Financial Conduct Authority opens consultation on overdrafts

Wednesday, December 19, 2018

overdrafts, pound

Vulnerable customers will be protected from unfair overdraft charges thanks to proposed new rules from the Financial Conduct Authority (FCA).

The FCA is opening a consultation to implement new rules around overdrafts in an effort to protect consumers.

New rules will protect vulnerable customers

In 2017, firms made an estimated £2.4 billion from overdraft charges with 30% of that coming from unarranged overdrafts. These charges are often paid by a small percentage of the population. In fact, in 2016, just 1.5% of customers paid 50% of all unarranged overdraft fees.

The report from the FCA states that overdraft fees can be 10 times more than those from payday loan lenders and often affect people in more deprived areas. This contributes to the poverty premium which sees those already in debt paying more for goods and services as they are unable to get approval for lower-cost financial products.

The FCA has proposed changes

  • 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 introduced reforms to help consumers gain a better understanding of their overdrafts:

  • Digital eligibility tools to allow customers to check if they can get a better deal elsewhere.
  • Overdraft calculators so customers can convert interest rates into pounds.
  • Alerts and changes to cash machines so overdrawn balances are shown.

The consultation will run until 18 March 2019. Final rules will be announced in June and come into force in December.