Unarranged overdraft fees could be overhauled as FCA announces payday loan cap will remain

The Financial Conduct Authority (FCA) today announced it will focus on areas such as unarranged overdraft fees, after it found its price cap on payday loans - which means people will never have to pay more than double what they originally borrowed - has been a big help to consumers.

Its review found 760,000 payday loan borrowers are saving £150 million a year, firms are much less likely to lend to customers who can't afford the repayments, and debt charities are seeing far fewer clients with problems as a result of the cap.

The FCA, however, believes there are problems with the cost of unarranged overdrafts, rent-to-own where people make weekly or monthly payments and only own the items when they have paid all the installments, and catalogue credit offers and so will be looking to tackle these early next year. See an exclusive blog for MoneySavingExpert.com from the FCA on why and how it hopes to tackle these areas.

FCA: 'We have significant doubts about whether unarranged overdrafts can continue in their current form'

As part of it's review into high-cost credit the FCA also looked at if unarranged overdraft fees have any place at all in the current market.

It found many users are unaware of the cost of unarranged overdrafts, which can cost more than payday loans, and sometimes don't even know if they have used an unarranged overdraft. It will look at whether banks should still be allowed to impose these charges, of up to £15 per returned payment and up to £10 daily charge for being in an unarranged overdraft.

In an exclusive blog for MoneySavingExpert.com Chris Woolard, Executive Director of Strategy and Competition for the Financial Conduct Authority, said: "We're working on solutions for unarranged overdraft charges, which I know have long been an issue for MSE. 

"As well as being very high and very complex, our evidence shows that a large proportion of these charges fall on a small minority of consumers – 60% of one bank’s unarranged overdraft charges in 2016 were paid by less than 5% of its current account customers.

"We have significant doubts about whether unarranged overdrafts can continue in their current form in a well-functioning market, and believe that fundamental changes in the way that unarranged overdraft charges are provided may be necessary.  We want to resolve these issues while preserving the parts of the market that work for consumers too."

From Wednesday banks will have to set a maximum monthly unarranged overdraft charge, however they can set whatever limit they like, and so this is unlikely to tackle the problem.

The FCA's report also referenced recent changes from Lloyds Banking Group, which banned unarranged overdraft fees. See the MSE Overdraft fee drop for millions of Lloyds, Halifax and Bank of Scotland customers News story for more information.

What happens next?

The FCA also looked at other high-cost credit options. It has pledged to tackle a number of these:

• Rent-to-own - The FCA will look at why people, particularly those with low incomes, use these offers for items such as washing machines and TVs and whether a better option could be for social housing schemes to provide essential goods instead.

• Doorstep lending - The FCA will look at restricting refinancing and rollover contracts, and imposing time limits on borrowing.

• Catalogue credit - The regulator is worried over fees for arrears and high interest charges.

The FCA will consult on how it can tackle problems within the high-cost credit areas in Spring next year.

It has also said it will next review the payday loan price cap in 2020.

What is the payday loan price cap?

To be clear, we don't like payday loans and most people who get them shouldn't. Yet if you're considering one, ensure you can protect yourself. Firstly, consider cheaper alternatives, using our guide, and if that fails we'll take you through the least nasty of a bad bunch. See our Payday loans best buys? guide.

MoneySavingExpert had campaigned for the payday loan price cap, and wanted it to be lower than the rules which were brought in on 2 January 2015. Here's how it currently works:

• Initial cost cap of 0.8% per day: Interest and fees must not exceed 0.8% of the amount borrowed on new loans and loans rolled over per day.

• Fixed default fees capped at £15: If borrowers cannot repay their loans on time, fees must not exceed £15. Interest on unpaid balances and default charges must not exceed the 0.8% rate.

• Total cost cap of 100%: Borrowers must never have to pay back more in fees and interest than the amount borrowed.

The caps mean someone taking out a loan for 30 days and repaying on time won't pay more than £24 in fees and charges per £100 borrowed. If you paid it back late, the maximum you'd be charged is £15, while the most you could repay in fees and interest on this £100 loan would be £100.