The Financial Conduct Authority (FCA) has confirmed it will introduce reforms to the overdraft system.
In what the regulator described “the biggest overhaul to the overdraft market for a generation”, it announced that it is:
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 new rules will be in force by April 6, 2020, 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.
The repeat use remedies will take effect alongside the changes the FCA announced in December 2018:
Peter Tutton, head of policy at StepChange Debt Charity, said: Our own research shows that around half our clients have accumulated overdraft debt at the point they turn to us. So while it’s disappointing that the rules prohibiting harmful unauthorised overdraft charges will take a bit longer, we are delighted that the FCA is turning the page on a long standing cause of hardship for struggling households. The challenge now is to make sure the steps to help customers get out of expensive overdraft debt work in practice.
“In the credit card market, the effectiveness of the remedies required by the FCA is not yet proven in practice. In the overdrafts market we would therefore like the regulator to be more proactive and fleet-of-foot in identifying and refining the specific, practical steps banks should be taking to help customers escape the overdraft trap more quickly, and to break the cycle of repeat use of overdrafts.”