The FCA proposes ‘radical changes’ to reform the dysfunctional overdraft market

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    Banks have been criticized for charging excessive fees for unauthorised overdrafts, making it extremely difficult for customers to climb their way out of the red. Research undertaken by the Financial Conduct Authority (FCA) has found that banks and building societies made over £2.4bn in 2017 from overdrafts alone, with around 30% of this coming from unarranged overdrafts. In some cases, these fees can be more than 10 times as high as charges for payday loans; the full report can be found here. The FCA is planning to crack down on banks charging higher prices for unarranged overdrafts and in doing so, protect some of the more vulnerable customers who are more likely to be impacted by these fees.

    What are the FCA proposing, and why?
    Overhauling the way fees are charged: The FCA are proposing to simplify interest rate charges on overdrafts by introducing a simple, single interest rate with no daily or monthly charges. This comes with a ban on fixed fees for borrowing through an overdraft. They are also proposing a ban on charging higher prices for when customers use an unarranged overdraft; currently the daily interest rate for unarranged drafts regularly exceeds 10%.

    Forcing clearer advertising: The FCA report states that only 20% of consumers fully understand the pricing differences and charging structures in the current overdraft market. The financial regulator is encouraging transparency in the market by mandating that arranged overdraft prices must be advertised in a standard way, which will make it easier for customers to compare accounts with alternatives offered by the competition.

    Issuing new guidance on reasonable fees: Banks have been criticised for charging hyperbolic amounts compared to the administrative costs they incur for attempting to collect payment through a direct debit. The FCA are reiterating that fees relating to refused payments should correspond to the administrative costs of refusing those payments, and explain that these costs may be incurred.

    Telling banks to ‘do more’ to identify vulnerable consumers: The FCA reported that in 2016, 14% of consumers who used their overdraft every month paid 69% of all arranged, unarranged and refused payment fees. StepChange (a UK debt charity) have stated that overdrafts were the second most commonly held consumer credit debts after credit cards, with the average amount £1,523. The FCA are urging banks to identify overdraft customers showing signs of experiencing financial strain or financial difficulty, and to help them to reduce their overdraft use. This supports the proposal’s objective of providing greater protection for overdraft customers, particularly the most vulnerable.

    What have the FCA done so far?
    Whilst these proposals have just been announced, the FCA is already taking action on the overdraft market following a consultation in May. The following reforms have already been introduced:

    Digital comparison tools: online eligibility tools have been introduced that allow customers to check if they can get a cheaper overdraft elsewhere or whether other forms of credit may better suit their circumstances.

    Clearing up the complexity of fees: banks and building societies are required to provide overdraft charge calculators that help customers translate interest rates into pounds and pence.

    Making customers better informed of their overdraft: The FCA has asked for mobile phone alerts when accounts look like they may go overdrawn, and changes to show overdrawn balances to the customer at cash machines. These changes have been brought in to address unexpected overdraft use.

    New rules to be in place by December 2019
    The Chief Executive of the FCA, Andrew Bailey, says this proposal is the ‘biggest intervention in the overdraft market for a generation’. Whilst the FCA recognises that overdrafts are an integral part of the UK banking market, the proposed changes will make using overdrafts more of a safety net and less of a slippery slope for millions of people in the UK who use them.

    Banks and building societies have been asked to respond to the report by 18 March 2019. The FCA will then consider responses and final rules will be published in early June 2019, giving firms a six-month window to comply with the new rules, before they come into force by early December 2019.

    Further articles
    We've looked into other investigations by the Financial Conduct Authority (FCA) including how savers are missing out on £480m in interest and findings on into the high-cost short-term credit market.

    Sophie Redgell
    Investment Marketing Team

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