The Government has today announced a voluntary package of measures, agreed with the major banks, to help limit overdraft charges when a customer exceeds their limit.

All the major banks have signed up to the agreement: Barclays, HSBC (including First Direct), Lloyds Banking Group (including Lloyds TSB, Halifax and Bank of Scotland), RBS (including Natwest) and Santander.

Under the code, banks must also complete the switching process when a consumer moves to a different provider within seven days.

The voluntary package also includes a curb on store card sales, including a ban on discounts within seven days of a customer applying for a card.

However, many of these plans won't be in place until 2013, though some banks already adopt a number of the measures.

Here is what is in the code on bank charges:

  • There will be a "small" buffer zone within which banks cannot levy charges for exceeding an overdraft. The Government has not defined how big the buffer is, it will be for the industry to decide.
  • There will be a grace period within which a consumer can transfer funds before receiving charges. This has also not been defined.
  • Consumers will have the option to receive alerts when their balance is low so they can take action to avoid charges. This can be by text, email or phone.
  • Annual statements will also be provided to customers so they can see how much their account costs over the year. This had already been agreed before today's announcement.
  • However, there will be no cap on the number or amount in charges a bank can levy.

Martin Lewis, creator, says: "On the whole, this is good news, though it's still missing the hardcore measures that'd really help consumers. 

"Clydesdale Bank still charges £35 per transaction if you're over your limit. This is an astronomical figure – proved by the fact payday lending at 5,000% APR works out cheaper in some cases.

"A cap on these charges and the ability for customers to truly opt out of payments and fines for going beyond them would really help.

"However all these measures to give people more info to help avoid accidentally going over the limit are useful. 

"Though the buffer zone is a red herring. It just moves the point at which people will be charged a little higher – not a bad thing, but for those suffering a catastrophic collapse in their finances it'll make little difference and they'll still be slammed by a range of big costs"

Switching changes

Banks must switch customers who want to transfer provider within seven days under the code.

Martin adds: "Anything that makes bank account switching work quicker is welcome. We need to get more competition into the sector.

"Things have improved over recent years and this is year another step – though portable bank account numbers would be the real breakthrough, doing for banking what it did for mobile phones, where customers can transfer number easily."

When will the changes happen?

Balance alerts will be available from March 2012, seven-day switching from September 2013, with full implementation of the other measures by March 2013.

The Government says over 85% of current account customers will benefit from measures to make charges for unarranged overdrafts, where someone exceeds their limit, clearer.

What the banks say

Angela Knight, chief executive of the British Bankers' Association, says: "We support the further commitment from the major banks to ensure all their full-facility accounts will benefit from the option to receive alerts and to have safety buffers. This will help prevent customers incurring unintentional costs.

"Many of our members already offer services to warn customers if they are close to zero or likely to go over an agreed overdraft limit. However, the safest course of action is still for people to contact their bank when an overdraft higher limit is anticipated."