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03.07.2018

Fact Check: Does Free Banking Exist?

Andrew Bailey, the Chief Executive of the Financial Conduct Authority (FCA), has said there is no such thing as free banking in the UK.

Is he correct?

Well it would appear he isn’t.  All the UK’s top banks offer free banking, but it’s just not for those with an overdraft.  Which is a problem, because if you are one of the over 19 million UK consumers who regularly dip into their overdrafts, or the 2 million who it is believed are trapped in permanent overdrafts, then the fees and charges you pay are likely to be paying for those who do enjoy free banking.

Mr Bailey was speaking in response to a new report which has been released by the Financial Conduct Authority and shows the UK bank account market is still not working the way it should and is part of a wide-ranging review being carried by the regulator into retail banking.

The report also showed one in ten of all UK bank customers generate between one third and one half of all the profits that banks make from current accounts and that more than 30% of all the income generated was made from overdraft revenue, which included interest and charges.  It is believed that overdrafts generate £2.3 billion in fees for banks across the UK each year.

It also revealed the six top UK banks (including Lloyds, HSBC, Barclays, and Royal Bank of Scotland) still control over 80% of the retail current account market and are making money from customers, who despite having savings, make little or no interest from them, despite better deals being available elsewhere, sometimes offering 30-50% more in interest.

UK consumers, however, it appears are still not prepared to switch bank accounts, which means the top banks have a captive audience, with half of the customer who hold a credit card, choosing to have it with their current account provider. The same was also found to be true for those customers who had personal loans, with a similar proportion taking it out with their bank account provider. This was despite the fact they were not always being offered the best deal and was despite the arrival of new bank account providers in the UK market, including new digital and internet-based banks.

The report also shows what many have suspected for too long, that it is those who are in debt and financially struggling who are paying the fees and charges that fund the UK bank account system.

Calls for more action on Overdrafts

It is likely the report will now lead to renewed calls for the FCA to act to curb the level of fees that banks can charge, particularly for unauthorised overdrafts. Another recent report by the FCA found, for example, that most unauthorised overdrafts are concentrated on less than 2% of customers, most of whom are vulnerable.

The Regulator has said banks need to do more to use new technology to help customers, such as by sending mobile alerts when they exceed their overdraft limits.

However, banks claim they are already acting, with some introducing overdraft buffers, so no fees are charged, providing customers remain within certain limits.

The FCA was also recently criticised for pulling back from introducing interest and fee caps on overdrafts, claiming they could face legal challenges by the banks.

The Labour Party, at the time, slammed the Regulator for the decision with the Shadow Chancellor, John McDonnell, calling the decision “deeply disappointing”.  Labour has proposed their own cap on overdraft fees should they be elected.

Is staying with the same bank advisable?

One of the advantages of staying with the same bank is they already know you, they know how much you are paid, and they know what you spend. It can, therefore, be easier just to stay with your existing bank.

However, when it comes to borrowing money from your current account provider, this is not always the best idea. Banks understand people want a frictionless customer journey, so they try and make it easier for you to stay with them than go somewhere else. The problem is this often means you not only don’t get the best deal, but when things go wrong banks can use a little-known power they have to recover what’s owed to them called the right of set off.

This means they can set one account off against another, without even taking court action. So, a credit card or personal loan account can be set off against a current account, meaning the customer can be left with no funds in their current account.

At Creditfix we always advise our clients who are struggling with an overdrawn current account to move away and open a new account. We also advise them to not take out a new overdraft. This allows us to protect our customers income from their banks using their rights of set off, whilst we explore all options including applying for the Debt Arrangement Scheme or a Protected Trust Deed in Scotland or an Individual Voluntary Arrangement in England, Wales and Northern Ireland.

If you are struggling with your bank account and are worried about overdraft fees, contact a Creditfix adviser on 0808 2085 198.