/ 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?

Cousin Jack says:
28 December 2018

So banks now effectively have to loan money at cheap(ish) rates to people who aren’t creditworthy.

I confidently predict 2 things will happen.
The feckless will run up overdrafts they cannot afford to repay.
The rest of us will pay the costs.

Thanks Which.

Hi, Could not agree more with Cousin Jack. Yes the charges need to be redesigned. The banks up till now have been able and willing to take people into further debt causing major problems for hard pressed people.
Scrapping them all together is not the way forward.

I don’t think there is any intention to scrap overdraft charges altogether, just to harmonise the interest rates and charges between arranged and unarranged overdrafts; one consequence could be to raise the cost of arranged overdrafts while lowering the charges for unarranged ones. Essentially there will be no need for any distinction between them, and it will just be an overdraft, but there could be some tightening of the borrowing limits in the case of those who overdraw without prior notice more frequently.

Time to call it a day on overdraft payments FULL STOP!
After all it’s the broad member ONLY benefiting
from the Overpayment cash Not us customers
of any Bank we just get screwed over ever time A FACT!
So bank bosses of all Banks do away with this unjust cash payment NOW

When my son took his life in 1998 I went to pieces and being self employed meant that I didn’t earn. The bank saw me go into overdraft and applied their penalty charges driving me further into their debt. In one month they applied £1234.00 in penalty charges and to this day,even though I went to my local branch of the Royal Bank of Scotland and kicked up a fuss, I have never received any apology for what they did to me. Things did not improve and my account was put under the debt department in the head office and to get them off my back I mortgaged my house to pay off the debt. Because I was self employed they required me to take out mortgage insurance and even after I had paid off the mortgage early using life policies they still continued to take the premium from my account until I again went to the bank and kicked up about it. So for me banks don’t deserve any consideration at all they are just a bunch of crooks insuits.

If you borrow money, you agree to certain terms. If you break them, you should face the consequences. I agree that there should not be profiteering rates imposed, but I don’t think people should expect to borrow as a right. There is too much unjustified credit demanded nowadays.

28 December 2018

I quite agree with you Peter , it is the change I disagree with, it was not agreed but imposed afterwards by the bank.

Andrea W says:
28 December 2018

We often go over our overdraft limit when our customers have not paid us! Being charged excessively does not help us keep in the black which we try very hard to do and are not taking advantage of the bank and its available credit. The bank charges themselves take us into the red and its a spiralling situation.

Well done Which,my brother-in-law died recently and when we were going through his papers we were disgusted by the charges the bank had imposed on him whilst unemployed and further down the line letters emerged showing he had appealed to the bank to no avail and the charges continued .The charges should be refunded and quickly!!!!!

I went overdrawn for under 24 hours by less than £1. It cost me £27 in fees! That is usury. In marketing terms, we are not customers but products to be exploited.

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Rachmann springs to mind!

28 December 2018

When I first arranged an overdraft with my bank Lloyds it was agreed it would not have any fees , so long as I stayed within the limit. Then they started charging a fee for any use of my overdraft within the agreed limit, telling me that all banks do it. It is very small but this has made me angry especially since I have been a customer with Lloyds since my father took me in to open an account when I was 18 ( I am now 76) since I have always had good service from them. I do not do on-line banking and I also have a basic account with HSBC. My work pension goes to Lloyds and my state pension goes into HSBC due to problems I had with my husband’s management of money when he was alive. He died in 2010.I have much better control over money now but it is very tight and any extra fees do not help.

Swingeing rates are unacceptable, and occasionally circumstances can deal a real financial blow to a hard-working person, but the fact remains that a bank customer has a responsibility to mange their finances and it should not be made easier for them just to borrow at will.

I hope these reforms are implemented. We also need to open up the debate about Public Banking like the Bank of North Dakota which provided services for local businesses and the local community and also other smaller banks with local branches. We have been badly let down by the big banks closing so many branches, especially in rural communities even after the public bailing them out to the tune of trillions. Scandalous.

We have similar institutions in the UK called credit unions. These are member-owned financial cooperatives with a community interest and management. Their rules are generally more restrictive than the case with banks as they require a good record of savings before any loan is advanced and then the repayments are carefully supervised. Their overall object is to encourage responsible financial management and to some extent they do depend on their members borrowing money in order to generate surpluses for the credit union to advance to more members.

Congratulations on this achievement Which. It is far too easy for people to borrow money! and many interest rates are extortionate. At the start of the “slippery slope”, many people have no idea how the debt will escalate if they are unable to keep up payments. Some people get into debt through unforeseen circumstances but if parents fail to set a good example, like saving up for something they want and “making do” in the mean time, their children will probably follow suit and so it will go on through the generations. Money management is something that should be taught in schools if we are ever going to solve this problem!

Back in the 80’s I went overdrawn by a £!.00 I was charge by the bank then had interest added and then a letter sent to tell me this and charged £28.00 for the letter. It was the banks putting up interest on mortgages every month that made it impossible to budget. And i went deeper into debt

This change is likely to make banks refuse credit not within agreed overdraft limits driving people to illegal (and expensive) money lenders.

Frobisher says:
28 December 2018

I am a former bank employee and a shareholder through various employee incentive schemes. Ever since the financial crisis, banks have been a popular target for recriminations and punitive measures. I worked for the Lloyds Bank Group, which was one of the most prudently managed banks in the UK until Gordon Brown persuaded the Chairman to take over HBoS, so that the government didn’t have to bail it out. That very nearly ruined the bank. The shares fell to a few pence from their previous high of £11. Ever since, they have stumbled around at a few pence, currently about 51p. Lloyds Bank was not responsible in any way for the financial crisis, which was triggereed by the stupid profligacy of American banks, lending against poor-quality property assets and engaging in high-risk speculation. But ever since, it (and that means the shareholders) have been hammered by punitive measures designed to reduce their profits. The abolition of unplanned, i.e. unagreed, overdraft fees is the latest example. People do not have the right to exceed their overdraft limits, but when they do, they risk bankruptcy and loss to the bank. Remember, the shareholders are not rich individuals profitting from the public. They are mostly either small private investor, or large institutions investing the life savings and pensions of millions of ordinary people. When the government enacts a measure like this, it is simply punishing the investing public for the financial crisis that they din’t cause.

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Alan Winter says:
28 December 2018

Excessive fees should be banned. However, scrapping charges completely will probably encourage many people to go deeper into the red and more often. A limited, small fee helps to deter such irresponsible behaviour. Banks will now try to recover the money they lose from everyone by some means or other. Please look at the overall picture and have a comprehensive strategy rather than an ad hoc approach that creates unbalance and possibly undesirable consequences.

Your headline in the ‘starting’ e-mail trumpets “Unarranged Overdraft charges SCRAPPED”. That means NONE. I am very unhappy if that is to be the case, because it means that many of those
people – cynical, unprincipled – will just carry on over-limit overdrawing – FREE, now.
The banks don’t/won’t ever actually give anything away, which means that they will off-load the expense of carrying these ‘freeloaders’ onto the rest of us who are doing no wrong. I object strongly – even more people will be encouraged to behave financially irresponsibly (being “poor” is not a defence), in this already morally defunct society. If you actually mean SCRAPPED, then you have become part of that default. Don’t bother trying to ‘fluff’ out of it.

I agree that it is a misleading headline on this conversation – not unusual for Which? which seeks to sensationalise anything it thinks it can take credit for. The thing that is being scrapped is the difference in charges between an unarranged and an arranged overdraft. The rates and terms will be harmonised and there is no guarantee that the charges for arranged overdrafts will not be raised. I expect the banks to procure this change on an overall cost-neutral basis so far as possible which could be bad news for the occasional user of an arranged overdraft.

The whole idea is to stop banks from charging excessive fees in the first place so how is it going to cost you more?
Not to mention banks are very wary about overdraft limits so they are not likely to give them ‘feckless’ people in the first place. Duh!

[This comment has been edited to conform with our community guidelines. Thanks, mods.]

Surely you can make your point without being insulting. People are entitled to their point of view; because you disagree with it does not turn them into a troll.

Colin Amos says:
29 December 2018

I think most of us accept fair fair and reasonable charges for the services we use so a victory such as this is welcome but the banks are not the only culprits. My wife missed just one payment on her Debenhams store account, my fault as I got a digit wrong in the reference number (they had the money but no idea where to credit it). They froze her account even though she was within her credit limit, hit her with an interest charge and a late payment fee amounting to around 20% – could have been worse I guess! Are we talking thousands of pounds in debt? No, just over £100. Has she missed payments before? No. Do they value her business? Apparently not. Did they respond to our complaints? No, not as yet anyway. I believe this is yet another example of taking the customer for granted and placing no value on our future business.
Today’s business ethic seems to be: Rip off the customer now while the sun shines for tomorrow we may all be out of business!
My apologies to those businesses who really do place an importance on customer satisfaction and value for money and who are prepared to actually talk to their customers.

Nacho says:
29 December 2018

Those of us who can manage our finances and live within our means will finish up paying for those who take advantage of the banks and just run up debts. My motto is don’t spend what you haven’t got!