FCA confirms crackdown on exorbitant unarranged overdraft fees

After much research and consultation, the Financial Conduct Authority will“fix a dysfunctional overdraft market” with a clampdown on steep fees. “The changes represent the biggest overhaul to the overdraft market for a generation,” said the regulator. Banks and building societies will no longer be able to charge higher prices for unarranged overdrafts than for arranged overdrafts. And fixed daily or monthly charges, as well as fees for having an overdraft facility, will be prohibited. Instead, lenders will be required to price overdrafts by a simple annual interest rate and to advertise arranged overdraft prices with an annual percentage rate, to help customers compare them against other products. New guidance will insist that refused payment fees should reasonably correspond to the actual cost involved, while banks and building societies will be expected to do more to identify customers who are showing signs of financial strain and implement a strategy to reduce repeat overdraft use.Of the 52 million people in the United Kingdom who have a current account, 19m use arranged overdrafts and 14m use unarranged overdrafts (7m use both). Overall there are around 26m overdraft users and in 2017 their banks made £2.4 billion from these facilities – around 30 per cent (£0.7bn) from unarranged overdraft fees and charges. Over half of banks’ unarranged overdraft fees came from only 1.5 per cent of customers in 2016. These are vulnerable customers, the FCA pointed out: “People living in deprived areas are more likely to be impacted by these fees. In some cases, unarranged overdraft fees can be more than ten times as high as fees for payday loans.”Andrew Bailey, the FCA’s chief executive, said the “complex and opaque charges… are both a result of and driver of poor competition” and added: “We are simplifying and standardising the way banks charge for overdrafts. Following our changes, we expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.” The guidance on refused payment fees takes effect immediately, the repeat use remedies commence on 18 December 2019 (alongside online and text aids announced in December 2018 to help users manage overdrafts), while the other new rules will kick in by 6 April 2020. Rachel Springall, of Moneyfacts.co.uk, commented: “It’s just a shame [the reforms] couldn’t come sooner. Over recent years, many current account providers introduced fixed fees to their tariff, so this is going to take some time to unravel.” She warned: “Consumers would be wise to keep a close eye on their current account tariff and any perks it may offer, because banks and building societies will likely need to recoup their losses caused by the fixed fee ban.”