A RADICAL shake-up to fix the “dysfunctional” overdraft market – where fees can be 10 times the charges for a payday loan – has been confirmed by the City regulator.
The Financial Conduct Authority (FCA) plans to make the products simpler, fairer and easier to manage for those who go into the red.
The FCA said the changes represent the biggest overhaul of overdrafts in a generation, and the reforms will “fix a dysfunctional overdraft market”.
Plans include stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
The FCA expects the typical cost of borrowing £100 through an unarranged overdraft to fall from £5 a day to less than 20 pence a day.
Fixed fees for borrowing through an overdraft will also be banned – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility.
In 2017, firms made more than £2.4 billion from overdrafts alone, with about 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 were more likely to be affected by these fees. The new rules will be in force by April 6 2020, but some changes will come into place earlier, such as the guidance on refused payment fees, which will take effect immediately.
The FCA said research showed consumers wanted to see the cost of borrowing set out in pounds and pence alongside an APR and interest rate. Trade association UK Finance has agreed to implement this alongside the FCA’s remedies.
The changes are part of wider reforms to high cost credit which have already seen payday loan costs capped.
The regulator is not proposing to cap overdraft prices but it will actively monitor developments. It acknowledged some firms may look to increase their arranged overdraft prices and reduce interest-free buffers to recoup lost revenue from unarranged overdrafts.
But it said the net effect will still be better for consumers – and increased competition between providers as a result of the changes will constrain any price increases.
Christopher Woolard of the FCA said: “We’re going to be looking at the market in detail as these changes roll out. The transparency remedies we’re putting in place here are about making it far easier [for customers] to compare, far easier to switch potentially to someone who’s giving them a better deal.”
Myles Fitt of Citizens Advice Scotland said: “Overdrafts can be one of the most insidious forms of borrowing because they operate almost invisibly and the charges imposed are impenetrable. The reforms should tackle some of the sharpest practice and create a simpler and fairer system for everyone who needs to dip into reserve funds occasionally.”
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