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Win! FCA takes action on the overdraft market

We’ve campaigned for years for an end to rip-off unarranged overdraft fees. Our guest, Chris Woolward, explains how the FCA is shaking up the market.

This is a guest post by Chris Woolard. All views expressed are Chris’s own and not necessarily shared by Which?.

In December last year, I wrote for Which? on our proposals for radical reforms to the way banks and building societies charge customers for overdrafts.

It was really interesting to see your reaction, and we read all of the 100+ comments from readers, with many supporting our approach and the proposals we set out.

Many readers took the time to set out difficult experiences they had with overdraft charges, showing the impact that these charges can have and why the market needs fundamental reform.

There were a couple of common reactions that I thought it might be useful for me to say more about.

Some worried that our proposals would make it too easy for people to borrow by reducing unarranged overdraft charges – that there ‘should be a disincentive to people who do not bother to ask if they can borrow money’.

That’s not how we see it.

Fair and proportionate charges

We’re not banning charges for overdrafts, but making sure charges are fair and proportionate. The evidence doesn’t justify the much higher charges that firms have been imposing for unarranged overdrafts.

We expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20p a day following our reforms, and all overdraft charges to be well below the level of the daily price cap on payday loans.

The fact that these charges currently fall disproportionately on the people who are least able to afford them, and who incur them more frequently, suggests that high charges aren’t acting as a deterrent.

Your stories

The stories you told us illustrated how those on insecure or low incomes or in difficult circumstances can find themselves paying high overdraft charges that they couldn’t predict or avoid. There were also concerns that our changes might lead to unintended consequences.

Some of you suggested that firms would try to recover lost revenue elsewhere – as one put it, ‘I just don’t expect the banking industry to take this lying down’.

We’ll be watching how the sector responds carefully, but this is why we’re not just focusing on prices.

We are making overdraft charging much simpler and easier to compare so customers can see what overdrafts cost, and firms compete to offer better deals.

Since December, we’ve listened to feedback on our proposed changes, directly from consumers and consumer groups including Which?, industry, politicians and others.

We’ve also been out doing more consumer research – exploring how complex people find current overdraft pricing structures and what information that they want to see.

We already knew that people had real difficulty in understanding and comparing overdrafts, but it was still important for us to hear directly about their experiences.

They told us that they found overdraft charges very complicated, to the point that many had decided over time and through experience that trying to understand and engage with overdraft charges under the current system just wasn’t worth their while.

Radically reforming the market

We think people deserve better than that – overdrafts should be simpler, fairer and easier to manage, and people should be able to compare products and understand what they will pay for them. That’s why we are radically reforming the market and bringing our full package of reforms into force.

Read the full details of the changes we are making

We’re very grateful to everyone who took the time to share views and experiences. Thank you for helping to inform what we believe is the biggest reform of overdraft charges for a generation.

This was a guest post by Chris Woolard. All views expressed were Chris’s own and not necessarily shared by Which?.

This strong action from the regulator will come as a huge relief to those people who’ve been regularly hit with such extortionate charges. The changes can’t come soon enough. Do you agree? What do you think of the action that’s been taken by the FCA?

Alan says:
8 June 2019

I would suggest that at this very time, bankers are looking for and employing ways around this. Bankers by their very nature are devious, scheming, wealth at all cost, parent-less individuals. I, like many others, have seen this at first hand with overdrafts and loan protection which is deviously flawed in favour of the banks – thanks to Lloyds-tsb in this instant.

Lloyds TSB were my antagonists too. The only way I could defeat them in the end was to apply for a Debt Relief Order, and even though it was granted Lloyds TSB still continued sending threatening demands until I asked the court to intervene. The Debt Relief Order meant all my debts were cleared, but I felt sorry for the people who tried to help me but lost their money through my taking action against Lloyds TSB.

Graham Wallace says:
8 June 2019

Very very good news but maybe 20 years overdue as this has caused unknown financial difficulties to many and has also lead to further irresponsible lending by banks which I believe also now needs to be tackled.
Well done to all involved

Fiona Letherby says:
8 June 2019

What about other obscene charges such as product fees for mortgages.

This site describes the various fees involved. https://moneyfacts.co.uk/mortgages/guides/what-fees-do-i-need-to-pay-when-getting-a-mortgage/

Might be best to discuss each component individually. Were Which? Mortgages Advisers still in existence they could no doubt explain the justification (or not) for the various charges. Perhaps Which? Money will join the topic instead?

We could also perhaps discuss the (obscene – are they?) prices people (and builders) want when they sell houses and the (obscene – are they?) profits they make.

I welcome the FCA reforms. Those of us who manage to stay in credit can enjoy free banking, partly at the expense of those who pay punitive interest charges. The FCA report provides figures about how much revenue is generated from overdrafts:

Numbers of consumers affected:
Revenue generated

52 million people have a current account.
19m* use arranged overdraft
14m* use unarranged overdrafts
7m* use both
26m* overdraft users
*numbers are rounded
Revenue generated
£2.4 billion made in revenue from overdrafts in 2017 – around 30% (ie £0.7bn) came from unarranged overdraft fees and charges”

As far as I am aware, banks are not obliged to offer unarranged overdrafts but presumably provide this service so because it lucrative, even allowing for the fact that some customers will not fully repay the loan.

I have been lucky and never needed an overdraft but until I read the FCA report, I was not aware that it is currently not required to provide APR figures. These have been used for years to allow customers to compare the interest from savings accounts.

I would like to see all customers seeking to borrow money, including via an overdraft, to make a simple application that includes the purpose of the overdraft, details of other borrowing, anticipated income and known risk factors that could affect their ability to repay. The decision whether or not to permit the overdraft could then be made on a rational basis. Easy overdrafts and credit cards seem to have made it easy to live in debt and it’s easy to see that if you can avoid interest charges you will have more money to spend.

According to these figures, for what averages are worth, the average arranged overdraft user pays £90 a year in charges (£1.73 a week). The average unarranged overdraft user pays £50 a year i.e. just under £1 a week, to borrow money. Loss of income, if any, from overdraft charges will be made up elsewhere to maintain the banks profitability. This will probably come from loan and mortgage interest rates, I’d suggest.

Presumably banks cannot quote an APR when overdraft charges are made on a fixed fee per day, irrespective of the amount overdrawn. This method of charging is, I believe, disappearing and interest rates only used so making comparisons easy.

I don’t see why the bank should need to know the purpose of a loan, just the ability of the customer to repay it.

I have long proposed that those who borrow money – either knowingly or unknowingly – give the bank the opportunity to agree or not, in case they cannot repay and get into a worse financial pickle. In general it might be best if banks only gave overdraft facilities to approved customers. This would leave a problem for those unapproved customers with direct debits for “essentials”, like car insurance, should their account attempt to go into the red. How do we deal with this?

One of the reforms that the FCA proposes: “Banning fixed fees for borrowing through an overdraft – calling an end to fixed daily or monthly charges, and fees for having an overdraft facility.” Making it possible to know the APR will help customers have a better understanding of interest rates.

Margaretgalloway says:
9 June 2019

Good well done

Margaretgalloway says:
11 June 2019

Please omit my Email number

Hi Margaret, Please be assured your email won’t appear on the website.

Quynh Diep says:
10 June 2019

I am so glad of this new rule as I do think it is very unfair. Natwest rejected my application for an overdraft so it is not a case of me not making an application. I don’t go overdrawn regularly but wanted an overdraft put in place just in case I do go over and get charge a huge amount. My only thought is that they rejected my application as it is a way of them making money out of me. Barclay charged me a huge fee for just going overdrawn by £2. Fair enough if they have to charge me for going overdrawn but the fee is far too high.

I am not sure the new rule from the FCA will mean that banks will not be able to refuse or restrict an overdraft. In fact, I expect that will be more likely and that some overdrafts will be called in if people have taken advantage of the new arrangements to borrow an excess amount relative to their financial situation. There is no entitlement to an overdraft on any terms and borrowing remains entirely at the bank’s discretion. It is only competition that has led to the present easy facilities and that could change at any time as the markets continue to tighten.

Would we expect to shop at Tescos, visit a petrol station, pick up some clothes from M&S, and leave without paying for what we acquired? A bit like going into your bank and leaving with cash you might not repay. The banks are initially to blame for allowing this to happen. I suspect the new rules may make them look hard at who they lend to in future. If that also inspires them to heavily promote a financial budgeting app (only one needed for all banks) then that might be a step forward – except for those determined to avoid reality.

David M Smith says:
10 June 2019

As a former building society and bank manager plus an I.F.A. during my working lifetime, this cannot come soon enough. The new daily charges were worse than the old high-interest rate ones. One of my last jobs in the banking industry was as the Customer Relations Manager for a new bank. One of the reasons I was made redundant was that I crossed swords with senior management over the cost of compensation for wrongly applied overdraft charges. Their attitude was it makes us x millions profit each year, the compensation was a fraction of this profit. This is twenty plus years overdue. No doubt charges will be made elsewhere to compensate for this old rip off!

Lynn M says:
15 June 2019

Good for you, a banker with morals and principles. My daughter had UC and is currently paying extortionate overdraft fees. Her anxiety and depression have increased 10 fold.

BigDaddyCat says:
10 June 2019

I loved the stories of huge overdraft fees because I knew that many of the idiots that incurred them were like my friend Coco who blew his dosh on gambling and skunk, needlessly & thoughtlessly getting into financial trouble. And I knew that the fees were a factor in providing free banking for the people who managed their finances responsibly.

MsSupertech says:
14 June 2019

This sounds wonderful and Kong ovedue but I would just say, be careful what you wish for.. Banks *will* find a way to make their money. They’re businesses, not charities.

John S. says:
14 June 2019

On the face of it, a welcome reform for those who, for whatever reason consistently use unauthorised overdrafts.
That said, for the rest of us you can be sure the Banks will quickly figure out ways of recovering the profits lost from this change, probably by dreaming up additional fees for phantom services so as far as I’m concerned, this is another nail in the coffin of free banking for those of us who follow the rules.
Lets face it, the days of banks providing and being viewed as a community service have long since disappeared with their ruthless programme of branch closures, removal of branch based managers along with every customer being viewed as a profit centre, the banking sector has but one concern – increasing profits by any means available.

Ian Richardson says:
14 June 2019

They should not be charging anything. Ask yourself what is an “unarranged” overdraft? Or more to the point is it in fact “unarranged” in the first place? If you phone the bank or walk in the bank and ask for one then it’s arranged, fair enough. But these unarranged overdrafts happen when you stick your card in a machine or you use it to pay for something. It’s automated. So if the bank tells you your overdraft limit is, say, £800 then it should not give you more than that. But it does. The only way that happens is because someone in the bank put a higher limit on your account. So they have to put £800 as your “limit” but then add an extra amount, say £250. That £250 is what they call “unarranged” and they then charge if you use that. If you use the extra £250 then it’ll tell you you have insuffucient funds, because the system reaches the actual limit set for your account. If your limit was £800 then the automated system wouldn’t give you one penny more than that, would it. No. The system will go to the limit set by the bank, it is therefore NOT unarranged, they simply didn’t tell you about it. The ability to use this technology enabled the banks to to do this in the first place, they knew full well what they were doing. There is no such thing as an unarranged overdraft, an overdraft is credit, banks do NOT give you credit unless they decide your earnings will cover it. They do that when you go in a bank to open an account and ask if you can have an overdraft. So when you get a letter telling you your overdraft limit is £??? Then if their automated system then gives you more than your limit then i’d question whether you should even pay it back. Because a limit is a limit, you should not get more than that.

In my experience if you try to exceed your overdraft limit (arranged), or are about to for an upcoming direct debit (or other programmed payment) the bank will inform you (assuming you’ve given them a mobile phone number for example), or will decline to make a payment, will decline a debit card transaction in store or at an ATM. Maybe not all banks behave this way.

I believe banks should not give overdrafts unless they have agreed a facility. If someone tries to go overdrawn without an arrangement then I’d expect the bank to contact them to decide what to do. Personally I would like to see unarranged overdrafts stopped; this may be the outcome of the FCA’s decisions. The banks should have the opportunity to decide if a client requesting one has the ability to repay it, or whether it will simply get them into more of a financial pickle. But this will require interaction between bank and customer.

I think a lot of banks and other lenders agree to loans on the basis of whether or not they’ll make money out of them. Knowing whether or not the lender can easily pay it back – or pay it back at all – does not seem to feature much in the decision process.

CurrentAccountHolder says:
14 June 2019

Great job Which. That’ll be the end of the free current account for everyone else in order to pay for those who think that its OK to spend other people’s money without asking!! The banks will make up the money somewhere that’s for sure and as usual it’ll be those that are careful that end up paying for it.

Grumpy Old Man says:
15 June 2019

If people couldn’t afford the fees they shouldn’t have gone into an overdraft they’d not agreed with their bank. This is just another step towards removing any sort of personal responsibility from people, for their own actions.
The banks are still going to make their money so it’s responsible people who are going to have to pay to make up the difference!

anna says:
15 June 2019

well done Which and team. Nat west ripped my son of since he was a young man (he is still with them) would he get a refund? hmmm!

jane dugdale says:
Today 12:38

I bank with Natwest. I have an arranged overdraft for which they charge me £6 per month plus interest. Will they still be able to do this? I think its ridiculous.