Banks are to be banned from charging excessive fees for unauthorised overdrafts, paid by 14 million people every year, after the City watchdog found that the current system of fees needed “fundamental change”.
The current range of fees and daily and monthly charges will be swept away and replaced by a simple, single interest rate, under proposals from the Financial Conduct Authority, which it described as its biggest intervention in the sector for a generation.
A customer who exceeds his or her overdraft by £100 for just one week can pay as much as £76 in fees. The charges are a rich revenue stream for banks and building societies, which make more than £2.4bn a year from overdrafts. About 30% of that – more than £700m – comes from unarranged overdrafts.
More than half the unauthorised overdraft fees came from just 1.5% of customers in 2016, with people living in deprived areas most affected. In some cases, the fees can be more than 10 times as high as those for payday loans.
The FCA chief executive, Andrew Bailey, said: “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 … These changes would make overdrafts simpler, fairer, and easier to manage.”
The FCA’s proposals were widely welcomed by debt charities, but analysts said banks may retaliate with higher fees for mainstream customers if their earnings from unarranged overdraft fees came to an end.
Under its proposals, the FCA says that overdraft prices will have to be advertised in a standard way, including an annual percentage rate (APR) to help customers compare them. It said it did not propose to ban refused payment fees, but they should “reasonably correspond to the costs of refusing payments”, which is likely to reduce them significantly.
The watchdog also told banks to do more to identify customers in financial difficulty and to help them reduce their overdraft use, but did not announce specific measures.
Martin Lewis of MoneySavingExpert said trying to calculate or compare overdrafts was “flummoxing due to a multiplicity of charging structures – such as 20% APR, 50p a day, or 1p per day per £7 overdrawn”. He said the FCA was on the right track with its latest measures but reiterated his call for a cap on the total cost of an overdraft.
TSB, Royal Bank of Scotland and NatWest lead the list of the worst banks for unarranged overdrafts, according to the consumer group Which?. TSB charges £76.35 for dipping into an unauthorised overdraft by £100 for one week while RBS and NatWest both charge £56. Santander, Clydesdale Bank and Yorkshire Bank each charge £42.
Banks that do not charge unarranged fees include Lloyds Banking Group, which owns Lloyds, Bank of Scotland and Halifax; Starling Bank; and M&S Bank.
The debt charity StepChange welcomed the ban on unauthorised overdraft charges. Its head of policy, Peter Tutton, said: “[It] should help to disrupt the toxic ‘debt spiral’ effect that overdrafts can create, trapping people in a persistent cycle of overdraft debt. Requiring firms to intervene earlier and more meaningfully when their customers show repeated use of overdrafts is hugely important, too.”
StepChange said overdrafts were the second most commonly held consumer credit debt after credit cards, with the average overdraft running at £1,523.
Banks would seek to replace the lost revenue with other charges on customers, said Sarah Nield, a director at the consultancy PwC.
“The potential loss of income these rules create, and the additional monitoring costs, could lead to firms seeking to make up their losses through additional current account charges or tighter lending criteria. The FCA has determined that this outcome is unlikely, but recognises firms may increase charges on arranged overdrafts to recoup losses.”
The banks issued a circumspect initial assessment of the proposals. UK Finance, which represents banks and other financial firms, said: “UK Finance members have been working with the regulator to explore new ways to better identify and support customers with repeat overdraft use.”
