FCA consults on major overhaul of overdraft market

The Financial Conduct Authority (FCA) is making what it calls ‘the biggest intervention in the overdraft market for a generation’ with proposals which would end banks charging higher prices for unarranged overdrafts, as part of a package of measures stemming from its high-cost credit review

The regulator says 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 a number of changes to the overdraft market. These include ensuring the price for each overdraft will be a simple, single interest rate – no fixed daily or monthly charges.

It also plans to stop firms from charging higher prices when customers use an unarranged overdraft and wants to ban fixed fees for borrowing through an overdraft.

Under the proposals, the FCA will mandate that arranged overdraft prices must be advertised in a standard way, including an APR to help customers compare them against other products. It will issue 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.

The FCA will also require 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.

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.'

The FCA is seeking comments on its overdraft proposals by 18 March 2019.

The FRC has published its strategic review of retail banking business models, which found that 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.

In addition, the FCA is making changes, proposed in May 2018, to tackle harm to consumers in the home-collected credit, catalogue credit and store card sectors. It is proposing additional protections on buy now pay later offers, including stopping backdated interest for repayments made during the offer period, that will save consumers around £40m-£60m. These are also open for consultation until 18 March 2019.

High-Cost Credit Review: Overdrafts consultation paper and policy statement is here

High-cost Credit Review Feedback on CP18/12 with final rules and guidance and consultation on Buy Now Pay Later offers is here

Strategic Review of Retail Banking Business Models final report is here

Report by Pat Sweet

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