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The FCA shakes up overdraft market: our thoughts

Representative Example

Total amount of credit £80, duration of the agreement 29 days, rate of interest 292% per annum (fixed), total amount payable (in one repayment) £98.56. Representative 1281.8% APR.

Payday lender 247Moneybox.com has long since held the view that there should be a level playing field when it comes to the provision of credit and that rules should be applied to all providers evenly. Therefore it comes as no surprise that the lender welcomes the Financial Conduct Authorities (FCA) sweeping changes to the way overdrafts are provided to UK consumers. The changes seek to simplify the overdraft service whilst ensuring the most vulnerable of consumers are not taken advantage of by the current system.

This article titled "The FCA shakes up overdraft market" will detail our thoughts on this.

According to numbers compiled by the FCA, 52 million people have a current account in the UK, and in 2017 banks made over £2.4bn, 30% of which was from unauthorised or unarranged overdrafts from only 1.5% of their customer base. They also found that in some cases, these charges could escalate to ten times more than would typically be paid in fees for a payday loan.


Droplet hitting water

So what changes are the FCA making?

The FCA declared it will make the following changes to the current overdraft model by:

  • Demanding that banks and building societies work harder to determine if customers are undergoing financial difficulty, and to then support them by creating new strategies to prevent or limit repeated use of the overdraft facility;
  • Preventing banks and building societies from charging consumers more for unauthorised overdraft fees than authorised ones;
  • Publishing new guidance to restate that refused payment fees should correlate with the cost of refusing payments;
  • Prohibiting fixed daily or monthly fees for utilising an overdraft facility;
  • Demanding that banks and building societies offer more clarity on their overdraft facility charges with an APR through better advertisement;
  • Demanding that all overdrafts use a simple annual interest rate.

Further research conducted by the FCA highlighted that consumers would like to have the cost of borrowing through an overdraft presented using pounds and pence with an APR and interest rate like most loan companies are required to do - this has already been agreed by UK Finance.

The FCA aim to enforce these changes by 6th April 2020 although some of these, such as the new guidance on refused payments, have been implemented immediately or are due to take effect by the end of 2019. They also hope to offer consumers more support through online digital tools that will help them to check their eligibility, compare the most cost-effective overdraft options available on the market, calculate charges/interest rates effectively and notify them through text messages or alerts when they unexpectedly go overdrawn.

Although these changes look to totally revolutionise and standardise the retail banking industry, there does appear to be a reluctance by the FCA to enforce a price cap on overdraft fees. It seems as though these remedies will rather look to improve the overall understanding of the implications of repeated use of an overdraft facility, whilst also limiting excessive fees to protect those most at risk. This could also be achieved by making information on overdraft charges clearer and more accessible to consumers, which seems to be one of the key concerns that was consistently raised by consumers during the FCA's investigations.

The FCA concludes by reflecting on overall revenue generation tactics and the stability and financial resilience of some banking firms. £2.4bn is a lot to recoup from elsewhere in the business, so will fees in other less contentious areas of revenue generation be increased? The lender believes so. Of equal concern is that these changes threaten financial inclusiveness and many potential customers will be denied a current account altogether. The firm will be monitoring the situation from 6 April 2020 closely and hopes any negative unintended consequences are minimal.