The Financial Conduct Authority has unveiled proposals to change how banks and building societies are able to charge customers who use overdrafts, after declaring the current system ‘dysfunctional’.
The FCA highlights that in some cases the fees incurred from an unarranged overdraft - equivalent to an interest rate of 10-20% a day - can be more than ten times as high as fees for payday loans.
The regulator noted that account providers pocketed an eye-watering £2.4 billion from overdrafts alone in 2017, with almost a third of this (30%) coming from unarranged overdrafts.
In fact, more than half of the money coming into banks’ coffers from unarranged overdrafts came from a paltry 1.5% of customers in 2016.
More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016, says FCA. Staggering stat that shows a tiny % effectively subsidise "free" banking for all— Damian Clarkson (@JournoDamo) December 18, 2018
Most worrying of all, the regulator pointed out that it’s people living in deprived areas who are most likely to be impacted by these punishing fees.
Overdrafts - what’s changing?
The FCA has outlined the following proposals to revamp the overdraft market:
Overdrafts will have a simple, single interest rate - no fixed daily or monthly charges
Firms will be prevented from charging higher prices for unarranged overdrafts
Fixed fees for overdraft borrowing will be banned
Arranged overdraft prices must be advertised in a standard way, including an APR so that people can compare deals more easily
Refused payment fees must reasonably correspond to the cost of refusing payments (the same will apply to other administration fees).
Pushing banks to do more to identify the customers who are exhibiting signs of being in financial difficulty, and to find ways to help them reduce their use of overdrafts.
These latest proposals follow reforms which were already introduced earlier this year, which the regulator reckons will help people better engage with and understand their overdraft.
These changes included forcing banks and building societies to provide online eligibility tools to help people see if they can get a cheaper overdraft with a different provider and overdraft charge calculators to ensure people can translate interest rates into pounds and pence to see what it is really going to cost them.
Will the changes actually make a difference?
Andrew Bailey, chief executive of the FCA, said that the regulator was proposing the “biggest intervention in the overdraft market for a generation”, arguing that it was clear that the way banks manage and charge for overdrafts needs fundamental reform.
“These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable,” he added.
The proposed changes won immediate favour from The Money Advice Trust charity, which runs the National Debtline.
Joanna Elson OBE, chief executive of the charity, said that repeated overdraft use is often a sign of wider financial problems, and so it was right that banks should do more to identify and help these customers.
However, she urged the regulator not to rule out introducing an overdraft price cap.
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.”
The FCA estimates that the cost of an unarranged overdraft will fall from £5 a day to 20p under their approach and have dismissed the idea of a cap as unsuitable for revolving credit like overdraft and credit cards.
It is possible that some customers could end up paying more for their overdraft.
Christopher Wollard, FCA director of strategy and competition, warned that "we will see some adjustment in charges by banks", including higher costs, although less than 10% of overdraft users would be worse off.
It’s not just overdrafts
Alongside the overdraft changes, the FCA is also proposing extending the protections on offer to people who use home-collected credit, catalogue credit and store cards.
These include stopping backdated interest for repayments made during buy now, pay later offers, a move it claims will save shoppers around £40-£60 million.
Firms offering these deals will also be required to send reminders when the offer period is coming to an end to prompt repayment.
What happens now?
These proposals are all just at the consultation stage for now, so nothing is changing just yet.
The consultations run until 18th March 2019, with the FCA then due to publish policy statements on what is actually going to happen in June next year.
Banks will need to have all the overdraft measures in place by December 2019.
With further reporting by Sam Richardson