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Banks must explain 40% overdraft interest rates, says FCA

Watchdog asks lenders how they decided on new charges after HSBC, First Direct, M&S Bank, TSB and Nationwide all introduce 39.9 per cent APR

Ben Chapman
Tuesday 28 January 2020 16:04 GMT
Major banks have announced plans to increase interest rates in response to new FCA rules
Major banks have announced plans to increase interest rates in response to new FCA rules (AFP)

The Financial Conduct Authority has asked high-street banks to explain why they have raised their overdraft interest rates to almost 40 per cent.

The watchdog said it was “keeping a close eye” on the overdraft market after lenders including Lloyds, Santander and HSBC hiked interest rates to 39.9 per cent.

Banks are responding to new rules that will come in on 6 April which clamp down on complicated overdraft charges.

The changes mean that banks can no longer charge daily fees for unarranged overdrafts and must instead offer customers an annual interest rate, making it easier to understand costs and to compare to other borrowing such as credit cards or loans.

However, banks have responded by increasing overdraft interest rates across the board, leaving millions of customers worse off. Those currently paying a lot in daily fees are likely to see their borrowing costs reduced while those who are less heavily into their overdrafts will pay more.

The FCA said on Tuesday that it has asked banks how they decided on their new rates, which have clustered around 40 per cent. It has previously warned that it would look at introducing a cap on overdraft charges if lenders did not introduce competitive rates.

HSBC, First Direct, M&S Bank and TSB will all introduce rates of 39.9 per cent while NatWest is to charge half a percentage point less. Nationwide has already brought in a 39.9 per cent rate for its current accounts and Barclays will charge 35 per cent.

Lloyds Banking Group has said its customers will be charged new “personalised” overdraft rates of up to 49.9 per cent from April.

In a letter to lenders, the FCA wrote: “We are writing to you to understand more about your new overdraft pricing and the measures you have in place to help customers who may be adversely impacted by the changes you are making to this pricing.”

The watchdog introduced changes to overdraft rules after it found that unarranged overdraft fees can be 10 times as high as charges for payday loans.

Gareth Shaw, head of money at Which?, said: “The changes introduced to provide clarity on overdraft fees and charges, and to protect the most vulnerable, must also allow customers to shop around.

“The current lack of competition on overdraft pricing is disappointing, so it is right the regulator is taking a closer look.

“Banks should also be clear on how they are communicating the changes to customers and helping more of them choose the right type of credit product for their circumstances.”

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The banks may have shot themselves in the foot by announcing sky-high arranged overdraft rates that bear a spooky similarity to one another.

“The FCA warned all along that if the banks didn’t offer competitive rates, it could consider overdraft-charge caps.”

Eric Leenders, managing director of personal finance at UK Finance, said the overdraft market is “highly competitive” with more than 90 products on offer.

He said: “Banks provide an online cost calculator for customers to work out how much the cost of their overdraft borrowing will be, reflecting any product features such as interest-free buffers.

“These changes build on the range of measures already introduced by the industry, such as text alerts for unarranged overdrafts and mobile banking apps which have been shown to reduce charges by 24 per cent.”

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