FCA Plan to reduce overdraft charges

20/12/2018

The regulator plans measures to reduce overdraft costs

The Financial Conduct Authority (FCA) has announced the next package of measures forming part of its high-cost credit review. It has announced proposals to change how banks charge for overdrafts, which would bring to an end to banks charging higher prices for unarranged overdrafts.

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.

    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.'