Why it makes sense for the banks to have 40% overdraft rates

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OUTRAGEOUS! RIP-OFF! Banks charge high rates for overdrafts!

The UK’s high-street banks were pressed by regulators to cut the cost of overdrafts. So they have. They’re no longer allowed to charge extra for borrowing without prior permission. So they’ve stopped. But that means they stand to lose millions, since overdrafts have been a nice money spinner in a market where current accounts are still mostly free. So banks have been trying to limit how much they lose.

The Financial Conduct Authority, whose overdraft reforms come into effect in April, held back from setting a cap on rates. The market has come up with one anyway. HSBC, Lloyds, TSB and the rest have all set interest charges at about the 40 per cent mark. Ridiculous, scream the red tops.

The banks would charge more if they thought they could. But when Nationwide became the first to announce its 40 per cent rate last July, the headlines were bad. Any lower and the banks worry they will lose too much cash.

Banks across the market made £2.4bn from overdrafts in 2017, the FCA reckons. Poorer customers were disproportionately hit, with total costs often 10 times as high as payday loans. The FCA’s reforms have succeeded in cutting rates for those customers.

For everyone else, charges have gone up. Last week, the FCA seemed fine with that. It crowed about the success of its new rules.

This week, it seems suddenly not so sure. It has made a show of tut-tutting at banks. They must explain how they arrived at their new 40 per cent rate, in more expansive terms than “I copied the next guy, guv”. The banks must cough up minutes of meetings, pricing proposals, blah-di-blah.

To conspiracy theorists it may smack of collusion. Outright collusion is unlikely, though. The rates are whopping, but transparently so. Unsecured consumer credit is a risky business. Banks charge accordingly. Not all customers are equally risky. As the FCA has noted, customers with better credit have other cheaper options — such as credit cards at 0 per cent.

The FCA has been stung by criticism over its handling of the minibond scandal and the Woodford debacle, to name just two. But we shouldn’t beat it up for bodging regulation of overdrafts. It has acted rationally. So have banks.

Cresting the waves

Take a moment to marvel. Crest Nicholson, the housebuilder, barely met full-year profit forecasts despite dialling down expectations in October. Exceptional costs covering a shortfall in London prices and a provision for fire risk, post Grenfell Tower, touched £18m. Profits, after those nasties but before tax, fell 40 per cent in 2019 to £103m. Yet the shares rose yesterday.

Shareholders were in an indulgent mood. Crest has a new boss in Peter Truscott, who joined from rival Galliford Try late last year and is rebasing expectations. His blueprint for the next three years outlined yesterday centres on streamlining costs, establishing common priorities across divisions, imposing new disciplines and broadening the group’s portfolio.

He has form. Before becoming Galliford’s chief executive, he was in charge of Galliford’s Linden Homes, where he helped lift margins by a third and diversified into affordable homes, regeneration and social housing.

Now Mr Truscott is laying similar foundations at Crest. The company will focus on cash and improve operating margins from 12 per cent to nearer 15 per cent by 2023. Returns on capital will rise to 20 per cent.

This is the house that Mr Truscott is building.

It is not overly ambitious. Rivals’ ROC top 25 per cent. Margins at Vistry — formerly known as Bovis — which bought Linden Homes for just over £1bn last year, are close to 17 per cent.

Still, Mr Truscott is right to be wary given the uncertainty over Brexit, London house prices and build cost inflation. The shares yielding 7.5 per cent are not pricey compared with peers. And if he gets the footings right, Crest could reach new heights.

Now, play nicely

Gravel-voiced Gareth Davis and Colin Jones, formerly of Euromoney, are to fill two of the non-executive holes on the board of ad agency M&C Saatchi.

The Saatchi moniker is powerful but the hires are a coup for the Aim tiddler that uncovered a black hole in its accounts last year. Mr Davis, a Hanson alumnus, has led Imperial and chaired William Hill, DS Smith and Ferguson. He has seen no end of board fracas. However, M&C Saatchi has recruited bruisers from the great and the good before. Michael Dobbs, a Tory peer, advised Maggie Thatcher, Michael Peat advised the crown. Both were M&C non-execs with banker Lorna Tilbian. They walked out last month after a spectacular scuffle with execs. It seems gravitas gained elsewhere counted for little.

kate.burgess@ft.com

FCA- banks: cat.rutterpooley@ft.com