Banks to be banned from charging ‘rip-off’ overdraft fees in FCA crackdown

Different rates for arranged and unarranged borrowing set to go as part of ‘biggest intervention in overdraft market for a generation’

Ben Chapman
Tuesday 18 December 2018 11:22 GMT
High street lenders made more than £2.4bn from overdrafts in 2017, with fees sometimes more expensive than payday loans
High street lenders made more than £2.4bn from overdrafts in 2017, with fees sometimes more expensive than payday loans (AP)

Banks will be banned from charging “rip-off” unarranged overdraft fees under new proposals.

The Financial Conduct Authority (FCA) will also ban fixed daily or monthly fees and force banks to advertise a single interest rate for overdrafts. Fixed fees, which charge a customer a set amount for entering their overdraft, will also be banned.

High street lenders made more than £2.4bn from overdrafts in 2017, with 30 per cent of that coming from unarranged borrowing.

Under the new proposals announced on Tuesday, banks will no longer be able to charge different rates for arranged and unarranged borrowing.

Research has shown that just 1.5 per cent of customers pay half of unarranged overdraft fees, with those people disproportionately living in deprived areas.

The fees can be more than 10 times as those for payday loans which have already been targeted by an FCA crackdown.

Charges will be simplified and standardised so customers can easily compare different products.

The watchdog said it will also tell banks to do more to identify and help customers showing signs of financial difficulty use their overdraft less.

However, the changes will not come in until at least June 2019 after the FCA has considered feedback and published a policy statement.

FCA chief executive Andrew Bailey, hailed the reforms as “the biggest intervention in the overdraft market for a generation”.

“It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform,” he said.

“These changes would make overdrafts simpler, fairer, and easier to manage.”

Money Saving Expert founder Martin Lewis said: “Now even the regulator, thankfully, is starting to feel that it’s unfair to make society’s poorest pay for others’ banking – via hideous charges designed to entrap people in debt.

He said the reforms were “on the right track” but repeated a call for a cap on the total cost of an overdraft.

StepChange debt charity’s head of policy Peter Tutton welcomed the “robust” proposals.

Almost half of StepChange’s clients were in their overdraft when they contacted the organisation.

“These [changes] should help to disrupt the toxic ‘debt spiral’ effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt,” Mr Tutton said.

“Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.”

Jenni Allen, managing director at Which? Money, said: “Finally, banks will no longer be able to charge rip-off unarranged overdraft charges, which have long penalised their customers, many of whom can afford it the least.

“Which? has campaigned on this issue for years and today’s strong action from the regulator will come as a massive relief for all those regularly hit with such extortionate charges, which cost some people thousands a year.

“The regulator must now ensure these important changes are swiftly introduced and enforced to finally stop this unfair practice and put an end to these excessive fees.”

The overdraft proposals are the latest in the FCA’s review of high-cost credit. A price cap has been imposed on payday lenders and the regulator has also proposed a cap on rent-to-own providers as well as greater consumer protection on store cards and catalogue credit.

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