Vulnerable members of society, including ethnic minorities and people with disabilities, are being discriminated against by banks, a former board member of the Financial Conduct Authority has said.
Mick McAteer, who now runs the Financial Inclusion Centre, says the regulator has failed to protect the people who can least afford it from being charged excessive amounts for unarranged overdrafts.
The FCA says those living in the most deprived areas are 70% more likely to have to use an unarranged overdraft than those living in the least deprived areas and when they do so are paying up to twice as much in charges and fees.
The regulator also highlights that they tend to be from BAME (black and minority ethnic) communities and more likely to be financially vulnerable due to poor health and disability.
While the regulator has announced plans to reform overdrafts, such as banning excessive fees, McAteer believes the only way to properly protect vulnerable people is to introduce a cap on repayments.
He said: “The impact [of a cap] on payday lending has been such a success and we can’t see why the FCA can’t do the same for overdraft lending. Banks have been allowed to overcharge people from BAME communities, people with disabilities, single parents – I think this is a real dereliction of duty.
“It’s a fact of life that if you’re from a particular minority, you [are more likely to] have suffered discrimination in the workplace, in the housing market through no fault of your own and the regulator allows banks to discriminate against you in another area of your life.”
The payday loan cap restrict lenders to charging 0.8% a day in interest, including fees, and restricts the total cost of the loan to 100% so that borrowers never pay more than double the amount they borrowed.
By contrast the proposed overdraft rules require banks to charge the same interest rate for authorised and unauthorised overdrafts but stipulate no maximum level. Campaigners fear lenders will increase the rate on authorised overdrafts for vulnerable customers, rather than bringing down rates on unauthorised overdrafts.
The FCA estimates that in 2017, current account providers made over £2.4bn from overdrafts alone, with about 30% from unarranged overdrafts of which more than 50% came from just 1.5% of current account customers. That equates to these particular vulnerable customers paying about £533 a year on average in unarranged overdraft charges, says McAteer.
He argues the operation of unadulterated market forces and risk-based pricing (charging different people different prices according to their circumstances) is unfair because: “Banking is a utility, almost as important as having access to electricity, gas – and different rules have to apply.”
He is not alone in his views. Martin Lewis of MoneySavingExpert also favours a cap.
McAteer believes the FCA should be asking banks to look at historical loans where they have imposed very high overdraft charges, in the same way compensation has been provided for those mis-sold PPI. “It’s not beyond the wit of the banks and the FCA to start a redress programme,” he said.
An FCA spokesman said the regulator was consulting on proposals “to undertake the biggest intervention in the overdraft market in a generation, and we welcome any view on the changes we’ve suggested.
“We believe that these changes will provide greater protection for the millions of people that use overdrafts, particularly the most vulnerable.”
A spokesperson for UK Finance, which represents banks, said: “UK Finance members have been working with the regulator to explore new ways to better identify and support customers with repeat overdraft use and we will continue to liaise with the FCA in the coming months.”