The FCA ends unarranged overdrafts fees in the biggest shake-up to the UK overdraft market for a generation.
According to the FCA, its proposed changes will fix a dysfunctional overdraft market. In particular, the changes aim to make overdrafts simpler, fairer, and easier to manage.
And, says the FCA, the regulations will protect millions of consumers that use overdrafts, particularly more vulnerable consumers.
But while the FCA ends unarranged overdraft fees to help the vulnerable, the cost for occasional overdraft users may rise.
In 2017, firms made over £2.4bn from overdrafts alone, with around 30% from unarranged overdrafts. Meantime, more than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers. People living in deprived areas are more likely to be impacted by these fees. In some cases, unarranged overdraft fees can be more than ten times as high as fees for payday loans.
FCA ends unarranged overdraft fees: the changes
- Banks and building societies must not charge higher prices for unarranged overdrafts than for arranged overdrafts;
- Fixed fees for borrowing through an overdraft. The FCA ends fixed daily or monthly charges, and fees for having an overdraft facility;
- Banks and building must price overdrafts by a simple annual interest rate;
- Banks and building societies must advertise arranged overdraft prices with an APR to help customers with price comparison;
In addition, the FCA will issue new guidance. This will reiterate that refused payment fees should reasonably correspond to the costs of refusing payments.
And the FCA says that banks must do more to identify vulnerable customers who are showing signs of financial strain. In addition, banks must develop and implement a strategy to reduce repeat overdraft use.
Andrew Bailey, FCA CEO says: “The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts.
“These are ten times as high as fees for payday loans. Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges. These are both a result of and driver of poor competition.
FCA ends unarranged overdraft fees: ‘from £5 a day to £0.20 a day’
“Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. We are simplifying and standardising the way banks charge for overdrafts. We expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.
“This will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”
The new rules will be in force by 6 April 2020 apart from the guidance on refused payment fees. These will take effect immediately and the repeat use remedies h will come into force on 18 December 2019.
The repeat use remedies take effect alongside changes announced in December 2018 to make overdrafts easier to manage:
- Digital eligibility tools that allow customers to check if they can get a cheaper overdraft with another provider;
- Overdraft charge calculators that help customers translate interest rates into pounds and pence, and
- Text message or push notification alerts and changes to display overdrawn balances at ATMs to address unexpected overdraft use.
Sarah Nield, financial services risk and regulation director at PwC, tells RBI: “The FCA’s measures today are fundamentally based on the need to prevent harm caused to the most vulnerable users of overdrafts. The FCA is taking action to improve outcomes for vulnerable customers by requiring pricing, competition and repeat use remedies.
FCA ends unarranged overdraft fees: but costs for some may rise
“The measures should make it cheaper for customers to use an unarranged overdraft. The long-term aim is to make it easier to escape repeated overdraft use altogether. However, for customers using arranged overdrafts, who show no signs of financial distress, costs may even increase.
“A number of banks and building societies have recently made changes to the structure of their overdrafts. The potential loss of income and additional monitoring costs, may lead firms seeking to make up their losses. This comes from higher arranged overdraft rates, loss of interest free buffers, additional current account charges or tighter lending criteria.
“The FCA expects any price increases to be tempered by firms’ desire to compete. Tools designed to facilitate better price comparison and more prominent APR disclosures will enable them to make more informed decisions.
“It’s interesting to see that the FCA will be keeping a close eye on firms’ strategies for repeat use. Firms can expect an ongoing dialogue on this topic with the regulator.
“Firms should not rest on their laurels. With some rules coming into effect today, and others in the not so distant future the deadlines will be fast upon them.”
UK Finance: text alerts are working
Eric Leenders, MD Personal Finance, UK Finance says the banking industry will work with the FCA to implement the rules.
“The industry is working on a voluntary agreement to make the cost of overdraft borrowing easier to understand for consumers. This will build on the range of measures already introduced by the industry.
“These include text alerts which have been shown to reduce overdraft charges by 25%. Overdrafts can provide a convenient way for customers to smooth their short-term cashflow. This is a highly competitive market in the UK with over 96 products on offer.
“We always urge customers to speak to their bank and arrange an overdraft in advance to ensure payments are honoured.”
Tom Goodey, Retail Banking Sector Lead at regulatory consultants Huntswood, adds: “In order to avoid heavy regulatory scrutiny, firms should be undertaking an assessment of their internal policies and procedures to ensure they are clearly communicating with customers.
It’s also crucial that firms invest in high quality training for frontline staff to spot the signs of vulnerability. In addition, firms need to introduce automated measures where direct contact may not be possible. This will enable firms to respond in an effective and responsible way. And it minimises the potential for further financial difficulty down the line.”
UK overdrafts-by numbers
- 52 million UK customers hold a current account
- 19m use arranged overdrafts
- 14m use unarranged overdrafts
- 7m use both
- £2.4bn: revenue from overdrafts in 2017
- £700m revenue from unarranged overdrafts