Radical shake-up of ‘dysfunctional’ overdraft market confirmed by FCA

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A radical shake-up to fix the ‘dysfunctional’ overdraft market has been confirmed by the Financial Conduct Authority (Dominic Lipinski/PA)

A radical shake-up to fix the “dysfunctional” overdraft market – where fees can be 10 times the charges for a payday loan – has been confirmed by the City regulator.

The Financial Conduct Authority (FCA) plans to make the products simpler, fairer and easier to manage for those who go into the red.

The FCA said the 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.

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 £2.4 billion from overdrafts alone, with about 30% from unarranged overdrafts.

More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.

People living in deprived areas were more likely to be affected by these fees.

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;

– Issuing new guidance to reiterate that fees for refused payment should reasonably correspond to the costs of refusing payments;

– Requiring banks and building societies to do more to identify customers showing signs of financial strain or in 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 FCA said research showed consumers wanted to see the cost of borrowing set out in pounds and pence alongside an APR and interest rate.

Trade association UK Finance has agreed to implement this alongside the FCA’s remedies.

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 actively 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.

Christopher Woolard, executive director of strategy and competition at the FCA, said the changes should make it easier for consumers to compare banks.

Mr Woolard told the Press Association: “We’re going to be looking at the market in detail as these changes roll out.

“The transparency remedies we’re putting in place here are about making it far easier (for customers) to compare, far easier to switch potentially to someone who’s giving them a better deal.”

Andrew Bailey, chief executive of the FCA 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.”

Gareth Shaw, head of money at Which?, 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.”

Gillian Guy, chief executive of Citizens Advice, said: “These new rules should help thousands of people from getting trapped in a debt spiral.”

She said if people still end up paying over the odds the FCA should review the need for a cap.

Martin Lewis, founder of MoneySavingExpert.com, said: “More work needs to be done to make the sector more competitive, with cheap switching deals that match existing overdraft limits.”

Eric Leenders, managing director, personal finance at UK Finance said: “The industry is working on a voluntary agreement to make the cost of overdraft borrowing easier to understand for consumers which will be implemented in April 2020.

“This will build on the range of measures already introduced by the industry, such as text alerts which have been shown to reduce overdraft charges by 25%.

“Overdrafts can provide a convenient way for customers to smooth their short-term cashflow, and there is a highly competitive market in the UK with over 96 products on offer.

“We would always urge customers to speak to their bank and arrange an overdraft in advance to ensure payments are honoured.”