John McDonnell has urged banks across the country to put significant hikes to overdraft interest rates for millions of people “on hold” for the duration of the coronavirus pandemic.
The shadow chancellor’s remarks come as high street lenders prepare to overhaul overdraft charging structures, with many increasing their annual rates to around 40 per cent in the coming weeks.
Though many could see no change, or benefit from the reforms, according to the Financial Conduct Authority (FCA), three in ten could be worse off as a result – amid pressure on banks to help customers through the Covid-19 crisis.
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While some banks across the industry have already implemented changes, the FCA’s rules will come into effect from April in attempt to fix what it describes as a “dysfunctional” overdraft market.
But debt charities have already warned that vulnerable customers could be forced to pay double their current fees, if they are consistently stuck in their arranged overdraft by a significant amount.
Mr McDonnell told The Independent: “Banks must put this on hold. This is a real kick in the teeth at this time when people are being laid off and struggling to get by”.
The new rules are intended to help consumers by banning daily overdraft charges which the regulator says can be expensive and confusing. These will be replaced with an interest rate that makes overdrafts easier to compare with other borrowing such as credit cards.
But the FCA said in January it would be “keeping a close eye” on high-street lenders after many of them introduced new overdraft interest rates of around 40 per cent.
HSBC, First Direct, M&S Bank and TSB have all announced rates of 39.9 per cent while NatWest is to charge half a percentage point less. Nationwide has already brought in a 39.9 per cent rate for its current accounts and Barclays will charge 35 per cent.
Lloyds Banking Group has said its customers will be charged new “personalised” overdraft rates of up to 49.9 per cent.
The regulator has warned that it could introduce a cap on overdraft fees if banks do not offer competitive rates. It launched a review after finding that in some cases an unarranged overdraft had cost consumers 10 times more than borrowing the same amount through a payday loan.
Baroness Altman, the former pensions minister, also told The Times: “I hope that banks will reconsider the egregious overdraft charges, to help their customers weather the storm.
“The self-employed, those who are away from work due to illness or isolation, or those waiting for benefit payments, will all need help,” she added. “If they are charged such huge rates then banks might be considered to be taking unfair advantage of the system.”
