Overdraft Mis-selling

Introduction

While overdrafts can seem like a convenient financial buffer, they can become a significant financial burden if used incorrectly. Many people are unaware that prolonged overdraft use can lead to substantial charges and exacerbate financial difficulties. Banks have a responsibility to ensure that overdrafts are used for short-term borrowing and not as a long-term solution to financial shortfalls. This section explores the issues surrounding overdraft mis-selling and provides information on how to address them.

Unaffordable Overdrafts

Overdrafts, with interest rates often exceeding 35%, are designed for short-term borrowing. However, many individuals find themselves trapped in their overdrafts for extended periods, incurring significant charges. This can be a sign of irresponsible lending, where banks have not adequately assessed the customer's ability to repay the overdraft within a reasonable timeframe. Unaffordable lending isn't limited to overdrafts; it can also encompass loans, credit cards, store cards, payday loans, and car finance. The common thread is that the lending is not sustainable for the borrower's financial situation.

Long-Term Overdraft Use

Millions of people in the UK have current accounts with attached overdraft facilities, often intended for unexpected expenses. While banks are willing to lend to individuals they believe they can profit from, they have a duty of care to ensure that this lending is responsible. Long-term overdraft use is a red flag for potential mis-selling. Banks should not encourage or allow customers to remain in their overdrafts indefinitely, especially given the high interest rates involved. This can constitute unaffordable lending and may be grounds for a complaint.

The increasing cost of living crisis is expected to drive a surge in complaints to the Financial Ombudsman Service (FOS) related to unaffordable lending, including overdrafts. This highlights the growing pressure on household finances and the potential for increased financial hardship due to irresponsible lending practices.

Making a Complaint

If you believe you have been mis-sold an overdraft or subjected to irresponsible lending practices, you can make a complaint to your bank. Here are the steps to follow:

1. **Gather Evidence:** Collect all relevant documents, including your bank statements, overdraft agreement, correspondence with the bank, and any evidence of your financial situation at the time the overdraft was offered or the limit increased.
2. **Contact the Bank:** Make a formal complaint to your bank, clearly outlining your concerns and the reasons why you believe the lending was irresponsible. Provide the evidence you have gathered.
3. **Internal Dispute Resolution:** Follow the bank's internal complaints procedure. They are required to have a process for handling customer complaints.
4. **Financial Ombudsman Service (FOS):** If you are not satisfied with the bank's response, you can escalate your complaint to the Financial Ombudsman Service. The FOS is an independent body that can help resolve disputes between consumers and financial businesses.

Impact on Credit Rating

Making a complaint about your overdraft does *not* directly affect your credit rating. The complaint itself is not recorded on your credit file. Only the bank you are complaining to (and other companies within the same financial group) will be aware of the complaint. However, if your complaint is successful, any negative marks on your credit record related to the mis-selling (e.g., missed payments due to unaffordable debt) will typically be removed, often after any outstanding balance is cleared.

The Financial Ombudsman Service may instruct lenders to correct credit files to remove any adverse information related to loans where irresponsible lending has been identified.