Unarranged overdraft fees can be expensive and harmful – that’s why we’re proposing a radical redesign, says Christopher Woolard, Director of Strategy and Competition at the Financial Conduct Authority.
We think it’s time for a radical redesign of the way banks charge for overdrafts. They need to be simpler, fairer and easier to understand. Today we’ve put forward a package of proposals that will address this.
In particular, unarranged overdraft fees can be very expensive and harmful to consumers.
They regularly exceed 10% a day and can be over 20% a day for some customers and half of firms’ unarranged overdraft fees came from just 1.5% of their customers in 2016.
We’ve found too that people who are least able to afford these charges are more likely to have to pay them – people living in some of the poorest areas of the country are twice as likely to pay overdraft fees and charges compared to those living in other areas.
Which? research informs change
Today’s proposals are built on a huge amount of analysis and data that we’ve gathered on overdrafts, what they cost and how they’re used. We’ve taken into account a wide range of evidence, including from Which? and other consumer groups, as well as talking to consumers directly.
.@WhichUK fought hard and long to #EndRipOffOverdrafts. At last progress is being made which will be good news for those for whom life is already tough enough without being ripped off. A pleasure to support your campaign and well done to @WhichUK https://t.co/mDIW9tEXya
— Jack Dromey MP (@JackDromeyMP) December 18, 2018
Which?’s evidence showed how unarranged overdrafts can be more costly than payday loans – we expect to see a significant reduction in unarranged overdraft charges and that all overdraft charges will be below the level of the daily price cap on payday loans.
We also agree with Which? on the need to simplify overdraft charges – just bringing down unarranged overdraft charges isn’t enough to address the underlying problems in the market.
Our research shows that only one in five people can correctly pick the best overdraft deal from a set of current products.
— Mhairi Black MP (@MhairiBlack) December 18, 2018
So we’re proposing changes that will mean consumers are much better placed to understand the price of their overdraft and choose the best deal for them. Under our plans:
◘ Unarranged overdrafts won’t cost more than arranged overdrafts – the cost to firms of providing unarranged overdrafts isn’t significantly higher and we see no justification for them to charge higher prices as a result.
◘ There will be no more fixed daily or monthly fees – firms will need to charge a simple, single interest rate for each account.
◘ Firms will have to show the APR for arranged overdrafts in most of their advertising and the industry will have to provide an overdraft cost calculator.
◘ We’re also encouraging firms to show examples of the cost in pounds and pence.
Protecting vulnerable consumers
We found that 69% of all overdraft fees come from people who go into their overdraft every month of the year.
Under our proposals banks will be required to do more to help customers who are showing signs of strain or are in financial difficulty, and help them reduce their overdraft use.
These proposals go alongside new rules we’re introducing to require banks and building societies to provide customers with better information about overdrafts.
Customers will receive mobile phone alerts, and they’ll see a negative balance at cash machines if they use an overdraft.
This is an ambitious set of changes that will both protect consumers and empower them to better use their overdraft as a buffer when they most need it. We look forward to reading your comments on our proposals.
This is a guest post by Christopher Woolard. All views expressed are Christopher’s own and not necessarily those also shared by Which?.
What do you think of today’s overdraft proposals? Have you been put in financial difficulty by unarranged overdraft fees?