Rip-off overdraft fees ‘worse than pay day loans’ to be banned

BANKS are to face a major crackdown on overdraft fees after the financial watchdog said that they can cost up to 10 times as much as payday loans.

The Financial Conduct Authority (FCA) branded the overdraft market “dysfunctional” as it announced the biggest shake-up in a generation.

Under new rules, banks and building societies will no longer be able to charge higher fees for unplanned overdrafts, and won’t be able to charge for the option of simply having an overdraft facility.

Banks must also charge a single interest rate instead of fixed daily or monthly fees and will be required to price overdrafts by a simple annual interest rate. That rate will have to be advertised so customers can shop around.

The regulator will also require banks to identify customers struggling financially and draw up individual plans to help them get out of their overdrafts. A spokesman for the FCA said: “People living in deprived areas are more likely to be impacted by these fees.

“In some cases, unarranged overdraft fees can be more than 10 times as high as fees for payday loans.”

Around 26 million people are now in overdraft in the UK. In 2017, banks earned £2.4 billion from overdrafts, around a third of which came from unplanned fees. FCA figures showed more than half of banks’ unarranged overdraft fees came from just 1.5 per cent of their customers in 2016.

The FCA is also introducing new guidelines telling banks that fees for refused payments must be in line with the size of the declined transaction.

Andrew Bailey, FCA chief executive, said: “The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, often 10 times as high as fees for payday loans.”

Mr Bailey said the changes, which come into force next April, would mean the cost of borrowing £100 through an unarranged overdraft should drop from £5 a day to less than 20p a day.

Sarah Nield, of PWC, warned banks might try to make up losses caused by the changes in other ways. She said: “The potential loss of income, and additional monitoring costs, could lead to firms seeking to make up their losses through higher arranged overdraft rates, loss of interest-free buffers, additional current account charges or tighter lending criteria.”