Ban on unarranged overdraft charges considered by FCA

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Charges for unarranged bank overdrafts could be banned, under one option being considered by the Financial Conduct Authority (FCA).

It said the charges for those who go into the red without agreement can be high and complex.

Earlier this month, the UK’s largest lender, Lloyds, said it was getting rid of unarranged overdraft fees altogether from November.

Barclays has already stopped all unauthorised lending.

However, other banks charge about £6 a day, or up to £90 a month.

“We believe there is a case to consider fundamental reform of unarranged overdrafts, and whether they should have a place in any modern banking market,” the FCA said, in its review into the high-cost credit market.

“Maintaining the status quo is not an option,” said FCA chief executive Andrew Bailey. Unarranged overdraft fees were often “significantly higher” than payday loans, he added.

However, the FCA made it clear that an outright ban on unarranged overdrafts was only one option being considered.

It could impose a cap on charges, or demand some affordability checks before a bank lends money on an unplanned basis.

A year ago the Competition and Markets Authority (CMA) decided against a capon charges.

Half of all overdraft users go over their agreed borrowing limit, according to the CMA. In 2014 such customers spent £1.2bn in charges as a result.

The banking industry responded by saying that customers were usually warned if they were about to go overdrawn, usually via a text alert on on a mobile app.

“When used sustainably, consumer credit is important for economic growth, and lenders work hard to ensure the balance is right between helping customers to borrow while ensuring longer term affordability,” said Eric Leenders, head of personal banking at UK Finance.

Motor finance

The FCA has also highlighted concerns about the rent-to-own market, typically used by consumers to buy fridges, freezers and televisions.

“We think that is a sizeable issue, because people are paying three or four times more than if they used cash,” Mr Bailey told the BBC.

The FCA said that one option might be for housing associations to provide such goods instead.

Mr Bailey said there were also concerns about motor finance, a worry already highlighted by the Bank of England.

“We’re looking at affordability tests and the transparency of terms,” he said.

The FCA will publish an update on this work in the first quarter of 2018.

Payday loans

As part of its review into high-cost lending, the FCA also looked at how the cap on payday loans was working.

It said that the cap, first imposed in January 2015, had delivered “substantial benefits” to consumers.

Since then, no one has had to pay more than 0.8% a day of the amount borrowed. The maximum they pay is no more than twice the amount they borrowed.

The FCA said its review found that the cap meant 760,000 borrowers in this market were saving a total of £150m a year, that companies were now less likely to lend to customers who cannot afford to repay, and debt charities were seeing fewer people struggling with ballooning borrowing from payday loans.

Mr Bailey said the FCA would continue to focus its efforts on what else needed to be done in this area.


Households due £285 rebate on fuel bills, says Citizens Advice

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Every household in the UK should get a one-off rebate of £285 on its fuel bills as a result of excess industry profits, Citizens Advice has said.

Over eight years, it claimed firms that transport gas and electricity – so-called energy networks – have made £7.5bn in “unjustified” profits.

It blamed the regulator, Ofgem, which sets industry price controls, for “errors in judgement”.

Ofgem disputed the claim and said it had already helped to lower fuel bills.

Citizens Advice said that network firms had enjoyed a multi-billion pound windfall at the expense of consumers.

As an example, Citizens Advice said National Grid had made an operating profit of more than £4bn in 2015/16.

However the company’s annual accounts show that around a quarter of that profit was made in the US or on other activities.

Complaints

“Decisions made by Ofgem have allowed gas and electricity network companies to make sky-high profits that we’ve found are not justified by their performance,” said Gillian Guy, head of Citizens Advice.

“Through their energy bills, it is consumers who have to pay the £7.5bn price for the regulator’s errors of judgment. We think it is right that energy network companies return this money to consumers through a rebate.”

Ofgem sets the charges that network companies like National Grid, SSE and Cadent – which distributes gas – can levy in any eight-year period.

That is because they are monopoly operators.

But in the current period, lasting from 2013 to 2021, Citizens Advice says Ofgem has been too favourable to the companies’ interests.

It claims that Ofgem:

  • overestimated the risks for investors in the networks, costing consumers £3bn
  • assumed interest rates would be higher than they turned out to be, costing consumers £3.4bn
  • rewarded companies that inflated cost estimates for projects, costing consumers £1.1bn
Cheaper costs

However, Ofgem said a number of the assumptions used by Citizens Advice were too high, and rejected the idea of a rebate.

“We do think they raise some valid points, but we don’t agree with their modelling or their figures,” said Jonathan Brearley, Ofgem’s senior partner for networks.

On Wednesday Ofgem also announced a consultation on how it should set price controls after 2021.

“We will take some of the issues into account when we examine future price controls,” Mr Brearley added.

He told the BBC that those controls are likely to be much tougher on the companies involved, providing downward pressure on bills.

At the moment, around a quarter of the average fuel bill is taken up by transmission charges.

The Energy Networks Association – which represents the operators – also said it did not agree with the modelling used by Citizens Advice.

It said a similar claim filed by British Gas had already been rejected by the Competition and Markets Authority (CMA).

 


Lloyds Bank, Bank of Scotland and Halifax to scrap charges for unplanned overdrafts

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 Lloyds Banking Group is to launch a simplified “pay-as-you-go” overdraft charging system and scrap some fees, in a shake-up affecting millions of customers.

The UK’s largest current account provider, with over 20 million personal current account customers, said more than nine in 10 of those with its brands Lloyds Bank, Bank of Scotland and Halifax will be left either better off or in the same position financially.

Starting in November, customers will be charged a single rate of 1p per day for every £7 of planned overdraft usage. A fee will be charged at the end of each day of planned overdraft usage, which Lloyds said would help customers to budget, rather than being hit with a bigger bill weeks later.

All fees and charges associated with unplanned overdrafts will be removed. Lloyds is writing to customers to tell them how they will be affected. The less than one in 10 who will be worse off will receive extra support, which could prompt them to consider a more cost-effective way of borrowing.

This may include reviewing alternative options, such as a personal loan. Those who may be worse off are particularly likely to have large overdrafts which they consistently max out for long periods. Lloyds said the average debit balance for a customer using their overdraft is £450 in a month. A Lloyds Bank Classic current account customer using £450 of a planned £1,000 overdraft limit for seven days would currently pay £7.49.

But under the new system they would pay £4.48. A Halifax Reward customer who goes overdrawn by up to their planned £100 limit for 10 days and also goes into an unplanned overdraft by £50 for two of those days will be charged £1.40 under the new system. Previously they would have been charged £18.

The bank expects to make less money overall from overdrafts as a result of the moves, but declined to specify amounts. It is also automatically opting customers into receiving free text alerts, to help them stay on top of their accounts.

People who do not want texts can opt out. Lloyds Banking Group’s changes will also mean that, from November, customers will no longer be charged a “returned item fee” for having payments stopped due to a lack of funds.

Greg Coughlan, the bank’s director of personal current accounts and payments, told the Press Association: “We want to put customers in control so that they can better manage their day-to-day finances” with “pay-as-you-go” daily charging.

He continued: “We think more customers will be able to use their overdraft in a smarter way.” Mr Coughlan said that while the banking group expects to see its overall income from overdrafts reduced: “We’re convinced we will have better relationships with our customers as a result of the change.”

He said that for the vast majority of customers, the charges under the new system would only be “pennies a day”. Vim Maru, group director, customer products and marketing, Lloyds Banking Group, said: “When asked about our new approach, over 80% of customers said that they preferred it compared to the current charging format.” An investigation by Which? into unarranged overdraft fees found some can potentially cost more than a payday loan.

The Competition and Markets Authority (CMA) previously said that in 2014, £1.2 billion of banks’ revenues came from unarranged overdrafts. The Financial Conduct Authority (FCA) is currently putting the high-cost credit sector under the spotlight, including overdrafts. Peter Vicary-Smith, Which? chief executive, said Lloyds’ decision is a “positive step”.

He said: “The Financial Conduct Authority must now use its review of high-cost, short-term credit to ensure other banks follow suit, restricting unarranged overdraft charges to the same level as for arranged overdrafts.

” Andrew Hagger, founder of Moneycomms.co.uk, said Lloyds had taken a “fairly radical move” and predicted more banks would be reviewing their overdraft charges. Mr Hagger said Lloyds’ new tariff works out cheaper for customers with smaller borrowing requirements.

But for those borrowing sums in four figures it starts to get more expensive, he said – for example a £2,000 overdraft for 12 days currently costs a Club Lloyds customer £17.47 but under the new tariff it is £34.29. Mike O’Connor, chief executive of StepChange Debt Charity, said around half of its clients have struggled with overdraft debt.

He said: “This looks a positive step forward, but there is a need to monitor what happens next, not least for the questions this announcement poses for the overdraft market as a whole.”

 

 


Energy bills: Are standard variable tariffs a rip off?

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Are we being ripped off by energy companies?

It’s the question at the heart of Theresa May’s policy announcement – the idea that these energy giants are charging us a lot more than they need to for life’s essential services.

Politically, it obviously has a certain allure. Nobody likes paying big bills for gas and electricity, and it allows the Tory party to maintain its stance of sticking up for the ordinary families who are “just about managing”.

But think about the other side of this.

For one thing, there are generations of Conservative voters who have been attracted to the party by its laissez-faire view of corporate Britain. Now, though, we have a policy that advocates Government interference in what is, by pretty much any definition, a competitive market.

That might chime with some JAMs (just about managing), but it might worry some others.

And is it the right solution anyway? There are lots of different tariffs available to most energy consumers, but at the heart of this argument is just one – the standard variable tariff (SVT). It’s the one that about 70% of us pay, and it’s almost always the most expensive.

So what is it? Well, you may well have joined an energy provider attracted by a good deal, one that ran out after a fixed period of time.

After that, you’re free to find another deal, maybe to switch to another supplier, but many of us forget, don’t bother or worry about the fiddle of switching supplier. And then we revert back to the company’s standard tariff.

They are, categorically, not good value. Every serious study of energy prices has found that, without any great difficulty, you can find a better deal than the SVT. Most of us should switch or at least pester our company into giving us a better deal, but whether it’s through inertia, ignorance, complacency or a fear of change we stick to the SVT.

When the Competition and Markets Authority (CMA) investigated the energy market last year, it concluded that of British Gas’s 6.6m customers, very nearly three in four were paying the standard rate.

It also found that that they could save an average of £129 by switching to the company’s cheapest tariff. Among SSE customers, 91% were on the standard rate, paying £98 per year more than they could be doing.

The CMA’s conclusion was that all these customers should be helped as much as possible to switch supplier. It proposed a database of people who had been on the SVT rate for three years or more, who could be directly marketed with better offers.It wanted greater involvement from the Government in understanding the rationale of price rises, and it also brought in a price cap on prepayment meters, typically used by some of the most vulnerable customers.

Switching, it said, was the most important way to get people to find better prices, and there are signs that switching is growing. Certainly there are more suppliers in the market, offering more deals.

Both the CMA and the energy regulator, OFGEM, said that mobility was the key to making the market work better.

What they categorically didn’t suggest was a price cap. In its report, the CMA was explicit: “Regulating prices over such a wide part of the market would give customers even less incentive to seek better deals,” it concluded.

“All suppliers would be under less pressure to drive prices down and improve customer service. And by creating that situation, it would prove difficult to remove in future.”

Energy companies concur, of course. No company wants more Government interference in its business and the likes of Centrica, which owns British Gas, are no exception, warning that price caps could lead to less competition, not more.

Iain Conn, Centrica’s chief executive, said a couple of weeks ago that he thought “there are some at the heart of Government who don’t believe in free markets”.

It’s worth noting that this has parallels in other parts of our life. Savers are routinely given teaser rates, car insurance seems always to get more expensive after you’ve been lured in by a good price for the first year of cover and credit card companies offer an array of offers to new customers.

All of them are everyday services – if not essential to everyone – and all rely on the same sort of inertia that has helped energy companies.

But the price of energy has a special resonance in our household spending, in the media and in politics.

That’s why Ed Miliband was drawn to it in the last election, and why Theresa May has picked up the idea now.

How that idea could be translated into managed, sustained policy is


Mastercard’s Vocalink buyout questioned by CMA

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The UK’s competition watchdog has raised concerns over Mastercard’s takeover of UK payments firm Vocalink.

The Competition and Markets Authority (CMA) said there were worries regarding competition over the Link ATM network, which is run by Vocalink. The CMA said Mastercard and Vocalink were two of the three most credible suppliers of services to Link. As a result, a merger would reduce the number of possible bidders the next time a service provider is chosen. The two companies have until 11 January to come up with a plan to address the concerns. If they fail to deliver, then the case could be referred for an in-depth investigation.

‘Closer investigation’

CMA acting chief executive Andrea Coscelli said: “The Link ATM network provides an essential service for millions of customers. “It’s important that Link has a good choice of providers when it comes to supplying the necessary infrastructure so it can take advantage of the opening up of payment systems to competition. “These concerns warrant a closer investigation in the event that Mastercard cannot address them at this stage.” When the deal was announced in July, Chancellor Philip Hammond said the takeover of Vocalink by America’s Mastercard “shows that Britain remains an attractive destination for international investors”. As well as the Link system, Vocalink also supplies Bacs, the automated clearing house which processes direct debits. Vocalink was owned by several major banks including Barclays, Lloyds and HSBC.

 


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