Fixed daily and monthly overdraft charges set to be banned
Fixed daily and monthly overdraft fees are set to be banned as part of a package of reforms proposed by the financial regulator.
The Financial Conduct Authority (FCA) says the price for each overdraft should be a simple, single interest rate, and so an unarranged overdraft – one that isn't agreed with your bank before you go into it – should not cost more than an arranged overdraft. This is just one of a number of planned measures following its review into high-cost credit.
It has also proposed that arranged overdraft prices must be advertised in a standard way, including an annual percentage rate (APR) to help customers compare them against other products.
And it's also told banks to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use.
None of the changes proposed by the FCA will be implemented immediately, they are all proposals, and won't come into place until at least summer 2019.
For full help, see Martin's blog: Are you an overdraft prisoner? How to escape it. And if you're struggling with debt, our Debt Problems guide has full help.
Martin: 'The FCA's consultation is on the right track'
MoneySavingExpert.com founder Martin Lewis said: "Many demonise credit cards, but debit cards are debt cards too when someone is overdrawn, and often they're far costlier. Now even the regulator, thankfully, is starting to feel that it's unfair to make society's poorest pay for others' banking – via hideous charges designed to entrap people in debt.
"Banks have reduced charges over the years, but not enough. Trying to calculate and compare overdrafts alone is flummoxing due to a multiplicity of charging structures – such as 20% APR, 50p a day, or 1p per day per £7 overdrawn – never mind seeing if other borrowing would be cheaper.
"This and the lack of competition for those in bank account debt has led to millions of overdraft prisoners, permanently entrapped because their borrowing costs eat up their repayments.
"The FCA's consultation is on the right track – though our main disappointment is it fails to impose the total cost cap, which it's applying to other high-cost credit sectors like payday loans and rent-to-own. We will be repeating our call for that.
"Overdrafts must be treated like any other debt, both by lenders and individuals. Charges must be fair, transparent and easy to compare, with competition encouraged, to allow those with overdrafts an easy way to try and pay them down.
"It's worth remembering that in 2005, we (and others) launched template letters to reclaim unfair bank charges.
"Over six million people downloaded them, and over £1 billion was paid back. Yet in 2009 the Supreme Court kiboshed it on a technicality. It didn't rule that bank charges were fair, just that fairness rules didn't apply. And finally, nearly a decade later, that campaign is still paying dividends."
What changes is the FCA making to the way overdrafts work?
The FCA has proposed the following:
- Ensuring the price for each overdraft will be a simple, single interest rate. So there will be no fixed daily or monthly charges.
- Stopping firms from charging more for unarranged overdraft use. The FCA says this will tackle the highest costs in the market. It says the difference in costs for providing unarranged and arranged overdrafts does not fully account for the difference in pricing.
- Banning fixed fees for borrowing through an overdraft. Daily and monthly fees would instead be replaced by the single interest rate charge.
- Arranged overdraft prices must be advertised in a standard way. This includes using an annual percentage rate (APR) to help customers compare them against other products.
- Refused payment fees should be fair. The FCA says refused payment fees should be reasonable, and so should cost the customer roughly what the bank pays to refuse the payment.
- Banks must do more to identify overdraft customers who are showing signs of financial strain. Banks should help them to reduce their overdraft use.
What problems has the FCA found?
In 2017, the FCA says that firms made over £2.4 billion from overdrafts alone, with around 30% from unarranged overdrafts, for which fees can be around £10/day.
More than 50% of banks' unarranged overdraft fees came from just 1.5% of customers in 2016.
People living in deprived areas are more likely to be impacted by these fees, and in some cases unarranged overdraft fees can be more than 10 times as high as fees for payday loans, the regulator said.
What overdraft reform has already taken place?
Following a consultation in May, the FCA has already introduced reforms to help all consumers understand their overdrafts. These include:
- Digital eligibility tools. That allow customers to check if they can get a cheaper overdraft with another provider.
- Overdraft charge calculators. These help customers translate interest rates into pounds and pence.
- Alerts which show overdrawn balances at cash machines. The FCA says these will address unexpected overdraft use.
What else is the FCA doing?
The FCA is also implementing changes following its May consultation to tackle harm to consumers in the home-collected credit, catalogue credit and store card sectors.
- Firms have been told not to visit customers to offer new loans unless requested.
- Firms have to do more to help catalogue credit and store card customers avoid persistent debt.
There are full details about these changes in our High-cost credit reforms proposed MSE News story.
It is also proposing additional protections on buy now, pay later offers. Sometimes, businesses offer products where there is no obligation to make repayments during the offer period and interest is waived if the consumer repays in full within the period.
But if they don't repay in full within the period, businesses sometimes charge interest on the whole balance or the unpaid part of the balance from the date of purchase, and the FCA is consulting on stopping this. It says these changes will save consumers around £40-60 million.
Consultations on these changes, and the changes to overdrafts, are open until 18 March 2019. The FCA will consider feedback before publishing policy statements on overdrafts and buy now, pay later offers in June 2019.
What does the FCA say?
FCA chief executive Andrew Bailey 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.
"It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.
"We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts. These changes would make overdrafts simpler, fairer, and easier to manage."
The FCA has also outlined its views in a blog for MoneySavingExpert.com, entitled Time for radical reform on overdrafts.
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