The FCA Tackles Overdraft Charges
Having already taken action in the payday market, followed by the rent to own and motor finance sectors the FCA’s next target is bank overdraft charges.
The FCA can’t be accused of failing to follow their published approach to regulation where they promise to categorise firms as either fixed or flexible portfolio firms. Firms with greater potential for harm fall within the FCA's fixed portfolio while other firms fall within the flexible. As part of managing their portfolios the FCA look at firms' business models, growth rates, pricing, as well as other key factors which could indicate customer harm, such as reliance on cross-selling. It’s clear that the FCA has been proactive in tackling products which they feel do not represent fair value for customers.
Arising as an issue after the FCA tackled the expense associated with rolling over payday loans, the FCA began a study in 2017 where it found that in 2017, firms made over £2.4bn from overdrafts alone, with around 30% from unarranged overdrafts. More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016. The FCA also found that people living in deprived areas were more likely to be impacted by the fees.
The findings also showed that charges for unarranged overdrafts are often ten times as high as fees for payday loans. As it currently stands, it is extremely difficult for consumers to meaningfully compare or estimate the cost of borrowing, because of complex charging structures.
In June 2019 the FCA announced a range of reforms to make overdrafts simpler and easier to manage. They expect, following the changes, that the typical cost of borrowing £100 through an unarranged overdraft will drop from £5 to less than 20p a day.
The FCA will:
Stop banks and building societies for charging higher prices for unarranged overdrafts than for arranged overdrafts.
Ban fixed fees for borrowing through an overdraft (fixed daily or monthly charges, and fees for having an overdraft facility)
Require banks and building societies to price overdrafts by a simple annual interest rate
Require banks and building societies to advertise arranged overdraft prices with an APR to help customers compare them against other products
Issue new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments
Require banks and building societies to do more to identify customers who are showing signs of financial strain or are in financial difficulty and develop a strategy to reduce repeat overdraft use.
The rules impact firms offering personal current accounts but will also impact payment services providers who charge for refused payments (see chapter 6). The new rules around refused payment fees are coming in immediately, whereas rules around pricing are due to start in April 2020.
The FCA is consulting on some elements of the new rules, this is due to previous feedback. FCA are consulting because feedback to CP18/43 highlighted the potential for representative APR details to not fully reflect the range of interest rates offered to all customers. The consultation is on proposals to require firms to publish more details of their overdraft charges.
Where firms charge different interest rates to different customers, the representative APR is the APR a firm reasonably expects the credit would be provided to at least 51% of those applying for credit. However, consumer groups were concerned vulnerable customers would routinely be offered a significantly higher APR on their overdraft than advertised. So the plans are to require firms to publish:
The representative APR used in all forms of advertising during the preceding 3 months, or the lowest, highest and median rate if there has been more than one.
The arranged overdraft rate on the last working day of the month preceding the publication, or the lowest, highest and median rate if there has been more than one.
The unarranged overdraft rate on the last working day of the month preceding the publication, or the lowest, highest and median rate if there has been more than one.
The refused payment fee on the last working day of the month preceding the publication.
This should be published as a table in an additional section of information about current account services.
All in all, the changes are aimed at making pricing fairer and more transparent but it is worth noting that the FCA is not actually placing a cap on the cost of using an unarranged overdraft. Instead it is hoped that by changing the mechanism by which firms charge, the cost should naturally reduce.