Andrew Hagger, founder of MoneyComms and personal finance expert

These rate hikes follow an overhaul imposed by the city regulator the Financial Conduct Authority (FCA), which said it was looking to fix a ‘dysfunctional overdraft market’.

The FCA reforms, which come into force from 6 April 2020, prevent banks charging high rates and fees to people with unauthorised overdraft borrowing, as many of these people are considered financially vulnerable.

The revenue banks make from unauthorised overdraft is eye watering, hitting more than £720 million in 2017, with 50% of unauthorised charges coming from just 1.5% of customers in 2016, so it is right that the regulator has moved to stop this practice.

Additional requirements from the FCA mean that the opaque overdraft tariffs which charge daily or monthly fees will be outlawed from April, and all agreed overdraft rates will be displayed as a percentage rate, thus aiding comparison.

However, what the regulator and customers didn’t expect was for most banks to replace lost revenue from soon-to-be banned unauthorised charging, by simply increasing agreed overdraft rates to almost 40% EAR (Effective Annual Rate) in many cases.

Yes, the new regulation will make it easier to compare overdraft costs between banks, and the problems around unarranged overdraft fees will be eradicated, but rather than review their cost models the banks have taken the easy option and simply shifted the cost of banking.

The outcome means banks will be making a similar amount of money as before, in what looks like attempts to protect the so called ‘free if in credit’ model.

Sadly, transparency and ethical practices are still in short supply among the major UK banks and building societies, all still refusing to come clean regarding the financial cost of providing a current account service.

It remains a broken banking market in that high street lenders are just replicating bad practices elsewhere and moving the cost of banking – another case of smoke and mirrors.

Triodos Bank UK’s model is different, they have always made a point of being upfront about the true cost of running a current account and the way it applies fees and charges, right from when its current account was launched in 2017.

There have never been separate unauthorised charges or rates, so Triodos is already compliant with the latest set of FCA regulations.

The Triodos model remains clear and transparent and in an ideal world would be recognised as the blueprint by the UK banking industry. Charging for a current account is not uncommon in continental Europe and the US, but in the UK we have this addiction to ‘free’ banking.

Triodos current account pricing is simple to understand and means all customers pay a monthly fee which helps cover the cost of providing a current account service. Customers who choose to borrow via an agreed overdraft facility are charged an additional, transparent and fair rate for doing so.

There has always been a reluctance from the big high street banks to change their spots and introduce any charges for current accounts, fearing an exodus of customers to rivals.

The upshot of this stubbornness is that we now face the absurd situation where agreed overdraft rates are seriously out of kilter, and customers with a spotless credit record will be charged similar rates to those seeking a sub-prime type credit card or a guarantor loan.

This just goes to highlight the extreme measures our major banks are prepared to take rather than move to a more open, ethical and fair charging model that works for all.

About Andrew Hagger

Andrew is founder of MoneyComms and a personal finance expert and industry commentator. The views expressed in this piece are those of the author, who was paid a fee by Triodos to write the article.

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