FCA announces proposals to fundamentally reform the way banks charge for overdrafts and extends protections for other high-cost credit products

The FCA has also made new rules[1] strengthening the protections for consumers using home-collected credit (doorstep lending), catalogue credit and store cards and it is consulting on further measures on buy now pay later offers[1].

As part of its work to help consumers get essential household goods and less expensive forms of credit, the FCA has today also published finalised guidance for registered social landlords[2].   

Overdrafts: proposals to fix a dysfunctional market

In 2017, firms made over £2.4bn from overdrafts alone, with around 30% from unarranged overdrafts. More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.  People living in deprived areas are more likely to be impacted by these fees and in some cases unarranged overdraft fees can be more than ten times as high as fees for payday loans. 

To address this the FCA is proposing the following radical changes to the overdraft market:

• Ensuring the price for each overdraft will be a simple, single interest rate – no fixed daily or monthly charges.
• Tackling the highest costs in the market by stopping firms from charging higher prices when customers use an unarranged overdraft.
• Banning fixed fees for borrowing through an overdraft.
• Mandating that arranged overdraft prices must be advertised in a standard way, including an APR to help customers compare them against other products.
• Issuing new guidance to reiterate that refused payment fees should reasonably correspond to the costs of refusing payments, and explain the costs that may be included.
• Telling banks to do more to identify overdraft customers who are showing signs of financial strain or are in financial difficulty, and to help them to reduce their overdraft use.

Following a consultation in May, the FCA has already introduced reforms to help all consumers better engage with and understand their overdraft by requiring banks and building societies to provide:

• Digital eligibility tools that allow customers to check if they can get a cheaper overdraft with another provider.
• Overdraft charge calculators that help customers translate interest rates into pounds and pence. 
• Alerts and changes to show overdrawn balances are displayed at cash machines will address unexpected overdraft use.

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.'

Overdrafts are an integral part of the UK banking market, so the proposals announced today are being published alongside the FCA’s Strategic Review of Retail Banking Business Models[3]. This informed the action taken on overdrafts. Current pricing models can work against loyal customers, leading to high transaction charges and low interest on credit balances. It also found that new business models could bring more competition and innovation leading to better value and customer service. It has 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.

Home-collected credit, catalogue credit and store cards: extending protections for consumers 

The FCA is also today making changes, proposed in May 2018, to tackle harm to consumers in the home-collected credit, catalogue credit and store card sectors. It is also proposing additional protections on buy now pay later offers, including stopping backdated interest for repayments made during the offer period, that will save consumers around £40-60 million.

These measures aim to support credit markets in which consumers can understand their options and so choose credit products that meet their needs. There is no ‘one size fits all’ way of achieving this across all high-cost credit products. Today’s package has been designed to address the specific consumer harms the FCA has identified in each market. 

Both consultations are open until 18 March 2019. The FCA will consider feedback before publishing policy statements on overdrafts and buy now pay later offers in June 2019.

Notes to editors 

1. CP18/42:High-Cost Credit Review: Overdrafts consultation paper and policy statement[4]
2. CP18/43: High-Cost Credit Review: Feedback on CP18/12 with final rules and guidance and consultation on Buy Now Pay Later offers[5]
3. Strategic Review of retail banking business models - Final repor[6]t
4. Further information on the work of the FCA in the High Cost Credit sector[7]
5. On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
6. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
7. Find out more information about the FCA[8].