Financial Conduct Authority  

FCA intervenes on overdraft fees

FCA intervenes on overdraft fees

The Financial Conduct Authority is to ban fixed fees on overdrafts in what it said was the 'intervention of a generation'.

In a 215-page consultation paper out this morning (December 18) the regulator proposed a number of radical changes which would see the cost of overdrafts reduced for struggling consumers.

The FCA wants to ban fixed daily or monthly charges and ensure the price for an overdraft is a single interest rate. It also wants to stopping firms from charging higher prices for unarranged overdrafts.

Under the proposed rules arranged overdraft prices will have to be advertised in a standard way, including an annual percentage rate (APR) to help customers compare against other products.

The FCA will also tell banks to do more to identify overdraft customers who are showing signs of financial strain, and to help them to reduce their overdraft use.

The intervention comes as the regulator identified a series of failings in the high cost credit market affecting particularly people in deprived areas.

It found in some cases unarranged overdraft fees could be more than ten times as high as fees for payday loans. 

Andrew Bailey, chief executive of the FCA, said: "Today we are proposing to make the biggest intervention in the overdraft market for a generation.

"These changes would provide greater protection for the millions of people who use an overdraft, particularly the most vulnerable.  

"It is clear to us that the way banks manage and charge for overdrafts needed fundamental reform.

"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.  

"Our consultation is informed by our analysis of retail banking business models, and how these are evolving in the face of significant technological change."

The FCA found in 2017 firms made more than £2.4bn from overdrafts alone, with about 30 per cent accounting for unarranged overdrafts.

More than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016. 

Elsewhere the regulator is already taking action against the issue of mortgage prisoners, and the unfair treatment of long-standing customers in the cash savings market.

The latest intervention had been informed by the regulator's Strategic Review of Retail Banking Business Models, which was also published this morning.

The FCA found current pricing models could work against loyal customers, leading to high transaction charges and low interest on credit balances.  

It also found new business models could bring more competition and innovation leading to better value and customer service.

In addition, it identified potential future issues around access, data usage and system resilience which may require the FCA and others to take action in the coming years to ensure a retail banking sector that works well for consumers.

The industry has responded positively to the regulator's plans.