CMA: bank overdrafts should be capped to boost current account switching

Regulator calls for cap on rip-off overdrafts, but decides against breaking up banks to boost competition.

The Competition and Markets Authority (CMA) has published its provisional package of remedies designed to improve competition in the personal current account market.

One of the major plans outlined in the report today (17th May) includes new protections for overdraft users including a cap on charges for unarranged borrowing.

The package of changes, which includes plans to help improve banking for SMEs too, is expected to benefit bank customers by £1 billion over five years.

However, the report which has been produced after an 18-month long inquiry has been criticised for lacking teeth as the regulator has disappointingly decided against breaking up the largest banks in order to help improve competition in the market.

The current accounts that still offer a free overdraft

What's being proposed?

The CMA says nearly 60% of people stick with the same bank for over 10 years. That’s despite the fact that many could save up to £153 a year by switching to a better deal.

The regulator says this is a clear sign that competition in the market is weak and means banks aren’t having to work hard on price or quality of service.

During the inquiry the CMA considered whether to get rid of ‘free if in credit’ (FIIC) current accounts. That's because FIIC accounts aren’t free for those that use an overdraft, which represents nearly half of personal customers.

However, the watchdog said these products work well for many so banning them would actually take choice away and risk the overall cost of accounts rising, not falling.

Instead the regulator is pinning its plan of transforming the market on forcing banks to be more transparent and provide customers with right information so they can compare accounts effectively.

Its proposals include new measures targeted on overdrafts with a focus on unarranged overdrafts. In 2014 £1.2 billion of banks’ revenues came from unarranged overdraft charges.

The CMA is proposing that banks set a monthly maximum charge for unarranged overdrafts on personal current accounts. It also wants them to alert customers before they go into an unarranged overdraft and give them time to avoid the charges.

Right now switching to a cheaper current account personal customers could save an average £116, ranging from £89 for those who don't use an overdraft and an average of £153 on average for overdraft users.

The CMA is also proposing that banks should also have to regularly prompt customers to check they are getting good value from their provider. These prompts will direct customers to comparison services and better technology will help them get tailored recommendations.

Fed up with your bank? Search for a new current account today

Missed opportunity?

The CMA said it considered whether the largest banks should be broken up but concluded that this would not help fix the fundamental problems in the market.

Creating more and smaller banks, would not be useful as customers would still find it difficult to choose between them because a lack of transparency on fees and charges, according to the regulator.

Alasdair Smith, Chair of the Retail Banking Investigation, said: “For too long, banks have been able to sit back and not work hard enough for their personal and small business customers.

"We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees.

“Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy.”

However, the CMA has been criticised for missing a chance to really change the market.

Alex Neill, Which? Director of Policy and Campaigns, said: “After 18 months this inquiry achieved little more than to propose basic information measures that the big banks should have introduced years ago. Steps to stimulate switching are welcome but the chance to deliver better banking for all consumers has been missed.

Rachel Springall from financial data firm Moneyfacts added: “The sentiment behind the latest suggestions from the CMA is welcome but there still needs to be a stronger crackdown on excessive charges and a greater attempt to level the playing field for current accounts."

Fed up with your bank? Search for a new current account today

What now?

The CMA is asking for feedback on the proposals in writing by 7th June, either by email to retailbanking@cma.gsi.gov.uk or to:

Retail banking market investigation
Competition and Markets Authority
Victoria House
Southampton Row
London
WC1B 4AD

The CMA says it will publish its final report on the retail banking market investigation by 12 August 2016.

Earn up to 5% interest from a current account

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