Martin: 'After 10 years there's finally an end to unfair bank charges'
Fixed daily and monthly overdraft fees will be banned and replaced with a single interest rate from next April, the financial regulator has announced.
An unarranged overdraft – one you haven't agreed with your bank before you use it – will no longer be able to cost more than an arranged overdraft under the new rules, and banks won't be able to charge you just for having an overdraft.
The price of each overdraft will be a single interest rate, rather than fixed fees of a certain amount per day or month. This price must be advertised using an annual percentage rate (APR) to help consumers compare costs across different accounts. The overdraft price rules will come into force on 6 April 2020.
The Financial Conduct Authority (FCA) also says banks must do more to identify customers in financial difficulty and help them reduce overdraft use, starting from this December.
These changes were proposed at the end of last year, after the FCA found firms made £2.4 billion from overdraft fees in 2017, with those living in deprived areas more likely to use unarranged overdrafts and pay higher charges than others.
Martin: 'After 10 years, finally an end to unfair bank charges'
Martin Lewis, founder of MoneySavingExpert.com, said: "It's taken a decade but this announcement by the FCA seems to finally mean the end to unfair bank charges for going beyond your overdraft limit.
"In 2005 we launched template letters to reclaim unfair bank charges – over six million people downloaded them, and more than £1 billion was paid back. Yet in 2009 the Supreme Court kiboshed the reclaiming on a technicality (it didn't rule that bank charges were fair, just that fairness rules didn't apply), and while that felt like a loss at the time, ultimately it was the direct catalyst for a rapid reduction in overdraft charges – which culminates in today's announcement.
"Many people believe credit cards are bad and debit cards are good. But debit cards are debt cards too for the millions who are overdrawn – and this is often a far more expensive type of debt, sometimes even at a higher effective rate than payday loans. Many of those who are overdrawn are still a big provider of profits, subsidising banks to allow free banking to those in credit.
"As well as an end to charges, the FCA is right to try and crack down on the misty, unclear, difficult-to-compare world of overdrafts. While its solutions aren't exactly what we were calling for, and it hasn't imposed a total cost cap, at least forcing all banks to charge via an interest rate and stopping penalties for unarranged overdrafts will make it easier to compare – though I still worry many will struggle to work out exactly how much they'll pay for their overdraft.
"Yet while ease of comparison is useful, it won't help the many people who are already overdraft prisoners be able to switch. Some people's overdrafts are facilitated to grow over time by their bank. That leaves them with a big debt and unable to move elsewhere, as the new bank will usually have a much lower limit. More work needs to be done to make the sector more competitive, with cheap switching deals that match existing overdraft limits."
What are the new overdraft rules?
Here's a summary of the key measures announced by the FCA today:
- The price of an overdraft will be a simple, single interest rate – starting 6 April 2020. Fixed daily or monthly costs for using an overdraft will be banned, and firms won't be able to charge customers for having an overdraft on their accounts.
FCA research also found consumers want to see the cost of borrowing in pounds and pence, as well as the overall interest rate, and banking association UK Finance has agreed to implement this alongside the FCA's reforms.
- Firms won't be able to charge more for unarranged overdraft use – starting 6 April 2020. 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.
- Arranged overdraft prices will have to be advertised in a standard way – starting 6 April 2020. This includes using an annual percentage rate (APR) to help customers compare them against other products.
- Firms must follow new guidance to make sure refused payment fees are fair – starting immediately. Any fees charged for refused payments must be reasonable, costing the customer roughly what the bank or building society pays to refuse the payment – and the FCA has reiterated this in its new guidance, which firms must follow from today.
- Firms will have to do more to identify overdraft customers who are showing signs of financial strain –starting 18 December 2019. They must also help these customers reduce their overdraft use, as part of a strategy to reduce repeat overdraft use.
However, Mick McAteer, founder and co-director of policy and research group The Financial Inclusion Centre, warned on Radio 4's Money Box programme that these changes could mean banks use a risk-based pricing system, saying: "They'll still be able to charge a higher overdraft rate for people who are financially vulnerable or people who are on a lower income."
What overdraft reform has already taken place?
Following a consultation last year, the FCA has already announced a series of reforms to help all consumers understand their overdrafts. From 18 December 2019, banks will be required to offer:
- Digital eligibility tools to allow customers to check if they can get a cheaper overdraft with another provider.
- Overdraft charge calculators to 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 does the FCA say?
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."
He added: "Following our changes, we expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day."