Financial Conduct Authority
FCA confirms biggest shake-up to the overdraft market for a generation
The Financial Conduct Authority (FCA) recently confirmed it is introducing reforms to fix a dysfunctional overdraft market. These changes will make overdrafts simpler, fairer, and easier to manage and will protect the millions of consumers that use overdrafts, particularly more vulnerable consumers. The changes represent the biggest overhaul to the overdraft market for a generation.
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. In some cases, unarranged overdraft fees can be more than ten times as high as fees for payday loans.
The FCA recently announced that it is:
- Stopping banks and building societies from charging higher prices for unarranged 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.
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.
Andrew Bailey, Chief Executive of the Financial Conduct Authority recently said:
'The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged 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.
'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 unarranged 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.
Notes to editors
- PS19/16: High-Cost Credit Review: Overdraft policy statement
- CP19/18: Overdraft Pricing and Competition Remedies
- FCA overdraft proposals consumer research summary report - Atticus
- Video: consumers' views on overdrafts
- Overdrafts infographic
- Additional information on the scope of application of our rules – private banks and currency accounts are exempt from our rules.
- Additional information on fixed fees for overdraft use – the ban covers all fees for making use of, opening or maintaining an overdraft. Fees for refusing a payment due to lack of funds (‘refused payment fees’) are not included in this: firms are entitled to charge these under the Payment Services Regulations 2017).
- Additional information on facility fees – the ban on these fees will apply to overdraft facilities of up to and including £10,000.
- Additional information on overdrafts:
Numbers of consumers affected:
- 52 million people have a current account.
- 19m* use arranged overdraft
- 14m* use unarranged overdrafts
- 7m* use both
- 26m* overdraft users
*numbers are rounded
- £2.4 billion made in revenue from overdrafts in 2017 – around 30% (ie £0.7bn) came from unarranged overdraft fees and charges
- 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
- Find out more information about the FCA.
Latest News from
Financial Conduct Authority
22 years of pension savings gone in 24 hours11/11/2019 10:25:00
Victims of pensions scams could lose 22 years’ worth of savings within 24 hours, according to the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR).
FCA urges victims of illegal loan scheme to come forward01/11/2019 10:25:00
The Financial Conduct Authority (FCA) yesterday urged customers who took out a loan with Mr Dharam Prakash Gopee to contact them as they may be eligible for compensation.
FCA confirms help for mortgage prisoners29/10/2019 10:25:00
The Financial Conduct Authority (FCA) yesterday confirmed that it has removed barriers that stop some mortgage customers from finding a cheaper mortgage deal.
FCA seeks compensation for Park First investors18/10/2019 11:10:00
The FCA has started proceedings against Park First Limited, its senior managers, including its chief executive officer and a number of other companies connected to the Park First group. The FCA is seeking compensation orders in favour of investors in respect of losses they have suffered in the Park First scheme.
FCA data show 4.29m complaints for first half of 201917/10/2019 15:25:00
The Financial Conduct Authority (FCA) has today published the complaints figures for regulated firms for the first half of 2019. The data showed an increase in complaints from 3.91m in the second half (H2) of 2018 to 4.29m for the first half (H1) of 2019.
FCA announces future work on climate change and green finance17/10/2019 13:25:00
The FCA has published a feedback statement setting out its proposals to improve climate change disclosures by issuers and information to consumers on green financial products and services.
FCA acts to protect those buying motor finance16/10/2019 14:10:00
The Financial Conduct Authority (FCA) yesterday announced plans to ban the way in which some car retailers, and other brokers in the motor finance sector, receive commission.
The FCA fines Tullett Prebon £15.4 million14/10/2019 16:25:00
The Financial Conduct Authority (FCA) has fined Tullett Prebon (Europe) Limited (Tullett Prebon) £15.4 million for failing to conduct its business with due skill, care and diligence, failing to have adequate risk management systems and for failing to be open and cooperative with the FCA.