British banks could see price caps imposed on overdraft fees by the Financial Conduct Authority, which said the banks had made £2.3 billion in revenue from "poorly understood" overdrafts.
The Financial Conduct Authority, or FCA, published a report May 31 as part of its review into the possible harm caused to consumers by high-cost credit products including overdrafts and rent-to-own as well as home-collected credit and catalogue credit.
On overdrafts, the regulator said it was considering directly intervening in how banks structure their prices, including a ban on fixed fees, introducing price-capping and requiring that the rate for unarranged overdrafts aligned with that for arranged overdrafts, as well as measures to ensure that banks take active steps to address repeat overdraft use.
Its figures show that out of 52 million people in the U.K. with a personal current account, 37% used an arranged overdraft and 25% used an unarranged overdraft facility, while banks obtained 30% of their overdraft revenues from those using an unarranged overdraft facility in 2016. The FCA's research also shows that fees for unarranged overdrafts were regularly more than 10 times higher than fees for borrowing similar amounts from payday-loan firms.
The regulator said it had discovered that charges for overdrafts were "highly concentrated," with just 1.5% of customers paying half of all charges for unarranged overdrafts. On average these consumers paid £450 a year in charges, the regulator said.
Divided reactions
The regulator's aim is to increase competition by increasing consumer awareness of how they are using their overdrafts and how overdrafts work. In addition to its proposal to introduce a price cap on overdraft charges, it has put up for consultation measures to ensure that banks provide mobile-phone alerts linked to overdrafts, as well as online tools to allow consumers to quickly get an indication of their eligibility for an overdraft.
UK Finance, which represents banks, is working with the regulator to develop alerts for customers who are about to overdraw, according to Eric Leenders, managing director of personal finance.
"People up and down the country use credit as a helpful means of managing their everyday spending, so we have been working closely with the regulator to develop alerts for customers who may be about to slip into the red as well as a range of prompts that make it much easier to keep on top of finances and reduce costs," he said. "The industry is also introducing proactive support where persistent use of an overdraft facility might be a symptom of financial difficulty."
However, consumer group Which? accused the regulator of dragging its feet on the issue.
"It's wrong that the regulator continues to delay taking action, leaving consumers affected by this unfair practice trapped in debt," spokesman Gareth Shaw said. "Last summer, the FCA expressed serious concerns about how unarranged overdrafts work, and now, almost a year later, it is still refusing to take action."
Which? also called for the government to intervene to ensure that unarranged overdraft fees are brought into line with arranged overdraft fees.
Further research into rent-to-own
On the rent-to-own sector, the FCA said about 400,000 consumers have outstanding debt to rent-to-own firms, and that it had seen cases where people eventually paid more than £1,500 for a household item like an electric cooker that could be bought on the high street for less than £300.
It believed the case was made in principle to consider the introduction of a price cap. However, the FCA said it needed to do further research on the issue and remained open-minded to alternative solutions. Meanwhile, any cap would not be in place before April 2019.
Greg Stevens, CEO of the Consumer Credit Trade Association, which represents more than 300 lenders, welcomed the regulator's commitment to undertaking further research.
"Providing credit to low-income consumers will always be an emotive topic," he said. "You can't simply wish away the costs of servicing this customer group. The FCA gets this and is taking its time to get the balance right."
On home-collected credit, the regulator said repeated borrowing and long-term use of what was essentially a short-term product was a problem. The FCA added that it was consulting on its interpretation of existing rules that companies are not allowed to come to consumers' homes to offer new loans. It also suggested that firms would have to provide consumers with comparative costs of taking out a new loan on top of an existing one.
Responses to the proposals put forward by the FCA must be submitted by the end of August.
