FCA announces overdraft and home credit reforms

The Financial Conduct Authority (FCA) has announced the next package of measures forming part of its high-cost credit review. It has announced proposals to change how banks charge for overdrafts, which would bring to an end to banks charging higher prices for unarranged overdrafts which ammounted to over £2.4 billion for banks last year alone.

The FCA has also made new rules 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.

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.   

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.  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.

The FCA is also  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.

Commenting on the announcement Joanna Elson OBE, chief executive of the Money Advice Trust, the charity that runs National Debtline, said“This is a significant and welcome shake-up of the way overdrafts work, and we are pleased that the FCA is taking strong action to protect consumers.”

“Putting an end to fixed charges and higher pricing for unarranged overdrafts should significantly reduce costs for people who use this form of borrowing.  At National Debtline we see that repeated overdraft use is often a sign of wider financial problems – and the regulator is right to also require banks to do more to identify and help these customers.”

“However, the option of introducing a price cap should remain firmly on the table.  The FCA should set a clear end date at which it will review the impact of these new measures in bringing costs down, and must be prepared to introduce a price cap if required.”

Commenting on the planned new rules, StepChange Head of Policy Peter Tutton said “We are extremely pleased to see the FCA’s plans for robust new rules on unauthorised overdraft charges. These 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.

“In a survey of our clients last year, we found that nearly four out of five (79%) of our clients who had used an overdraft were constantly overdrawn in the year before they sought help from us. So while the new measures are very welcome, we think that more work is needed to establish how to reduce reliance on overdrafts in practice, and to understand the link between persistent overdraft use and problem debt.”

Dan Cooper, UK Head of banking and capital markets, EY said “Today’s announcement signals a milestone change in the way banks and customers use overdrafts.  It means banks will have to fundamentally reassess their pricing structure and considerably increase clarity on the cost of overdrafts. 

“Whilst we knew pricing was under scrutiny, it will be surprising to some that the FCA have gone as far as one single interest rate for all customers. While many expected the end to the distinction between authorised and unauthorised charges, the FCA have today announced an end to tiering, where charges change dependent on the amounts overdrawn.

“Clearer pricing structure and use of APR are designed to encourage better customer interaction, enabling easier comparison between overdrafts and over types of lending as well as allowing customers to better compare overdrafts products.”

“The regulator expects banks to proactively speak to customers who are holding expensive short term debt.  It has already made that clear for credit card balances, and today extended that obligation to overdrafts and catalogue debt as it looks to help those in high cycles of debt.”

“These proposals are due to be introduced in December 2019, although the direction of travel has been clear since earlier this year.  Many firms are likely to have already made changes, or started planning, but today’s announcements, focusing on a single interest rate, will require some firms to re-evaluate their plans.”

Paul Smith, CEO of Morses Club, said “We are proud of the high quality service we offer our customers, consistently delivering customer satisfaction scores above 95%. Our business model already supports appropriate forbearance, and affordability checks are built into every loan for every customer. Our sophisticated IT platform is already set up to deliver many of the changes announced by the FCA today.  We have advanced plans to take customer communication even further in early 2019, giving the customer multiple channels to contact us 24/7. We were glad to contribute to this consultation, thank the FCA for their positive comments regarding the home credit sector, and consider that these changes are unlikely to have an adverse impact on our business.”