The FCA announce radical changes to overdraft fees
The FCA have announced a proposal to make radical changes to the way banks can impose charges for unarranged overdraft fees. Their Consultation Paper sets out a package of remedies intended to reduce harm to consumers – particularly vulnerable customers - who can end up paying unarranged overdraft fees that can be more than ten times as high as fees for payday loans.
The Paper sets out findings that banks made over £2.4 billion from overdrafts in 2017, with around 50% of firms’ unarranged overdraft fees coming from just 1.5% of customers. The FCA suggest that some current practices, such as charging higher prices for the use of an unarranged overdraft, are causing harm to more vulnerable customers.
Those customers who do use an unarranged overdraft are liable to flat rate fees – charged without regard to the financial situation of the customer – and which can lead to the consumer not realising how much they could end up paying to be able to use their overdraft.
The FCA is proposing a package of remedies and not a single simple price cap at this stage, as it feels there are potential risks that a cap could signal that prices around the cap are acceptable. The remedies look to tackle a number of ‘drivers of harm’ including a complex pricing structure, which means that customers are unable to work out how much they would be liable to pay; high levels of fees, prices for unarranged overdraft can amount, for some users, to the equivalent of an interest rate of 20% per day; and lack of awareness and engagement.
Repeat use – where consumers use the overdraft facility meant for short term emergencies over a long period of time and which can lead to the accumulation of charges - is also tackled, with proposals to ensure firms use early identification strategies and targeted intervention. The FCA found that 14% of consumers used their overdraft every month in 2016, and paid 69% of all arranged, unarranged and refused payment fees and proposes that firms should develop a strategy to reduce repeat use, which firms should supply to the FCA, and should monitor the progress of the strategy, reporting on the outcome of the monitoring after 6 and 12 months.
The proposals to address the harm of complex charging structures and high prices include:
Aligning prices of unarranged overdrafts with arranges overdrafts – which will stop firms from charging higher prices
Simplifying overdraft pricing – using a single interest rate on each account
Standardising the presentation of arranged overdraft prices – which will make them easier to compare. In addition, overdrafts should be positioned as borrowing, which will require an APR in certain advertising
The FCA will also issue new guidance to help firms comply with existing rules, particularly relating to refused payment fees, which should ‘reasonably correspond to the costs of refusing payment’. Firms wishing to comment on the consultation should respond by 18 March 2019; final rules will be published in June 2019, which are intended to be in force by early December 2019.
The Paper also sets out rules to tackle low levels of awareness and engagement around overdrafts. The FCA is consulting on whether to implement these rules from early December 2019 – in line with the overdraft pricing rules. They set out that firms should:
Require overdraft eligibility tools – that will help overdraft customers assess the likelihood they will be eligible for an overdraft. The tool will not require the information to be presented in a standardised format, but will need to communicate the results in a way that is fair, clear and not misleading.
Provide improved information about overdrafts, including overdraft calculators – to help consumers understand how overdrafts work and to improve the content of key general information, including a cost calculator
Send overdraft alerts – via text messages or push notifications in banking apps to let customers know they have entered an overdraft (whether arranged or unarranged), and where they have had a payment refused due to a lack of funds, or if the firm can predict they will do so
Ban including available overdrafts in descriptions of available funds – the customer’s own money should be presented separately to the amount that includes an available arranged overdraft.
As part of their high-cost credit review, the FCA have also published feedback to their May 2018 Consultation Paper, publishing final rules and guidance on home-collected credit, catalogue credit and store cards, as well as consulting on a package of remedies for Buy Now Pay Later offers. The final rules and guidance for home-collected credit comes into force on 19 December 2018, and firms will have three months to fully comply. Firms affected by the catalogue credit and store cards new rules and guidance need to comply immediately, or after implementation periods of 3 or 6 months, depending on the measure.