The FCA says that its measures to limit overdraft charges mean that UK customers have saved almost £1bn.
The FCA overdraft regulations have resulted in:
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- more than £500m saved due to pricing rules that came into force in April 2020.
- and approximately up to £486m saved due to measures to help customers manage repeated overdraft use. This came into force in December 2019.
The FCA evaluation found each customer who had an arranged overdraft or access to an unarranged overdraft saved, on average, £17.40 in charges in 2021 due to the new pricing rules.
The FCA estimates that the 30% of consumers living in the most deprived areas in the UK saved £153m in 2021.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said: ‘We know that overdrafts offer a convenient way to help some people manage temporary cash flow issues. But some banks were charging more than 80% APR (Annual Percentage Rate) on arranged overdrafts, once fees and charges were factored in.
“We took action to simplify overdraft charges and to tackle high unarranged overdraft fees. It has saved people across the UK almost £1bn in total.
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By GlobalData“Such savings are vital as people manage cost of living pressures. We expect banks and building societies to price fairly and support those in difficulty. And we encourage consumers to shop around for the best current account to suit their needs.
‘We expect banks to work with customers, who repeatedly use their overdrafts, to help them understand the options available to reduce their reliance on overdrafts.”
FCA overdraft regulations designed to encourage competition – but switching remains low
The FCA called for an end to high overdraft charges in 2018. At the time, the FCA estimated that banks earned over £2.3bn from overdraft fees in 2016. It said that nearly 30% of this came from unarranged overdrafts.
The rules on pricing required firms to stop charging fixed fees for overdraft borrowing, to charge no more for an unarranged overdraft than an arranged one, to price overdrafts with a single annual interest rate, and advertise overdrafts with a representative Annual Percentage Rate.
The FCA’s new rules are also aimed at encouraging competition in the market. But despite the changes and even taking into account the successful operation of the 7-day switching initiative, UK current switching rates remain stubbornly low.
For calendar year 2022, there was a total of 986,959 current account switches. It means that around 2% of UK adults switched their primary current account.
Not only are the 986,959 total switches for 2022 about par for the course, but the figure also remains less than the annual figure when seven-day switching was rolled out in 2013. Specifically, in 2012 there were 1.2 million switches and in 2013 a total of 1.02 million switches. So, despite a huge amount of energy and promotion of the switching service, switch rates are less than the levels witnessed back in 2013.
The new rules also require banks to identify and take action to support customers who frequently use their overdraft. This results in high cumulative charges that are harmful to the customer.
The FCA estimates that consumers will save between £88m and £105m in charges a year from now on due to its actions to tackle repeat use.
Overdrafts are intended for short-term or emergency use so consumers should consider other methods of credit if they find they need to borrow for longer.
Overdraft good practice
The FCA has also published examples of good practice and areas of concern by firms, following its review of their strategies to help customers who are repeat users of their overdrafts.
Many of the firms were meeting the FCA’s expectations. But gaps were found particularly about how firms monitor and review the effectiveness of their policies and procedures for customers who repeatedly use their overdraft. All firms included in the review will be sent the good practice examples so they can improve where necessary.
