Radical plans to overhaul how banks charge customers for overdrafts – including stopping firms charging higher prices for unarranged borrowing – have been proposed by the City regulator.
The Financial Conduct Authority (FCA) will also ban fixed fees for borrowing through an overdraft and make charges simpler to understand under its proposals.
The watchdog described the plans as the biggest shake-up to the overdraft market in a generation.
Press release: We announce proposals to fundamentally reform the way banks charge for overdrafts and extend protections for other high-cost credit products https://t.co/kjCL5r44Xi #faircredit
— FCA (@TheFCA) December 18, 2018
In 2017, firms made more than £2.4 billion from overdrafts alone, with around 30% from unarranged overdrafts.
More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.
People living in deprived areas are more likely to be affected by these fees and in some cases unarranged overdraft fees can be more than 10 times as high as fees for payday loans, the FCA said.
The FCA said the changes it is proposing include:
– Ensuring the price for each overdraft will be a simple, single interest rate – with no fixed daily or monthly charges;
– Tackling the highest costs in the market by stopping firms from charging higher prices when customers use an unarranged overdraft;
– Banning fixed fees for borrowing through an overdraft;
– Mandating that arranged overdraft prices must be advertised in a standard way, including an APR (annual percentage rate) to help customers compare them against other products;
– Telling banks to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use.
Andrew Bailey, chief executive of the FCA, said: “Today we are proposing to make the biggest intervention in the overdraft market for a generation.
“These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable.
“It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.
“We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts.
“These changes would make overdrafts simpler, fairer, and easier to manage.”
Our findings, proposals and remedies on overdrafts and high-cost credit #faircredit pic.twitter.com/KW0QUys4Zd
— FCA (@TheFCA) December 18, 2018
The proposals are part of the FCA’s wide-ranging high cost credit review, which has seen it probe various types of borrowing.
As part of the review, the FCA also recently proposed a price cap on the rent-to-own sector which is subject to consultation and could save consumers up to £22.7 million per year. A price cap has already been imposed on payday lenders.
The FCA also said it is making changes, proposed in May, to give more protection to consumers in the home-collected credit, catalogue credit and store card sectors.
It also said on Tuesday that it is proposing additional protections on “buy now, pay later” offers, including stopping backdated interest for repayments made during the offer period.
The FCA will consider feedback before publishing policy statements on overdrafts and buy now, pay later offers in June 2019.
Finance expert Andrew Hagger, of Moneycomms, said the overdraft proposals “will prevent customers getting a raw deal”.
He said: “The banning of fixed-fee overdrafts is long overdue as they are simply punitive, particularly for those who borrow short-term or relatively small amounts.
“The banks have tried to claim that fixed-fee charging is easier for customers to understand – that might be so but such ‘transparency’ comes at a huge cost for the borrower.”
The FCA’s proposals were also welcomed by StepChange Debt Charity, which said in the first half of this year just under half (47%) of its clients had an overdraft at the time they contacted the organisation.
Overdrafts were the second most commonly-held consumer credit debt after credit cards, it said, and the average overdraft debt was £1,523.
StepChange head of policy Peter Tutton said: “We are extremely pleased to see the FCA’s plans for robust new rules on unauthorised overdraft charges.
“These should help to disrupt the toxic ‘debt spiral’ effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt.
“Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.”
Jenni Allen, managing director of Which? Money, also welcomed the clampdown on “rip-off unarranged overdraft charges”.
She added: “Today’s strong action from the regulator will come as a massive relief for all those regularly hit with such extortionate charges, which cost some people thousands a year.
“The regulator must now ensure these important changes are swiftly introduced and enforced.”
