Watchdog to act on overdrafts market
COMMERCE: Millions of banking customers will benefit from the biggest overhaul in a generation to fix the “dysfunctional” overdraft market where fees can cost 10 times a payday loan.
The Financial Conduct Authority has revealed plans to make overdrafts simpler, fairer and easier to manage.
MILLIONS of banking customers will benefit from the biggest overhaul in a generation to fix the “dysfunctional” overdraft market where fees can be 10 times the charges for a payday loan.
The Financial Conduct Authority (FCA) announced plans yesterday to make the products simpler, fairer and easier to manage for those who go into the red.
The City regulator said the radical changes represent the biggest overhaul of overdrafts in a generation, and the reforms will “fix a dysfunctional overdraft market”.
Plans include stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
The FCA expects the typical cost of borrowing £100 through an unarranged overdraft to fall from £5 a day to less than 20 pence a day.
FCA chief executive Andrew Bailey said: “The overdraft market is dysfunctional, causing significant consumer harm.
“Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often 10 times as high as fees for payday loans.
“Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.
“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”
Fixed fees for borrowing through an overdraft will also be banned – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility. In 2017, firms made more than £2.4bn from overdrafts alone, with about 30 per cent from unarranged overdrafts.
More than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016. People living in deprived areas were more likely to be affected by these fees.
Gareth Shaw, the head of money at the Which? consumer group, said: “This strong action from the regulator will come as a huge relief to those people who’ve been regularly hit with such extortionate charges. The changes can’t come soon enough.”
The FCA has also announced it is requiring banks and building societies to advertise arranged overdraft prices with an APR (annual percentage rate) to help customers compare them against other products.
Banks and building societies will also be required to do more to identify customers showing signs of financial strain or financial difficulty, and put strategies in place to reduce repeat overdraft use.
The new rules will be in force by April 6, 2020, but some changes will come into place earlier, such as the guidance on refused payment fees, which will take effect immediately.
The changes are part of wider reforms to high-cost credit which have already seen payday loan costs capped. The regulator is not proposing to cap overdraft prices, but it will monitor developments.
It acknowledged some firms may look to increase their arranged overdraft prices and reduce interest-free buffers to recoup lost revenue from unarranged overdrafts.
But it said the net effect will still be better for consumers – and increased competition between providers as a result of the changes will constrain any price increases.
Vulnerable consumers are disproportionately hit by excessive charges. Financial Conduct Authority chief executive Andrew Bailey.