penalties. In the west of Scotland, another CAS client was charged 35 by her bank of 20 years for being 2p short of being able to cover a direct debit while she was on holiday. The service has reported numerous examples of Scots – often pensioners or those recently made redundant – who have incurred massive charges for single-figure overdrafts, yet found their bank unsympathetic towards their plight.
As the CAS report implies, any shake-up of overdraft fees as a result of the OFT test case was scuppered by the outcome. Indeed, the average cost of an authorised overdraft is the highest for a decade at an average of 14.2 per cent, according to Moneyfacts, up from 13.6 per cent a year ago. The last time authorised overdraft costs were that high the Bank of England base rate was 6 per cent.
David Black, head of banking at financial researchers Defaqto, said: "Since the OFT case began there have been a number of new overdraft tariffs launched – but the effects on overdraft charges have resulted in winners and losers according to individual circumstances."
Some of the new tariffs are part of packaged or tailored accounts – fee-based current accounts typically offering services including motor and travel insurance. The number of packaged accounts available has almost doubled in the past four years, according to Defaqto, while the average monthly fee for the accounts has risen by 42 per cent to 14.89.
But the wider variety of options able may add to consumer confusion. Black said: "There are a myriad of different charging structures for overdrafts and the optimum deal will vary from individual-to-individual according to the size and duration of their overdraft, the frequency and amount of transactions which take them into – or increase – their overdraft and whether it is authorised or unauthorised."
Among the most prominent initiatives last year was the controversial 1-a-day overdraft arrangement introduced by Bank of Scotland, with unauthorised fees at 5 a day. Better received was RBS's decision to cut the cost of a bounced cheque or unpaid item from 38 to 3, halve its charge for paying an item on an overdrawn account to 15 and trim its monthly overdraft charge from 28 to 20. Elsewhere, Santander's preferred overdraft rate account offers a 0 per cent overdraft for one year, provided 1,000 is paid in each month, but the rate jumps to 12.9 per cent after a year. Santander-owned Alliance & Leicester has a similar deal.
"It is hard for people to compare that and similar accounts with the APRs on normal overdraft rates," pointed out Samantha Owens of Moneyfacts. "Whether someone loses or benefits depends on how long they are overdrawn for and other factors, so comparing like-for-like can be difficult."
But it's not just about charges. The CAS has called for banks to take steps including factoring in a customer's financial situation before levying charges; levying fees proportionate to the overdraft size; warning customers when they are approaching overdraft; and introducing "buffer zones" allowing customers to go into overdraft temporarily without incurring charges.
McPhee said: "We can't allow this to go on. We are in a recession and people are struggling to get by – yet they are still being exploited. If the banks themselves will not act fairly then the government should force them."
How to limit your charges in a crisis
ONE in ten Britons is permanently overdrawn, according to Moneysupermarket.com, and that number could grow if unemployment continues to rise. But there are several ways to cut the cost of being in the red. Here are five of them:
Be prepared – If there's a chance you could go into the red make sure you have arranged an overdraft facility, as charges for authorised overdrafts are a fraction of those for going into the red without permission (although the gap is narrowing). For some on low income it may also be worth considering a basic bank account instead, as they don't permit overdrafts.
Try talking – If you are having problems reducing your overdraft try and negotiate a repayment arrangement with your bank. If you're lucky you will have a bank that doesn't turn a blind eye to customers needing help.
Switch account – Being overdrawn is not necessarily a barrier to moving. There are several differing approaches to overdraft charging, including monthly or daily charges, and some will be more suitable than others, depending on how often you are overdrawn and by how much. Websites including www.moneyfacts.co.uk and www.moneysupermarket.com can help you compare the various options.
Be vigilant – Some charges related to overdrafts, such as fees for spending while overdrawn and for bounced payments, can be avoided by keeping a closer eye on your bank account.
Budget – It may sound obvious, but the value of keeping a record of your income and outgoings is often underestimated. Only by knowing what you have coming in and going out can you identify the costs to be cut.