Bank overdraft fees targeted in biggest ever market shake-up

Mark Johnson's picture
by Mark Johnson

The Financial Conduct Authority has introduced the biggest ever set of reforms to fix what it called a “dysfunctional” overdraft market. 

As a result of the changes, overdrafts will be simpler, fairer, and easier to manage and will protect the millions of consumers that use overdrafts, particularly more vulnerable consumers, the FCA said. 

The changes represent the biggest overhaul to the overdraft market for a generation.

£2.4bn market

In 2017, firms made over £2.4bn from overdrafts alone, with around 30% from un-arranged overdrafts. 

More than 50% of banks’ un-arranged overdraft fees came from just 1.5% of customers in 2016, the FCA said. 

People living in deprived areas are more likely to be impacted by these fees. 

In some cases, un-arranged overdraft fees can be more than ten times as high as fees for payday loans.

Today the FCA announced a raft of measures which include:

Stopping banks and building societies from charging higher prices for un-arranged overdrafts than for arranged overdrafts.

Banning fixed fees for borrowing through an overdraft – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility.

Requiring banks and building societies to price overdrafts by a simple annual interest rate.

Requiring banks and building societies to advertise arranged overdraft prices with 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.

Requiring banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use.

FCA research

Extensive FCA research with consumers showed that they also wanted to see the cost of borrowing set out in pounds and pence alongside an APR and interest rate; UK Finance have agreed to implement this alongside the FCA’s remedies.

“The overdraft market is dysfunctional, causing significant consumer harm”, said Andrew Bailey, Chief Executive of the Financial Conduct Authority.

“Vulnerable consumers are disproportionately hit by excessive charges for un-arranged overdrafts, which are often ten times as high as fees for payday loans. 

“Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.

Overdraft fees radically cut

“Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. 

“We are simplifying and standardising the way banks charge for overdrafts. Following our changes we expect the typical cost of borrowing £100 through an un-arranged overdraft to drop from £5 a day to less than 20 pence a day.

“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”

The new rules will be in force by 6 April 2020, apart from the guidance on refused payment fees, which will take effect immediately, and the repeat use remedies which will come into force on 18 December 2019. 

The repeat use remedies will take effect alongside the changes we announced in December 2018 to make overdrafts easier to manage:

Digital eligibility tools that allow customers to check if they can get a cheaper overdraft with another provider.

Overdraft charge calculators that help customers translate interest rates into pounds and pence.

Text message or push notification alerts and changes to display overdrawn balances at cash machines to address unexpected overdraft use.

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