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New proposals to ban excessive bank overdraft charges/fees

Tuesday, 18th December 2018

The Financial Conduct Authority (FCA) has today announced proposals to change how banks charge for authorised and unauthorised bank overdrafts.

The proposed changes to the bank overdraft market:

  • Banning fixed fees for borrowing through an overdraft
  • No more fixed daily or monthly charges, instead single interest rate
  • Banning high charges for unarranged overdraft
  • Overdrafts charges (inc APR) must be advertised to enable customer to make comparisons
  • Making refused payment fees reflect on the true costs of refusing payments
  • 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.

Who uses bank overdrafts? The numbers

According to the FCA, 19 million people use an arranged overdraft (agreed limit to go overdrawn with the bank) each year compared to 14 million who do not have permission to draw down money from the bank known as an unarranged overdraft. Interestingly, 7.3 million individuals use both, the arranged and unarranged bank overdraft each year.

When might we see the changes?

The earliest date the FCA expects the changes to commence would be December 2019.

Bank overdraft fees can be 10 times higher than Payday loan fees.

In 2017, firms made over £2.4bn from bank overdrafts alone, with around 30% of this income from unarranged overdrafts. 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 ten times as high as fees for payday loans.

Andrew Bailey, Chief Executive of the FCA 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. Our consultation is informed by our analysis of retail banking business models, and how these are evolving in the face of significant technological change.'

Mike Thomas, Founder of DebtWizard said:

‘Millions of consumers use bank overdrafts to help them get through to payday or cover that unexpected bill. Up until now there has been no incentive for the bank to intervene and help the consumer because it is such a money earner for them. In 2017 alone the consumers paid a whopping £2.4bn in bank charges.

Although I’m pleased to see that this type of borrowing will soon become cheaper for bank customers, my concern is what will the banks be doing to claw back that lost revenue once the changes come in next year? Is this the beginning of the end of free banking for current account holders?'

Home-collected credit, catalogue credit and store cards: extending protections for consumers

The FCA is also today making changes which were proposed in May 2018, to tackle harm to consumers in the home-collected credit, catalogue credit and store card sectors. This includes proposing additional protections on ‘buy now pay later’ offers and stopping backdated interest for repayments made during the offer period. Expected savings for consumers - £40-60 million.

No one size fits all

The regulator says there is no ‘one size fits all’ on all high-cost credit products and that the measures has been designed to address the specific consumer harms they identified in each market.

Both consultations 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.

Full FCA press release can be found here (external link)

Related reading

My thoughts on the FCA proposals to reduce high cost credit and unarranged overdraft fees




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