Thursday, 31 May 2018

Of Interest

You check your account balance at a cash machine and what do you see? You have, say, £1,200 in your account – but “available funds” of £2,200. It’s one of the tricks used by banks to encourage us into using expensive overdrafts, and it works.

The Financial Conduct Authority’s review of overdrafts on Thursday revealed that 19 million of us use our arranged overdrafts every year. An extraordinary 13 million go further into the red, falling into an “unarranged” overdraft, where the fees rack up faster than a Wonga payday loan.

Interest on payday loans are capped at £24 for every £100 borrowed over 30 days, yet some banks could charge £179 for going £100 beyond the arranged overdraft limit for the same period, according to Which?.

The big banks scoop £2.3bn a year in fees from overdrafts, with a third of the money coming from the sky-high charges on unarranged overdrafts, sometimes £5 or £10 a day for going just a few pounds over the limit.

The consumer detriment is clear. What’s less clear is how the FCA’s package of measures will do anything to improve the situation. The “available funds” trick is to go – in future cash machine screens are likely to say “You have a balance of £1,200” but also that “You have an overdraft facility of £1,000”, so it’s only a mild improvement.

Our regulators are excessively cautious about imposing price caps, stuck as they are in classical economic thinking that if consumers are armed with the correct information (cue text message alerts and reams of paper warning us about APRs), they will make rational financial decisions.

But when Wonga exploded on to the scene it became clear that information was not enough and, thanks to  MP Stella Creasy and others there are now price caps in force, which have demonstrably worked.

In the “rent to own” sector, where your average shopper earns £16,000 a year and is already £4,500 in debt, a £300 cooker ends up costing as much as £1,500 once all the add-on charges are paid. The FCA thinks this is so obviously unfair that it is prepared to bring in a price cap – although not until next year.

Why not extend price caps to overdrafts? If you are charged £5 a day by your bank because you go £25 over your overdraft limit, then the effective interest rate is higher than using a payday lender.

We think of the US as a country where capitalism rules. Yet even there, individual states have the power to cap interest rates – and they do, at levels that campaigners here can only dream about.

In Michigan, the maximum legal interest rate is just 7%. In Alabama, Maryland and Minnesota it is 8%. In California the maximum legal rate on consumer loans is 10%, while on other loans lenders can only charge 5% above the Federal Reserve Bank of San Francisco’s “discount rate”, currently 2.25%. Only a few states, such as Nevada, have no caps on interest rates.

The FCA has no doubt had lots of legal advice that rate and price caps will result in a court challenge, such as the Office of Fair Trading’s stunning reversal in the Supreme Court in 2009. But the courts interpret laws, they don’t make them.

If we want to cut back on high cost credit, what is required is legislation such as the US’s usury laws, not timid rules from regulators.

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