Banks to be banned from charging higher fees for unarranged overdrafts

Banks in the UK are to be banned from charging excessive fees for unauthorised overdrafts as part of the City watchdog’s clampdown on the “dysfunctional” high-cost credit sector.

In what the Financial Conduct Authority described as its biggest intervention in the sector for a generation, it is proposing a simple, single interest rate for each overdraft regardless of the amount borrowed, with no fixed daily or monthly charges.

Last year, banks and building societies made more than £2.4bn from overdrafts, with about 30% from unarranged overdrafts – more than £700m – the watchdog said. More than half the unauthorised overdraft fees came from just 1.5% of customers in 2016, with people living in deprived areas most affected. In some cases, these fees can be more than 10 times as high as those for payday loans.

Laura Suter, a personal finance analyst at the stockbroker AJ Bell, said: “Someone with a £100 unarranged overdraft at the moment can pay £5 a day in charges, and the FCA plans to reduce this to just 20p a day.”

TSB, Royal Bank of Scotland and NatWest lead the list of the worst banks for unarranged overdrafts, according to the consumer group Which?. TSB charges £76.35 for dipping into an unauthorised overdraft by £100 for one week while RBS and NatWest both charge £56. Santander, Clydesdale Bank and Yorkshire Bank each charge £42.

Banks that don’t charge unarranged fees include Lloyds Banking Group, which owns Lloyds, Bank of Scotland and Halifax; Starling Bank; and M&S Bank.

Which? also compared the cost of borrowing £100 for 30 days in an unarranged overdraft in May. A payday loan cost £24, due to the price cap introduced in 2015. An unuathorised overdraft is far more expensive: Santander charges £179 over 30 days, TSB charges £160, HSBC and First Direct charges £150, RBSA and NatWest £144 and Yorkshire and Clydesdale Bank have £120 fees.

The debt charity StepChange welcomed the ban on unauthorised overdraft charges. Its head of policy, Peter Tutton, said: “[It] should help to disrupt the toxic ‘debt spiral’ effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt. Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.”

StepChange said overdrafts were the second most commonly held consumer credit debt after credit cards, with the average overdraft running at £1,523.

Which? said the ban would come as a “massive relief for all those regularly hit with such extortionate charges, which cost some people thousands a year”.

Its managing director, Jenni Allen, added: “The regulator must now ensure these important changes are swiftly introduced and enforced to finally stop this unfair practice and put an end to these excessive fees.”

UK Finance, which represents banks and other financial firms, said: “UK Finance members have been working with the regulator to explore new ways to better identify and support customers with repeat overdraft use. We will consider today’s proposals carefully and continue to liaise with the FCA in the coming months.”

Despite calls from charities and MPs, the watchdog would not set a monthly price cap, arguing it could prompt providers with low, or no, charges to raise prices, but said it would consider introducing a cap if it saw “signs that prices are becoming harmful”.

Martin Lewis, founder and chair of MoneySavingExpert, said trying to calculate or compare overdrafts was “flummoxing due to a multiplicity of charging structures – such as 20% APR, 50p a day, or 1p per day per £7 overdrawn”. He added that the FCA was on the right track with its latest measures. However, he reiterated his call for a cap.

Money Advice Trust, the charity that runs National Debtline, said the option of imposing a price cap should remain on the table.

The FCA says that overdraft prices must be advertised in a standard way, including an APR to help customers compare them; and refused payment fees should “reasonably correspond to the costs of refusing payments”.

The watchdog also told banks to do more to identify customers who are in financial difficulty and to help them reduce their overdraft use – without announcing specific measures.

The watchdog has already ordered firms to provide online tools that allow customers to check if they can get a cheaper overdraft elsewhere, along with calculators that translate interest rates into pounds and pence. It has also asked for mobile phone alerts and changes to how overdrawn balances are displayed at cash machines.

The FCA chief executive, Andrew Bailey, said: “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 … These changes would make overdrafts simpler, fairer, and easier to manage.”

The watchdog has also proposed new rules for doorstep lending, catalogue credit and store cards. It wants to introduce additional protections on “buy now, pay later” offers, including stopping backdated interest for repayments made during the offer period, that will save consumers about £40m-£60m.

The FCA will consider feedback before publishing its final rules on overdrafts and “buy now, pay later” offers next June.