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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?

Comments

Used sensibly, arranged overdrafts can save unexpected interest charges but I wonder if they are used as an incentive to encourage us to dip into the red. When my bank offered me the opportunity to arrange an overdraft I did so and accepted their figure of £200. Many years later and this has risen to £1700, even though I have not used it. Whenever I make an online payment from my current account, the figure for the ‘funds available’ is the current balance plus the arranged overdraft. I see that as an incentive to spend money that does not belong to me.

I was entirely in support of these changes……..until I recently received a letter from my building society (a frequent Which?RP) informing me that the new arrangements mean that my overdraft EAR is changing from 18.9% to 39.9%!!!!!!! Not impressed. Which? Can you put pressure on the banks to change this, they have simply used it as an excuse to charge the higher, unarranged fee to all, so now no-one can borrow short term at a reasonable rate? I’d also like a quick link on my banking app to tell me whether it’s cheaper not to pay my credit card bill in full or to use my overdraft to pay it and pay for the overdraft. Impossible to calculate this easily anywhere!

AB, if your credit card APR is less than 39.9% then you’re better off using it. The perverse decision to allow those who don’t bother to arrange an overdraft I (and don’t, therefore, give their bank the opportunity to decide if they are a good risk, or not, and, if not, get into deeper financial hot water) to pay just the same as a responsible customer was foreseeable in one form or another. The banks need to make up the shortfall in income. I didn’t much like the excessive charges they made, but some penalty was sensible; a better solution would be to simply not give an overdraft unless it were approved. Where would the loss in income then come from? Charging people for the use they make of their account, and paying market interest in the balance, increasing loan and mortgage rates for example. But to remain competitive, all banks would need to follow the same route.