Martin Lewis: new FCA rules will help overdraft prisoners, but a price cap is needed too

Today the Financial Conduct Authority (FCA) has announced a raft of changes to how banks charge for overdrafts, including a single interest rate (with no daily or monthly fixed fees) and stopping firms charging more for using unarranged overdrafts.

Martin Lewis, founder and chair of MoneySavingExpert.com, which led the campaign against unfair bank charges, 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 6m 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.”

Writing for MoneySavingExpert.com, the FCA’s Executive Director of Strategy and Competition Chris Woolard said: “We agree with MSE that firms need to treat customers who are ‘overdraft prisoners’ fairly.  Our proposed changes will mean that they pay lower charges for using unarranged overdrafts and get earlier help with repeat use.  We’re also implementing changes to give customers tools to check if they can get a cheaper overdraft elsewhere. […]

“Overdrafts should be a buffer to help you when you most need it. But the cost should be fair and they must not trap people into paying high charges month after month.”