A Financial Conduct Authority (FCA) crackdown on the fees levied by banks for unarranged overdrafts has been judged unlikely to have a significanta effect on the sector's profitability.
According to Ian Gordon, analyst at Investec, the contents of the FCA’s report, published this morning (31 May), “don’t shock, and are in the category of unhelpful to banks rather than materially damaging.”
The regulator unveiled plans to curb high-cost credit and overdraft charges following an in-depth review.
Measures include a cap on the cost of rent-to-own lending, making overdraft charges more transparent, and forcing catalogue credit and store card firms to do more to stop people getting into debt.
The FCA called for "fundamental reform" in the way banks charge for overdrafts, highlighting that in 2016 firms made an estimated £2.3bn in revenue from overdrafts, 30 per cent of which was from unarranged overdrafts.
The majority of unarranged overdraft charges are paid by just 1.5 per cent of customers, who pay around £450 per year in fees and charges.
But Mr Gordon said the prospect of banks being forced to apply the same fee for unarranged overdrafts as it does for those which have been pre arranged "lacks commercial logic”.
He put the cost to banks of such a measure being implemented at £700m, and said the amount usually appears in the “other income” line of a bank’s report and accounts, and analysts have stopped expecting revenue growth from banks in this area of the profit and loss account.
Eric Moore, who runs the £176m Miton Income fund, said he has long been cautious on the outlook for bank shares.
He said: “The FCA announcement shows the regulator is happy to get into the nitty gritty of the market, and regulation more generally for banks does seem to be in a place where whenever a bank makes a decent profit, some of it goes to the regulator.”
He said UK banks “have quite a long journey to go on to be allowed to earn decent returns.”
His largest bank investment is in Lloyds, “because it is the simplest of the UK banks, it is mostly UK focused and there is no investment bank.”
Sarah Coles, personal finance analyst at Hargreaves Lansdown said a ban on fixed overdraft fees would be a welcome and a long-overdue change.
"The 13 million people who use unarranged overdrafts typically go £60 into their overdraft for five days a month, yet the fixed fees involved mean some are paying the equivalent of 20 per cent interest a day for their borrowing.”
