FCA introduces reforms for ‘dysfunctional’ overdraft market

The Financial Conduct Authority (FCA) has today announced it is introducing reforms to fix a “dysfunctional overdraft market”, in a bid to make them simpler, fairer and easier to manage.

The regulator has announced that it is preventing banks and building societies from charging higher prices for unarranged overdrafts that for arranged overdrafts, banning fixed fees for borrowing through an overdraft and instead implementing the requirement for banks and building societies to price overdrafts by a simple annual interest rate.

Furthermore, banks and building societies will have to advertise arranged overdraft prices with an APR to help customers compare them against other products.

The FCA will issue new guidance to “reiterate that refused payment fees should reasonably correspond to the costs of refusing payments”. Banks and building societies will also need to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to repeat overdraft use.

Research published by the FCA, in conjunction with UK Finance, found that consumers wanted to see the cost of borrowing set out in pounds and pence, which the two bodies have agreed to.

Commenting, FCA chief executive Andrew Bailey said: “'The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often 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, that are both a result of and driver of poor competition.

“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. Following our changes 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.

“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”

The regulator revealed that the new rules will be in force by 6 April 2020 and, apart from the guidance on refused payment fees, which will take effect immediately, and the repeat use remedies which will come into force on 18 December 2019.

In 2017, firms made over £2.4bn from overdrafts alone, with around 30 per cent from unarranged overdrafts. More than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016. 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.

Also commenting, UK Finance managing director, personal finance, Eric Leenders added: “The banking industry is committed to helping customers manage their money and we will be working closely with the FCA to implement these rules.

“The industry is working on a voluntary agreement to make the cost of overdraft borrowing easier to understand for consumers which will be implemented in April 2020. This will build on the range of measures already introduced by the industry, such as text alerts which have been shown to reduce overdraft charges by 25 per cent.

“Overdrafts can provide a convenient way for customers to smooth their short-term cashflow, and there is a highly competitive market in the UK with over 96 products on offer.”

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