The decision, on whether the Office of Fair Trading (OFT) has the power to investigate the fairness of charges for unauthorised overdrafts, was a shock as a ruling in favour of the OFT was widely expected.
Meanwhile the banks will be cracking open the champagne as the threat of having to repay up to £20 billion in compensation and losing an estimated £2.6 billion of annual revenue has lifted, for now.
While I’ve no doubt that the banks have been greedy and that fairer charges would be a good thing for customers, I believe a far more important issue is the need for a stronger deterrent against reckless borrowing.
Total personal debt in the UK now stands at around £1.5 trillion and those households with unsecured debts typically owe over £21,000. Debt at these kinds of levels can be crippling. Even at a relatively low APR of 10%, a £21,000 loan over five years would have monthly repayments of £442 with interest totalling £5,505 over the term. Factor in the far higher rates of interest that are inevitably charged in some of these debts and picture is terrifying.
The problem, as I see it, is that we need far stronger deterrents to stop individuals spending more than they can afford. And while many bank unauthorised overdraft charges are unfair, reducing or removing them will only encourage yet more debt unless other measures are put in place.
What measures would I like to see?
For starters, I think banks must become stricter on serial offenders. For example, by closing the current accounts of customers who breach their unauthorised overdraft limit more than three times in a year without first discussing financial difficulties they might be experiencing.
Secondly, banks could encourage greater responsibility and loyalty by rewarding customers who don’t stray over their unauthorised overdraft limit with an interest free ‘buffer’, increasing annually by £50. So a customer who acts responsibly could build up a £500 interest free overdraft buffer after 10 years, in turn reducing the likelihood they’ll ever face ‘unfair’ charges for straying over their unauthorised overdraft limit.
Sadly I doubt the banks will listen. And it’s also difficult to preach about financial responsibility while our Government sets such an appalling example of spending beyond one’s means.