FCA has confirmed its final reforms to fix what it describes as a “dysfunctional” overdraft market. Andrew Bailey said he expects the reforms to mean the typical cost of borrowing £100 on an unarranged overdraft to drop from £5 to around 20p per day. There will be no absolute cap on overdraft prices, and FCA does not envisage introducing one but will keep the market under review. Neither does it expect the changes to significantly reduce access to unarranged overdrafts, as it expects firms’ margins for them to remain positive so there will still be incentive to lend. The changes will largely amend BCOBS and (mainly) CONC and will:
- ban higher charges for unarranged overdrafts than for arranged ones;
- ban fixed fees for borrowing through an overdraft and fees for having an overdraft facility, so the charges to customers are directly related to the amounts borrowed and the length of time they borrow for;
- require pricing of overdrafts to be done by a simple annual interest rate, without fixed daily or monthly charges;
- require arranged overdraft prices to be advertised with an APR;
- confirm that refused payment fees should reasonably correspond to the cost of refusing the payment; and
- put more onus on banks and building societies to identify customers in difficulty or showing signs of strain and put in place a strategy to reduce repeat overdraft use. This could include limiting access to unarranged overdrafts if this would not create financial hardship.
The revised guidance on refused payment fees has immediate effect, adding to the Finalised Guidance: Payment Services and Electronic Money – Our Approach document, while the “repeat use” remedy takes effect on 19 December (firms must submit their repeat use strategies to FCA by this date) with the competition remedies, and the remainder of the rules will come into force on 6 April 2020.
UK Finance is also working with FCA to make the cost of borrowing transparent in clear terms of absolute figures alongside the interest and APR information.
FCA is separately consulting on further proposals to require firms to publish overdraft fees and charges quarterly as part of the current account service metrics.