UK banks are to be banned from charging higher fees for unarranged overdrafts.
It is, says the FCA, the biggest regulatory intervention in current accounts for a generation.
In 2017, UK banks charged overdraft fees of over £2.4bn with around £720m coming from unarranged overdrafts.
One in four UK current account customers, about 12 million adults, uses an unarranged overdraft each year.
But according to the FCA, more than 50% of banks’ income from charging higher fees for unarranged overdrafts comes from just 1.5% of customers.
Moreover, unarranged overdraft fees can be more than ten times as high as fees for payday loans.
The FCA also says that its overdrafts proposals are designed to fix “a dysfunctional market.”
Higher fees for unarranged overdrafts ban: FCA proposals
- The price for each overdraft will be a simple, single interest rate with no fixed daily or monthly charges;
- Stopping banks 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 promote price comparison;
- Issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments, and
- Telling banks to identify overdraft customers who are in financial difficulty and help them to reduce their overdraft use.
The banks cannot say that they have not been on notice that such regulatory intervention was on the cards.
As long ago as 2010 the UK Office for Fair Trading called on UK banks to change their policies on higher fees for unarranged overdrafts.
In the interim, a number of UK banks have tweaked their charging structure for overdrafts. Notably, in 2017 Lloyds Banking Group ripped up its charging structure across its Lloyds, Halifax and Bank of Scotland brands.
Lloyds axed unarranged overdraft fees and introduced a single fee: 1p per day for every £7 of overdrawn balance.
NatWest higher fees for unarranged overdrafts
For the likes of RBS NatWest, with a 17% current account market share, the FCA moves will cost the bank more than £100m in lost fees.
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If successful, the FCA fees clamp down will make it cheaper for customers to use an overdraft. The FCA’s long-term aim is to make it easier for customers to escape from a cycle of permanent overdrawn accounts.
The fees crackdown is part of the FCA’s long running review of high-cost credit.
In 2015 the FCA cracked down on fees charged by payday lenders. And only last month, the FCA proposed a price cap for so-called ‘rent-to-own’ retailers.
In addition, the FCA aims to improve safeguards for consumers in the home-collected credit, catalogue credit and store card sectors. It is also proposing additional protections on buy now pay later offers.
This includes stopping backdated interest for repayments made during the offer period that will save consumers around £40m-£60m.