Britain’s high street banks are being asked to explain how they calculated their new 40% overdraft rates by the country’s financial watchdog.
The Financial Conduct Authority (FCA) wants to know why the banks ‘set very similar prices’ after it had called for changes in the system. It has previously warned it will cap rates if they are not made competitive.
Many of the big banks – Lloyds Banking Group (including Halifax and Bank Of Scotland), Santander, HSBC, Royal Bank Of Scotland (RBS) and the Nationwide building society – have all set their new rates at 39.9%.
Barclays is the odd one out having set a rate of 35%.
The regulator has now written to the banks asking them to explain what influenced their decision and what they intend to do about customers who will end up worse off.
The letter suggested that firms could either reduce or even waive interest rates for customers who get into financial trouble because of their overdraft.
New interim FCA chief executive, Christopher Woolard, said seven out of 10 customers would be better off or unaffected by the changes, adding: ”If you had an unarranged overdraft before, you saw some rates that were 10 times higher than the equivalent payday loans.
“The reforms force banks to publish clear headline rates, without fixed fees and charges in them. In some banks, as many as nine in 10 customers will be better off, or no worse off.”
Why the change?
So why have the rates changed?
Having examined the overdraft market, the FCA condemned it as ‘dysfunctional’ and said it wanted to get rid of ‘confusing’ fees for customers.
The new rules will come into effect in April. They will prevent lenders from charging higher prices for unarranged overdrafts and require the lenders to set a single annual interest rate on all overdrafts, getting rid of fixed daily or monthly fees.
Personal finance expert Kevin Peachey commented: “As the hackneyed phrase says, we change partners more often than we switch bank accounts. So, when the FCA announced what it called the biggest overhaul of overdrafts for generation, its aim was to inspire competition.
Easier to compare
“The theory is that a clear, simple overdraft interest rate allows customers to compare and move current accounts, potentially saving them a lot of money.
“But now the banks have pretty much clustered around the same, somewhat expensive, 40% rate, there is little sign of any competition at all.”
“It should not be forgotten that the changes will mean more support for those facing financial trouble, and those who used to regularly bust their overdraft limit will not be hit so hard.
“But you can understand the accusations that the reforms have backfired for the regulator, and why it has now responded by asking questions of the banks.”