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Martin: 'FCA subtly slaps banks' wrists – and provides some relief for overdraft prisoners'

Martin: 'FCA subtly slaps banks' wrists – and provides some relief for overdraft prisoners'

The financial regulator has warned that banks must act to help consumers hurt by its overhaul of overdraft costs, after several announced they will bring in interest rates of 40%.

Under new rules from the Financial Conduct Authority (FCA), which come into effect in April, banks must scrap fixed fees and charge a single interest rate for all overdrafts.

Many providers have now announced their new overdraft rates as a result, with most – including First Direct, HSBC, Nationwide, NatWest, RBS and Santander – introducing rates of around 40%. Bank of Scotland, Halifax and Lloyds will charge some a whopping 49.9%.

The FCA now says it's written to major banks asking for evidence of how they arrived at their new pricing structures. It also says it expects firms to take "positive steps" to help customers who could be left worse off or struggling as a result of the changes – suggesting banks could reduce or waive interest, allow customers to continue using their overdraft at current rates or agree repayment programmes.

The regulator says anyone worried by the changes should contact their bank directly.

If you've got an overdraft, see our Cut Overdraft Costs guide for full help. And if you're struggling, see Martin's blog: Are you an overdraft prisoner? How to escape it.

Martin: 'The regulator is baring its teeth'

Martin Lewis, founder of MoneySavingExpert.com, said: "This subtle note is actually a slap on the wrist for the banks and is exactly what I and others have been calling for behind the scenes. It's an admission that the FCA's overdraft changes haven't worked entirely as it wanted, and now the regulator is baring its teeth, asking banks why from April they've all set the same 40% overdraft rate, and how do they justify what looks like cartel pricing?

"It also provides welcome relief for those who these changes will hit hardest – those trapped in with high amounts of authorised overdrafts.

"Someone with a £2,000 authorised overdraft could see their costs more than triple, from around £180 a year to around £680. If so, the FCA has followed our call to tell banks to provide alternative, cheaper arrangements to those who these changes put in financial hardship.

"The fact the regulator is saying this in writing, in black and white, is important. It means customers should make a formal complaint to their bank if the overdraft changes are over-expensive, unaffordable and detrimental to their financial health.

"Then even if the bank rejects their complaint, individuals have a right to go on to the free financial ombudsman. As the ombudsman doesn't just look at the law but also looks at standard industry practice – the fact the regulator has said this effectively defines this standard industry practice, meaning consumers can expect cases to be looked at favourably.

"If we look beneath the surface at why this has happened, it's because the FCA set out three aims with the overdraft changes and move to a single interest rate:

  • To end unauthorised charges, which it's done quite simply by regulation.
  • To improve transparency in comparison, which it has succeeded in, as it's now very easy to compare interest rates, whereas before, comparing interest rates to daily charges was impossible.
  • For the new transparency to foster competition. This has ultimately failed for an important group of customers. While the majority who only dip into their overdrafts for small amounts and short times will likely pay less due to the end of daily charges, those who are constantly overdrawn for larger amounts will pay more as almost all banks are charging 40%.

"The FCA's announcement today is an acknowledgement of that issue and an attempt to tweak the system to protect consumers."

What overdraft rates have banks announced?

All the major banks have now announced their new overdraft rates as a result of the upcoming rule changes, with most charging similar amounts. While Nationwide has already started charging the new rate, most of the changes will be implemented in the spring.

Here are the rates for arranged overdrafts announced by the big banks so far:

New arranged overdraft rate by bank 

Bank New rate When the new rate comes in
Bank of Scotland Up to 49.9% depending on credit score (most will get 39.9%) 6 April 
Barclays 35% 22 March
First Direct 39.9% 14 March
Halifax Up to 49.9% depending on credit score (most will get 39.9%) 6 April
HSBC 39.9% 14 March
Lloyds Up to 49.9% depending on credit score (most will get 39.9%) 6 April 
M&S Bank 39.9% 14 March
Nationwide 39.9% Already implemented
NatWest 39.49% (1) Late March/early April 
RBS 39.49% (1) Late March/early April 
Santander 39.9% 6 April 

(1) 19.49% on Reward Black and Premier Select accounts.

How to cut the cost of your overdraft

If you're currently paying to use your overdraft, there are different ways you can cut the cost. Your options will generally depend on how big your overdraft is:

  • Overdraft of up to £500? Consider switching to the First Direct current account*, which offers many a £250 interest-free overdraft, and currently also pays a £100 switching bribe. So if your overdraft's up to £350, it pays some off and the rest is interest-free.

    On any overdraft borrowing above this up to a standard arranged overdraft limit of £500, you'll pay 39.9% interest (though this is after First Direct's changes come into effect – until 14 March 2020 you'll pay 15.9%). But even so, you'll still likely save by only paying interest on part of your overdraft.
      
  • Overdraft of up to £1,500ish? The Nationwide FlexDirect* account offers a year's 0% overdraft, as long as you haven't had a FlexDirect account before – and if you get a friend with a Nationwide account to refer you before you switch, you'll both receive £100.

    There's no guaranteed overdraft limit though, as it'll be based off your credit score – so while it could be bigger than the £250 at 0% offered by First Direct, it could also be smaller than your current limit.

    And remember that the 0% rate will only last for 12 months after you open the account, so you should see this as a temporary respite to sort out your finances. Once the year's up, you'll be charged 39.9% interest on the entire overdraft.

  • Very large overdraft? If your overdraft is larger still, it's unlikely you'll be able to cover all of it with a 0% bank deal, but a few specialist credit cards offer '0% Money Transfers'.

    This is where, for a one-off fee of around 3-4% of the value of the transfer, the card pays cash into your bank account. You can use this to clear your overdraft, so you owe the card instead at 0%. You can currently get up to 28 months at 0%. For a full rundown, see the Money Transfers guide.

For full help, see Martin's Overdraft prisoners blog and see our How to cut your overdraft costs guide.