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FCA proposes amendments to rein in overdraft market

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FCA proposes amendments to rein in overdraft market

The Financial Conduct Authority on Dec. 18 proposed changes to the overdraft market to better protect consumers from high costs and unexpected fees.

Lenders made £2.4 billion from overdrafts in 2017, with about 30% from unarranged overdrafts. In 2016, more than 50% of lenders' unarranged overdraft fees came from 1.5% of customers, according to the FCA.

"It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform," said Andrew Bailey, CEO of the FCA. "We are proposing a series of radical changes to simplify the way banks charge for overdrafts and tackle high charging for unarranged overdrafts. These changes would make overdrafts simpler, fairer, and easier to manage."

The regulator has proposed a simple, single overdraft interest rate of fixed daily or monthly charges. In addition, banks will no longer be allowed to charge higher prices when customers use an unarranged overdraft, and fixed fees for borrowing via overdrafts will be banned.

Banks will also be required to advertise arranged overdraft prices along with the annual percentage rate so customers can compare services. They will have to issue new guidance that refused payment fees should fairly mirror the costs of refusing payments along with an explanation of what the costs might be.

Finally, the changes will obligate banks to do more in identifying overdraft customers experiencing financial troubles and help them reduce their overdraft usage.

The FCA has already asked banks and building societies, following a consultation in May, to provide customers with digital overdraft eligibility tools, overdraft charge calculators and alerts to show overdrawn balances at cash machines in order to mitigate unexpected overdraft usage.