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The bank is squeezing customers who accidentally slip into the red as it struggles to shore up its profits
Lloyds TSB, which has nearly one in five of the UK’s current accounts, has come under fire for craftily changing the overdraft rules for 8m customers in a move that could result in charges of as much as £135 if you slip into the red by 1p.
The ploy, which follows a hike in overdraft rates last month, will net the bank an estimated £70m in extra revenue.
The bank is thought to have made the move on unauthorised borrowing to boost revenues ahead of a clampdown on overdraft fees by the Office of Fair Trading (OFT), expected next spring.
At the moment, Lloyds gives a little leeway to customers who accidentally slip into the red or exceed their overdraft limit. If they become overdrawn by less than £10 without permission they are not charged the usual £30 fee, although they do pay interest at 29.8 per cent.
If they exceed the £10 buffer but have not offended in the previous 12 months, Lloyds will also waive the penalty fee.
However, from November 1 Lloyds is removing the fee waiver for all customers except those with a fee-charging Premier or Platinum account.
It is also abolishing the £10 buffer for all customers, so anyone who goes into the red or exceeds their agreed overdraft limit by just 1p once a year will be hit by a £30 fee. Lloyds calls this an overdraft excess fee.
This fee can be levied daily up to a maximum of three a month, when you make additional transactions that take you further into the red. Even if you are overdrawn without permission, your bank may still honour some transactions.
It can also refuse, however, and if any payments bounce, you will rack up further charges. If Lloyds bounces a cheque or direct debit, it charges £35.
At present there is no limit on the number of returned items for which customers can be charged, but from November this will be capped at three a day. But you could still pay £135 in charges — the initial £30 penalty plus three returned-item charges of £35.
Barclays and HSBC still offer buffers and say they intend to keep them, although there is no doubt removing them would be a big money-spinner.
Lloyds claimed most customers manage their current accounts well and will not be affected. It added that being charged £135 for a 1p overdraft is very unlikely, but possible.
Research from Moneysupermarket.com, a comparison site, found 43 per cent of current-account customers had gone into the red or exceeded their overdraft limit by mistake in the past year. And 20 per cent of those had done it only once. These are the people who would formerly have escaped a fee with Lloyds.
Stuart Glendinning of Moneysupermarket said: “The withdrawal of Lloyds’ buffer zone and penalty waiver may indicate that it is widening its margins in anticipation of the OFT demanding lower charges. Consumers need to watch out because all banks levy fees and charge higher rates of interest if customers go overdrawn without permission.”
Banks and building societies are raking in about £4.7 billion a year in overdraft fees according to Which, the consumer group. This has gone up about 20 per cent in three years.
Some of this revenue is now under threat from the OFT, which is looking into whether the fees can be justified. It is due to announce its findings next spring.
If it rules that such charges should be no more than £10, as expected, the industry stands to lose £1.2 billion a year, according to Credit Suisse, the investment bank. Banks and building societies will be looking for ways to claw it back.
Earlier this year, the OFT ruled that the fees levied by credit card providers for late payments or exceeding your credit limit were excessive. Many firms charged between £20 and £25, but the OFT decided they should be no more than £12. Most providers have adhered to the ruling and reduced their fees, but they have lost no time in recouping the revenue in other ways.
Several card providers have hiked their balance-transfer fees, for example. Halifax has increased its fee from 2 per cent to 3 per cent, while Lloyds TSB has upped its charge from 2 per cent to 2.5 per cent. This measure alone will generate an extra £383m a year, according to Uswitch, a comparison site.
Many firms have also raised their interest rates. American Express put the rate on its Platinum card up six points, from 8.9 per cent to 14.9 per cent.
Lloyds increased its overdraft rates last month by between 0.2 and 2.5 percentage points, and will implement the new charging structure next month.
NatWest, HSBC, Yorkshire Bank, Clydesdale Bank and Smile have also hiked their overdraft rates recently.
Nick White at Uswitch said: “It’s clear the crackdown on credit-card charges and the investigation into current accounts are already driving many big banks to find new methods of getting more money from their customers.”
There are steps you can take to reduce the risk of getting stung by unauthorised borrowing charges. If you bank with Lloyds and usually keep your account in credit, but have occasionally strayed into the £10 buffer zone, it is worth setting up an overdraft facility. Many banks will agree a limit over the phone or online.
Interest rates on unauthorised overdrafts are much higher than those charged for authorised debt. NatWest’s authorised rate ranges form 15.93 per cent to 18.86 per cent, but its unauthorised rate is 29.69 per cent. Rates vary significantly, however, so if you are regularly overdrawn it may be worth switching your current account.
Alliance & Leicester’s Premier Direct account offers an interest-free overdraft for the first 12 months. Thereafter the rate is 5.9 per cent — for authorised and unauthorised borrowing.
The Times October 8th, 2006
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