Debt advice charities have backed the Financial Conduct Authority’s (FCA’s) plan to drastically reduce unarranged overdraft charges, as the regulator pledged to make its “biggest intervention in overdrafts for a generation.”
The FCA today (December 18) announced its next package of measures to overhaul the way banks charge for overdrafts, and to strengthen protection for customers of home credit, catalogue credit and store cards.
Alongside this the FCA has also published the results of its review into the retail banking market and launched further measures on ‘buy now pay later’ offers.
Under the package of measures now open for consultation, the FCA will stop banks charging higher prices for unarranged overdrafts. The reforms include:
The FCA will also issue new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments. Lenders will have to explain the costs that may be included.
Banks will also be told to do more to identify overdraft customers showing signs of financial strain or are in financial difficulty. Lenders will be expected to help those customers reduce their overdraft use.
While many lenders such as Lloyds Banking Group moved to abolish unplanned overdraft charges in 2017, research from consumer groups such as Which? has found that unarranged overdraft fees have outstripped payday loan costs.
But today the overdraft measures have been launched to fix what the FCA called a “dysfunctional market.”
Chief executive Andrew Bailey said: “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.”
Bailey added: “These changes would make overdrafts simpler, fairer, and easier to manage.”
The reforms were informed by the FCA’s analysis of the retail banking market. This study found that, in 2017, firms made more than £2.4bn from overdrafts alone, with around 30 percent from unarranged overdrafts. More than 50 percent of banks’ unarranged overdraft fees came from just 1.5 percent of customers in 2016.
The regulator also found that people living in deprived areas are more likely to be impacted by these fees and in some cases, unarranged overdraft fees could be more than 10 times as high as fees for payday loans.
Gillian Guy, chief executive of Citizens Advice, said: “People who are financially insecure have been punished by unarranged and complicated overdraft fees for far too long.
“We have long called for a clampdown on these indefensible charges. It will help the thousands of people who come to see us with overdraft problems from staying stuck in debt.”
Guy added that in the past 12 months alone, 30,000 people came to Citizens Advice with problems related to bank and building society overdrafts. The charity’s research also found that people with insecure incomes were twice as likely to have paid arranged overdraft fees when compared to those with stable incomes.
Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said: “This is a significant and welcome shake-up of the way overdrafts work.
“Putting an end to fixed charges and higher pricing for unarranged overdrafts should significantly reduce costs for people who use this form of borrowing. At National Debtline we see that repeated overdraft use is often a sign of wider financial problems – and the regulator is right to require banks to do more to identify and help these customers.”
However, Elson added that the option of introducing a price cap “should remain firmly on the table”.
She said: “The FCA should set a clear end date at which it will review the impact of these new measures in bringing costs down, and must be prepared to introduce a price cap if required.”
Following a consultation in May 2018, the FCA has already introduced reforms to help all consumers understand their overdraft by requiring banks and building societies to provide:
The new proposals announced on December 18 are being published alongside the FCA’s Strategic Review of Retail Banking Business Models. This is the study that informed the action on overdrafts.