From 2017 to 2020 people with the Lloyds group of banks – Lloyds, Halifax and Bank of Scotland -have seen their overdraft charges change dramatically several times.
This article charts the extraordinary rollercoaster of these fees.
Overdraft charges before 2017
People were charged multiple fees on a Lloyds overdraft:
- a £6 a month for having an arranged overdraft;
- a £10 a day if you go more than £25 over your overdraft limit (Halifax customers only £5 a day);
- a £10 “returned item fee” for every direct debit or standing order that is rejected; and
- 19.89% interest on the balance.
This complex structure made it hard for someone to know what their overdraft fees are going to be or to compare charges across banks.
2017 – simplification and cuts for most people
In 2017, Lloyds Bank announced major changes to the way it charged for overdrafts which came into effect in November 2017 for the Lloyds group of banks.
The previous complicated system was replaced by a simple:
1p per day for every £7 of planned overdraft used.
So the £6 monthly fee went, no fees or charges for unarranged overdrafts and no charge for rejected direct debits or standing orders.
Nice and simple? Or pretty expensive?
A lot of people thought the way the new fees were described was made them sound lower than they were. 1p per £7 doesn’t sound a lot. But it is an APR of just over 50%. More than almost all credit cards. More than many sorts of high cost credit!
Most overdraft users did gain overall, with the scrapping of flat fees more than compensating for the higher interest.
But Lloyds estimated two million accounts would end up paying more. These are people with large overdraft limits who use them a lot. They then paid the new very high rate of interest and didn’t gain much from not having to pay the flat charges.
2019 – more complex & higher for most people
A new set of charges came into effect in late January/early February 2019 for customers of the Lloyds group of banks.
The simple rate has gone and a tiered structure has been re-introduced:
- the cost for the first £1,250 of an overdraft will increase to 1p a day per £6. An APR of 61%;
- the cost for borrowing between £1,250 and £2,500 remains at the previous 1p a day per £7;
- for overdraft amounts over £2,500 the charge will reduce to 1p a day per £8.
As a result, all customers with overdrafts with less than £4,100 will be paying more.
These new and complicated charges came as a surprise. In December 2018, the FCA had said it wanted to simplify overdraft pricing and would introduce rules saying that.
But the 2019 new Lloyds charges went in the exact opposite direction. Higher fees for most people and additional complexity.
Rachel Reeves MP, who chaired the Business, Energy and Industrial Strategy select committee, commented:
While these fees might be legal, they are not within the spirit of the FCA’s recommendations.
And Which? said:
Lloyds was praised for [its new charges in 2017], so it’s disappointing to see Lloyds using its new structure to ramp up charges just a year after cutting them back.
2020 – simpler and lower for many, higher for some
LIn 2019 the FCA introduced the new rules it had said it would. These required all banks to introduce simplified overdraft pricing by April 2020. I have looked at how all the banks changed their overdrafts here: Overdrafts in 2020 – simple doesn’t always mean lower.
Lloyds was the last group to announce its new charges in late January. By that point, it was clear that most banks were charging 35-40%. And Lloyds followed this pattern
- Most people will pay 39.9%;
- Club Lloyds customers will be charged 27.9%;
- a few people will pay a high 49.9% because of their credit score or the way they have operated their account
Lloyds have estimated that 90% of their customers with an overdraft will pay less than they did before.
It will be interesting to see how the “higher charges for people with poor credit” works out in practice. If someone is moved to a higher charge because they have financial problems, that may sound sensible to the risk managers at Lloyds, but is it really treating these customers fairly?
The FCA wrote to all banks in January reminding them that:
our rules require you to take measures to help and support those customers who are worse off because of these changes. This is important for all customers and particularly those who are or may be vulnerable.