/ Money

FCA: why we’re taking action on overdrafts

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.


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.

Radical redesign

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.

Empowering customers

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?

Comments

About time too for action.

It has never been a secret that a small section of the customer base pays the most in charges and the Banks have been living off those who find budgetting a problem. The drive to a non-cash sytem that make bank accounts a must has been very handy for the Banks.

People on a low budgets or disability or pensions do not have the same disposable income as people working also their income comes in cyclically (different dates each month) not on a static date like DDs. O/D fees are not necessarily because people *cannot manage their budgets or overdrafts*. Utility.companies often force customers to have Direct Debits as unless you do a DD you have to pay a much higher price per gas or electric units – some have no other payment system available. Which should be illegal tmultyyiply over estimates dictating monthly DDs – how many customers pay over the top monthly DDs – using customers for unofficial borrowing. AND BANKS are well aware of the conflict of regular & reliable cyclical income a/cs and that they are in conflict with UTILITY COMPANIES DDs. they still levy high fees for a couple of £s O/D for 12 hours!
Utility gas water & elctricity DDs often leave one in CREDIT to £50 – £150 + every 3 months, try getting customer service to reduce DD payments even if you are in CREDIT after paying the current quarterly bill, is impossible they’re on script.
Plus many utility companies won’t provide paper billing & force people onto DD & online accounts making it much harder to dispute billing discrepancies. NOTHING TO DO WITH CUSTOMERS’ PAYMENT RECORD EITHER. Companies estimate much higher usage to justify upping DD payments – if you do not arrange a D D which e.g. the gas companies raised at least 3 times in one year – with no notification you pay higher price per unit –

Those who cannot manage their money are being punished with high interest rates, yet those who can manage their money and remain in credit at all times are enjoying free banking services. Removing ATMs and encouraging use of contactless cards for small transactions does not help anyone budget and some retailers only give receipts for contactless transactions on request.

Although I’m one of those who does not pay for banking services I would be happy to pay my way and know that I was not being subsidised by those who are in debt for whatever reason.

Sting says:
28 December 2018

It is not free banking, we are being robbed by the rate of credit interest the banks are paying the very people whom are responsible for supporting the economy–the savers.

Maybe, but all you need to do to qualify for free banking is to make sure that you keep just enough in the account to avoid paying interest. Current accounts have never paid much interest.

Yes – even regular savings accounts in mutual institutions are barely paying any interest these days so banks are not depriving customers with savings accounts of any significant sums.

I agree that this is a great step forward.

It should help reduce the “costs of money” for those on low incomes, pensions and benefits.

Also, if it reduces the need for those folk to use pay day loans, door step loans and “buy back” loans, that will be further good news.

This is a good report and set of proposals from the FCA because there is no doubt that the differential treatment of arranged and unarranged overdrafts has been so badly exploited. I have previously been in favour of a differential because it seemed to recognise the benefit of making an arrangement in advance of overdrawing and the extra cost to the bank of servicing customers who have not made an arrangement. But this report clearly demonstrates (a) the unjustifiably excessive [and punitive] cost of unarranged overdrafts, (b) that the costs to the bank are not markedly different between the two types of overdraft, and (c) the social injustice of the existing system [vide the loyalty penalty on insurance premiums that is now under close scrutiny by the CMA].

I especially support the proposal that “there will be no more fixed daily or monthly fees – firms will need to charge a simple, single interest rate for each account”. This means that the distinction between
“arranged” and “unarranged” overdrafts can be dropped and the two terms taken out of the banks’ vocabulary. Competition will then open up between different accounts and between different banks, which is healthy.

I don’t suppose things will be as simple as at first appears, however. I cannot believe there will not be attempts to set up tiered interest rate structures according to the amount borrowed and/or according to the duration of the overdrawing; this would be a result of competition. There could also be an increase in the number of cases where an overdraft was declined, and where a seemingly never-ending overdraft was called in. There could be an attempt to make up for the lost profits by tweaking other banking service charges and introducing charges where accounts are currently free of charge [again with the possibility of tapered or stepped reductions in charges according to the account balance either month-by-month or on an annual average basis. I just don’t expect the banking industry to take this lying down.

Someone who manages their affairs correctly should not subsidise those who do not. Banks can budget for arranged overdrafts efficiently but not unarranged overdrafts. However bank charges for unarraged overdrafts should be fair, reasonable and regulated and, in particular, the vulnerable must be protected.

LOL, You seriously think that the banks won’t get this loss back from the rest of us? People should live within their means, the last intervention by the government resulted in backs reducing their interest-free buffer zones from £50 to £10

Tom! How can everyone live within their means nowadays?!!

I totally support you in this. If people go over an arranged overdraft amount they should indeed pay for it as it is so irresponsible. Shows a lack of “care for self” .
However people should not be charged huge fees for an unarranged
overdraft if the amount is small, say under £100 and for a period of less than 28 days. Perhaps the rate should be Bank of England Base rate plus 1% provided that the amount of overdraft is cleared within that 28 days.
Bank account holders pay for this in unseen ways, such as lower interest rates.

This is a great step and win for consumers. There are banks like Halifax who charge ridiculous costs for arranged overdrafts and these are even more expensive than costs of unplanned overdrafts. For example, using an overdraft of £700 used to have a set fee of less than £10 per month. Now, the fees are charged daily and by end of month you find, you have paid over £40 in fees for a planned overdraft. This makes absolutely no sense and should be stopped.

Graeme Cruickshank says:
28 December 2018

I am very glad to see that the banks’ rip-off fees will be outlawed, though your headline saying that they were to be scrapped is both misleading and concerning. There must be some financial deterrent to going into debt deliberately, or it would be further encouragement to those people who lack a sense of financial responsibility to regard debt as an easy way to get money which they have little intention of paying back.

Brooke Harvey says:
28 December 2018

This is another example of the sad fact that the British economy runs on theft. We need an end to it.

My monthly DD credit card payment is still taken out of my a/c even though I pay early and in excess of DD!!

My Granddaughter’s partner was charged £75.00 for 3 payments which were due when he didn’t have enough in his account to cover them.

I`m not even sure my experience is relevant it was so long ago. When I separated from my husband in about 1980 I still had his Barclays account and they charged me £25 for an accidental overdraft of £8 despite the fact that I hardly had enough to pay the mortgage,bills and feed my kids and I saw the manager & explained that! That was when I revived my Giro account(the P.O bank-remember that?) and will have nothing to do with Barclays to this day.

I was charge £5.00 for going over for a few pennies but after going into the city to my faceless bank on my mobility scooter in the cold and wet the charge was reversed. What a waste of time all to make the shareholders rich- plain greed

I fully endorse the decision that has been made. I also believe that insurances companies should be curbed from large increasing in yearly premiums for house and cars when the insured has never made a claim.
With regards to banks and money lenders their charges for loans should also be controlled so the poorer people get so far into debt that they are driven onto the streets.

Hope this will apply to business overdrafts too, when times have been really tough in our business all the bank has done is charged extra daily rate penalties at the time when we were in our worst possible cash flow situation. Then when renewing our overdraft limit for the coming year found they had raised the arrangement fee to almost double previous yearly fees.

Only once was stung by these charges over 50 years ago after the bank closed my branch where I had an understanding with the manager because I worked away and my wages didn’t go in on a set date, I closed the account, and have never been overdrawn since, if I haven’t got the money I don’t buy. End of story.

If you stop the banks charging one way ( that doesn’t affect me) they will find another that might. How else can they pay the massive bonuses to their managers and directors.

Howard says:
28 December 2018

Whilst I understand the thought process behind they will find another way to charge so to make the money which could affect more people. It is right to stop them from placing people into even more debt which they perhaps can’t afford. Perhaps they should become more responsible in lending which has not been the case in recent years. I totally agree someone has to take responsibility but people very often make snap decision when they are finding it hard. Would it not be better for banks to take this on board and find better ways to help these people and not rip them off causing them even more problems. Bearing in mind that more than likely some off these people will have been banking with them for a good number of years. Once again it’s this loyality thing not counting for anything. Perhaps they have just become to big and unmanageable. I am glad to see some action being taken against them , perhaps if some of these outrageous bonuses which must be hard to justify surely can be looked at,or this will make them look at which in turn might help them to become fairer to there clients in the long run. Could this not also be better for their business. My view is yes more customers larger business.

John Taylor says:
28 December 2018

This is one in the backside for the Supreme Court who took-on its first case ‘judging’ whether banks were lawfully charging (Rip off) fees for such a practice. Of course, being the first case, the court found, not really a brainer, in favour of the banks. Justice at last, though it has took years to surface.

one month I was over my limit so I was lucky enough to have money in a different account so I transferred it over, the result should have been my account being back in the black, it was not to be, the bank had claimed their fees and a fee for not paying a bill, result I was back in the red.

Paul Hockie says:
28 December 2018

It’s time banks were brought under control, starting with making all transaction fees being based on cost.and not a percentage. It doesn’t cost any more to process a credit card transaction that a debit card transaction.

It does – you get up to six weeks free credit with a credit card…

If you have an unarranged overdraft, then you are getting an unsecured loan.Whilst I agree that the charges are too steep, why should the rest of us pay for these people?

David says:
28 December 2018

Whilst I applaud the end of unfair and repetitive unarranged overdraft fees, I cannot agree with the removal of the fee altogether. It is not hard to set up an arrangement and all accounts should have had a buffer limit to avoid fees for small amounts. Why should those who carelessly manage their banking affairs get cart blanche to spend money they haven’t got. This will encourage bad behaviour by some and we all know who will pay for that! Those that play by the rules. This may have unintended consequences.

Some of the unintended consequences could be that certain customers have their overdraft facilities restricted or suspended until their accounts are back in balance, new limits could be placed on accounts generally with no allowance for further overdrawing without prior management approval, the stopping of cheques and other outgoings, and possible charges on current accounts counterbalanced by higher interest rates for savings and lower interest rates on personal loans for those who have a good record of account management. The banks have a wide range of measures at their disposal to offset the loss of income from the current high charges for unarranged overdrafts; they will describe these as incentives rather than sanctions. The concept of loyalty by customers will be revised to exclude those who have remained customers for long periods of which much has been in negative balance.