In January 2019 new charges for Lloyds, Halifax and Bank of Scotland overdrafts came into effect.
For anyone with an overdraft of less than £4,100 these will result in higher monthly fees. And the new charging structure is also more complicated.
This article looks at how these banks simplified their charges and reduced them for most customers in 2017 but have now reversed that. The banks are all part of the same group so they all have the same overdraft charges.
UPDATE In June 2019 the FCA announced that by April 2020 all banks will have to charge a single rate for an overdraft. So Lloyds are going to have to change their fees again! But we don’t know yet if the new simpler charges will be lower.
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 pay £5);
- 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 Lloyds, Halifax and Bank of Scotland accounts.
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.
1p per £7 doesn’t sound much but it is an APR of just over 50%. So it’s still not cheap!
Most overdraft users gained. The losers were the people with large overdraft limits who use them a lot. They will be paying the higher rate of interest on their overdraft and not gain much from losing the flat charges.
Lloyds estimated 1 in 10 people will fall into this category – so about two million accounts.
2019 – more complex and higher for most people
A new set of charges is coming 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.
As Which? says:
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.
What the regulator thinks…
The Financial Conduct Authority has been considering overdrafts for over a years as part of its High Cost Credit review.
In December 2018, in a consultation paper the FCA wrote:
We want to address the complexity of overdrafts, the high level of charges and the harm from repeat use with a package of remedies. …
[we propose to] simplify overdraft pricing structures requiring firms to charge a single interest rate for arranged and unarranged overdrafts on each customer account.
The new Lloyds charges have gone in the opposite direction. Higher fees for most people and additional complexity.
Although the new Lloyds charging was announced before the FCA’s paper, previous papers from the FCA have emphasised the same points – harm from high level of charges, complexity makes it hard for someone to know what their overdraft fee will be each month and makes it more difficult o compare banks’ overdrafts charges to find a cheaper option.
Rachel Reeves MP, who chairs 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.