Barclays is the first bank to alter its unauthorised overdraft charges in order to escape the Office of Fair Trading attack on unfair charges. Surprise, surprise - the charges are still confusing.
Last month the OFT said it considered the banks unauthorised interest charges to be unfair. It said it would negotiate with the banks but hinted that if they didn’t change their ways, a reference to the Competition Commission would follow. Since the banks have already been mauled by the CC over Payment Protection Insurance, they will presumably be keen to avoid this.
Barclays’ revamp of its charges shows evidence of this, since a key item, the ‘unpaid items’ charge, drops from £35 under its old tariff to just £8 with its new Personal Reserve. But comparing old with new is a bit tricky.
Personal reserve works as an unauthorised overdraft
Personal Reserve is a substitute not for an overdraft but for an unauthorised overdraft. So effectively Barclays is saying that its customers can negotiate to have an unauthorised overdraft, its Personal Reserve, for which it will charge £22 for each 5 days plus £8 per item for any unpaid items that exceed the figure agreed for the Reserve, which is unlikely to be more than £500 except for a handful of customers.
There is no interest charge on the Personal Reserve, and with a fee of £22 for 5 days for a likely sum of £500 there doesn’t need to be, because the effective interest rate is about ten times the 27.5% interest rate charges under its old tariff.
Under the old tariff, though, paid item charges at £30 and unpaid items charges at £30 quickly ran up big balances on which 27.5% interest was charged, whereas that won’t be possible with Personal Reserve. That could help Barclays to wriggle off the OFT’s hook.
But effectively, if you end up with an unauthorised overdraft/Personal Reserve you will still end up paying Barclays a lot of money. And, as the OFT said in one of its key criticisms of the banks, comparing what you’d actually pay for an unauthorised overdraft with the different banks remains horrendously difficult, because their tariffs apply in slightly different ways.
As far as Barclays customers go, the new Personal Reserve looks as if it will cost most of them significantly less than the old system.
Current accounts make the banks £8.3 billion
The OFT’s report into unauthorised overdrafts said the banks make £8.3 billion a year from personal accounts, of which £2.6 billion comes from unauthorised overdrafts.
Effectively, the £8.3 billion works out at £152 per active bank account, which finally nails the idea that personal accounts are free. The OFT also calculated that no less than 1.4 million people paid over £500 in bank charges in 2006, which explains the vast numbers of consumer bank charge reclaims now ‘on hold’ while the OFT’s court case against the banks grinds through the mill.
Confusingly, this court case concerns the application of consumer contract rules to bank charges and is quite independent of the OFT’s verdict that the banks’ charges are confusing and that the current account market is not working well for consumers.
Market not working for consumers
The OFT concluded that the current account market ‘may be stuck in an equilibrium that does not work well for many consumers’, and under its remit it is right to press the banks to change.
But as I have said before, a lot of this is history. New technology will enable new entrants to the banking market to offer accounts that don’t use direct debits or cheque guarantee cards - the biggest cause of people incurring unauthorised overdrafts. More and more people are finding they can live without cheque books.
In the meantime, regardless of whether the charges are unfair, get organised with your finances and avoid unauthorised overdrafts.
