Birmingham Post

Major shake-up to help bank overdraft prisoners

- Vicky Shaw Special Correspond­ent

OVERDRAFT charges will be made simpler and fairer and “overdraft prisoners” who are persistent­ly in the red will get more help under a radical shake-up proposed by the City regulator.

A fundamenta­l overhaul of overdraft pricing has been suggested by the Financial Conduct Authority (FCA), including ensuring the price for each overdraft will be a simple, single interest rate – with no fixed daily or monthly charges.

It also wants to tackle the highest costs in the market by stopping firms from charging higher prices when customers slip into an unarranged overdraft – when they borrow without arranging this with their lender first.

There would be a ban on fixed fees for borrowing through an overdraft. These fees can quickly ramp up the costs for borrowers and make it hard to compare deals.

Banks will have to do more to identify overdraft prisoners who are persistent­ly in the red and help them sooner.

The proposals, which the FCA described as the biggest interventi­on in the overdraft market in a generation, could be in force by early December 2019.

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

Referring to the proposal to align the cost of an unarranged overdraft with that of an arranged overdraft, Christophe­r Woolard, executive director of strategy and competitio­n at the FCA, told the Press Associatio­n: “The effect of that is if you’ve got a £100 unarranged overdraft at the moment you’re probably paying something like £5 a day for having that £100 overdraft.

“If you take these alignment proposals through, the cost of that drops to about 20p. So it’s a huge difference.”

Mr Woolard said fixed fees of, for example £2, £3 or £5 can sound like small numbers to borrowers.

He continued: “Actually, looked at as an interest rate, that’s huge.”

Around 19 million people use an arranged overdraft each year and around 14 million people use an unarranged overdraft annually.

A significan­t chunk of the money banks make from overdrafts comes from a small proportion of customers – who are often those who can least afford to pay charges.

In 2017, firms made more than £2.4 billion from overdrafts alone, with nearly a third (30 per cent) of this coming from unarranged overdraft fees and charges.

More than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016. Consumers in more deprived areas are 70 per cent more likely to use an unarranged overdraft than other consumers.

The plans are part of the FCA’s high cost credit review, which has already seen it propose a price cap on the rent-to-own sector.

The FCA has stopped short of proposing a price cap for overdrafts, saying it does not believe this would fix the problems.

But it will keep firms’ overdraft pricing under review and consider a cap if it sees signs prices are becoming harmful.

Andrew Bailey, chief executive of the FCA, said: “Today 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.”

Eric Leenders, managing director, personal finance at trade associatio­n UK Finance, said industry initiative­s to help people manage their money include text alerts and fee-free buffers for small overdrafts.

Mr Leenders said: “Helping customers to manage their everyday finances is a priority for the banking industry and we acknowledg­e the FCA’s intention to make overdraft pricing simpler and easier to understand.

“The personal current account market in the UK is highly competitiv­e with over 40 different providers offering hundreds of competitiv­e products.”

 ??  ?? > Banks will have to do more to identify customers who are always in the red
> Banks will have to do more to identify customers who are always in the red

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