The Financial Conduct Authority (FCA) has today announced proposals to amend the way in which banks charge for overdrafts, which would bring an end to banks charging higher prices for unarranged overdrafts.
The authority revealed that in 2017 alone, firms made over £2.4bn from overdrafts, with approximately 30 per cent of that coming from unarranged overdrafts. Furthermore, more than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016, with those living in deprived areas the most likely to be impacted.
The regulator found that, in some instances, unarranged overdraft fees can be more than ten times as high as fees for payday loans.
In order to address this growing issue, the FCA has proposed the following “radical” changes to the overdraft market: ensuring the price for each overdraft will be a simple, single interest rate, rather than fixed daily or monthly charges; preventing firms from charging higher prices for an unarranged overdraft; and banning fixed fees for borrowing through an overdraft.
The regulator has also proposed making it compulsory for lenders to advertise arranged overdraft prices in a standard way, including an APR, to allow customers to compare products more easily, while also issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments, and explain that costs may be included.
Finally, the FCA wants lenders to do more to identify overdraft customers who are displaying signs of financial strain or are in financial difficulty, and to support them in reducing their overdraft use.
Following a consultation in May, the FCA has already introduced reforms to help consumers better engage with and understand their overdraft. Since the consultation, banks and building societies have had to provide digital eligibility tools which allow customers to see if they can get a cheaper deal elsewhere, supply overdraft charge calculators, and give consumers alerts and changes to display overdrawn balances at cash machines.
Commenting, FCA chief executive Andrew Bailey 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 consultation is informed by our analysis of retail banking business models, and how these are evolving in the face of significant technological change.”
Subscribe to our newsletter to receive breaking news by email.