FCA announces changes to overdraft rules

FCA announces changes to overdraft rules

The Financial Conduct Authority has announced proposals to change how banks charge for overdrafts.

It would bring to an end to banks charging higher prices for unarranged overdrafts.

Alongside this the FCA has published the results of its review into the retail banking market. 

The FCA has also made new rules strengthening the protections for consumers using home-collected credit (doorstep lending), catalogue credit and store cards and it is consulting on further measures.

As part of its work to help consumers get essential household goods and less expensive forms of credit, the FCA has today also published guidance for registered social landlords.

In 2017, firms made over £2.4bn from overdrafts alone, with around 30% 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. 

To address this the FCA is proposing the following radical changes to the overdraft market:

  • Ensuring the price for each overdraft will be a simple, single interest rate – no fixed daily or monthly charges.
  • Tackling the highest costs in the market by stopping firms from charging higher prices when customers use an unarranged overdraft.
  • Banning fixed fees for borrowing through an overdraft.
  • Mandating that arranged overdraft prices must be advertised in a standard way, including an APR to help customers compare them against other products.
  • Issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments, and explain the costs that may be included.
  • Telling 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.

Following a consultation in May, the FCA has already introduced reforms to help all consumers better engage with and understand their overdraft by requiring banks and building societies to provide:

  • Digital eligibility tools that allow customers to check if they can get a cheaper overdraft with another provider.
  • Overdraft charge calculators that help customers translate interest rates into pounds and pence. 
  • Alerts and changes to show overdrawn balances are displayed at cash machines will address unexpected overdraft use.

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.'

Overdrafts are an integral part of the UK banking market, so the proposals announced today are being published alongside the FCA’s Strategic Review of Retail Banking Business Models. This informed the action taken on overdrafts. Current pricing models can work against loyal customers, leading to high transaction charges and low interest on credit balances. It also found that new business models could bring more competition and innovation leading to better value and customer service. It has identified potential future issues around access, data usage and system resilience which may require the FCA and others to take action in the coming years to ensure a retail banking sector that works well for consumers.

Published: by Radio NewsHub
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