BBC News - Crackdown on high-interest lending announced by FCA


(Robert S) #1

I’ve just read on BBC news that the FCA is considering a ban on fixed fees for overdrafts as ‘this can lead to relatively high charges for a small unarranged overdraft’.
Isn’t this what Monzo offers? A fixed fee no matter the amount? How does this fit in with Monzo’s ethical banking stance?

Crackdown on high-interest lending announced by FCA - http://www.bbc.co.uk/news/business-44307663


Spread the cost
(Thomas Guthrie) #2

Seems to be focused on unauthorised overdrafts where the fixed fees are multiple pounds a day at some banks I think?


#3

Not quite. From the actual report:

In this chapter we set out a case for considering more direct intervention in the way
that firms price their overdrafts in order to address these concerns. We set out a
potential package of measures which we intend to model:

  • price simplification through a ban on all fees, a requirement for firms to charge for
    overdrafts using interest rates and to include APRs in arranged overdraft advertising
  • price alignment between arranged and unarranged overdrafts

Edit: Sorry, forgot the source: High-cost Credit Review: Overdrafts (pdf), chapter 4. The whole chapter is very interesting to read, particularly on the back of the - often fiery - discussions around Monzo’s overdraft pricing …

Edit 2 (sorry, I’m kind of making this up as I read the report): These are the pricing structures that they were considering - while Monzo isn’t specifically mentioned, the report considers daily fees from 50p to £3:

image


#4

It does seem to be talking about arranged overdraft charges on the bbc article but the fca report is broader and interesting. I like the fixed fee as it’s easier to predict

Glad they’re cracking down on Brighthouse, absolute scum


#5

Brighthouse are the modern day equivalent of DER television rentals. People used to rent TVs and ended up paying about 10 times what their TV was actually worth!

https://www.gracesguide.co.uk/Domestic_Electric_Rentals


#6

The FCA’s reasoning on this boils down to this:

Prices that are not linked to the level of use, or that contain significant jumps in price for small additional levels of borrowing, make it harder to consumers to apply simple rules of thumb to understand their overdraft charges.
[…]
A drawback of interest rates is that many consumers find it difficult to understand exactly what they will be charged for a particular use of their overdraft. […] We think that the impact of this would be limited, since

  • While a fixed fee would offer more clarity on what each use of the overdraft would cost [compared to an interest rate], consumers tend to overlook how these fees can accumulate over time. The benefit of clarity on daily costs can be over-emphasised.
  • The proposals in Chapter 3 to introduce online calculators will mean that consumers have a tool available to calculate charges if they need it.
  • Other credit products make use of interest rates and so having interest rates for overdrafts allows for simpler comparison.

I’m not entirely sure I agree with all of that. It’s hard to argue against the simplicity of fixed fees, and no online calculator will save that, as noone uses calculators, but I think it’s worth mentioning anyway.

What is, however, true, is that the way in which overdraft interests rates are often expressed (% per day/week/month) make them seem much cheaper than they actually are. So changing overdraft pricing to APR certainly has the advantage of making it more easily comparable to other forms of credit.


(Ben) #7

And yet I still know at least one family that still do this :man_facepalming:


(Danny) #8

Radio Rentals, Rumbelows etc etc… all a scam,

I had a TV from Radio Rentals for 2 months, the then folded and I kept the TV lol


(Christopher) #9

@robsug as I am sure you’re aware, it’s part of a wider package to address the problems around high cost interest credit products, which have a particularly negative impact on people who have difficulty accessing mainstream credit products.

This is from the FCA review crib sheet on the review:
Untitled

https://www.fca.org.uk/publication/documents/high-cost-credit-findings-and-proposals-infographic.pdf

I think that’s an interesting point around ethics, but I don’t think you can view Monzo’s approach solely in terms of a daily fee - although I do think 50p day is fair, as it’s ultra transparent, and easier to understand perhaps than say dynamically working out interest. Yes, it may not be the cheapest when compared to calculating borrowing based on interest alone but it I think it is the clearest. Monzo’s fee is singular. For example, the Max. monthly charge for a Monzo overdraft is £15.50 cf. up to £95 (unauthorised borrowing) with Santander.

@nanos the comparisons with the legacy banks are particularly useful to highlight how these institutions can really throw already struggling customers into a pit of never ending debt. £95 MMC really is an egregious sum.

I think Monzo’s work on providing realtime balances, notifications, and ‘actual’ financial position as well as removing the option to access unauthorised borrowing go a long way to helping people manage their money better, which should mean money saved on servicing expensive debt, and ultimately greater levels of solvency for those that need the most help.

I haven’t read the review yet, should be an interesting read!


#10

This :heart_eyes:


#11

How else? A daily fee is all they have…

I’m not entirely sure how Monzo is fundamentally different here. Yes, it’s a different amount, but fundamentally the FCA still have a problem with fixed fees (as do I :wink: ) that isn’t removed through notifications and such stuff.

Worth mentioning (just for the sake of completeness) that those MMCs apply to unarranged overdrafts, so in its current form you cannot compare Monzo’s £15.50 to the numbers of the other banks (although the FCA would like to change that), and that Santander’s MMC is in the process of being overhauled.


(Jonathon) #12

This absolutely includes Monzo’s way of doing it. I’m not saying they are in the same league as other banks (hint: £3 per day…) but I still feel there is a fundemental unfairness at a daily charge regardless of how much you are borrowing.

Personally I’m glad that this is happening, but I think Monzo might want to start thinking about possible different options (ie. percentage rates).


(Christopher) #14

Sorry @nanos, perhaps I wasn’t clear here. But we know the single, simple fee is not all they have in their tool kit in the overall approach to their banking ethics. Notifications, real time balances and clarity over costs are absolutely part of this. And these are clearly referred to in the FCA infographic.

The key difference is that punitive fees are not part of their model. Monzo don’t even consider unauthorised borrowing as a revenue driver, by simply not providing the facility. Therefore, no hefty surprise fees to clobber you if you’re already struggling to manage debt. There’s clarity from start to finish. You can make a strong case that they’re doing the right thing by both their customers and the business by preventing further indebtedness.

You’re absolutely right @nanos, related to the above point, it’s not comparing like for like - again, could have been clearer here.

@coffeemadman

I totally understand the sentiment here, but I don’t see it as unfair per se. Expensive, for smaller sums, yes, but unfair no. Monzo is clear and transparent on costs, clear on terms and there are lots of alternative banks and current account providers offering authorised overdraft facilities.

I also totally agree with you that it may be prudent for Monzo to consider different pricing for it’s OD product though if only to mitigate the impact if the FCA decide to come down hard on the practice with a blunt instrument blanket ban. If Monzo can make it less expensive to borrow smaller sums without taking too much of a dent in the road to profitability, even better.


(Jonathon) #15

I see what you mean but fair does not equate to transparency.

Halifax charge(d) £3.00 per day for an overdraft. Totally upfront about it. Do I think it’s fair? No.

In principle I believe you should pay more if you borrow more. Simple as that. I don’t think simply being upfront or clear about something automatically implies it’s a fair deal.


(Christopher) #16

I’m not overly familiar with Halifax’s fees and charges, but whether that is authorised or unauthorised, at 6 times the cost of Monzo, £93 a month is quite simply an egregious amount on even a modestly large negative balance. This fee clearly takes advantage of the relatively low headline figure to extract as much as they can from their customers and that is quite clearly wrong.

I agree in principle that the costs should be proportionate to the amount you’re borrowing, but of course there are trade offs and several other factors that come in to play; commercial, risk, ethical and philosophical.

I don’t want to restate all the same points over and over, and bring up the overdrafts arguments, so going back to the original question on their ethical stance. I think Monzo are addressing a good few many issues that others simply aren’t. The up to £15.50/month cost may just be the acceptable compromise, if you can call it that. From previous recollection, we know Monzo have been looking at improvements and alternatives.

Not saying you shouldn’t try, but it’s worth noting you can’t please all the people all the time.


#17

This topic has always been one that interested me - I don’t think a fixed fee is particularly fair unless you’re borrowing the top of the band (or the maximum available to you, if there is no band).

Years ago I banked with Halifax, and the fees IIRC were something like

£1 a day - up to £1,999.99
£2 a day - 2k to £2,999.99
£3 a day - 3k plus

I had a £4k limit (madness in itself…). My funds (note, not salary!!) weren’t being paid into that account, so it literally was a constant balance (that obviously got worse when I ran out of money elsewhere, or when charging day came along)

I was stuck at -£500 ish for quite a while, being hit with £1 a day, which I thought was fairly steep (‘simple’ calculation of £365/£500 = 73%). It then upped and upped… with it not really costing me anymore. Before I knew it, it was £1,800… £365/£1,800 = 20% - not so bad, and the kind of typical arranged overdraft fee.

A few months later and fees came out, birthdays came around etc… I remember was one stage I was on something like -£2,020 so paying £2 a day… doubling my daily fee. I kept paying money in to stay on -£1,999 or thereabouts “saving” half the fee… then I got smacked with a fee at another bank for bounced direct debit.

Eventually, I was at £3k and £3 a day… so thought sod it, lets just take the full £4k.

Halifax (eventually) had enough and pulled the overdraft and I ultimately defaulted etc - but I think the fixed daily charge on such a small amount initially did CONTRIBUTE TO (not cause!) my future problems.

I completely accept I was silly accepting the overdraft which was pretty much the same as my annual income, and for digging a hole as time went on - but I strongly believe interest based charging is better. To say people don’t understand interest rates is extremely worrying, and strengthens the case for financial education in schools!

I welcome the review, and really hope Monzo will look at alternative charging (I have an OD with Monzo, but this time would use it as it’s intended… i.e. short term!). Even if that does mean paying 50p to borrow an extra £1 pushing me to -£21, I’d rather do that than get “value for money” and start the slippery slope again!


(Gareth) #18

Is it blunt to say life isn’t always fair? Or you could see it that everyone pays the same rate - so that’s quite fair.

I’d say Annual % Rate (or AER) isn’t really the most appropriate figure for a debt that’s meant to be short term (i.e. days or weeks). Not that banks do the best job of teaching what short is meant to mean (see: uni students). Banks just used it because that’s what we know for loans.

I’d suggest using maximum daily fee (Starling: ~£1.56 for £4k), but there’s the lovely fine print that makes things less clear:

  • In scenarios that are greater than one calendar month (60 days and 90 days), it is assumed that all interest and other charges are repaid by the borrower in full at the time they are charged. These are not capitalised and therefore, do not increase the interest incurred in a subsequent month.
  • We recommend that you check the rate on your current account as this may differ.

Over banks would need clauses about other additional fees etc.

Do you think if it was interest-based at 0.1% per day, you would have taken any action to stop going further at the £2k mark (£1.99~£2.01 per day)? Though at that point, Halifax or the other bank should have stepped in or given a better warning as well given the overdraft/DDs were not under control.

They were stupid to offer it. Some might call it irresponsible lending. Unless you were a student, but that’s a whole other thing.


(Jonathon) #19

Agree 100%


#20

Agree life isn’t fair! I just think providers that offer a fixed fee seem to place far too much emphasis on it being “simple”. E.g. Santander & Halifax used to massively play up the “per day” and it being “easy” concept. Monzo also do “we’ll charge you a max of £15.50” - yes that potentially sounds great if you have a £1k or £2k limit (when they up the max available) but if you’re borrowing £50 to pay for essentials like bread & milk, £15.50 isn’t cheap and I’d prefer a more “complex” APR calculation that might see somebody getting charged £2 or £3! Glad the FCA are looking into that aspect particularly.

Although I don’t think it’ll be anything like the PPI mis-selling we’ve seen over the last X years, I’d agree with those above who say people who regularly use their overdraft are among the most vulnerable in society and so offering it as a “simple” product at 50p a day or £15.50 a month maximum… “nice and easy” concept could in itself be deemed potentially irresponsible. Of course it’s nowhere near the likes of PayDay Loan Companies, or worse still loan sharks, but I am surprised the FCA have taken so long to consult.

I think had it been say 0.1% per day, at 2k it wouldn’t have stopped me - but 0.1% a day would’ve ment far fewer charges when I was in the low and mid-hundreds, and so potentially a whole different course of action as it went up towards the £1,000 mark and beyond (but swings and roundabouts, as can never know for sure!)


(Simon B) #21

I am not sure that borrowing £50 for essentials = you being in your overdraft for 31 days. That seems like a false equivalence.

Surely the most likely scenario for someone only being £50 into the overdraft is that they ran out of money a few days before being paid?

Let’s say they hit a £0 balance 5 days before payday and then spent £10 a day until payday. The fee would be £1.50 in that scenario.