'Unprecedented' help on overdrafts and credit cards planned for those hit by coronavirus
The financial regulator is set to order banks to take new steps to help customers hit financially by the coronavirus pandemic, offering interest-free overdrafts of up to £500 and allowing payment holidays on credit and store cards, loans and catalogue debt.
The Financial Conduct Authority (FCA) unveiled the plans today and is holding a short consultation on them this week. If the proposals are approved, banks will be expected to start enacting the new measures from Thursday 9 April.
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Martin: 'Another welcome, yet unprecedented, coronavirus-driven intervention'
This is yet another important, welcome, yet unprecedented coronavirus-driven market intervention – this time by the regulator. We have already seen many unsecured lenders put some forbearance criteria in place, a few even more generous than the minimum standards the FCA is imposing – such as entire overdrafts at 0%. However, the provision is patchy and has become a banking lottery; and that's unfair – no one could've taken into account when they signed up for products how considerate each lender would be in these extraordinary times.
The overdraft change is especially important. In a terror of timing, by next Monday – the start of the tax year, almost all lenders were due to be charging about 40% EAR on overdrafts – nearly double high-street credit cards. That made overdrafts the new danger debt. This change reverses that at least in the short term, both with the new minimum £500 interest-free, but also because it's required that no one will pay more than they used to due to the changes.
While the overdraft changes are unambiguously good, the move on loans, cards and catalogues is useful for some but must be treated with care. Payment holidays mean exactly what they say, you don't pay, but you can still be charged interest. And with interest rates often high, especially on cards, that can mean storing up trouble for the future. Those struggling for cash flow may have no choice, but if you don't need to do it, don't.
It's important to remember all of this is a consultation, done urgently, ending next Monday with changes enacted on Thursday. Having said that, my suspicion is the consultation is just a formality, following process, and this'll be put in place relatively unchanged.
What help would customers get under the proposals?
But the new proposals from the regulator would mean all banks would need to offer a minimum level of support – though banks can still continue to offer more generous relief if they choose to.
The new measures are intended to help customers who have been financially affected by coronavirus, rather than all customers. However, the FCA says it doesn't expect banks to investigate the circumstances of customers who ask for payment holidays – though they may make enquiries to make sure it would be in the customer's best interest to be offered these measures.
Here's what the regulator is proposing that banks will have to do:
- Offer interest-free overdrafts of up to £500 for up to three months. Those who already have an arranged overdraft facility with their banks will be able to ask for the first £500 of overdraft to be provided at 0% interest.
If your arranged overdraft limit is less than £500 your bank doesn't have to extend it, but all of your existing overdraft will be interest-free.
Those who don't have an overdraft facility will be able to request one, again with the first £500 interest-free.
- Offer payment holidays on loans, credit cards, store cards and catalogue credit for up to three months. This means you won't have to make repayments during this period, though banks can still charge a "reasonable" interest rate during the payment holiday (unless a customer needs more forbearance, in which case interest could be waived).
There shouldn't be any penalty or charge for using these offers – and Martin's responded to the consultation saying that credit card customers' agreed 0% interest periods shouldn't be ended as a result of taking a payment holiday.
Banks can also consider other measures, such as accepting lower monthly payments on credit cards, and customers won't have their cards suspended during this time.
- Make sure no one is worse off under new overdraft rules. Most high street banks have announced shake-ups of their overdraft rates ahead of new FCA rules which are set to come into force next week.
While many will be better off under the new rates, some are set to pay far more. Under the FCA's new proposals, banks will need to make sure customers aren't paying more for their overdrafts than they would have done under the previous rates, for at least 90 days.
- Make sure customers' credit ratings won't be affected if they take advantage of a payment freeze or interest-free overdraft.
Payday lenders and buy now, pay later firms aren't included in the proposals. The FCA says it's considering whether to include other types of lending, such as car finance, in the measures.
What does the regulator say?
Christopher Woolard, interim chief executive of the FCA, said: "Coronavirus has caused an unprecedented financial shock with far-reaching consequences for consumers in every corner of the UK.
"If confirmed, this package of measures we are proposing today will help provide affected consumers with the temporary financial support they need to help them weather the storm during this challenging time."