UK savers have received another boost from the financial regulator as it seeks to reduce the detrimental impact of high-cost loan products.
The Financial Conduct Authority (FCA) has said there is “a case for fundamental reform” in conclusion to a paper that has investigated the “unarranged” charges that lending institutions apply to the credit they extend (and attract criticism for blindsiding borrowers who may have been enticed by initial low-interest rates of repayment).
This applies not only to payday loans and cash advances on salaries but also to the overdraft on everyday current accounts; your overdraft is classed as a credit arrangement because (in theory) you’ve charged the bank through debits that exceed the money in the account.
Indeed, the charges on overdrafts can be particularly pernicious since – unlike a cash advance or credit card – there are not always explicit Terms & Conditions for current accounts in the event that you go into the red (as there are for loan-specific products). Best have a look at your own account arrangements, eh?
The Telegraph gives a useful comparison between the ‘arranged’ overdraft charge on Santander’s 123 current account and that which is ‘unarranged’. While the arranged fees include £1 per day on overdrafts up to £2,000; £2 per day for between £2,000-£2,999.999; £3 per day for £3,000 and above, there is an ‘unarranged’ £6 per day charge capped at £95 per month. £6 a day!!!
Furthermore, while the 123 account does not charge for unpaid transactions, Santander’s Everyday current account slaps on a £10 fee.
Charge(s) of the credit brigade
The UK population takes out a lot of loans. Data providers The Money Charity found that, by July 2017, Brits had a total £199.7bn worth of unsecured loans – that’s borrowing without the loan ‘secured’ against a specific asset, as opposed to a mortgage that’s secured against the house you’re buying.
What’s more, both big-ticket items AND day-to-day needs are increasingly being funded by credit products. The country has an average savings ratio of just 1.7% in first-quarter 2017 (The Money Charity); not a lot for a rainy day, and arguably not a lot put aside to settle the debts incurred from such borrowing.
The FCA is looking at the very least to reduce the inflated size of the repayment rate on dozens of loan products.
The regulators have been on the war-path recently, right?
Absolutely. Two years ago, the FCA implemented a cap on the interest that could be charged on short term credit, using the example of capping a loan for 30 days or less to £24 per £100 loaned.
Just six weeks ago, the FCA ruled out any chance of lifting this cap, citing the beneficial effects thus far to eke Britons out of any debt spiral – though with lots more still to be done!
And now the issue of current account overdrafts has been added to the FCA’s aggressive area of focus on behalf of consumers.
Separately, last month, the UK Treasury slammed credit card companies for their ‘rip off charges’ on plastic purchases. Again, it’s all about the hidden charges – such as transaction fees – in addition to the advertised headline rate of interest.
The Bank of England, for its part, warned the banks that it keeps in check that loose lending policies and too-good-to-be-true initial offers to consumers will only backfire on the banks themselves since defaults on loans will leave a big hole in their corporate forecasts.
Despite these institutions flying the flag, it’s still more necessary than ever for savers to get to grips with any debts they have and get on a firmer financial footing where saving, rather than paying off spending, is the name of the game.