At the end of last year, the FCA published a consultation paper and policy statement on its proposed reforms to the way banks charge for overdrafts. This forms part of the regulator’s overall review of the consumer credit market; following previous interventions on high-cost short-term credit, rent-to-own and credit cards.
The table below sets out a summary of the FCA’s proposed measures for the overdraft market:
The FCA plans to publish its final rules in early June and intends for the rules to come into force in early December. The rules set out under the policy statement were originally intended to come into force on the 18th December but the FCA is aligning this with the consultation paper proposed implementation date of early December.
52 million people in the UK have a personal current account. The FCA estimates that 36% use an arranged overdraft whilst 26% use an unarranged overdraft each year. The revenue from such overdrafts in 2017 was £2.4bn (30% of which originates from unarranged overdrafts despite unarranged overdrafts only accounting for 4% of all overdraft balances). The FCA is concerned that consumers use overdrafts over prolonged periods and that this form of debt may not be the best form of borrowing for them. The FCA has found that unarranged overdrafts cause financial detriment to vulnerable consumers in particular.
The FCA is concerned about the high charges for overdraft use, the complexity of charging structures, the prolonged and repeated use of overdrafts by consumers and general low consumer awareness and engagement. From its research the FCA has found that 20% of unarranged overdrafts could be avoided using cash or savings and half of all unarranged overdrafts could be avoided using cash, savings or the limit available on existing credit cards or arranged overdraft lines with the same provider. This suggests that consumers currently use overdrafts even though cheaper alternatives are available to them.
The FCA is therefore proposing a number of pricing interventions which it hopes will protect consumers:
- Fees for unarranged overdrafts will be aligned with arranged overdraft fees.
- Clearer pricing structures of overdrafts so consumers can compare with other products such as credit cards or loans.
- Simplification of charges through a single interest rate. All other overdraft fees would be banned (other than fees for refused payments which are permitted under the Payment Services Regulations provided such fees correspond to the costs of refusing payments). Any charges applied in breach of these restrictions would be unenforceable and any consumers charged accordingly would be entitled to reclaim such sums.
- Representative APR as required for other forms of consumer credit will need to be included in certain advertising of arranged overdrafts to help consumers compare the borrowing rates as against credit cards and loan facilities. The APRs will need to be reported to the FCA who may publish this information on its website.
- Ban on tiered pricing so that firms must charge the same interest rate regardless of the amount borrowed (i.e. firms could not offer a certain amount interest-free and then charge a higher rate when the buffer is exceeded).
Despite fears from the industry that prescribing how overdrafts are charged could stifle innovation, restrict competition and the availability of overdrafts, the FCA is pressing ahead with its proposals with the view that they are necessary for consumer protection. Although by reducing the price of unarranged overdraft fees the FCA is aware that this may mean the price of arranged overdraft fees increases, the FCA hopes that the price simplification and disclosure proposals will increase the competitiveness of such fees overall.
Repeat use of overdrafts
To deal with the FCA’s concern with consumers’ repeated use of overdrafts, the FCA is proposing that firms be required to develop a strategy to reduce such repeat use. The strategy will need to be provided to the FCA (and an updated copy would need to be provided following any substantial changes). Firms will need to implement the strategy and monitor its progress, reporting on the outcome after 6 and 12 months respectively.
The consultation paper also incorporates a policy statement for the competition remedy rules for the overdraft market that the FCA consulted on earlier in the year. To increase consumer awareness and engagement around overdrafts, the FCA is requiring firms to provide an online / banking app eligibility tool to indicate whether a consumer is eligible for an overdraft.
Key information about overdrafts will need to be presented clearly and firms will be required to provide an online calculator so consumers can work out the costs of the overdraft.
In addition, consumers should be automatically registered to receive alerts, either by text message or via another channel, warning them of overdraft use that may result in charges.
These requirements only apply to banks with at least 70,000 personal current accounts.
The FCA is also banning the inclusion of an overdraft amount when calculating a consumer’s “available funds”, “balance”, “available balance” or similar to ensure that the consumer understands that an overdraft is a line of credit rather than forming part of the consumer’s own money.
Private Banks excluded?
Private Banks are excluded from the FCA’s proposals; however, it is important to note that the definition of “private bank” may not cover all such firms. The definition requires that half of the bank’s personal current account customers are “eligible individuals” who are individuals who hold assets of not less than £250,000 in the previous 12 months either in cash or in transferable securities (i.e. shares and bonds). This would not include assets held in collective investment schemes for example.