Britain’s financial regulator – the Financial Conduct Authority (FCA) – has announced proposals to ban ‘rip-off’ fees for unarranged overdrafts in a crackdown on the way banks levy their charges.
Calling it ‘the biggest intervention in the overdraft market for a generation’, the move is part of the regulator’s review of high cost credit.
Chief executive Andrew Bailey 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.”
FCA research has shown that high street lenders made £2.4 billion from overdraft charges in 2017, of which 30% came from unarranged borrowing.
It also showed that the rates charged could be 10 times higher than those demanded by payday lenders who have already been subject to a crackdown on their business methods.
The comprehensive proposals being sent out for consultation will come into effect next summer and include:
- 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.
The 215 page consultation document reveals that more than half of the unauthorised overdraft fees charged in 2016 came from just 1.5% of customers with people living in deprived areas being the most affected.
The ‘robust proposals’ were welcomed by Peter Tutton of the StepChange debt charity. He said: “These changes should help to disrupt the toxic ‘debt spiral’ effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt.
“Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.”
Jenni Allen of consumer champion Which? added: “Finally, banks will no longer be able to charge rip-off unarranged overdraft charges, which have long penalised their customers, many of whom can afford it the least.
“Which? has campaigned on this issue for years and today’s strong action from the regulator will come as a massive relief for all those regularly hit with such extortionate charges, which cost some people thousands a year.
“The regulator must now ensure these important changes are swiftly introduced and enforced to finally stop this unfair practice and put an end to these excessive fees.”
High cost credit review
The regulator has also published a consultation paper based on its high cost credit review with proposed new rules for the sale of extended warranties with rent-to-own goods, home-collected credit, catalogue credit and store cards.
An extract from the paper says: “The risks of harm are particularly acute with high-cost credit, as many customers of high-cost credit are in vulnerable circumstances. They often have unpredictable variations in their incomes and expenses and have limited savings. They are generally higher risk and borrow smaller sums than mainstream consumers.
“As a result, their cost of borrowing is normally higher. This increases their overall financial burden and could put them at risk of defaulting on other payments, such as rent and bills, and getting further into debt.”