FCA announces proposals to fundamentally reform the way banks charge for overdrafts and extends protections for high-cost credit products

14 December 2018

The 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. Alongside this the FCA has published the results of its review into the retail banking market.

The FCA has also made new rules strengthening the protections for consumers using home-collected credit (doorstep lending), catalogue credit and store cards and it is consulting on further measures on buy now pay later offers.

As part of its work to help consumers get essential household goods and less expensive forms of credit, the FCA has today also published finalised guidance for registered social landlords.  

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.

Following a consultation in May, the FCA has already introduced reforms to help all consumers better engage with and understand their overdraft by requiring banks and building societies to provide:

• 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.
• Alerts and changes to show overdrawn balances are displayed at cash machines will address unexpected overdraft use.

The FCA is also making changes, proposed in May 2018, to tackle harm to consumers in the home-collected credit, catalogue credit and store card sectors. It is also proposing additional protections on buy now pay later offers, including stopping backdated interest for repayments made during the offer period, that will save consumers around £40-60 million.

These measures aim to support credit markets in which consumers can understand their options and so choose credit products that meet their needs. There is no ‘one size fits all’ way of achieving this across all high-cost credit products. Today’s package has been designed to address the specific consumer harms the FCA has identified in each market.

Both consultations are open until 18 March 2019. The FCA will consider feedback before publishing policy statements on overdrafts and buy now pay later offers in June 2019.

Full news

CP18/42:High-Cost Credit Review: Overdrafts consultation paper and policy statement

CP18/43: High-Cost Credit Review: Feedback on CP18/12 with final rules and guidance and consultation on Buy Now Pay Later offers

Strategic Review of retail banking business models - Final report

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