FCA overhauls overdraft rules

In what the regulator described “the biggest overhaul to the overdraft market for a generation”, it announced that it is:

• Stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts;
• Banning fixed fees for borrowing through an overdraft – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility;
• Requiring banks and building societies to price overdrafts by a simple annual interest rate;
• Requiring banks and building societies to advertise arranged overdraft prices with an APR to help customers compare them against other products;
• Issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments; and
• Requiring banks and building societies 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 reduce repeat overdraft use.

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:

• 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 cash machines to address unexpected overdraft use.

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.”